EXHIBIT 17(d)
PROSPECTUS o May 29, 2002
Mercury U.S. Government Securities Fund
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This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep
it for future reference.
The Securities And Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
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Table of Contents
PAGE
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FUND FACTS
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About the Mercury U.S. Government Securities Fund 2
Risk/Return Bar Chart 4
Fees and Expenses 6
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ABOUT THE DETAILS
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How the Fund Invests 8
Investment Risks 9
Statement of Additional Information 14
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ACCOUNT CHOICES
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Pricing of Shares 15
How to Buy, Sell, Transfer and Exchange Shares 20
How Shares are Priced 25
Participation in Fee-Based Programs 25
Dividends and Taxes 26
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THE MANAGEMENT TEAM
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Management of the Fund 28
Financial Highlights 29
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TO LEARN MORE
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Shareholder Reports Back Cover
Statement of Additional Information Back Cover
MERCURY U.S. GOVERNMENT SECURITIES FUND
MERCURY U.S. GOVERNMENT SECURITIES FUND
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The Board of Directors has approved the acquisition of the assets and
assumption of the liabilities of Mercury U.S. Government Securities Fund (the
"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 the stockholders of the Fund (the "Reorganization").
The investment objectives of the Fund and Government Mortgage Fund are
similar. Government Mortgage Fund seeks high current return through
investments in U.S. Government securities and U.S. Government agency
securities, including Government National Mortgage Association mortgage backed
certificates and other mortgage backed government securities. It is intended
that the Reorganization qualify for Federal income tax purposes as a tax-free
reorganization under the Internal Revenue Code of 1986.
If the Reorganization takes place, the Fund Class I, Class A, Class B and
Class C stockholders will receive Class A, Class D, Class B and Class C
shares, respectively, of Government Mortgage Fund with the same aggregate net
asset value as such stockholder held in the Fund immediately prior to the
Reorganization.
It is anticipated that a meeting of the stockholders of the Fund to consider the
Reorganization will be called for August 23, 2002. Stockholders of the Fund of
record as of June 21, 2002 will be entitled to receive notice of and to vote at
such meeting. If approved, it is anticipated that the Reorganization will take
place in late 2002.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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In an effort to help you better understand the many concepts involved in
making an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
Government Agencies -- entities that are part of or sponsored by the federal
government, such as the Government National Mortgage Administration ("GNMA"),
the Tennessee Valley Authority or the Federal Housing Administration.
Government-sponsored enterprises -- private corporations sponsored by the
federal government that have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association or Fannie Mae.
Mortgage-backed securities -- securities that give their holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed
by government agencies.
Maturity -- the time at which the principal amount of a bond is scheduled to
be returned to investors.
ABOUT THE MERCURY U.S. GOVERNMENT SECURITIES FUND
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What is the Fund's investment objective?
The Fund's investment objective is to seek a high current return through
investments in securities issued or guaranteed by the U.S. government,
government agencies or government-sponsored enterprises, including GNMA
mortgage-backed certificates and other mortgage-backed securities.
What are the Fund's main investment strategies?
The Fund invests in a portfolio of bonds and other debt securities that are
issued or guaranteed by the U.S. government, government agencies or
government-sponsored enterprises. The Fund may invest a substantial portion of
its portfolio in mortgage-backed securities issued or guaranteed by
government-sponsored enterprises. The Fund invests in securities of any
maturity. The Investment Adviser selects securities depending on its
assessment of the relative yields available on securities of different
maturities and its assessment of future interest rate patterns. Thus, at
various times the average maturity may be relatively short (under five years,
for example) or relatively long (over ten years, for example).
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may fluctuate. Although government securities
involve minimal credit risk, changes in the value of government securities may
occur in response to interest rate movements -- generally, when interest rates
go up, the value of most government securities, like other fixed income
investments, goes down. Also, Fund management may select securities which
underperform the markets, the relevant indices or other funds with similar
investment objectives and investment strategies. If the value of the Fund's
investments goes down, you may lose money.
The Fund may invest a substantial portion of its portfolio in mortgage-backed
securities. Mortgage-backed securities involve special risks, including
prepayment risk and extension risk, and may involve more volatility than other
fixed income securities of similar maturities.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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Prepayment Risk -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the proceeds may be invested in
securities with lower yields.
Extension Risk -- the risk that certain obligations will be paid off more
slowly by the obligor than anticipated and the value of these securities will
fall.
Volatility -- the amount and frequency of changes in a security's value.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for an investment that provides income
o Want a professionally managed portfolio
o Are willing to accept the risk that the value of your investment may
decline as the result of interest rate movements in order to seek
high current return
o Are looking for an investment that provides current return with
relatively minimal credit risk
MERCURY U.S. GOVERNMENT SECURITIES FUND
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RISK/RETURN BAR CHART
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The bar chart and table shown below provide an indication of the risk of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each complete calendar year since the Fund's inception.
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The Table compares the
Fund's average annual total returns (before and after taxes) with a broad
measure of market performance. How the Fund performed in the past (before and
after taxes) is not necessarily an indication of how the Fund will perform in
the future.
[GRAPH]
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
4.57% 8.95% 8.42% 0.08% 10.05% 6.29%
During the period shown in the bar chart, the highest return for a quarter
was 4.44% (quarter ended September 30, 1998) and the lowest return for a quarter
was -0.85% (quarter ended June 30, 1999). The year-to-date return as of March
31, 2002 was 0.61%.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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The table below compares the average annual total returns of the Fund's shares
with those of Salomon Brothers Mortgage Index for the periods indicated.
After-tax returns are shown only for Class B shares and will vary for other
classes. The after-tax returns are calculated using the historical highest
marginal Federal individual income tax rates in effect during the periods
measured. The after-tax returns do not reflect the impact of state and local
taxes. Actual after-tax returns depend on an investor's tax situation and may
differ from those shown. The after-tax returns shown are not relevant to
investors who hold their Fund shares through tax-deferred arrangements, such
as 401(k) plans or individual retirement accounts or through tax advantaged
education savings accounts.
Average Annual Total Returns
(for the periods ended
December 31, 2001) Class Past One Year Past Five Years Since Inception
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Mercury U.S. Government
Securities Fund I
Return Before Taxes* 2.80% 6.68% 7.61%+
Mercury U.S. Government
Securities Fund A
Return Before Taxes* 2.35% 6.37% 7.30%+
Mercury U.S. Government
Securities Fund B
Return Before Taxes* 2.29% 6.39% 7.38%+
Return After Taxes on
Distributions* 0.26% 3.89% 4.68%+
Return After Taxes on
Distributions and Sale of
Fund Shares* 1.37% 3.86% 4.57%+
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Mercury U.S. Government
Securities Fund C
Return Before Taxes* 5.35% 6.68% 7.33%+
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Salomon Brothers Mortgage
Index** (reflects no deduction for
fees, expenses or taxes)
Return for Past One and Five
Years and Since February 28, 1995 8.20% 7.47% 7.91%
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* Includes sales charges.
** This unmanaged Index reflects the performance of a capital market weighting of the outstanding agency-issued
mortgage-backed securities. Past performance is not predictive of future performance.
+ Inception date is February 1, 1995.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed
below are some of the main types of expenses that the Fund may charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these fees include sales charges which you may pay when
you buy or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and
distribution efforts, such as compensating financial advisors and other
financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers and other financial intermediaries for services to beneficial
shareholders and/or account maintenance activities.
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your financial
advisor can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
Shareholder Fees (Fees paid directly from your
investment)(a): Class I Class A Class B(b) Class C
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Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(c) 4.00%(c) None None
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Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption
proceeds, whichever is lower) None(d) None(d) 4.00%(c) 1.00%(c)
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Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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Annual Fund Operating Expenses (Expenses that
are deducted from Fund assets):
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Management Fee(g) 0.50% 0.50% 0.50% 0.50%
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Distribution and/or Service (12b-1) Fees(e) None 0.25% 0.75% 0.80%
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Other Expenses (including transfer agency
fees)(f) 0.60% 0.61% 0.62% 0.64%
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Total Annual Fund Operating Expenses(g) 1.10% 1.36% 1.87% 1.94%
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(a) Certain securities dealers or other financial intermediaries may charge a fee to process a purchase or sale of
shares. See "How to Buy, Sell, Transfer and Exchange Shares."
(b) Class B shares automatically convert to Class A shares approximately ten years after you buy them and will no
longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used elsewhere
in this Prospectus and in all other Fund materials. If you hold Class B or C shares, over time, it may cost you
more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of
the other classes.
(f) Financial Data Services, Inc., an affiliate of the Investment Adviser, provides transfer agency services to the
Fund. The Fund pays a fee for these services. The Investment Adviser or its affiliates also provide certain
accounting services to the Fund and the Fund reimburses the Investment Adviser or its affiliates for such services.
(g) The Investment Adviser has agreed to voluntarily waive management fees and/or reimburse expenses. The Total Annual
Fund Operating Expenses shown in the table does not reflect such voluntary management fee waiver and/or
reimbursement of expenses because they may be discontinued by the Investment Adviser at any time without notice.
During the fiscal year ended January 31, 2002, the Investment Adviser waived management of $252,010 fees and
reimbursed expenses totaling $314,841. After taking into account the fee levels described above and such waiver and
reimbursement, the total expense ratio was 0.25% for Class A, 0.75% for Class B and 0.80% for Class C. All expenses
for Class I were reimbursed.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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Example:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in these examples. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Expenses if you did redeem your shares:
Class I Class A Class B Class C
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One Year $ 508 $ 533 $ 590 $ 297
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Three Years $ 736 $ 814 $ 888 $ 609
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Five Years $ 982 $ 1,115 $ 1,211 $ 1,047
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Ten Years $ 1,687 $ 1,970 $ 2,190 $ 2,264
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Expenses if you did not redeem your shares:
Class I Class A Class B Class C
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One Year $ 508 $ 533 $ 190 $ 197
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Three Years $ 736 $ 814 $ 588 $ 609
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Five Years $ 982 $ 1,115 $ 1,011 $ 1,047
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Ten Years $ 1,687 $ 1,970 $ 2,190 $ 2,264
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MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] About the Details
About the Portfolio Management Team-- Teresa L. Giacino is a Senior Vice
President and a Portfolio Manager of the Fund. Ms. Giacino has been a Vice
President of Merrill Lynch Investment Managers since 1992. Frank Viola is a
Senior Vice President and Co-Portfolio Manager of the Fund. Mr. Viola has been
a Director of Merrill Lynch Investment Managers and a portfolio manager
thereof since 1997. Mr. Viola was the Treasurer of Merrill Lynch Bank and
Trust from 1996 to 1997 and a Vice President of Merrill Lynch Capital Markets
from 1993 to 1996.
About the Investment Adviser-- The Fund is managed by Mercury Advisors.
HOW THE FUND INVESTS
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The Fund's investment objective is to seek high current return through
investments in a portfolio of bonds and other debt securities that are issued
or guaranteed by the U.S. government, government agencies or
government-sponsored enterprises, including GNMA mortgage backed certificates
and other mortgage-backed government securities.
The Fund may invest in all securities issued or guaranteed by the U.S.
government or its agencies of any maturity. Certain securities, such as U.S.
Treasury obligations, are direct obligations of the U.S. government. The Fund
also invests in securities that are issued by government-sponsored enterprises
or agencies but that are not direct obligations of the U.S. government. These
securities are, however, backed by the credit of the particular agency or
government-sponsored enterprise that issued the securities and are generally
considered to have a relatively low risk of default. The Fund invests
substantially all (at least 80%) of its total assets in bonds or other debt
securities that are issued or guaranteed by the U.S. government, government
agencies or government sponsored enterprises.
It is anticipated that under certain circumstances, a significant portion of
the Fund's assets may consist of GNMA mortgage-backed certificates and other
U.S. government securities representing ownership interests in mortgage pools.
The Fund will normally invest a portion of its assets in short term U.S.
government and government agency debt securities, such as Treasury bills. As a
temporary measure for defensive purposes, the Fund may invest more heavily in
these securities, without limitation. The Fund may also increase its
investment in these securities when Fund management is unable to find enough
attractive longer term investments, to reduce exposure to longer term
investments when management believes it is advisable to do so on a temporary
basis, or to meet redemptions. Investments in short term securities can be
sold easily and have limited risk of loss but earn only limited returns. Short
term investments may, therefore, limit the potential for the Fund to achieve
its investment objective.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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INVESTMENT RISKS
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This section contains a summary discussion of the general risks of investing
in the Fund. As with any fund, there can be no guarantee that the Fund will
meet its objective, or that the Fund's performance will be positive over any
period of time.
The Fund's principal risks include:
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, the relevant
indices or other funds with similar investment objectives and investment
strategies.
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 of a security owned by
the Fund 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. Because the obligations in which the Fund invests are
typically guaranteed by the U.S. government or government agencies, there is
minimal credit risk.
Call and Redemption Risk -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond the Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower yields.
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
MERCURY U.S. GOVERNMENT SECURITIES FUND
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anticipated and the 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 increases and decreases)
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, the Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association. 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 risk.
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 payment 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 the Fund invests in CMO tranches (including 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.
The Fund also may be subject, to a lesser extent, to risks associated with the
following investment strategies:
Derivatives
The Fund may use derivative instruments including futures, forwards, options,
indexed securities and inverse securities. Derivatives allow the Fund to
increase or decrease its risk exposure more quickly and efficiently than other
types of instruments.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] About the Details
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 obligations 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.
The Fund may use derivatives such as futures and options for hedging purposes,
including anticipatory hedges and cross-hedges, and to increase its return.
Hedging is a strategy in which the Fund uses a derivative to offset the risk
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 Fund is not required to use hedging and may
choose not to do so.
Indexed and Inverse Floater Securities -- The Fund may invest in debt
securities the potential returns of which 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 Fund may also invest
in securities whose return is inversely related to changes in an index or
interest rate. In general, inverse securities change in value in a manner that
is opposite to most securities--that is, the return of inverse securities will
decrease when interest rates increase. Investments in indexed and inverse
securities may subject the Fund to the risks of reduced or eliminated interest
payments and losses of principal. In addition, certain indexed and inverse
securities may increase or decrease in value at a greater rate than the
underlying index, which effectively leverages the Fund's investment. As a
result, the market value of such securities will generally be more volatile
than that of other securities.
MERCURY U.S. GOVERNMENT SECURITIES FUND
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Covered Call Options -- The Fund can sell covered call options, which are
options that give the purchaser the right to require the Fund to sell a
security owned by the Fund to the purchaser at a specified price within a
limited time period. The Fund will receive a premium (an upfront payment) for
selling a covered call option, and if the option expires unexercised because
the price of the underlying security has gone down the premium received by the
Fund will partially offset any losses on the underlying security. By writing a
covered call option, however, the Fund limits its ability to sell the
underlying security and gives up the opportunity to profit from any increase
in the value of the underlying security beyond the sale price specified in the
option.
Repurchase Agreement Risk -- The Fund may enter into 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 repurchase
agreement defaults on its obligation under the agreement, 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 a security the Fund buys will lose value prior to its delivery
to the Fund. 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.
Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of the Fund's shares and in the return on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The costs of
borrowing may reduce the Fund's return. Certain securities that the Fund buys
may create leverage including, for example, derivatives, when issued
securities, futures, forward commitments and options. The use of investments
that create leverage subjects the Fund to the risk that relatively small
market movement may result in large changes in the value of an investment and
may result in losses that greatly exceed the amount invested.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] About the Details
Illiquid securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities it may be unable to quickly resell 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 the 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 Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
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.
Securities Lending -- The Fund may lend securities with a value not exceeding
33 1 /3% of its assets to financial institutions that provide cash or
securities issued or guaranteed by the U.S. Government 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.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] About the Details
STATEMENT OF ADDITIONAL INFORMATION
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If you would like further information about the Fund, including how the Fund
invests, please see the Statement of Additional Information.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMTTED] Account Choices
PRICING OF SHARES
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The Fund offers four classes of shares, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your
needs. Each share class represents an ownership interest in the same
investment portfolio. When you choose your class of shares, you should
consider the size of your investment and how long you plan to hold your
shares. Your financial advisor or other financial intermediary can help you
determine which share class is best suited to your personal financial goals.
For example, if you select Class I or Class A shares, you generally pay the
Distributor a sales charge at the time of purchase. If you buy Class A shares,
you also pay out of Fund assets an ongoing account maintenance fee of 0.25%.
You may be eligible for a sales charge reduction or waiver.
Certain financial intermediaries may charge additional fees in connection with
transactions in Fund shares. The Investment Adviser, the Distributor or their
affiliates may make payments out of their own resources to selected securities
dealers and other financial intermediaries for providing services intended to
result in the sale of Fund shares or for shareholder servicing activities.
If you select Class B or Class C shares, you will invest the full amount of
your purchase price, but you will be subject to a distribution fee of 0.50%
for Class B shares and 0.55% for Class C shares and an account maintenance fee
of 0.25%. Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees increase the cost of your investment and may cost
you more than paying other types of sales charges, such as an initial sales
charge. In addition, you may be subject to a deferred sales charge when you
sell Class B or Class C shares.
Certain financial institutions may charge you additional fees in connection
with transactions in fund shares. The Investment Adviser, the Distributor or
their affiliates may make payments out of their own resources to securities
dealers and other financial intermediaries for providing services intended to
result in the sale of Fund shares or for shareholder servicing activities.
The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
the Investment Adviser.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
To better understand the pricing of the Fund's shares, we have summarized the
information below:
Class I Class A Class B Class C
- ------------------------------------------------------------------------------------------------------------------------
Availability Limited to certain Generally available Generally available Generally available
investors including: through selected through selected through selected
o Current Class I Securities dealers Securities dealers Securities dealers
shareholders and other financial and other financial and other financial
o Certain Retirement intermediaries. intermediaries. intermediaries.
Plans
o Participants in
certain sponsored programs.
o Certain affiliates of
selected securities
dealers and other
financial intermediaries.
- ------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of Yes. Payable at time of No. Entire purchase No. Entire purchase
Charge? purchase. Lower sales purchase. Lower sales price is invested in price is invested in
charges available for charges available for shares of the Fund. shares of the Fund.
certain larger certain larger
investments. investments.
- -----------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged No. (May be charged Yes. Payable if you Yes. Payable if you
Charge? for purchases over $1 for purchases over $1 redeem within six redeem within one years
million that are million that are years of purchase. of purchase.
redeemed within one redeemed within one
year.) year.)
- -----------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee. Maintenance Fee. Maintenance Fee.
Distribution Fees? No Distribution Fee. 0.50% Distribution Fee. 0.55% Distribution Fee.
- -----------------------------------------------------------------------------------------------------------------------
Conversion to No N/A Yes, automatically after No.
Class A Shares? approximately ten
years.
- -----------------------------------------------------------------------------------------------------------------------
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in Mercury
mutual funds.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Mercury mutual funds that you agree to
buy within a 13 month period. Certain restrictions apply.
Class I and A Shares -- Initial Sales Charge Options
If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation
will be as shown in the last column.
Dealer
As a % of Compensation
As a % of Your as a % of
Your Investment Offering Price Investment* Offering Price
-------------------------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.75%
-------------------------------------------------------------------------
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
-------------------------------------------------------------------------
$50,000 but less
than $100,000 3.25% 3.36% 3.00%
-------------------------------------------------------------------------
$100,000 but less
than $250,000 2.50% 2.56% 2.25%
-------------------------------------------------------------------------
$250,000 but less
than $1,000,000 1.50% 1.52% 1.25%
-------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
-------------------------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class I or Class A shares, you may
not pay an initial sales charge. In that case, the Investment Adviser
compensates the selling dealer from its own resources. If you redeem your
shares within one year after purchase, you may be charged a deferred
sales charge. This charge is 1.00% of the lesser of the original cost of
the shares being redeemed or your redemption proceeds. A sales charge of
0.75% will be charged on purchases of $1,000,000 or more of Class I and
Class A shares by certain employer-sponsored retirement or savings plans.
No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class I or Class A shares
may apply for:
o Purchases under a Right of Accumulation or Letter of Intent
o Certain trusts managed by banks, thrifts or trust companies
including those affiliated with the Investment Adviser or its
affiliates
o Certain employer-sponsored retirement or savings plans
o Certain investors, including directors or trustees of mutual funds
sponsored by the Investment Adviser or its affiliates, employees of
the Investment Adviser and its affiliates and employees or customers
of selected dealers
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
o Certain fee-based programs managed by the Investment Adviser or its
affiliates and other financial intermediaries that have agreements
with the Distributor or its affiliates
o Certain fee-based programs of selected dealers and other financial
intermediaries that have an agreement with the Distributor or its
affiliates
o Purchases through certain financial advisers that meet and adhere to
standards established by the Investment Adviser or its affiliates
o Purchases through certain accounts over which the Investment Adviser
or an affiliate exercises investment discretion
Only certain investors are eligible to buy Class I shares, including existing
Class I shareholders of the Fund, certain retirement plans and participants in
certain programs sponsored by the Investment Adviser or its affiliates. Your
financial advisor or financial intermediary can help you determine whether you
are eligible to buy Class I shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class I and Class A shares, you should buy Class I
shares since Class A shares are subject to a 0.25% account maintenance fee,
while Class I shares are not.
If you redeem Class I or Class A shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount.
The amount eligible for this "Reinstatement Privilege" may not exceed the
amount of your redemption proceeds. To exercise the privilege, contact your
financial advisor, selected securities dealer, or other financial intermediary
or contact the Fund's Transfer Agent at 1-888-763-2260.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales
charge at the time of purchase. However, if you redeem your Class B shares
within six years after purchase or Class C shares within one year after
purchase, you may be required to pay a deferred sales charge. You will also
pay distribution fees of 0.50% for Class B shares and 0.55% for Class C shares
and account maintenance fees of 0.25% each year under distribution plans that
the Fund has adopted under Rule 12b-1. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees increase the cost of
your investment and may cost you more than paying other types of sales charge.
The Distributor uses the money that it receives from the deferred sales charge
and the distribution fees to cover the costs of marketing, advertising and
compensating the financial advisor, selected securities dealer or other
financial intermediary who assists you in your decision in purchasing Fund
shares.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
Class B Shares
If you redeem Class B shares within six years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
Year Since Purchase Sales Charge*
------------------------------------
0-1 4.00%
------------------------------------
1-2 4.00%
------------------------------------
2-3 3.00%
------------------------------------
3-4 3.00%
------------------------------------
4-5 2.00%
------------------------------------
5-6 1.00%
------------------------------------
6 and thereafter 0.00%
------------------------------------
* The percentage charge will apply to the lesser of the original cost of
the shares being redeemed or the proceeds of your redemption. Shares
acquired by dividend reinvestment are not subject to a deferred sales
charge. Mercury funds may not all have identical deferred sales charge
schedules. If you exchange your shares for the shares of another Mercury
fund, the higher charge, if any, would apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 591/2 years old
o Redemption by certain eligible 401(a) and 401(k) plans and
certain retirement plan rollovers
o Redemption in connection with participation in certain
fee-based programs managed by the Investment Adviser or its
affiliates or in connection with involuntary termination of an
account in which Fund shares are held
o Redemption in connection with participation in certain
fee-based programs managed by selected securities dealers or
other financial intermediaries that have agreements with the
Distributor or its affiliates
o Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year after death
or disability or, if later, reasonably promptly following
completion of probate
o Withdrawal through the Systematic Withdrawal Plan of up to 10%
per year of your Class B account value at the time the plan is
established
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
Your Class B shares convert automatically into Class A shares approximately
ten years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class A
shares are subject to lower annual expenses than Class B shares. The
conversion of Class B shares to Class A shares is not a taxable event for
Federal income tax purposes.
Different conversion schedules may apply to Class B shares of different
Mercury mutual funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year
conversion schedule will apply. If you exchange your Class B shares in the
Fund for Class B shares of a fund with a longer conversion schedule, the other
fund's conversion schedule will apply. The length of time that you hold the
original and exchanged Class B shares in both funds will count toward the
conversion schedule.
The conversion schedule may be modified in certain other cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be
charged a deferred sales charge of 1.00%. The charge will apply to the lesser
of the original cost of the shares being redeemed or the proceeds of your
redemption. You will not be charged a deferred sales charge when you redeem
shares that you acquire through reinvestment of Fund dividends. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- -------------------------------------------------------------------------------
The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through your financial advisor, a selected securities dealer,
broker, investment adviser, service provider or other financial intermediary.
You may also buy shares through the Transfer Agent. To learn more about buying
shares through the Transfer Agent, call 1-888-763-2260. Because the selection
of a mutual fund involves many considerations, your financial advisor or
financial intermediary may help you with this decision. The Fund does not
issue share certificates.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
Because of the high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will
then have 60 days to make an additional investment to bring the value of your
account to at least $500 before the Fund takes any action. This involuntary
redemption does not apply to retirement plans or Uniform Gifts or Transfers to
Minors Act accounts.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
If you want to Your choices Information important for you to know
------------------------------------------------------------------------------------------------------------------------
Buy shares First, select the share class Please refer to the pricing of shares table on page
appropriate for you 17. Be sure to read this Prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000
your investment for all accounts except:
o $500 for certain fee-based programs
o $100 for retirement plans
(The minimum for initial investments may be waived or
reduced under certain circumstances.)
------------------------------------------------------------------------------------------------
Have your financial advisor, The price of your shares is based on the next calculation of
securities dealer or financial net asset value after your order is placed. Generally, any
intermediary submit your purchase orders placed prior to the close of business on the
purchase order New York Stock Exchange (generally, 4:00 p.m. Eastern time)
will be priced at the net asset value determined that day.
Certain financial intermediaries, however, may require
submission of orders prior to that time.
Purchase orders placed after that time will be priced at the
net asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale of
shares at any time. Selected securities dealers or financial
intermediaries may charge a fee in connection with a purchase.
For example, the fee charged by Merrill Lynch, Pierce, Fenner
& Smith Incorporated is currently $5.35. The fees charged by
other securities dealers or financial intermediaries may be
higher or lower.
------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-888-763- 2260 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this Prospectus.
-----------------------------------------------------------------------------------------------------------------------
Add to your Purchase additional shares The minimum investment for additional purchases is generally
investment $100 for all accounts except:
o $50 for certain fee-based programs
o $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a
through the automatic dividend sales charge.
reinvestment plan
------------------------------------------------------------------------------------------------
Participate in the automatic You may automatically invest a specific amount in the Fund on
investment plan a periodic basis through your securities dealer or other
financial intermediary.
The current minimum for such automatic investments is $100.
The minimum may be waived or revised under certain
circumstances.
------------------------------------------------------------------------------------------------
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
If you want to Your choices Information important for you to know
------------------------------------------------------------------------------------------------------------------------
Transfer shares to Transfer to a participating You may transfer your Fund shares to another securities dealer
another securities securities dealer or other or other financial intermediary if authorized agreements are
dealer or other financial intermediary in place between the Distributor and the transferring
financial securities dealer or financial intermediary and the
intermediary Distributor and the receiving securities dealer or other
financial intermediary. Certain shareholder services may not
be available for all transferred shares. You may only purchase
additional shares of a fund previously owned before transfer.
All future trading of these shares must be coordinated by the
receiving securities dealer or other financial intermediary.
--------------------------------------------------------------------------------------------------
Transfer to a non- You cannot transfer your shares of the Fund to a securities
participating dealer or financial intermediary that does not have an
securities dealer or other authorized dealer agreement with the Distributor.
financial intermediary You must either:
o Transfer your shares to an account with the Transfer Agent;
or
o Sell your shares, paying any applicable deferred sales
charge.
------------------------------------------------------------------------------------------------------------------------
Sell your shares Have your financial advisor, The price of your shares is based on the next calculation of
selected securities dealer net asset value after your order is placed. For your
or other financial redemption request to be priced at the net asset value on the
intermediary submit your day of your request, you must submit your request to your
sales order dealer or other financial intermediary prior to that day's
y close of business on the New York Stock Exchange (generally
4:00 p.m. Eastern time). Certain financial intermediaries,
however, may require submission of orders prior to that time.
Generally, any redemption request placed after that time will
be priced at the net asset value at the close of business on
the next business day.
Certain securities dealers or other financial intermediaries
may charge a fee to process a sale of shares. For example
Merrill Lynch currently charges a fee of $5.35. No processing
fee is charged if you redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
--------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover of
this Prospectus. All shareholders on the account must sign the
letter. A signature guarantee generally will be required but
may be waived in certain limited circumstances. You can obtain
a signature guarantee from a bank, securities dealer,
securities broker, credit union, savings association, national
securities exchange or registered securities association. A
notary public seal will not be acceptable. The Transfer Agent
will normally mail redemption proceeds within seven days
following receipt of a properly completed request. If you make
a redemption request before the Fund has collected payment for
the purchase of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay usually will not
exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-888-763-2260 for details.
-------------------------------------------------------------------------------------------------------------------
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
If you want to Your choices Information important for you to know
------------------------------------------------------------------------------------------------------------------------
Sell shares Participate in the Fund's You can choose to receive systematic payments from your
systematically Systematic Withdrawal Fund account either by check or through direct deposit to your
Plan bank account on a monthly or quarterly basis. You can
generally arrange through your selected dealer or financial
intermediary for systematic sales of shares of a fixed dollar
amount on a monthly, bi-monthly, quarterly, semi-annual or
annual basis, subject to certain conditions. You must have
dividends automatically reinvested.
For Class B and Class C shares your total annual withdrawals
cannot be more than 10% per year of the value of your shares at
the time your plan is established. The deferred sales charge is
waived for systematic redemptions. Ask your financial advisor,
selected securities dealer or other financial intermediary for
details.
------------------------------------------------------------------------------------------------------------------------
Exchange
your shares Select the fund into which You can exchange your shares of the Fund for shares of other
you want to exchange. Mercury mutual funds or for shares of the Summit Cash Reserves
Be sure to read that fund's Fund. You must have held the shares used in the exchange for
prospectus at least 15 calendar days before you can exchange to another
fund.
Each class of Fund shares is generally exchangeable for shares
of the same class of another Mercury fund. If you own Class I
shares and wish to exchange into a fund in which you have no
Class I shares (and are not eligible to buy Class I shares),
you will exchange into Class A shares. If you own Class I or
Class A shares and wish to exchange into Summit, you will
exchange into Class A shares of Summit. Class B or Class C
shares can be exchanged for Class B shares of Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or Class A shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B or Class C shares for shares of a fund with a
different deferred sales charge schedule, the higher schedule
will generally apply. The time you hold Class B or Class C
shares in both funds will count when determining your holding
period for calculating a deferred sales charge at redemption.
Your time in both funds will also count when determining the
holding period for a conversion from Class B to Class A
shares.
To exercise the exchange privilege contact your financial
advisor, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-888-763-2260.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
Short term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's
opinion, have a pattern of short term or excessive trading or whose trading
has been or may be disruptive to the Fund. For these purposes, Fund management
may consider an investor's trading history in the Fund or other affiliated
funds, and accounts under common ownership or control.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
Net Asset Value -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- ------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net
asset value, minus any applicable deferred sales charge. The Fund calculates
its net asset value (generally by using market quotations) each day the New
York Stock Exchange is open after the close of business on the Exchange based
on prices at the time of closing. The Exchange generally closes at 4:00 p.m.
Eastern time. If events that are expected to materially affect the value of
securities traded in other markets occur between the close of those markets
and the close of business on the New York Stock Exchange, those securities may
be valued at their fair value. The net asset value used in determining your
share price is the next one calculated after your purchase or redemption order
is placed. As a result, the Fund's net asset value may change on days when you
will not be able to purchase or redeem Fund shares.
The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value
next computed by the Fund after such acceptance. If the payment for a purchase
order is not made by a designated later time, the order will be canceled and
the financial intermediary could be held liable for any losses.
Generally, Class I shares will have the highest net asset value because that
class has the lowest expenses, and Class A shares will have a higher net asset
value than Class B or Class C shares. Also, dividends paid on Class I and
Class A shares will generally be higher than dividends paid on Class B and
Class C shares because Class I and Class A shares have lower expenses.
PARTICIPATION IN FEE-BASED PROGRAMS
- -------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by the Investment
Adviser, an affiliate of the Investment Adviser, selected securities dealers
or other financial intermediaries that have an agreement with the Distributor
or its affiliates, you may be able to buy Class I shares at net asset value,
including by exchanges from other share classes. Sales charges on the shares
being exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] Account Choices
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of the Fund's shares or into the
Summit fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class A
shares may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your
financial advisor, selected securities dealer or other financial intermediary.
DIVIDENDS AND TAXES
- ------------------------------------------------------------------------------
The Fund distributes any net investment income monthly. The Fund may also pay
a special distribution at the end of the calendar year to comply with Federal
tax requirements. Dividends may be reinvested automatically in shares of the
Fund at net asset value without a sales charge or may be taken in cash. If
your account is with a securities dealer that has an agreement with the Fund,
contact your financial advisor about which option you would like. If your
account is with the Transfer Agent, and you would like to receive dividends in
cash, contact the Transfer Agent. The Fund anticipates that the majority of
its dividends, if any, will consist of ordinary income. Capital gains paid by
the Fund, if any, may be taxable to you at different rates, depending, in
part, on how long the Fund held the assets sold.
You will pay tax on dividends from the Fund whether you receive them in cash
or additional shares. If you redeem Fund shares or exchange them for shares of
another fund, you generally will be treated as having sold your shares and any
gain on the transaction may be subject to tax. Capital gain dividends are
generally taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or
if you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of the excess of net short term capital gains over net long term
capital losses) will generally be subject to a 30% U.S. withholding tax, unless
a lower treaty rate applies.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] Account Choices
"Buying a Dividend"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a taxpayer identification number or
social security number or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] The Management Team
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------------------
Fund Asset Management, L.P., doing business as Mercury Advisors, the Fund's
Investment Adviser, manages the Fund's investments under the overall
supervision of the Board of Directors of The Asset Program, Inc. The
Investment Adviser has the responsibility for making all investment decisions
for the Fund. The Fund pays the Investment Adviser a fee at the annual rate of
0.50% of the average daily net assets of the Fund.
Mercury Advisors was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Mercury Advisors and its affiliates had approximately $517 billion in
investment company and other portfolio assets under management as of March
2002.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] The Management Team
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the
Fund's financial performance for the five years since the Fund's inception.
Certain information reflects financial results for a single Fund share. The
total return in the table represents the rate that an investor would have
earned or lost on an investment in the Fund (assuming reinvestment of all
dividends). This information has been audited by Deloitte & Touche LLP, whose
report, along with the Fund's financial statements, is included in the Fund's
Annual Report, which is available upon request.
Class I++ Class A++
-------------------------------------------- -------------------------------------------
For the Year Ended January 31, For the Year Ended January 31,
------------------------------------------ ---------------------------------------------
Increase (Decrease) in
Net Asset Value: 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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 year $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.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC OMITTED] The Management Team
FINANCIAL HIGHLIGHTS (concluded)
- ------------------------------------------------------------------------------
Class B Class C
--------------------------------------------------------------------------------------------
For the Year Ended January 31, For the Year Ended January 31,
------------------------------------------ ---------------------------------------------
Increase (Decrease)
in Net Asset Value: 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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
investment -- 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.
MERCURY U.S. GOVERNMENT SECURITIES FUND
Fund
Mercury U.S. Government Securities Fund
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(866-MERCURY)
Investment Adviser
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
(888-763-2260)
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1008
Distributor
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian
The Bank of New York
5 Penn Plaza
New York, New York 10001-1810
Counsel
Sidley Austin Brown & Wood LLP
875 Third Avenue
New York, New York 10022-6225
Accounting Services Provider
State Street Bank and Trust Company
500 College Road East
Princeton, New Jersey 08540
MERCURY U.S. GOVERNMENT SECURITIES FUND
To Learn More
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Fund's Annual Report
you will find a discussion of the relevant market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. You may obtain these reports at no cost by calling
1-888-763-2260.
If you hold your Fund shares through a brokerage account or directly at the
Transfer Agent, you may receive only one copy of each shareholder report and
certain other mailings regardless of the number of Fund accounts you have. If
you prefer to receive separate shareholder reports for each account (or if you
are receiving multiple copies and prefer to receive only one), call your
financial advisor or other financial intermediary or write to the Transfer
Agent at its mailing address. Include your name, address, tax identification
number and brokerage or mutual fund account number. If you have any questions,
please call your financial advisor or other financial intermediary or call the
Transfer Agent at 1-888-763-2260.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing or calling the
Fund at Financial Data Services, Inc., P.O. Box 44064, Jacksonville, Florida
32232-4062 or by calling 1-888-763-2260.
Contact your financial advisor or other financial intermediary, or contact the
Fund at the telephone number or address indicated above if you have any
questions.
Information about the Funds (including the Statement of Additional
Information) can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Call 1-202-942-8090 for information on the operation of the
Public Reference Room. This information is also available on the SEC's
Internet Site at http://www.sec.gov and copies may be obtained upon payment of
a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
You should rely only on the information contained in this Prospectus. No one
is authorized to provide you with information that is different from
information in this Prospectus.
Investment Company Act File #811-7177.
Code #MF-19096-05-02
(C) Fund Asset Management, L.P.
[LOGO] MERCURY FUNDS
800 Scudders Mill Road
Plainsboro, New Jersey 08536
866-MERCURY
FAM Distributors, Inc. Member NASD
www.mercuryfunds.com
STATEMENT OF ADDITIONAL INFORMATION
Mercury U.S. Government Securities Fund
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (888) 763-2260
---------------------------
The Mercury U.S. Government Securities Fund (the "Fund") is a series
of The Asset Program, Inc. (the "Program"), a professionally-managed open-end
management investment company organized as a Maryland corporation. The Fund
seeks high current return by investing in a diversified portfolio of U.S.
Government and Government agency securities, including Government National
Mortgage Association ("GNMA") mortgage-backed securities and other
mortgage-backed government securities. There can be no assurance that the
investment objective of the Fund will be realized. For more information on the
Fund's investment objective and policies, see "Investment Objective and
Policies."
The Fund offers four classes of shares, each with a different
combination of sales charges, ongoing fees and other features. These
alternatives permit an investor to choose the method of purchasing shares that
the investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances. See "Purchase of Shares."
---------------------------
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated May 29,
2002 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
the Fund at 1-888-763-2260 or your financial advisor, or by writing to the
Fund at the address listed above. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement of
Additional Information is incorporated by reference into the Prospectus. The
Fund's audited financial statements are incorporated in this Statement of
Additional Information by reference to the Fund's 2002 Annual Report to
shareholders. You may request a copy of the Annual Report or the Prospectus at
no charge by calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. Eastern
time on any business day.
---------------------------
Mercury Advisors -- Investment Adviser
FAM Distributors, Inc. -- Distributor
---------------------------
The date of this Statement of Additional Information is May 29, 2002.
TABLE OF CONTENTS
Page
----
Investment Objective and Policies 2
GNMA Certificates and Other Mortgage-Backed Government Securities 2
Other Investment Policies and Practices 4
Derivatives 7
Suitability 11
Investment Restrictions 11
Portfolio Turnover 13
Management of the Program 13
Directors and Officers 13
Compensation of Directors/Trustees 17
Management and Advisory Arrangements 18
Code of Ethics 20
Purchase of Shares 20
Initial Sales Charge Alternatives--Class I and Class A Shares 21
Reduced Initial Sales Charges 23
Deferred Sales Charge Alternatives--Class B and Class C Shares 24
Distribution Plans 26
Limitations on the Payment of Deferred Sales Charges 28
Redemption of Shares 29
Redemption 29
Repurchase 30
Reinstatement Privilege--Class I and Class A Shares 30
Pricing of Shares 31
Determination of Net Asset Value 31
Computation of Offering Price Per Share 32
Portfolio Transactions and Brokerage 32
Transactions in Portfolio Securities 32
Shareholder Services 34
Investment Account 34
Exchange Privilege 35
Fee-Based Programs 37
Retirement and Education Savings Plans 37
Automatic Investment Plans 37
Automatic Dividend Reinvestment Plan 37
Systematic Withdrawal Plan 38
Dividends and Taxes 39
Dividends 39
Taxes 39
Tax Treatment of Options and Futures Transactions 40
Performance Data 41
General Information 43
Description of Shares 43
Independent Auditors 43
Accounting Services Provider 43
Custodian 43
Transfer Agent 44
Legal Counsel 44
Reports to Shareholders 44
Shareholder Inquiries 44
Additional Information 44
Financial Statements 44
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high current return
through investments in U.S. Government and Government agency securities,
including Government National Mortgage Association ("GNMA") mortgage-backed
certificates and other mortgage-backed government securities. The investment
objective of the Fund is a fundamental policy of the Fund which may not be
changed without a vote of a majority of the Fund's outstanding voting
securities. Reference is made to "How the Fund Invests" and "Investment Risks"
in the Prospectus. The Fund is classified as a diversified fund under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
There can be no assurance that the investment objective of the Fund will be
achieved.
The Fund invests in a portfolio of bonds and other debt 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 ("U.S. Government
securities"). Certain of these obligations, including U.S. Treasury bills,
notes and bonds and securities of GNMA and the Federal Housing Administration
("FHA"), are issued or guaranteed by the U.S. Government and supported by the
full faith and credit of the United States. Other U.S. Government securities
are issued or guaranteed by Federal agencies or government-sponsored
enterprises and are not direct obligations of the United States but involve
sponsorship or guarantees by Government agencies or enterprises. The guarantee
by Federal agencies or government-sponsored enterprises of their securities
does not extend to the Program's shares. These obligations include securities
that are supported by the right of the issuer to borrow from the Treasury,
such as obligations of Federal Home Loan Banks, and securities that are
supported only by the credit of the instrumentality, such as Federal National
Mortgage Association ("FNMA") bonds. Because the U.S. Government is not
obligated to provide support to its instrumentalities, the Fund will invest in
obligations issued by these instrumentalities where the Fund is satisfied that
the credit risk with respect to the issuers is minimal. The Fund intends to
invest substantially all (at least 80%) of its total assets in bonds or other
debt securities that are issued or guaranteed by the U.S. government,
government agencies or government sponsered enterprises. In addition, the Fund
may invest up to 5% of its assets in obligations issued or guaranteed by the
International Bank for Reconstruction and Development (the "World Bank"), an
international organization of which the United States is a member country.
The Fund has authority to invest in all U.S. Government securities. A
significant portion of its portfolio of U.S. Government securities may consist
of GNMA mortgaged-backed certificates ("GNMA Certificates") and other U.S.
Government securities representing ownership interests in mortgage pools. For
a description of GNMA Certificates and other eligible securities representing
interests in mortgage pools, see "GNMA Certificates and Other Mortgage-Backed
Government Securities" below. Determinations as to the types of U.S.
Government securities held by the Fund will be made by the Investment Adviser.
The Investment Adviser's decisions will be based on, among other factors, the
relative yields of the various types of U.S. Government securities, its
assessment of future interest rate patterns and the desirability of holding
U.S. Government securities on which it may write covered options, as described
below.
The Investment Adviser will effect portfolio transactions without
regard to any holding period if, in its judgment, such transactions are
advisable in light of a change in general market, economic or financial
conditions. A high portfolio turnover rate involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Fund. Such turnover also has certain tax
consequences for the Fund.
The average maturity of the Fund's holdings will vary based on the
Investment Adviser's assessment of pertinent economic and market conditions.
As with all debt securities, changes in market yields will affect the value of
such securities. Prices generally increase when interest rates decline and
decrease when interest rates rise. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do shorter term
securities. In as much as the Fund invests in mortgage-backed securities,
however, it is also important to note that the Fund's net asset value may also
fall when interest rates fall to the extent the Fund's holdings expose the
Fund to losses from prepayment risk. See "GNMA Certificates and Other
Mortgage-Backed Government Securities" below.
GNMA Certificates and Other Mortgage-Backed Government Securities
The Fund will invest a significant portion of its assets in GNMA
Certificates and other mortgage-backed government securities. 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 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 is likely to 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, the Fund may invest in
mortgage-backed securities issued by FNMA and by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA, a federally-chartered and
privately-owned corporation, issues pass-through securities and certificates
representing an interest in a pool of FNMA pass-through securities which are
guaranteed as to payment of principal and interest by FNMA. 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 FNMA and FHLMC mortgage-backed securities will
vary based on the prepayment experience of the underlying pool of mortgages.
Securities guaranteed by FNMA and FHLMC are not backed by the full faith and
credit of the United States.
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 of 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 relating 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 of the Fund and will accelerate the recognition of income,
which, when distributed to shareholders, will be taxable as ordinary income.
Stripped Mortgage-Backed Securities. The Fund 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. 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, the 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, the 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 collateralized mortgage obligations ("CMOs") or fixed rate
securities; as interest rates fall, presenting a greater risk of unanticipated
prepayments of principal, the negative effect on the 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 of SMBSs are considered by the staff of the
Commission to be illiquid securities and, consequently, as long as the staff
maintains this position, 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% (10% to the extent required by certain state laws) of
the Fund's total assets.
Other Investment Policies and Practices
Temporary Investments. For temporary or defensive purposes or in
anticipation of redemptions, the Fund is authorized to invest up to 100% of
its assets in money market instruments (short term, high quality debt
instruments), including obligations of or guaranteed by the U.S. Government or
its instrumentalities or agencies, certificates of deposit, bankers'
acceptances and other bank obligations, commercial paper rated in the highest
category by a nationally recognized rating agency or other fixed income
securities deemed by the Investment Adviser to be consistent with the
objectives of the Fund, or the Fund may hold its assets in cash.
When Issued and Delayed Delivery Securities and Forward Commitments.
The Fund may purchase or sell securities that it is entitled to receive on a
when issued or delayed delivery basis. The Fund may also purchase or sell
securities through a forward commitment. These transactions involve the
purchase or sale of securities by the Fund at an established price with
payment and delivery taking place in the future. The Fund enters into these
transactions to obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not established any
limit on the percentage of their assets that may be committed in connection
with these transactions. When the Fund is purchasing securities in these
transactions, it maintains a segregated account with its custodian of cash,
cash equivalents, U.S. Government securities or other liquid securities in an
amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued
basis will be issued, or a security purchased or sold through a forward
commitment will be delivered. The value of securities in these transactions on
the delivery date may be more or less than the Fund's purchase price. The Fund
may bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the value of the
security during the commitment period.
Standby Commitment Agreements. The Fund may enter into standby
commitment agreements. These agreements commit the Fund, for a stated period
of time, to purchase a stated amount of securities which may be issued and
sold to that Fund at the option of the issuer. The price of the security is
fixed at the time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. The Fund will enter into such agreements for
the purpose of investing in the security underlying the commitment at a price
that it considers advantageous. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of the
commitment. The Fund will maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other liquid securities
in an aggregate amount equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the
security thereafter will be reflected in the calculation of the Fund's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may
invest in U.S. Government securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts 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 other party agrees, upon entering into the
contract with the Fund, 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. In the case of repurchase agreements, the
prices at which the trades are conducted do not reflect accrued interest on
the underlying obligation; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with
disposition of the collateral.
A purchase and sale contract differs from a repurchase agreement in
that the contract arrangements stipulate that the securities are owned by the
Fund. In the event of a default under such a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate, the rate of
return to the Fund would be dependent upon intervening fluctuations of the
market values of such securities and the accrued interest on the securities.
In such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform. The Fund may not invest in repurchase
agreements or purchase and sale contracts maturing in more than seven days if
such investments, together with the Fund's other illiquid investments, would
exceed 15% of the Fund's total assets.
Securities Lending. The Fund may lend securities to banks, brokers
and other financial institutions. In return, the Fund receives collateral in
cash or securities issued or guaranteed by the U.S. Government, which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. This limitation is a fundamental policy
and it may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities, as defined in the Investment Company
Act. The fund receives the income on the loaned securities. Where the Fund
receives securities as collateral, the Fund receives a fee for its loan from
the borrower. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, 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 borrowed securities within the standard time period for
settlement of securities transactions. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with its loans.
In the event that the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the Fund could
experience delays and costs in gaining access to the collateral. The Fund also
could 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 Fund
has received an exemptive order from the Commission permitting it to lend
portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") or its affiliates and to retain an affiliate of the fund as
lending agent. See "Portfolio Transactions and Brokerage."
Illiquid or Restricted Securities. The Fund may invest up to 15% of
its net assets in securities that lack an established secondary trading market
or otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from
comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of that
investment in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered under the
Securities Act of 1933, as amended (the "Securities Act"), or that are subject
to trading restrictions under the laws of a foreign jurisdiction ("restricted
securities"). Restricted securities have contractual or legal restrictions on
their resale and include "private placement" securities that the Fund may buy
directly from the issuer. Restricted securities may be sold in private
placement transactions between issuers and their purchasers and may be neither
listed on an exchange nor traded in other established markets. In many cases,
privately placed securities may or may not be freely transferable under the
laws of the applicable jurisdiction or due to contractual restrictions on
resale. As a result of the absence of a public trading market, privately
placed securities may be more difficult to value than publicly traded
securities and may be less liquid, or illiquid, and therefore may be subject
to the risks associated with illiquid securities, as described in the
preceding paragraph. Some restricted securities, however, may be liquid. To
the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the Fund are
required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less-seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict its ability to conduct portfolio transactions in such securities.
Although not a fundamental policy, the Fund will include OTC options
and securities underlying such options in calculating the amount of its assets
subject to the limitation on restricted securities. The Fund will not change
or modify this policy prior to the change or modification by the Commission
staff of its positions regarding OTC options.
144A Securities. The Fund may purchase restricted securities that can
be offered and sold to "qualified institutional buyers" under Rule 144A under
the Securities Act. The Directors have determined to treat as liquid Rule 144A
securities that are either freely tradable in their primary markets offshore
or have been determined to be liquid in accordance with the policies and
procedures adopted by the Program's Directors. The Directors have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Directors,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance exactly
how this market for restricted securities sold and offered under Rule 144A
will continue to develop, the Directors will carefully monitor the Fund's
investments in these securities. This investment practice could have the
effect of increasing the level of illiquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these securities.
Borrowing and Leverage. The Fund may borrow up to 33 1/3% of its total
assets, taken at market value, but only from banks as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions or to
settle securities transactions. The Fund will not purchase securities at any
time when borrowings exceed 5% of its total assets, except (a) to honor prior
commitments or (b) to exercise subscription rights when outstanding borrowings
have been obtained exclusively for settlements of other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging increases the Fund's
exposure to capital risk, and borrowed funds are subject to interest costs
that will reduce net income. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value
of Fund shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund which can exceed the income from the assets
purchased with the borrowings. To the extent the income or capital
appreciation derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay on the borrowings, the Fund's return will
be greater than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such borrowed funds is
not sufficient to cover the cost of borrowing, the return to the Fund will be
less than if leverage had not been used, and therefore the amount available
for distribution to shareholders as dividends will be reduced. In the latter
case, the Investment Adviser in its best judgment nevertheless may determine
to maintain the Fund's leveraged position if it expects that the benefits to
the Fund's shareholders of maintaining the leveraged position will outweigh
the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage,
portfolio composition requirements and other matters. It is not anticipated
that observance of such covenants would impede the Investment Adviser from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies. However, a breach of any such covenants not cured
within the specified cure period may result in acceleration of outstanding
indebtedness and require the Fund to dispose of portfolio investments at a
time when it may be disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment
Adviser, provided that the terms of such borrowings are no less favorable than
those available from comparable sources of funds in the marketplace.
Derivatives
The 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 oil or gold), a currency 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 Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
Hedging. The Fund may use Derivatives for hedging purposes. Hedging
is a strategy in which a Derivative is used to offset the risks associated
with other 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 investing in the Derivative 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 Fund is not required to use
hedging and may choose not to do so.
The Fund may use the following types of derivative investments and
trading strategies:
Indexed and Inverse Floating Rate Securities. The Fund may invest in
securities the potential return of which is based on an index. As an
illustration, the Fund may invest in a debt security that pays interest based
on the current value of an interest rate index, such as the prime rate. The
Fund may also invest in a debt security which returns principal at maturity
based on the level of a securities index or a basket of securities, or based
on the relative changes of two indices. In addition, the Fund may invest in
securities the potential return of which is based inversely on the change in
an index (that is, a security the value of which will move in the opposite
direction of changes to an index). For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index
decreases and pay a lower rate of interest (or do not fully return principal)
when the value of the index increases. If the Fund invests in such securities,
it may be subject to reduced or eliminated interest payments or loss of
principal in the event of an adverse movement in the relevant index or
indices. Indexed and inverse securities involve credit risk, and certain
indexed and inverse securities may involve leverage risk, liquidity risk, and
currency risk. The Fund may invest in indexed and inverse securities for
hedging purposes, to increase return or to vary the degree of portfolio
leverage relatively efficiently under different market conditions. When used
for hedging purposes, indexed and inverse securities involve correlation risk.
Indexed and inverse securities are currently issued by a number of U.S.
governmental agencies such as FHLMC and FNMA, as well as a number of other
financial institutions. To the extent the Fund invest in such instruments,
under current market conditions, it most likely will purchase indexed and
inverse securities issued by the above-mentioned U.S. governmental agencies.
Options and Futures Transactions. The Fund may engage in various
portfolio strategies to seek to increase its return through the use of listed
or over-the-counter ("OTC") options on its portfolio securities and to hedge
its portfolio against adverse movements in the markets in which it invests.
The Fund is authorized to write (i.e., sell)
covered put and call options on its portfolio securities or securities in
which it anticipates investing and purchase put and call options on
securities. The Fund may also engage in transactions in interest rate futures
and related options on such futures. Although certain risks are involved in
options and futures transactions, the Investment Adviser believes that,
because the Fund will (i) write only covered options on portfolio securities
or securities in which they anticipate investing and (ii) engage in other
options and futures transactions only for hedging purposes, the options and
portfolio strategies of the Fund will not subject it to the risks frequently
associated with the speculative use of options and futures transactions. While
the Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, its net asset value will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
the equity or debt markets, interest rates or currency exchange rates occur.
Writing of Covered Options. The Fund may from time to time write
(i.e., sell) covered call options on its portfolio securities and may enter
into closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund in return for a premium gives
another party a right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. A call option
is considered covered where the writer of the option owns the underlying
securities. The principal reason for writing covered call options is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing a covered call option,
the Fund, in return for the premium income realized from the sale of the
option, may give up the opportunity to profit from a price increase in the
underlying security above the option exercise price. In addition, the Fund
will not be able to sell the underlying security until the option expires, is
exercised or the Fund effects a closing purchase transaction as described
below. A closing purchase transaction cancels out the Fund's position as the
writer of an option by means of an offsetting purchaser of an identical option
prior to the expiration of the option it has written. If the option expires
unexercised, the Fund realizes a gain in the amount of the premium received
for the option which may be offset by a decline in the market price of the
underlying security during the option period. The use of covered call options
is not a primary investment technique of the Fund and such options normally
will be written on underlying securities as to which management does not
anticipate significant short term capital appreciation. Covered call options
serve as a partial hedge against the price of the underlying security
declining. The Fund may not write covered options on underlying securities
exceeding 15% of its total assets.
The Fund also may write put options which give the holder of the
option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option,
which increases the Fund's return. The Fund writes only covered put options,
which means that so long as the Fund is obligated as the writer of the option
it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars with a securities depository with a
value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of
that security at the time of exercise for so long as the option is
outstanding. The Fund may engage in closing transactions in order to terminate
put options that it has written.
A closing purchase transaction is effected by purchasing on an
exchange an option of the same series (i.e., same underlying security,
exercise price and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing purchase
transaction ordinarily will be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, to permit
the sale of the underlying security or to permit the writing of a new call
option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. An option may be closed out only on an
exchange which provides a secondary market for an option of the same series
and there is no assurance that a liquid secondary market on an exchange will
exist for any particular option. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon
exercise, with the result that the writer will be subject to the risk of
market decline in the underlying security during such period. The Fund will
write an option on a particular security only if management believes that a
liquid secondary market will exist on an exchange for options of the same
series which will permit the Fund to make a closing purchase transaction in
order to close out its position.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option, the Fund has a right to sell the underlying security at the exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction, and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund may purchase call options
on securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. The Fund will not purchase options on
securities if, as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's total assets.
Interest Rate Futures Contracts. The Fund may purchase and sell
interest rate futures contracts, as a hedge against adverse changes in the
market value of portfolio securities, as described below. Interest rate
futures contracts are herein referred to as "futures contracts."
A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and seller of a futures
contract to sell a financial instrument for a set price on a future date. The
terms of a futures contract require actual delivery of the financial
instrument underlying the contract. The Fund may invest in interest rate
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in futures contracts are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the
securities that might otherwise result. When the Fund is not fully invested in
the securities markets and anticipates a significant advance, it may purchase
futures in order to gain rapid market exposure. This technique generally will
allow the Fund to gain exposure to a market in a manner which is more
efficient than purchasing individual securities and may in part or entirely
offset increases in the cost of securities in such market that the Fund
ultimately purchases. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. The Fund does not
consider purchases of futures contracts to be a speculative practice under
these circumstances. It is anticipated that, in a substantial majority of
these transactions, the Fund will purchase such securities upon termination of
the long futures position, whether the long position is the purchase of a
futures contract or the purchase of a call option or the writing of a put
option on a future, but under unusual circumstances (e.g., a Fund experiences
a significant amount of redemptions), a long futures position may be
terminated without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put
options on futures contracts in connection with its hedging (including
anticipatory hedging) activities. Generally, these strategies are utilized
under the same market and market sector conditions (i.e., conditions relating
to specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on
futures contracts rather than selling the underlying futures contract in
anticipation of a decrease in the market value of its securities. Similarly,
the Fund may purchase call options, or write put options on futures contracts,
as a substitute for the purchase of such futures contract to hedge against the
increased cost resulting from an increase in the market value of securities
which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S.
exchanges and in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
with standardized strike prices and expiration dates. OTC options are
two-party contracts with prices and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission (the "CFTC") applicable to the Fund
provide that the futures trading activities described herein will not result
in the Fund being deemed a "commodity pool" as defined under such regulations
if the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's holdings,
after taking into account unrealized profits and unrealized losses on any such
contracts and options. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will
be deposited in a segregated account in the name of the Fund with the Fund's
custodian so that the amount so segregated, plus the amount of initial and
variation margin held in the account of its broker, equals the market value of
the futures contracts, thereby ensuring that the use of such futures contract
is unleveraged.
Restrictions on OTC Options. The Fund may engage in OTC options only
with such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has 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 transaction, the sum of the market
value of OTC options currently outstanding which are held by the Fund, the
market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and market deposits on the
Fund's existing OTC options of futures contracts exceed 15% (10% to the extent
required by certain state laws) of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are illiquid or
are not otherwise readily marketable. However, if the OTC option is sold by
the Fund to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer 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 strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors of the
Program without the approval of the Fund's shareholders. However, the Fund
will not change or modify this policy prior to the change or modification by
the SEC staff of its position.
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, the 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) of other GNMA Certificates in the cash market in order to maintain
its "cover."
A GNMA Certificate held by the Fund to cover an options 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.
Risks Factors in Options and Futures Transactions. Utilization of
options and futures transactions to hedge a Fund involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of
the hedged securities, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of the subject of the hedge.
The successful use of options and futures also depends on the Investment
Adviser's ability to correctly predict price movements in the market involved
in a particular options or futures transaction. To compensate for imperfect
correlations, the Fund may purchase or sell options or futures contracts in a
greater dollar amount than the hedged securities if the volatility of the
hedged securities is historically greater than the volatility of the options
or futures contracts. Conversely, the Fund may purchase or sell
fewer options or futures contracts if the volatility of the price of the
hedged securities is historically less than that of the options or futures
contracts. The risk of imperfect correlation generally tends to diminish as
the maturity date of the options or futures contract approaches.
The Fund intends to enter into options and futures transactions, on
an exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of
over-the-counter transactions, the Investment Adviser believes the Fund can
receive in each business day at least two independent bids or offers. However,
there can be no assurance that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to hedge effectively its portfolio.
There is also a risk of loss by the Fund of margin deposits or collateral in
the event of bankruptcy of a broker with whom the Fund has an open position in
an option, a futures contract or a related option.
The exchanges on which the Fund intends to conduct options
transactions have generally established limitations governing the maximum
number of call or put options on the same underlying security or currency
(whether or not covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or
more accounts or through one or more brokers). "Trading limits" are imposed on
the maximum number of contracts which any person may trade on a particular
trading day. The Investment Adviser does not believe that these trading and
position limits will have any adverse impact of the portfolio strategies for
hedging the Fund's holdings.
All options referred to herein and in the Fund's Prospectus are
options issued by the Options Clearing Corporation (the "Clearing
Corporation") which are currently traded on the Chicago Board Options
Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange or New York Stock Exchange ("NYSE").
Suitability
The economic benefit of an investment in the Fund depends upon many
factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on mortgage-backed securities, the Fund
should be considered a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor of a purchase
of shares in the Fund will depend on, among other things, such investor's
investment objectives and such investor's ability to accept the risks
associated with investing in mortgage-backed securities, including the risk of
loss of principal.
Investment Restrictions
The Program has adopted the following restrictions and policies
relating to the investment of the Fund's assets and its activities. The
fundamental restrictions set forth below may not be changed with respect to
the Fund without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the Investment
Company Act means the lesser of (i) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares). Unless otherwise provided, all references
to the assets of the Fund below are in terms of current market value. The Fund
may not:
1. Make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities directly
or indirectly secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or
any similar instruments shall not be
deemed to be the making of a loan, and except further that the Fund may
lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the
guidelines set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the
Fund may purchase securities on margin to the extent permitted by
applicable law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when issued and
forward commitment transactions and similar investment strategies. The
Fund will not purchase securities while borrowings exceed 5% of its
assets. The Fund has no present intention to borrow money in amounts
exceeding 5% of its assets.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except
to the extent that the Fund may do so in accordance with applicable law
and the Fund's Prospectus and Statement of Additional Information, as
they may be amended from time to time, and without registering as a
commodity pool operator under the Commodity Exchange Act.
Additional investment restrictions adopted by the Fund that may be
changed by the Program's Board of Directors without shareholder approval,
provide that the Fund may not:
(a) Purchase securities of other investment companies, except
to the extent such purchases are permitted by applicable law. As a
matter of policy, however, the Fund will not purchase shares of any
registered open-end investment company or registered unit investment
trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of
funds" provisions) of the Investment Company Act, at any time the
Fund's shares are owned by another investment company that is part
of the same group of investment companies as the Program.
(b) Make short sales of securities or maintain a short
position, except to the extent permitted by applicable law.
(c) Invest in securities that cannot be readily resold because
of legal or contractual restrictions or that cannot otherwise be
marketed, redeemed or put to the issuer or a third party, if at the
time of acquisition more than 15% of its net assets would be
invested in such securities. This restriction shall not apply to
securities that mature within seven days or securities that the
Directors of the Program have otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act and determined to be liquid by
the Program's Board of Directors are not subject to the limitations
set forth in this investment restriction.
(d) Notwithstanding fundamental investment restriction (7)
above, borrow amounts in excess of 10% of its total assets, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as redemption of Fund
shares. The Fund will not purchase securities while borrowing
exceeds 5% (taken at market value) of its total assets.
Portfolio securities of the Fund generally may not be purchased from,
sold or loaned to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless pursuant to a
rule or exemptive order under the Investment Company Act.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding that were sold by the Fund
and margin deposits on the Fund's existing
OTC options on futures contracts exceeds 15% of the net assets of the Fund
taken at market value, together with all other assets of the Fund that are
illiquid or are not otherwise readily marketable. However, if the OTC option
is sold by the Fund to a primary U.S. Government securities dealer recognized
by the Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer 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 securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price that is generally based
on a multiple of the premium received for the option plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors without the
approval of the shareholders. However, the Directors will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or
its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions." Without such an exemptive order, the Fund would
be prohibited from engaging in portfolio transactions with Merrill Lynch or
any of its affiliates acting as principal.
Portfolio Turnover
The Investment Adviser will effect portfolio transactions without
regard to any holding period if, in its judgment, such transactions are
advisable in light of a change in general market, economic or financial
conditions. The Fund's portfolio turnover increased from 84.53% in the fiscal
year ended Januray 31, 2001 to 185.42% in the fiscal year ended January 31,
2002 due to a significant net inflow of assets into the Fund, changes in
interest rates and an increase in the use of purchase and sale contracts
involving GNMA Certificates. A high portfolio turnover rate involves certain
tax consequences such as increased capital gain dividends and/or ordinary
income dividends and correspondingly greater transaction costs in the form of
dealer spreads and brokerage commissions, which are borne directly by the
Fund. See "Portfolio Transactions."
MANAGEMENT OF THE PROGRAM
Directors and Officers
The Directors of the Program consist of nine individuals, eight of
whom are not "interested persons" of the Program as defined in the Investment
Company Act. The Directors are responsible for the overall supervision of the
operations of the Program and perform the various duties imposed on the
directors of investment companies by the Investment Company Act.
Each non-interested Director is a member of the Program's Audit
Committee ("Audit Committee"). The principal responsibilities of the Committee
are to (i) recommend to the board the selection, retention or termination of
the Fund's independent auditors; (ii) review with the independent auditors the
scope, performance and anticipated cost of their audit; (iii) discuss with the
independent auditors certain matters relating to the Fund's financial
statements, including any adjustment to such financial statements recommended
by such independent auditors, or any other results of any audit; (iv) ensure
that the independent auditors submit on a periodic basis a formal written
statement with respect to their independence, discuss with the independent
auditors any relationships or services disclosed in the statement that may
impact the objectivity and independence of the Program's independent auditors
and recommend that the Board take appropriate action in response thereto to
satisfy itself of the independent auditor's independence; and (v) consider the
comments of the independent auditors and management's responses thereto with
respect to the quality and adequacy of the Fund's accounting and financial
reporting policies and practices and internal controls. The Board of the
Program has adopted a written charter for the Committee. The Committee also
reviews and nominates candidates to serve as non-interested Directors. The
Committee generally will not consider nominees recommended by shareholders.
The Committee has retained independent legal counsel to assist them in
connection with these duties.
Biographical Information. Certain biographical and other information
relating to the non-interested Directors of the Program is set forth below,
including their ages, their principal occupations for at least the last five
years, the length of the time served, the total number of portfolios overseen
in the complex of funds advised by the Investment Adviser and its affiliate,
Merrill Lynch Investment Managers, L.P. ("MLIM"), ("MLIM/FAM-Advised Funds")
and other public directorships.
Term of
Office* and Number of
Position(s) Held Length of Time Principal Occupation During MLIM/FAM-Advised
Name, Address and Age with Program Served Past Five Years Funds Overseen
- --------------------- ----------------- --------------- --------------------------- ----------------
James H. Bodurtha (58) Director Director Since 2002 Director and Executive Vice 53 registered investment
36 Popponesset Road President, The China Business companies consisting of 74
Cotuit, Massachusetts 02635 Group, Inc. since 1996; portfolios
Chairman and Chief Executive
Officer, China Enterprise
Management Corporation from
1993 to 1996; Partner, Squire,
Sanders & Dempsey from 1980 to
1993.
Joe Grills (67) Director Director since 1994 Member of the Committee of 56 Registered investment
PO Box 98 Investment of Employee Benefit companies consisting of 77
Rapidan, Virginia 22733 Assets of the Association of portfolios
Financial 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.
Herbert I. London (63) Director Director since 2002 John M. Olin Professor of 53 Registered investment
2 Washington Square Village Humanities, New York companies consisting of 74
New York, New York 10012 University since 1993 and portfolios
Professor thereof since 1980;
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.
Name, Address and Age Public Directorships
- --------------------- --------------------
James H. Bodurtha (58) None
36 Popponesset Road
Cotuit, Massachusetts 02635
Joe Grills (67) Kimco Realty Corporation
PO Box 98
Rapidan, Virginia 22733
Herbert I. London (63) None
2 Washington Square Village
New York, New York 10012
Term of
Office* and Number of
Position(s) Held Length of Time Principal Occupation During MLIM/FAM-Advised
Name, Address and Age with Program Served Past Five Years Funds Overseen
- --------------------- ----------------- --------------- --------------------------- ----------------
Andre F. Perold (50) Director Director since 2002 Harvard Business School: 53 Registered investment
Morgan Hall George Gund Professor of companies consisting of 74
Soldiers Field Finance and Banking since portfolios
Boston, Massachusetts 02163 2000; Sylvan C. Coleman
Professor of Financial
Management from 1993 to 2000;
Trustee, Commonfund from 1989
to 2001; Director, Sanlam
Limited since 2001; Director,
Genbel Securities Limited and
Gensec Bank since 1999;
Director, Stockback.com since
2000; 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) Director Director since 2002 Shareholder, Modrall, 53 Registered investment
PO Box 2168 Sperling, Roehl, Harris & companies consisting of 74
500 Fourth Street, N.W. Sisk, P.A. since 1993; portfolios
Albuquerque, New Mexico 87107 President, American Bar
Association from 1995 to 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
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.
Robert S. Salomon, Jr. (65) Director Director since 1995 Principal of STI Management 56 Registered investment
106 Dolphin Cove Quay (investment adviser) since companies consisting of 77
Stamford, Connecticut 06902 1994; Chairman and CEO of portfolios
Salomon Brothers Asset
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) Director Director since 1994 Director of Silbanc 56 Registered investment
780 Third Avenue, Suite 2502, Properties, Ltd. (real estate, companies consisting of 77
New York, New York 10017 investment and consulting) portfolios
since 1987; Chairman and
President of Seiden & de
Cuevas, Inc. (private
investment firm) from 1964 to
1987.
Stephen B. Swensrud (68) Director Director since 1994 Chairman of Fernwood Advisors 56 Registered investment
88 Broad Street, 2nd Floor, (investment adviser) since companies consisting of 77
Boston, Massachusetts 02110 1996; Principal of Fernwood portfolios
Associates (financial
consultant) since 1975;
Chairman of RPP Corporation
(manufacturing) since 1978;
Director, International Mobile
Communications, Inc.
(telecommunications) since
1998.
Name, Address and Age Public Directorships
- --------------------- --------------------
Andre F. Perold (50) None
Morgan Hall
Soldiers Field
Boston, Massachusetts 02163
Roberta Cooper Ramo (59) None
PO Box 2168
500 Fourth Street, N.W.
Albuquerque, New Mexico 87107
Robert S. Salomon, Jr. (65) None
106 Dolphin Cove Quay
Stamford, Connecticut 06902
Melvin R. Seiden (71) None
780 Third Avenue, Suite 2502,
New York, New York 10017
Stephen B. Swensrud (68) None
88 Broad Street, 2nd Floor,
Boston, Massachusetts 02110
- ----------------
* Each Director serves until his or her successor is elected or qualified, or until his or her death or resignation,
or removal as provided in the Program's by-laws or charter or by statute, or until December 31 of the year in which
he or she turns 72.
Certain biographical and other information relating to the Director who
is an "interested person" as defined in the Investment Company Act, and other
officers of the Program is set forth below:
Term of
Office and Number of
Position(s) Held Length of Time Principal Occupation During MLIM/FAM-Advised
Name, Address+ and Age with the Program Served Past Five Years Funds Overseen
- ---------------------- ----------------- --------------- --------------------------- ----------------
Terry K. Glenn (61)++ Director and President* and Chairman (Americas Region) of 127 Registered investment
President Director** since MLIM and FAM since 2000; companies consisting of 184
1999 Executive Vice President of portfolios
FAM and MLIM (which terms as
used herein include their
corporate predecessors) 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, LP ("Princeton
Administrators") since 1988;
Director of Financial Data
Services, Inc. since 1985.
R. Elise Baum (42) Senior Vice Senior Vice Managing Director of MLIM 1 Registered investment
President President and since 2000. First Vice company consisting of 3
and Portfolio Portfolio Manager President of MLIM from 1999 to portfolios
Manager since 2000*** 2000; Director of MLIM from
1997 to 1999; Vice President
of MLIM from 1995 to 1997.
Donald C. Burke (41) Vice President Vice President First Vice President of FAM 128 Registered investment
and Treasurer since 1994 and and MLIM since 1997 and the companies consisting of 185
Treasurer Treasurer thereof since 1999; portfolios
since 1999*** Senior Vice President 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.
Robert C. Doll, Jr. (47) Senior Vice Senior Vice President of FAM and MLIM 51 Registered investment
President President since 2001; Co-head (Americas companies consisting of 75
since 1999*** Region) of MLIM from 2000 to portfolios
2002 and Senior Vice President
thereof from 1999 to 2000;
Director of Princeton Services
since 1999; Chief Investment
Officer of OppenheimerFunds,
Inc. in 1999 and Executive
Vice President thereof from
1991 to 1999.
Lawrence R. Fuller (61) Senior Vice Senior Vice First Vice President of MLIM 3 Registered investment
President President since since 1997 and Vice President companies consisting of 7
and Portfolio 1998 and Portfolio thereof from 1992 to 1997. portfolios
Manager Manager since
1996***
Teresa Giacino (39) Vice President Senior Vice Vice President of MLIM since 1 Registered investment
and Portfolio President since 1992. company consisting of 3
Manager 2002 portfolios
and Portfolio
Manager since
2001***
Name, Address+ and Age Public Directorships
- ---------------------- --------------------
Terry K. Glenn (61)++ None
R. Elise Baum (42) None
Donald C. Burke (41) None
Robert C. Doll, Jr. (47) None
Lawrence R. Fuller (61) None
Teresa Giacino (39) None
Term of
Office and Number of
Position(s) Held Length of Time Principal Occupation During MLIM/FAM-Advised
Name, Address+ and Age with the Program Served Past Five Years Funds Overseen
- ---------------------- ----------------- --------------- --------------------------- ----------------
Frank Viola (37) Senior Vice Senior Vice Director of MLIM since 1997 5 Registered investment
President and President since and a Portfolio Manager companies consisting of 5
Portfolio Manager 2002 and Portfolio thereof since 1997; Treasurer portfolios
Manager since of Merrill Lynch Bank & Trust
2001*** from 1996 to 1997 and Vice
President of Merrill Lynch
Capital Markets from 1993 to
1996.
Susan B. Baker (44) Secretary Secretary Director (Legal Advisory) of 45 Registered investment
since 2001*** MLIM since 1999; Vice companies consisting of 53
President of MLIM from 1993 to portfolios
1999; attorney associated with
MLIM since 1987.
Name, Address+ and Age Public Directorships
- ---------------------- --------------------
Frank Viola (37) None
Susan B. Baker (44) None
- --------------
+ The address for each officer listed is P.O. Box 9011, Princeton, New Jersey 08543-9011.
++ Mr. Glenn is an "interested person," as defined in the Investment Company Act, of the Program based on his
positions with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators.
* Mr. Glenn was elected President of the Program in 1999. Prior to that he served as Executive Vice President of the
Fund.
** Each Director serves until his or her successor is elected and qualified, or until his or her death or resignation,
or removal as provided in the 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 Directors of the Program.
Share Ownership. Information relating to each Director's share
ownership in the Fund and in all registered funds in the Merrill Lynch family
of funds that are overseen by the respective Director ("Supervised Merrill
Lynch Funds") as of December 31, 2001 is set forth in the chart below:
Aggregate Dollar Range
Aggregate Dollar Range of Securities in Supervised
Name of Equity in the Fund Merrill Lynch Funds
- ---- ---------------------- ---------------------------
Interested Directors:
Terry K. Glenn None Over $100,000
Non-Interested Directors:
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 None
Melvin R. Seiden None $1 - $10,000
Robert S. Salomon, Jr. None None
Stephen B. Swensrud None None
As of May 10, 2002, the Directors and officers of the Fund as a group
(16 persons) owned an aggregate of less than 1% of the outstanding shares of
the Fund. At such date, Mr. Glenn, a Director and officer of the Program, and
the other officers of the Program owned an aggregate of less than 1% of the
outstanding shares of common stock of Merrill Lynch & Co., Inc. ("ML & Co.").
As of December 31, 2001, none of the non-interested Directors of the Program
nor any of their immediate family members owned beneficially or of record any
securities in "ML & Co.".
Compensation of Directors
The Program pays each non-interested Director, for service to the
Program, a fee of $1,300 per year plus $300 per in-person meeting attended,
together with such individual's actual out-of-pocket expenses relating to
attendance at meetings. The Program also compensates members of the Audit
Committee, which consists of all of the non-affiliated Directors at the rate
of $1,300 annually for service to the Program plus $300 per Committee meeting
attended. The Committee met four times during the fiscal year ended January
31, 2002.
The following table sets forth the compensation earned by the
non-interested Directors for the fiscal year ended January 31, 2002 and the
aggregate compensation paid to them by all investment companies advised by
MLIM/FAM-advised funds for the calendar year ended December 31, 2001.
Aggregate
Pension or Compensation from
Retirement Benefits Estimated Annual Program and Other
Position with Compensation Accrued as Part of Benefits upon MLIM/FAM-Advised
Name Program from Program Program Expense Retirement Funds
- ----------------- ------------- ------------ ------------------- ---------------- -----------------
James H. Bodurtha* Director None None None $160,000
Joe Grills Director $9,167 None None $259,500
Herbert I. London* Director None None None $160,000
Andre F. Perold* Director None None None $160,000
Roberta Cooper Ramo* Director None None None $160,000
Robert S. Salomon, Jr. Director $9,167 None None $222,000
Melvin R. Seiden Director $9,167 None None $222,000
Stephen B. Swensrud Director $9,167 None None $406,083
- ----------------------
* Ms. Ramo and Messrs. Bodurtha, London and Perold were elected to serve as
Directors of the Program on April 15, 2002.
The Directors of the Program may be eligible for reduced sales
charges on purchases of Class I shares. See "Purchase of Shares--Reduced
Initial Sales Charges--Purchase Privileges of Certain Persons."
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund
with investment advisory and management services. Subject to the supervision
of the Board of Directors, the Investment Adviser is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
Investment Advisory Fee. As compensation for its services to the Fund,
the Investment Adviser will receive from the Fund a fee at an annual rate of
0.50% of the average daily net assets of the Fund.
Prior to April 3, 2000, MLIM, an affiliate of the Investment
Adviser under common control and management as the Investment Adviser, acted
as investment adviser to the Fund. The table below sets forth for the periods
indicated the total advisory fee paid by the Fund to the Investment Adviser
and, for the period prior to April 3, 2000, to MLIM. For the fiscal years
ended January 31, 2001 and 2002, the Investment Adviser voluntarily waived
management fees.
Investment Advisory
Period Fee Amount ($) Fee Waived
- ------ -------------- -------------------
Fiscal year ended January 31, 2002 $252,010 $252,010
Fiscal year ended January 31, 2001 $ 83,077 $ 83,077
Fiscal year ended January 31, 2000 $100,949 $100,949
Payment of Fund Expenses. The Investment Advisory Agreement obligates
the Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Program
who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays
all other expenses incurred in the operation of the Fund, including among
other things: taxes, expenses for legal and auditing services, costs of
preparing, printing, and mailing proxies, stock certificates, shareholder
reports, prospectuses and statements of additional information, except to the
extent paid by the Distributor; charges of the custodian and the transfer
agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal and state securities laws; fees and
expenses of unaffiliated Directors; accounting and pricing costs (including
the daily calculations of net asset value); insurance; interest; brokerage
costs; litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Certain accounting services are
provided for the Fund by State Street Bank and Trust Company ("State Street")
pursuant to an agreement between State Street and the Program, on behalf of
the Fund. The Fund
pays a fee for these services. In addition, the Fund reimburses the Investment
Adviser for the cost of other accounting services. The Distributor will pay
certain promotional expenses of the Fund incurred in connection with the
offering of shares of the Fund. Certain expenses will be financed by the Fund
pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Distribution Plans."
Organization of the Investment Adviser. Fund Asset Management, LP,
doing business as Mercury Advisors, is the Fund's Investment Adviser. The
Investment Adviser is a limited partnership, the partners of which are ML &
Co., a financial services holding company and the parent of Merrill Lynch and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Investment Adviser as defined under the Investment Company Act because
of their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described
herein, the Investment Advisory Agreement for the Fund will remain in effect
from year to year if approved annually (a) by the Board of Directors of the
Program or by a majority of the outstanding shares of the subject Fund and (b)
by a majority of the Directors who are not parties to such contract or
interested persons (as defined in the Investment Company Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party or by vote of the
shareholders of the Fund.
At a meeting of the Board of Directors held on April 10, 2002, the
Board approved the continuation of the Fund's Investment Advisory Agreement
for an additional year. In connection with its deliberations, the Board
reviewed information derived from a number of sources and covering a range of
issues. The Board considered the services provided to the fund by the
Investment Adviser and its affiliated under other agreement, and the personnel
who provide these services. In addition to investment advisory services, the
Investment Adviser and its affiliates provide administrative services,
shareholder services, oversight of fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund. The Board also considered the
Investment Adviser's costs of providing services, and the direct and indirect
benefits to the Investment Adviser from its relationship with the Fund. The
benefits considered by the Board included not only the Investment Adviser's
compensation for investment advisory services under the Investment Advisory
Agreement and the Investment Adviser's profitability under the Investment
Advisory Agreement, but also compensation paid to the Investment Adviser or
its affiliates for other, non-advisory, services provided to the Fund. The
Directors also considered the Investment Adviser's access to research services
from brokers to which the Investment Adviser may have allocated Fund brokerage
in a "soft dollar" arrangement. In connection with its consideration of the
Investment Advisory Agreement, the Board also compared the Fund's advisory fee
rate, expense ratios and historical performance to those of comparable funds.
The Board considered whether there should be changes in the advisory fee rate
or structure in order to enable the fund to participate in any economies of
scale that the Investment Adviser may experience as a result of growth in the
Fund's assets. The Board also reviewed materials supplied by Fund counsel that
were prepared for use by the Board in fulfilling its duties under the
Investment Company Act and state law.
Based on the information reviewed and the discussions, the Board,
including a majority of the non-interested Directors, concluded that it was
satisfied with the nature and quality of the services provided by the
Investment Adviser to the Fund and that the investment management fee rate was
reasonable in relation to such services. The non-interested Directors were
represented by independent counsel who assisted the non-interested Directors
in their deliberations.
Transfer Agency Services. Financial Data Services, Inc. (the
"Transfer Agent"), a subsidiary of ML & Co., acts as the Program's Transfer
Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. The Fund currently pays between $16.00
and $20.00 for each Class I or Class A shareholder account and between $19.00
and $23.00 for each Class B or Class C shareholder account depending on the
level of service required. The Fund also reimburses the Transfer Agent's
reasonable out-of-pocket expenses and pays a fee of 0.10% of account assets
for certain accounts that participate in certain fee-based programs. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co.
The table below sets forth information about the total amounts paid
by the Fund to the Transfer Agent for the periods indicated.
Fiscal Year Ended January 31, Transfer Agent Fee*
2002 $79,561
2001 $47,537
2000 $62,789
* During the periods shown, the Fund paid fees to the Transfer Agent at
lower rates than the ones currently in effect. If the current rates had
been in effect for the periods shown, the fees paid may have been
higher.
Accounting Services. The Program, on behalf of the Fund, entered into
an agreement with State Street, effective January 1, 2001, pursuant to which
State Street provides certain accounting services to the Fund. The Fund pays a
fee for these services. Prior to January 1, 2001, the Investment Adviser
provided accounting services to the Fund and was reimbursed by the Fund at its
cost in connection with such services. The Investment Adviser continues to
provide certain accounting services to the Fund and the Fund reimburses the
Investment Adviser for the cost of these services.
The table below shows the amounts paid by the Fund to State Street
and the Investment Adviser for the periods indicated:
Paid to Paid to the
Fiscal Year Ended January 31, State Street Investment Adviser
---------------------------- ------------ ------------------
2002 $30,433 $ 4,793
2001 $897* $22,200
2000 N/A $13,556
- ---------------
* Represents payments pursuant to the agreement with State Street
effective on January 1, 2001.
Distribution Expenses. The Fund has entered into a distribution
agreement with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreement"). The
Distribution Agreement obligates the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to financial intermediaries and potential investors. The
Distributor also pays for other supplementary sales literature and advertising
costs. The Distribution Agreement is subject to the same renewal requirements
and termination provisions as the Investment Advisory Agreement described
above.
Code of Ethics
The Board of Directors of the Program has approved a Code of Ethics
under Rule 17j-1 of the Investment Company Act that covers the Fund, the
Investment Adviser and the Distributor. 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 Fund.
PURCHASE OF SHARES
Reference is made to "Account Choices--How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase
of Fund shares.
The Fund issues four classes of shares: shares of Class I and Class A
are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Each Class I, Class A, Class B and Class C share of
the Fund represents an identical interest in the investment portfolio of the
Fund, and has the same rights, except that Class A, Class B and Class C shares
bear the expenses of the ongoing account maintenance fees (also known as
service fees) and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The contingent deferred
sales charges ("CDSCs"), distribution fees and account maintenance fees that
are imposed on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class A shares, are imposed directly against those
classes and not against all assets of the Fund, and, accordingly, such charges
do not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares are calculated in the same manner at the same time and
differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class A, Class B and Class C shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which the account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the distribution plan for
Class A Shares). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class I and Class A shares are the
same as those of the CDSCs and distribution fees with respect to the Class B
and Class C shares in that the sales charges and distribution fees applicable
to each class provide for the financing of the distribution of the shares of
the Fund. The distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Fund offers its shares at a public offering price equal to the
next determined net asset value per share plus any sales charge applicable to
the class of shares selected by the investor. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase order by the Distributor. As to
purchase orders received by securities dealers or other financial
intermediaries prior to the close of business on the NYSE (generally 4:00
p.m., Eastern time) which includes orders received after the determination of
net asset value on the previous day, the applicable offering price will be
based on the net asset value on the day the order is placed with the
Distributor, provided that the orders are received by the Distributor prior to
30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received prior to 30 minutes after the close of
business on the NYSE on that day, such orders shall be deemed received on the
next business day. Dealers or other financial intermediaries have the
responsibility of submitting purchase orders to the Fund not later than 30
minutes after the close of business on the NYSE.
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Fund or the Distributor.
Neither the Distributor, the securities dealers nor any other financial
intermediary is permitted to withhold placing orders to benefit themselves by
a price change. Certain securities dealers or other financial intermediaries
may charge a processing fee to confirm a sale of shares to such customers. For
example, the fee currently charged by Merrill Lynch is $5.35. Purchases made
directly through the Transfer Agent are not subject to the processing fee.
Initial Sales Charge Alternatives--Class I and Class A Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class A shares or, if an eligible investor, Class I shares. Investors
choosing the initial sales charge alternatives who are eligible to purchase
Class I shares should purchase Class I shares rather than Class A shares
because there is an account maintenance fee imposed on Class A shares.
Investors qualifying for significantly reduced initial sales charges
may find the initial sales charge alternative particularly attractive, because
similar sales charge reductions are not available with respect to the deferred
sales charges imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class A shares, the
account maintenance fee. Although some investors who previously purchased
Class I shares may no longer be eligible to purchase Class I shares of other
Affiliated-Advised Funds, those previously purchased Class I shares, together
with Class A, Class B and Class C share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class A
account maintenance fees will cause Class A shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class I shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or their own
account and to single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account although more
than one beneficiary is involved. The term "purchase" also includes purchases
by any "company," as that term is defined in the Investment Company Act, but
does not include purchases by any such company that has not been in existence
for at least six months or which has no purpose other than the purchase of
shares of the Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any group
of individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an insurance
company, customers of either a bank or broker-dealer or clients of an
investment adviser.
Eligible Class I Investors. Class I shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends paid
on outstanding Class I shares. Investors who currently own Class I shares in a
shareholder account are entitled to purchase additional Class I shares of a
Fund in that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class I shares at net asset
value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by the Investment Adviser or
any of its affiliates. Also eligible to purchase Class I shares at net asset
value are participants in certain investment programs including certain
managed accounts for which a trust institution, thrift, or bank trust
department provides discretionary trustee services, certain collective
investment trusts for which a trust institution, thrift, or bank trust
department serves as trustee, certain purchases made in connection with
certain fee-based programs and certain purchases made through certain
financial advisers that meet and adhere to standards established by the
Investment Adviser. In addition, Class I shares are offered at net asset value
to ML & Co. and its subsidiaries and their directors and employees, to members
of the Boards of Mercury and Affiliate-Advised Funds, including the Fund, and
to employees of certain selected dealers. Class I shares may also be offered
at net asset value to certain accounts over which the Investment Adviser or an
affiliate exercises investment discretion.
The following table sets forth information regarding Class I and
Class A sales charge information for the Fund.
Class I Shares
- ------------------------------------------------------------------------------
For the Gross Sales CDSC's Received
Fiscal year Sales Charges Sales Charges on
ended Charges Retained by Paid to Redemption of
January 31, Collected Distributor Merrill Lynch Load-Waived Shares
- ----------- --------- ----------- ------------- -------------------
2002 $0 $0 $0 $0
2001 $0 $0 $0 $0
2000 $0 $0 $0 $0
Class A Shares
- ------------------------------------------------------------------------------
For the Gross Sales CDSC's Received
Fiscal year Sales Charges Sales Charges on
ended Charges Retained by Paid to Redemption of
January 31, Collected Distributor Merrill Lynch Load-Waived Shares
- ----------- --------- ----------- ------------- -------------------
2002 $47,579 $3,153 $44,426 $2
2001 $ 6,065 $ 406 $ 5,659 $0
2000 $ 1,180 $ 73 $ 1,106 $0
The Distributor may reallow discounts to selected securities dealers
and other financial intermediaries and retain the balance over such discounts.
At times the Distributor may reallow the entire sales charge to such dealers
and financial intermediaries. Since securities dealers and other financial
intermediaries selling Class I and Class A shares of the Fund will receive a
concession equal to most of the sales charge, they may be deemed to be
underwriters under the Securities Act.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales load are
due to the nature of the investors and/or the reduced sales efforts that will
be needed to obtain such investments.
Reinvested Dividends. No initial sales charges are imposed upon Class
I and Class A shares issued as a result of the automatic reinvestment of
dividends.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other Mercury mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided
at the time of purchase, by the purchaser or the purchaser's securities dealer
or other financial intermediary, with sufficient information to permit
confirmation of qualification. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time. Shares held in the name of a nominee or custodian under pension,
profit-sharing, or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class I or Class A shares of the Fund or any
other Mercury mutual funds made within a 13-month period starting with the
first purchase pursuant to the Letter of Intent. The Letter of Intent is
available only to investors whose accounts are established and maintained at
the Fund's Transfer Agent. The Letter of Intent is not available to employee
benefit plans for which affiliates of the Investment Adviser provide plan
participant record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class I or Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant
to a Letter of Intent may be included under a subsequent Letter of Intent
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class I and
Class A shares of the Fund and of other Mercury mutual funds presently held,
at cost or maximum offering price (whichever is higher), on the date of the
first purchase under the Letter of Intent, may be included as a credit toward
the completion of such Letter, but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If the
total amount of shares does not equal the amount stated in the Letter of
Intent (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the execution of such Letter, the difference between the
sales charge on the Class I or Class A shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Class I or Class A shares equal to 5.0% of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter
of Intent must be at least 5.0% of the dollar amount of such Letter. If a
purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge but there will be no retroactive reduction of
the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter. An exchange from the
Summit Cash Reserves Fund ("Summit"), a series of Financial Institutions
Series Trust, into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class I or Class A shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in
specified investments. Certain other plans may purchase Class B shares with a
waiver of the CDSC upon redemption, based on similar criteria. Such Class B
shares will convert into Class A shares approximately ten years after the plan
purchases the first share of any Mercury mutual fund. Minimum purchase
requirements may be waived or varied for such plans. For additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements, call your plan administrator or your
selected dealer.
Managed Trusts. Class I shares are offered at net asset value to
certain trusts to which trust institutions, thrifts, and bank trust
departments provide discretionary trustee services.
Purchase Privileges of Certain Persons. Directors of the Program,
members of the Boards of other investment companies advised by the Investment
Adviser or its affiliates, directors and employees of ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes the Investment Adviser, MLIM, Mercury Asset Management
International, Ltd. and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.), employees of certain selected dealers and
financial intermediaries, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class I shares of the Fund at net
asset value. The Fund realizes economies of scale and reduction of
sales-related expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors or trustees wishing to purchase shares of the
Fund must satisfy the Fund's suitability standards.
Class I and Class A shares may also be offered at net asset value to
certain accounts over which the Investment Adviser or an affiliate exercises
investment discretion.
Acquisition of Certain Investment Companies. Class A shares may be
offered at net asset value in connection with the acquisition of the assets of
or merger or consolidation with a personal holding company or a public or
private investment company.
Purchases Through Certain Financial Advisers. Reduced sales charges
may be applicable for purchases of Class I or Class A shares of the Fund
through certain financial advisers, selected securities dealers and other
financial intermediaries that meet and adhere to standards established by the
Investment Adviser from time to time.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an extended
period of time and Class C shares if they are uncertain as to the length of
time they intend to hold their assets in Mercury mutual funds.
Because no initial sales charges are deducted at the time of the
purchase, Class B and Class C shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made. The deferred
sales charge alternatives may be particularly appealing to investors that do
not qualify for the reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution fees
potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class A shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares--Determination of Net Asset Value" below.
Class B Shares.
Class B shares that are redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends. It will be assumed
that the redemption is first of shares held for over six years or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the six-year period. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
The following table sets forth the Class B CDSC:
CDSC as a Percentage
of Dollar amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------- --------------------
0-1 4.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and thereafter None
To provide an example, assume an investor purchased 100 shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because they were issued through dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.0% (the applicable rate in the third year after
purchase).
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services--Exchange Privilege" will continue to
be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the Class B shares acquired as a result of the
exchange.
As discussed in the Prospectus under "Account Choices--Pricing of
Shares--Class B and C Shares--Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an individual retirement
account ("IRA") or other retirement plan or redemption of Class B shares in
certain circumstances following the death of a Class B shareholder. In the
case of such withdrawal, the reduction or waiver applies to: (a) any partial
or complete redemption in connection with a distribution following retirement
under a tax-deferred retirement plan on attaining age 59 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA (certain legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution); or (b) any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability, or if later, reasonably
promptly following completion of probate or in connection with involuntary
termination of an account in which Fund shares are held (certain legal
documentation may be required at the time of liquidation establishing
eligibility for qualified distribution).
The charge may also be reduced or waived in other instances, such as:
(a) redemptions by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers; (b) redemptions in connection with participation in
certain fee-based programs managed by the Investment Adviser or its
affiliates; (c) redemptions in connection with participation in certain
fee-based programs managed by selected dealers or other financial
intermediaries that have agreements with Mercury; or (d) until June 30, 2002,
redemptions in connection with the termination by the Distributor of certain
distributor arrangements regarding that Fund with unaffiliated selected
securities dealers or other financial intermediaries; or (e) withdrawals
through the Systematic Withdrawal Plan of up to 10% per year of your account
value at the time the plan is established; or (f) involuntary termination of
an account in which Fund Shares are held. See "Shareholder Services--Fee-Based
Programs" and "--Systematic Withdrawal Plan."
Conversion of Class B Shares to Class A Shares. After approximately
ten years (the "Conversion Period"), Class B shares of the Fund will be
converted automatically into Class A shares of that Fund. Class A shares are
subject to an ongoing account maintenance fee of 0.25% of the average daily
net assets of a Fund but are not subject to the distribution fee that is borne
by Class B shares. Automatic conversion of Class B shares into Class A shares
will occur at least once each month (on the "Conversion Date") on the basis of
the relative net asset value of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class A shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class A shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at the Conversion Date the conversion
of Class B shares to Class A shares of the Fund in a single account will
result in less than $50 worth of Class B shares being left in the account, all
of the Class B shares of the Fund held in the account on the Conversion Date
will be converted to Class A shares of the Fund.
The Conversion Period may be modified for investors that participate
in certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services--Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Class C Shares.
Class C shares that are redeemed within one year of purchase may be
subject to a 1.0% CDSC charged as a percentage of the dollar amount subject
thereto. In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC
will be assessed on shares derived from reinvestment of dividends. It will be
assumed that the redemption is first of shares held for over one year or
shares acquired pursuant to reinvestment of dividends and then of shares held
longest during the one-year period. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held or withdrawals through
the Systematic Withdrawal Plans. See "Shareholder Services--Systematic
Withdrawal Plan."
Class B and Class C Sales Charge Information.
Class B Shares*
----------------------------------------------------------------
For the fiscal year CDSCs Received CDSCs Paid to
ended January 31, by Distributor Merrill Lynch
------------------- -------------- -------------
2002 $58,945 $58,945
2001 $47,511 $47,511
2000 $44,536 $44,536
* Additional Class B CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
Class C Shares
----------------------------------------------------------------
For the fiscal year CDSCs Received CDSCs Paid to
ended January 31, by Distributor Merrill Lynch
------------------- -------------- -------------
2002 $11,057 $11,057
2001 $ 1,402 $ 1,402
2000 $ 5,163 $ 5,163
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of securities dealers or other financial intermediaries (including
Merrill Lynch) and financial intermediaries related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
advisors for selling Class B and Class C shares from a dealer's own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. See "Distribution Plans" below.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the National Association of Securities Dealers, Inc. (the
"NASD") asset-based sales charge rule. See "Limitations on the Payment of
Deferred Sales Charges" below.
Distribution Plans
Reference is made to "Account Choices--Pricing of Shares" in the
Prospectus for certain information with respect to separate distribution plans
for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Funds to the
Distributor with respect to such classes.
The Distribution Plan for each of the Class A, Class B and Class C
shares provides that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and paid monthly,
at the annual rate of 0.25% of the average daily net assets of the Fund
attributable to shares of the relevant class in
order to compensate the Distributor, a selected securities dealer or other
financial intermediary (pursuant to a sub-agreement) in connection with
account maintenance activities with respect to Class A, Class B and Class C
shares. Each of those classes has exclusive voting rights with respect to the
Distribution Plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B
shareholders may vote on any material changes to expenses charged under the
Class A Distribution Plan).
The Distribution Plans for Class B and Class C shares provide that
the Fund also pays the Distributor a distribution fee relating to the shares
of the relevant class, accrued daily and paid monthly, at the annual rate of
0.50% for Class B shares and 0.55% for Class C shares of the average daily net
assets of the Fund attributable to the shares of the relevant class in order
to compensate the Distributor, a selected securities dealer or other financial
intermediary (pursuant to a sub-agreement) for providing shareholder and
distribution services, bearing certain distribution-related expenses of the
Fund, including payments to financial advisors for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B or Class C
shares through selected securities dealers or other financial intermediaries,
without the assessment of an initial sales charge, and at the same time permit
the dealer to compensate its financial advisors, selected securities dealers
or other financial intermediaries in connection with the sale of the Class B
and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule
12b-1 under the Investment Company Act. In their consideration of each
Distribution Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of each Distribution Plan to the Fund
and the related class of shareholders. Each Distribution Plan further provides
that, so long as the Distribution Plan remains in effect, the selection and
nomination of non-interested Directors shall be committed to the discretion of
the non-interested Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested Directors concluded
that there is reasonable likelihood that such Distribution Plan will benefit
the Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
non-interested Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by the
Fund without the approval of the related class of shareholders, and all
material amendments are required to be approved by the vote of Directors,
including a majority of the non-interested Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of its Distribution Plans and any report made pursuant to such
plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
Among other things, each Distribution Plan provides that the
Distributor shall provide and the Directors shall review quarterly reports of
the disbursement of the account maintenance and/or distribution fees paid to
the Distributor. Payments under the Distribution Plans are based on a
percentage of average daily net assets attributable to the shares regardless
of the amount of expenses incurred and, accordingly, distribution-related
revenues from each Distribution Plan may be more or less than
distribution-related expenses of the related class. Information with respect
to the distribution-related revenues and expenses is presented to the
Directors for their consideration quarterly, and, in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans, annually. Distribution-related revenues consist of the account
maintenance fees, distribution fees and CDSCs. Distribution-related expenses
consist of financial advisor compensation, branch office and regional
operation center selling and transaction processing expenses, advertising,
sales promotion and marketing expense, and interest expense.
As of January 31, 2002, direct cash distribution revenues for the
period since the commencement of operations of Class B shares exceeded direct
cash distribution expenses by $154,735 (0.325% of Class B net assets at that
date). As of January 31, 2002, direct cash distribution revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash distribution expenses by $156,055 (0.858% of Class C net assets at that
date).
For the fiscal year ended January 31, 2002, the Fund paid the
Distributor $241,852 pursuant to the Class B Distribution Plan (based on
average daily net assets subject to such Class B Distribution Plan of
approximately $32.3 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class B shares. For the fiscal year ended January 31, 2002,
the Fund paid
the Distributor $100,810 pursuant to the Class C Distribution Plan (based
on average daily net assets subject to such Class C Distribution Plan of
approximately $12.6 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended January 31, 2002,
the Fund paid the Distributor $9,323 pursuant to the Class A Distribution Plan
(based on average daily net assets subject to such Class A Distribution Plan
of approximately $3.7 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class A
shares.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares, but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by
the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from
the payment of the distribution fee and the CDSC). In connection with the
Class B shares, the Distributor has voluntarily agreed to waive interest
charges on the unpaid balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor (referred to as
the "voluntary maximum") in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of the distribution
fee with respect to Class B shares and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstance payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of January
31, 2002 with respect to the Class B and Class C shares indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and, with respect to the Class B shares, the Distributor's voluntary maximum
for the periods indicated.
Data Calculated as of January 31, 2002
----------------------------------------------------------------------------------------
(In thousands)
Annual
Allowable Distribution
Allowable Interest Amounts Fee at
Eligible Aggregate on Maximum Previously Aggregate Current
Gross Sales Unpaid Amount Paid to Unpaid Net Asset
Sales(1) Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------- ---------- ---------- ------- -------------- --------- ------------
Class B Shares, for the period
February 1, 1995 (commencement of
operations) to January 31, 2002
Under NASD Rule as Adopted $41,418 $2,580 $291 $2,871 $592 $2,279 $238
Under Distributor's Voluntary Waiver $41,418 $2,580 $216 $2,796 $592 $2,204 $238
Class C Shares, for the period
February 1, 1995 (commencement of
operations) to January 31, 2002
Under NASD Rule as Adopted $22,559 $1,409 $179 $1,588 $176 $1,142 $100
- --------------
(1) Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund"). Upon such an exchange, the maximum
allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange
out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus
1.0%, as permitted under the NASD Rule.
(footnotes continued on next page)
(footnotes continued from previous page)
(4) Consists of CDSC payments, distribution fee payments and accruals. See "Fund Facts--Fees and Expenses" in the
Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in
Class A shares in conjunction with the shareholder's participation in the MFA Program. The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC
payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will
reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B
and Class C shares).
REDEMPTION OF SHARES
Reference is made to "Account Choices--How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.
The Fund is required to redeem for cash all shares upon receipt of a
written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any
such redemption may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by the Commission
or during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders.
The value of shares of the Fund at the time of redemption may be more
or less than the shareholder's cost, depending in part on the market value of
the securities held by the Fund at such time.
The Fund has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates and
a syndicate of banks that is intended to provide the Fund with a temporary
source of cash to be used to meet redemption requests from Fund shareholders
in extraordinary or emergency circumstances.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent
may do so without charge by tendering the shares directly to the Fund's
Transfer Agent, Financial Data Services, Inc., PO Box 44062, Jacksonville,
Florida 32232-4062. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Redemption requests should not be sent to the
Program or the Fund. A redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption request may require a guarantee by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934 (the "Exchange Act"), the existence and validity of which
may be verified by the Transfer Agent through the use of industry
publications. In the event a signature guarantee is required, notarized
signatures are not sufficient. In general, signature guarantees are waived on
redemptions of less than $50,000 as long as the following requirements are
met: (i) all requests require the signature(s) of all persons in whose name(s)
shares are recorded on the Transfer Agent's register; (ii) all checks must be
mailed to the stencil address of record on the Transfer Agent's register and
(iii) the stencil address must not have changed within 30 days. Certain rules
may apply regarding certain account types such as but not limited to UGMA/UTMA
accounts, Joint Tenancies With Rights of Survivorship, contra broker
transactions and institutional accounts. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority.
A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the
Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder
of record and be for an amount less than $50,000. Before telephone requests
will be honored, signature approval from all shareholders of record on the
account must be obtained. The shares being redeemed must have been held for at
least 15 days. Telephone redemption requests will not be honored in the
following situations: the accountholder is deceased, the proceeds are to be
sent to someone other than the shareholder of record, funds are to be wired to
the client's bank account, a systematic withdrawal plan is in effect, the
request is by an individual other than the accountholder of record, the
account is held by joint tenants who are divorced, the address on the account
has changed within the last 30 days or share certificates have been issued on
the account.
Since this account feature involves a risk of loss from unauthorized
or fraudulent transactions, the Transfer Agent will take certain precautions
to protect your account from fraud. Telephone redemption may be refused if the
caller is unable to provide: the account number, the name and address
registered on the account and the social security number registered on the
account. The Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.
For shareholders redeeming directly with the Transfer Agent, payments
will generally be mailed within seven days of receipt of a proper notice of
redemption. At various times the Fund may be requested to redeem shares for
which it has not yet received good payment (e.g., cash, Federal funds or
certified check drawn on a U.S. bank). The Fund may delay or cause to be
delayed the mailing of a redemption check until such time as good payment
(e.g., cash, Federal funds or certified check drawn on a U.S. Bank) has been
collected for the purchase of such Fund shares, which will not usually exceed
10 days. In the event that a shareholder account held directly with the
Transfer Agent contains a fractional share balance, such fractional share
balance will be automatically redeemed by the Fund.
Repurchase
The Fund also will repurchase its shares through a selected
securities dealer or other financial intermediary. The Fund normally will
accept orders to repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after the order is placed.
Shares will be priced at the net asset value calculated on the day the request
is received, provided that the request for repurchase is submitted to the
selected securities dealer or other financial intermediary prior to the close
of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) and such request is received by the Fund from such selected securities
dealer or other financial intermediary not later than 30 minutes after the
close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the NYSE in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Certain
securities dealers or other financial intermediaries may charge a processing
fee to confirm a repurchase of shares. For example, the fee currently charged
by Merrill Lynch is $5.35. Fees charged by other securities dealers may be
higher or lower. Repurchases made through the Fund's Transfer Agent, on
accounts held at the Transfer Agent, are not subject to the processing fee.
The Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by
the Fund, however, may redeem Fund shares as set forth above.
Reinstatement Privilege--Class I and Class A Shares
Shareholders of the Fund who have redeemed their Class I and Class A
shares have a privilege to reinstate their accounts by purchasing Class I or
Class A shares, as the case may be, at net asset value without a sales charge
up to the dollar amount redeemed. The reinstatement privilege may be exercised
by sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's financial
advisor within 30 days after the date the request for redemption was accepted
by the Transfer Agent or the Distributor. The reinstatement will be made at
the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "Account Choices--How Shares are Priced" in the
Prospectus.
The net asset value of the shares of all classes of the Fund is
determined once daily Monday through Friday as of the close of business on the
NYSE on each day the NYSE is open for trading based on prices at the time of
closing. The NYSE generally closes at 4:00 p.m. Eastern time. The NYSE is not
open for trading on New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Net asset value is computed by dividing the value of the securities
held by the Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares of the Fund outstanding at
such time, rounded to the nearest cent. Expenses, including the fees payable
to the Investment Adviser and Distributor, are accrued daily.
The per share net asset value of Class A, Class B and Class C shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. Moreover, the per share net asset
value of the Class B and Class C shares of the Fund generally will be lower
than the per share net asset value of Class A shares, reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the four classes of the Fund
will tend to converge (although not necessarily meet) immediately after the
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities of the Fund that are traded on stock exchanges
are valued at the last sale price on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors of the
Program as the primary market. Long positions in securities traded in the OTC
market are valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions in securities traded in the OTC market
are valued at the last available ask price. When the Fund writes an option,
the amount of the premium received is recorded on its books as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last ask price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Other
investments, including financial futures contracts and related options, are
generally valued at market value. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless the Investment Adviser
believes that this method no longer produces fair valuations. Repurchase
agreements will be valued at cost plus accrued interest. Securities and assets
for which market quotations are not readily available are stated at fair value
as determined in good faith by or under the direction of the Board of
Directors of the Program. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Program.
Generally, trading in non-U.S. securities as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of business on the NYSE that may not be reflected
in the computation
of the Fund's net asset value. If events occur during such periods that are
expected to materially affect the value of such securities, then those
securities may be valued at their fair value as determined in good faith but
the Board of Directors of the Fund.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class I,
Class A, Class B and Class C shares of the Fund based on the value of its
estimated net assets and number of shares outstanding on January 31, 2002 is
as follows:
Class I Class A Class B Class C
------- ------- ------- -------
Net Assets $4,700,486 $5,412,675 $47,935,930 $18,217,007
Number of Shares Outstanding 466,643 514,973 4,563,681 1,732,677
Net Asset Value Per Share
(net assets divided by number
of shares outstanding) $ 10.52 $ 10.51 $ 10.50 $ 10.51
Sales Charge (for Class I and
Class A Shares: 4.00% of
offering price (4.17% of
net amount invested))* .44 .44 ** **
---------- ---------- ----------- -----------
Offering Price $ 10.96 $ 10.95 $ 10.50 $ 10.51
========== ========== =========== ===========
- ------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption.
See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the Directors of the Program, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Investment Adviser
does not execute transactions through any particular broker or dealer, but
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution, operational facilities of the
firm and the firm's risk in positioning blocks of securities. While the
Investment Adviser generally seeks reasonably competitive trade execution
costs, the Fund does not necessarily pay the lowest spread or commission
available. Subject to applicable legal requirements, the Investment Adviser
may select a broker based partly upon brokerage or research services provided
to the Investment Adviser and its clients, including the Fund. In return for
such services, the Investment Adviser may pay a higher commission than other
brokers would charge if the Investment Adviser determines in good faith that
the commission is reasonable in relation to the services provided.
Section 28(e) of the Exchange Act ("Section 28(e)") permits an
investment adviser, such as the Investment Adviser, under certain
circumstances, to cause an account to pay a broker or dealer a commission for
effecting a transaction in excess of the amount of commission another broker
or dealer would have charged for effecting the same transaction in recognition
of the value of brokerage and research services provided by that broker or
dealer. This includes commissions paid on riskless principal transactions
under certain conditions. Brokerage and research services include (1)
furnishing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). The Investment Adviser believes that
access to independent investment research is beneficial to its investment
decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers,
such services may be in written form or through direct contact with
individuals and may include information as to particular companies and
securities as well as market, economic, or institutional areas and information
which assists in the valuation of investments. Examples of research-oriented
services for which the Investment Adviser might use Fund commissions include
research reports and other information on the economy, industries, groups of
securities, individual companies,
statistical information, political developments, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance and other analysis. Except as noted immediately below, research
services furnished by brokers may be used in servicing some or all client
accounts and not all services may be used in connection with the account that
paid commissions to the broker providing such services. In some cases,
research information received from brokers by mutual fund management personnel
or personnel principally responsible for the Investment Adviser's individually
managed portfolios is not necessarily shared by and between such personnel.
Any investment advisory or other fees paid by the Fund to the Investment
Adviser are not reduced as a result of the Investment Adviser's receipt of
research services.
In some cases the Investment Adviser may receive a service from a
broker that has both a "research" and a "non-research" use. When this occurs,
the Investment Adviser makes a good faith allocation, under all the
circumstances, between the research and non-research uses of the service. The
percentage of the service that is used for research purposes may be paid for
with client commissions, while the Investment Adviser will use its own funds
to pay for the percentage of the service that is used for non-research
purposes. In making this good faith allocation, the Investment Adviser faces a
potential conflict of interest, but the Investment Adviser believes that its
allocation procedures are reasonably designed to ensure that it appropriately
allocates the anticipated use of such services to their research and
non-research uses. From time to time, the Fund may purchase new issues of
securities in a fixed price offering. In these situations, the broker may be a
member of the selling group that will, in addition to selling securities,
provide the Investment Adviser with research services. The NASD has adopted
rules expressly permitting these types of arrangements under certain
circumstances. Generally, the broker will provide research "credits" in these
situations at a rate that is higher than that which is available for typical
secondary market transactions. These arrangements may not fall within the safe
harbor of Section 28(e).
In addition, consistent with the Conduct Rules of the NASD and
policies established by the Board of Directors of the Fund and subject to best
execution, the Investment Adviser may consider sales of shares of the Fund as
a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund; however, whether or not a particular broker or
dealer sells shares of the Fund neither qualifies nor disqualifies such broker
or dealer to execute transactions for the Fund.
Foreign equity securities may be held by the Fund in the form of
ADRs, EDRs, GDRs or other securities convertible into foreign equity
securities. ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in
over-the-counter markets in the United States or Europe, as the case may be.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates.
The Fund's ability and decisions to purchase or sell portfolio
securities of foreign issuers may be affected by laws or regulations relating
to the convertibility and repatriation of assets. Because the shares of each
Fund are redeemable on a daily basis in U.S. Dollars, the Program intends to
manage each Fund so as to give reasonable assurance that it will be able to
obtain U.S. Dollars to the extent necessary to meet anticipated redemptions.
Under present conditions, it is not believed that these considerations will
have significant effect on the Program's portfolio strategies.
During the fiscal years ended January 31, 2000, 2001, and 2002 the
Fund did not pay any brokerage commissions.
Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such persons are prohibited from dealing
with the Fund as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Fund,
including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund
may serve as its broker in listed or OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by
such affiliated broker is reasonable and fair compared to the fee or
commission received by nonaffiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of Trustees
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch or its affiliates except for brokerage transactions
permitted under the Investment Company Act involving only usual and customary
commissions or transactions pursuant to an exemptive order under the
Investment Company Act. Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any
of its affiliates acting as principal.
The Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to Merrill Lynch or its affiliates.
Pursuant to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent for a fee, including a fee
based on a share of the returns on investment of cash collateral. That entity
may, on behalf of the Fund, invest cash collateral received by the Fund for
such loans, among other things, in a private investment company managed by
that entity or in registered money market funds advised by the Investment
Adviser or its affiliates. For the fiscal year ended January 31, 2002 (the
first fiscal year during which the exemption order was applicable) that
affiliated entity received no securities lending agent fees from the Fund.
Section 11(a) of the Exchange Act generally prohibits members of the
U.S. national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Program in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Program and annual statements as to aggregate compensation will be
provided to the Program. Securities may be held by, or be appropriate
investments for, the Program as well as other funds or investment advisory
clients of the Investment Adviser or its affiliates.
The Board of Directors have considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid to the
Investment Adviser. After considering all factors deemed relevant, the
Directors made a determination not to seek such recapture. The Directors will
reconsider this matter from time to time.
Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Investment Adviser or
its affiliates when one or more clients of the Investment Adviser or its
affiliates are selling the same security. If purchases or sales of securities
arise for consideration at or about the same time that would involve the Fund
or other clients or funds for which the Investment Adviser or an affiliate act
as investment adviser, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Investment Adviser or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that
are designed to facilitate investment in its shares. Full details as to each
such service and copies of the various plans or how to change options with
respect thereto, can be obtained from the Fund by calling the telephone number
on the cover page hereof, or from the Distributor, a selected securities
dealer or other financial intermediary. Certain of these services are
available only to U.S. investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent
has an Investment Account and will receive statements, at least quarterly,
from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
dividends. The statements also will show any other activity in the account
since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent. The
Fund does not issue share certificates.
Shareholders considering transferring their Class I or Class A shares
from a selected securities dealer or other financial intermediary to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take
delivery of Fund shares, a shareholder either must redeem the Class I or Class
A shares so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class I or Class A shares.
Shareholders interested in transferring their Class B or Class C
shares from a selected dealer or financial intermediary and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent
may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Certain shareholder services may not be
available for the transferred shares. After the transfer, the shareholder may
purchase additional shares of funds owned before the transfer, and all future
trading of these assets must be coordinated by the new firm.
Shareholders considering transferring a tax-deferred retirement
account, such as an individual retirement account, from a selected securities
dealer or other financial intermediary to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account
is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at a selected
dealer for those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an
exchange privilege with other Mercury mutual funds and Summit, which is a
Merrill Lynch-sponsored money market fund 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 used in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange,
shareholders should obtain a currently effective prospectus of the fund into
which the exchange is to be made. Exercise of the exchange privilege is
treated as a sale of the exchanged shares and a purchase of the acquired
shares for Federal income tax purposes.
Exchanges of Class I and Class A Shares. Under the Fund's pricing
system, Class I shareholders may exchange Class I shares of the Fund for Class
I shares of a second Mercury mutual fund. If the Class I shareholder wants to
exchange Class I shares for shares of a second Mercury mutual fund, but does
not hold Class I shares of the second fund in his or her account at the time
of exchange and is not otherwise eligible to acquire Class I shares of the
second fund, the shareholder will receive Class A shares of the second fund as
a result of the exchange. Class A shares also may be exchanged for Class I
shares of a second Mercury mutual fund at any time as long as, at the time of
the exchange, the shareholder is eligible to acquire Class I shares of any
Mercury mutual fund.
Exchanges of Class I or Class A shares outstanding ("outstanding
Class I or Class A shares") for Class I or Class A shares of another Mercury
mutual fund, or for Class A shares of Summit ("new Class I or Class A shares")
are transacted on the basis of relative net asset value per Class I or Class A
share, respectively, plus an amount equal to the difference, if any, between
the sales charge previously paid on the outstanding Class I or Class A shares
and the sales charge payable at the time of the exchange on the new Class I or
Class A shares. With respect to outstanding Class I or Class A shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such
Class I or Class A shares in the initial purchase and any subsequent exchange.
Class I or Class A shares issued pursuant to dividend reinvestment are sold on
a no-load basis in each of the funds offering Class I or Class A shares. For
purposes of the exchange privilege, Class I and Class A shares acquired
through dividend reinvestment shall be deemed to have been sold with a sales
charge equal to the sales charge previously paid on the Class I or Class A
shares on which the dividend was paid. Based on this formula, Class I and
Class A shares of the Fund generally may be exchanged into the Class I and
Class A shares, respectively, of the other funds with a reduced or without a
sales charge.
Exchanges of Class B and Class C Shares. In addition, each of the
funds with Class B and Class C shares outstanding ("outstanding Class B or
Class C shares") offers to exchange its Class B or Class C shares for Class B
or Class C shares, respectively, of another Mercury mutual fund or for Class B
shares of Summit ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares of the fund from which the exchange was made. For purposes of
computing the CDSC that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
another Mercury fund ("new Mercury Fund") after having held the Fund's Class B
shares for two-and-a-half years. The 3.0% CDSC that generally would apply to a
redemption would not apply to the exchange. Four years later the investor may
decide to redeem the Class B shares of the new Mercury Fund and receive cash.
There will be no CDSC due on this redemption since by "tacking" the
two-and-a-half year holding period of the Fund's Class B shares to the four
year holding period for the new Mercury Fund Class B shares, the investor will
be deemed to have held the new Mercury Fund Class B shares for more than six
years.
Exchanges for Shares of a Money Market Fund. Class I and Class A
shares are exchangeable for Class A shares of Summit and Class B and Class C
shares are exchangeable for Class B shares of Summit. Class A shares of Summit
have an exchange privilege back into Class I or Class A shares of
Affiliate-Advised Funds; Class B shares of Summit have an exchange privilege
back into Class B or Class C shares of Affiliate-Advised Funds and, in the
event of such an exchange, the period of time that Class B shares of Summit
are held will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any Conversion Period
with respect to Class B shares. Class B shares of Summit will be subject to a
distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. This exchange privilege does not apply with respect to
certain fee-based programs for which alternative exchange arrangements may
exist. Please see your financial advisor for further information.
Prior to October 12, 1998, exchanges from the Fund and other
MLIM/FAM-advised funds into a money market fund were directed to certain
MLIM/FAM-advised money market funds other than Summit. Shareholders who
exchanged MLIM/FAM-advised fund shares for such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will not count
toward satisfaction of the holding period requirement for reduction of the
CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the holding period for
Class B or Class C shares of the Fund received in exchange for such money
market fund shares will be aggregated with the holding period for the fund
shares originally exchanged for such money market fund shares for purposes of
reducing the CDSC or satisfying the Conversion Period.
Exercise of the Exchange Privilege. To exercise the exchange
privilege, a shareholder should contact his or her financial advisor, who will
advise the Fund of the exchange. Shareholders of the Fund and shareholders of
the other funds described above with shares for which certificates have not
been issued may exercise the exchange privilege by wire through their
securities dealers or other financial intermediary. The Fund reserves the
right to require a properly completed Exchange Application.
Telephone exchange requests are also available in accounts held with
the Transfer Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-888-763-2260. The request must be from
the shareholder of record. Before telephone requests will be honored,
signature approval from all shareholders of record must be obtained. The
shares being exchanged must have been held for at least 15 days. Telephone
requests for an exchange will not be honored in the following situations: the
accountholder is deceased, the request is by an individual other than the
accountholder of record, the account is held by joint tenants who are divorced
or the address on the account has changed within the last 30 days. Telephone
exchanges may be refused if the caller is unable to provide: the account
number, the name and address registered on the account and the social security
number registered on the account. The Fund or the Transfer Agent may
temporarily suspend telephone transactions at any time.
This exchange privilege may be modified or terminated in accordance
with the rules of the Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares to the general public at
any time and may thereafter resume
such offering from time to time. The exchange privilege is available only to
U.S. Shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Fee-Based Programs
Certain fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "program"),
may permit the purchase of Class I shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class I shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in certain programs may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value. In addition, upon termination of participation in a program,
shares that have been held for less than specified periods within such program
may be subject to a fee based on the current value of such shares. These
programs also generally prohibit such shares from being transferred to another
account, to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
program fees. Additional information regarding certain specific programs
offered through particular selected dealers or financial intermediaries
(including charges and limitations on transferability applicable to shares
that may be held in such programs) is available in each such program's client
agreement and from the Transfer Agent at 1-888-763-2260.
Retirement and Educational Savings Plans
Individual retirement accounts and other retirement and education
savings plans are available from Merrill Lynch. Under these plans, investments
may be made in the Fund and certain of the other mutual funds sponsored by
Merrill Lynch as well as in other securities. There may be fees associated
with investing through these plans. Information with respect to these plans is
available on request from Merrill Lynch.
Dividends received in each of the plans referred to above are exempt
from Federal taxation until distributed from the plans and, in the case of
Roth IRAs and education savings plans, may be exempt from taxation when
distributed, as well. Investors considering participation in any retirement or
education savings plans should review specific tax laws relating thereto and
should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time
by purchasing Class I shares (if he or she is an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer
or financial intermediary or by mail directly to the Transfer Agent, acting as
agent for such securities dealer or financial intermediaries. You may also add
to your account by automatically investing a specific amount in the Fund on a
periodic basis through your selected dealer or financial intermediary. The
current minimum for such automatic additional investments is $100. This
minimum may be waived or revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends paid by the Fund may be taken in cash or automatically
reinvested in shares of the Fund at net asset value without a sales charge.
You should consult with your financial intermediary about which option you
would like. If you choose the reinvestment option, dividends paid with respect
to the Fund's shares will be automatically reinvested, without sales charge,
in additional full and fractional shares of the Fund. Such reinvestment will
be at the net asset value of shares of the Fund as determined after the close
of business on the NYSE on the monthly payment date for such dividends. No
CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to their
selected dealer or financial intermediary if their account is maintained with
a selected dealer or financial intermediary, or by written notification or by
telephone (1-888-763-2260) to the Transfer Agent, if their account is
maintained with the Transfer Agent, elect to have subsequent dividends of
ordinary income and/or capital gains paid with respect to shares of the Fund
in cash, rather than reinvested in shares of the Fund (provided that, in the
event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares). If
the shareholder's account is maintained with the Transfer Agent, he or she may
contact the Transfer Agent in writing or by telephone (1-888-763-2260). For
other accounts, the shareholder should contact his or her financial advisor,
selected securities dealer or other financial intermediary. Commencing ten
days after the receipt by the Transfer Agent of such notice, those
instructions will be effected. The Fund is not responsible for any failure of
delivery to the shareholder's address of record and no interest will accrue on
amounts represented by uncashed dividend checks. Cash payments can also be
directly deposited to the shareholder's bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or
her Investment Account by check or through automatic payment by direct deposit
to his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Fund shares having a value, based on cost or the current offering price, of
$5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
the dollar amount and class of shares to be redeemed. Redemptions will be made
at net asset value determined as of the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m. Eastern time) on the 24th day of each
month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the net asset value determined as of the close of business on
the following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for withdrawal payment will be made on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's
systematic withdrawal plan may be terminated at any time, without a charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to
a systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and C Shares." Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of
the last Class B shares in an account to Class A shares, a shareholder must
make a new election to join the systematic withdrawal program with respect to
the Class A shares. If an investor wishes to change the amount being withdrawn
in a systematic withdrawal plan the investor should contact his or her
financial advisor.
Withdrawal payments generally should not be considered as dividends.
Withdrawals generally are treated as sales of shares and may result in taxable
gain or loss. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for shares
of the Fund from investors who maintain a systematic withdrawal plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid
at least annually. All net realized capital gains, if any, will be distributed
to the Fund's shareholders at least annually. From time to time, the 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. If in any
fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be
reinvested automatically in shares of the Fund, see "Shareholder
Services--Automatic Dividend Reinvestment Plan." A shareholder whose account
is maintained at the Transfer Agent or whose account is maintained through his
or her selected dealer may elect in writing to receive any such dividends in
cash. Dividends are taxable to shareholders, as discussed below, whether they
are reinvested in shares of the Fund or received in cash. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class I and Class A shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
on Class A shares will be lower than the per share dividends on Class I shares
as a result of the account maintenance fees applicable with respect to the
Class A shares. See "Pricing of Shares--Determination of Net Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as
the Fund so qualifies, the Fund (but not its shareholders) will not be subject
to Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class I, Class A, Class B and Class C
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund intends to
distribute its income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
Dividends paid by the Fund from its ordinary income or from an excess
of net short term capital gains over net long term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net long
term capital gains over net short term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Certain categories
of capital gains are taxable at different rates. Generally not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amount of any capital gain
dividends as well as any amount of capital gain dividends in the different
categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested
in additional shares of the Fund. Distributions by the Fund, whether from
ordinary income or capital gains, generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. If the
Fund pays a dividend in January that was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class A shares. A shareholder's basis
in the Class A shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class A
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid on the exchanged shares reduces any sales charge the shareholder
would have owed upon the purchase of the new shares in the absence of the
exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if such shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders who are non-resident
aliens or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the U.S. Withholding
tax.
Under certain provisions of the Code, some shareholders may be
subject to a withholding tax on ordinary income dividends, capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to such Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
The Fund may make investments that produce taxable income that is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount,
accrue negative amortization or are subordinated in the mortgaged-backed or
asset-backed securities structure. Such taxable income would be treated as
income earned by the Fund and would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding receipt of cash by the Fund or an offsetting deduction, the Fund
may be required to borrow money or dispose of other securities to be able to
make distributions to shareholders. The Fund intends to make sufficient and
timely distributions to shareholders so as to qualify for treatment as a RIC
at all times.
Tax Treatment of Options and Futures Transactions
The Fund may write, purchase or sell options and futures. In general,
unless an election is available to the Fund or an exception applies, options
and futures contracts that are "Section 1256 Contracts" will be "marked to
market" for Federal income tax purposes at the end of each taxable year (i.e.,
each such option or futures contract will be treated as sold for its fair
market value on the last day of the taxable year), and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest or currency exchange rates with respect
to its investments.
Code Section 1092, which applies to certain "straddles," may affect
the taxation of the Fund's sales of securities and transactions in options and
futures. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain sales of securities and certain
closing transactions in options and futures.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by
RICs that are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total
return and other total return data in advertisements or information furnished
to present or prospective shareholders. Total return is based on the Fund's
historical performance and is not intended to indicate future performance.
Average annual total return is determined separately for Class I, Class A,
Class B and Class C shares in accordance with a formula specified by the
Commission.
Quotations of average annual total return before tax for the
specified periods are computed by finding the average annual compounded rates
of return (based on net investment income and any realized and unrealized
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such investment
at the end of each period. Average annual total return before taxes is
computed assuming all dividends are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class I and Class A shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares but does not take
into account taxes payable on dividends or on redemption.
Quotations of average annual total return after taxes on dividends
for the specified periods are computed by finding the average annual
compounded rates of return that would equate the initial amount invested to
the ending value of such investment at the end of each period assuming payment
of taxes on dividends received during such period. Average annual total return
after taxes on dividends is computed assuming all dividends, less the taxes
due on such dividends, are reinvested and taking into account all applicable
recurring and nonrecurring expenses, including the maximum sales charge in the
case of Class I and Class A shares and the CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period in
the case of Class B and Class C shares. The taxes due on dividends are
calculated by applying to each dividend the highest marginal Federal
individual income tax rates in effect on the reinvestment date for that
dividend. The rates used correspond to the tax character of each dividend. The
taxable amount and tax character of each dividend are specified by the Fund on
the dividend declaration date, but may be adjusted to reflect subsequent
recharacterizations of distributions. The applicable tax rates may vary over
the measurement period. The effects of state and local taxes are not
reflected. Applicable tax credits, such as foreign credits, are taken into
account according to Federal law. The ending value is determined assuming
complete redemption at the end of the applicable periods with no tax
consequences.
Quotations of average annual total return after taxes on both
dividends and redemption for the specified periods are computed by finding the
average annual compounded rates of return that would equate the initial amount
invested to the ending value of such investment at the end of each period
assuming payment of taxes on dividends received during such period as well as
on complete redemption. Average annual total return after taxes on
distributions and redemption is computed assuming all dividends, less the
taxes due on such dividends, are reinvested and taking into account all
applicable recurring and non recurring expenses, including the maximum sales
charge in the case of Class I and Class A shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares and assuming, for
all classes of shares, complete redemption and payment of taxes due on such
redemption. The ending value is determined assuming complete redemption at the
end of the applicable periods, subtracting capital gains taxes resulting from
the redemption and adding the presumed tax benefit from capital losses
resulting from redemption. The taxes due on dividends and on the deemed
redemption are calculated by applying the highest marginal Federal individual
income tax rates in effect on the reinvestment and/or the redemption date. The
rates used correspond to the tax character of each component of each dividend
and/or the redemption payment. The applicable tax rates may vary over the
measurement period. The effects of state and local taxes are not reflected.
The Fund also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage and
as a dollar amount based on a hypothetical investment of $1,000 or some other
amount, for various periods other than those noted below. Such data will be
computed as described above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (2) the maximum applicable sales charges will
not be included with respect to annual or annualized rates of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Set forth in the tables below is total return information, before and
after taxes, for the Class I, Class A, Class B and Class C shares of the Fund
for the periods indicated, expressed as a percentage based on a hypothetical
$1,000 investment.
Class I Class A Class B Class C
Shares Shares Shares Shares
------- ------- ------- -------
Average Annual Total Return
(including maximum applicable sales charge)
One year ended January 31, 2002 2.62% 2.26% 2.10% 5.16%
Five years ended January 31, 2002 6.73% 6.45% 6.44% 6.74%
Inception (February 1, 1995) through
January 31, 2002 7.65% 7.36% 7.41% 7.37%
Class I Class A Class B Class C
Shares Shares Shares Shares
------- ------- ------- -------
Average Annual Total Return
After Taxes on Dividends
(including maximum applicable sales charge)
One year ended January 31, 2002 0.40% 0.15% 0.10% 3.18%
Five years ended January 31, 2002 3.96% 3.79% 3.95% 4.30%
Inception (February 1, 1995) through
January 31, 2002 4.64% 4.46% 4.73% 4.71%
Class I Class A Class B Class C
Shares Shares Shares Shares
------- ------- ------- -------
Average Annual Total Return
After Taxes on Dividends and Redemptions
(including maximum applicable sales charge)
One year ended January 31, 2002 1.54% 1.33% 1.24% 3.12%
Five years ended January 31, 2002 3.98% 3.81% 3.91% 4.18%
Inception (February 1, 1995) through 4.60% 4.43% 4.61% 4.58%
January 31, 2002
Total return figures are based on the Fund's historical performance
and are not included to indicate future performance. The Fund's total return
will vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of Class I
or Class A shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares," respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses is
deducted.
On occasion, the Fund may compare its performance to various indices
including, among other things, the Standard & Poor's 500 Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or other published indices,
or to data contained in publications such as Lipper Analytical Services, Inc.,
Morningstar
Publications, Inc. ("Morningstar"), Money Magazine, U.S. News & World
Report, Business Week, Forbes Magazine, Fortune Magazine or other industry
publications. When comparing its performance to a market index, the Fund may
refer to various statistical measures derived from the historic performance of
the Fund and the index, such as standard deviation and beta. In addition, from
time to time, the Fund may include its Morningstar risk-adjusted performance
rating in advertisements or supplemental sales literature.
The Fund may provide information designed to help investors
understand how the Fund is seeking to achieve its investment objectives. This
may include information about past, current or possible economic, market,
political, or other conditions, descriptive information on general principles
of investing such as asset allocation, diversification and risk tolerance,
discussion of the Fund's portfolio composition, investment philosophy,
strategy or investment techniques, comparisons of the Fund's performance or
portfolio composition to that of other funds or types of investments, indices
relevant to the comparison being made, or to a hypothetical or model
portfolio. The Fund may also quote various measures of volatility and
benchmark correlation in advertising and other materials, and may compare
these measures to those of other funds or types of investments. As with other
performance data, performance comparisons should not be considered indicative
of the Fund's relative performance for any future period.
GENERAL INFORMATION
Description of Shares
The Program was incorporated under Maryland law on May 12, 1994. As
of the date of this Statement of Additional Information, the Program has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
shares, of which 33,750,000 shares have been designated to the 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 Board of Directors of the Program
may classify and reclassify the shares of a Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Program
does not intend to hold meetings of shareholders in any year in which the
Investment Company Act does not require shareholders to act on any of the
following matters: (i) election of Directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Generally, under Maryland
law, a meeting of shareholders may be called for any purpose on the written
request of the holders of at least 10% of the outstanding shares of the
Program. Voting rights for Directors are not cumulative. Shares issued are
fully paid and non-assessable and have no preemptive or conversion rights.
Redemption rights are discussed elsewhere herein and in the Prospectus. Each
share is entitled to participate equally in dividends and distributions
declared by the Program and in the net assets of the Program on liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
are issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
Independent Auditors
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1008, has been selected as the independent auditors of the Program. The
independent auditors are responsible for auditing the annual financial
statements of the Program.
Accounting Services Provider
State Street Bank and Trust Company, 500 College Road East,
Princeton, New Jersey 08540, provides certain accounting services for the
Fund.
Custodian
The Bank of New York, 5 Penn Plaza, New York, New York 10001-1810,
(the "Custodian") acts as the Custodian of the Program's assets. Under its
contract with the Program, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Program to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is
responsible for safeguarding and controlling the Program's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Program's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Your Account--How to Buy, Sell Transfer and Exchange Shares" in the Program.
Legal Counsel
Sidley Austin Brown & Wood LLP, 875 Third Avenue New York, New York
10022-6225, is counsel for the Program and the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on January 31 of each year. The Fund
sends to its shareholders at least semiannually reports showing its portfolio
and other information. An Annual Report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
Additional Information
The Prospectus and this Statement of Additional Information do not
contain all the information set forth in the Registration Statement and the
exhibits relating thereto, which the Corporation has filed with the
Commission, Washington, DC, under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, Mercury Advisors ("Mercury") has granted
the Fund the right to use the "Mercury" name and has reserved the right to
withdraw its consent to the use of such name by the Fund at any time or to
grant the use of such name to any other company, and the Fund have granted
Mercury under certain conditions, the use of any other name it might assume in
the future, with respect to any corporation organized by Mercury.
To the knowledge of the Fund, the following persons or entities owned
beneficially or of record 5% or more of any class of the stock of the Fund as
of May 10, 2002:
Name Address Percent and Class
- ------------------------------ ---------------------------- -------------------------
Merrill Lynch Trust Company* 800 Scudders Mill Road 23.46% of Class I
Trustee FBO Merrill Lynch Plainsboro, New Jersey 08536
Bishop Institutional Advisors LLC 800 Scudders Mill Road 13.47% of Class I
Plainsboro, New Jersey 08536
Knight Advisers, LLC 800 Scudders Mill Road 10.40% of Class I
Plainsboro, New Jersey 08536
A. Delia, Inc. 800 Scudders Mill Road 7.70% of Class I
Plainsboro, New Jersey 08536
Hudson View, LLC 800 Scudders Mill Road 7.25% of Class I
Plainsboro, New Jersey 08536
Merrill Lynch, Pierce, Fenner & Smith, 800 Scudders Mill Road 13.53% of Class A
Incorporated, Plainsboro, New Jersey 08536
Custodian FBO
Arthur W. John IRRA
Name Address Percent and Class
- ------------------------------ ---------------------------- -------------------------
Merrill Lynch Trust Company* 800 Scudders Mill Road 13.40% of Class A
Trustee FBO The Jones Company Plainsboro, New Jersey 08536
Africare 800 Scudders Mill Road 12.52% of Class A
Plainsboro, New Jersey 08536
Alliance of American Insurers 800 Scudders Mill Road 10.57% of Class A
Retirement Plan Plainsboro, New Jersey 08536
Ram Group, Inc. 800 Scudders Mill Road 10.15% of Class A
Plainsboro, New Jersey 08536
- ---------------
* Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or
savings plan accounts for which it acts as trustee.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 2002 Annual Report.
You may request a copy of the Annual Report at no additional charge by calling
1-888-673-2260 between 8:00 a.m. and 8:00 p.m. Eastern time on any business
day.
CODE NO. 19097-05-02