As filed with the Securities and Exchange Commission on October 22, 2002
Securities Act File No. 333-
Investment Company Act File No. 811-02857
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
(Check Appropriate Box or Boxes)
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MERRILL LYNCH BOND FUND, INC.
(Exact Name of Registrant as Specified in Its Charter)
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(609) 282-2800
(Area Code And Telephone Number)
--------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
--------------------
Terry K. Glenn
Merrill Lynch Bond Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
--------------------
Copies to:
Leonard B. Mackey, Jr., Esq. Frank P. Bruno, Esq. Philip L. Kirstein, Esq.
Clifford Chance US LLP Sidley Austin Brown & Wood LLP Fund Asset Management, L.P.
200 Park Avenue 787 Seventh Avenue P.O. Box 9011
New York, NY 10166 New York, NY 10019 Princeton, NJ 08543-9011
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Title of Securities to Be Registered: Common Stock, par value $.10 per share.
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT,
MERCURY TOTAL RETURN BOND FUND, a series of
MERCURY FUNDS II,
MERRILL LYNCH TOTAL RETURN BOND FUND, a series of
MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.
and
THE CORPORATE FUND ACCUMULATION PROGRAM, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS
To Be Held On January 17, 2003
To the Shareholders of
Merrill Lynch Global Bond Fund for Investment and Retirement
Mercury Total Return Bond Fund
Merrill Lynch Total Return Bond Fund
The Corporate Fund Accumulation Program, Inc.:
NOTICE IS HEREBY GIVEN that Special Meetings of Shareholders (each, a
"Meeting" and collectively, the "Meetings") of the following funds (each, a
"Target Fund" and collectively, the "Target Funds"), will be held at the offices
of Fund Asset Management, L.P. ("FAM") and Merrill Lynch Investment Managers,
L.P. ("MLIM"), 800 Scudders Mill Road, Plainsboro, New Jersey, on January 17,
2003, at the times indicated below:
Legal Name Referred to Herein As Meeting Time
---------- --------------------- ------------
Merrill Lynch Global Bond Fund for Investment and Global Bond [o] a.m. Eastern time
Retirement
Mercury Total Return Bond Fund Mercury Total Return Bond [o] a.m. Eastern time
Merrill Lynch Total Return Bond Fund ML Total Return Bond [o] a.m. Eastern time
The Corporate Fund Accumulation Program, Inc. Corporate Fund [o] a.m. Eastern time
The Meetings will be held for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
("Agreement and Plan") providing for a series of transactions that would
result in the acquisition of assets and assumption of liabilities of each
Target Fund by Core Bond Portfolio ("Core Bond"), a series of Merrill Lynch
Bond Fund, Inc.;
(2) To transact such other business as properly may come before any
Meeting or any adjournment thereof.
The transactions described in paragraph 1 above are described in greater
detail in the accompanying Joint Proxy Statement and Prospectus.
Each acquisition of assets and assumption of liabilities of a Target Fund
by Core Bond is individually referred to herein as a "Target Fund
Acquisition," and the Target Fund Acquisitions are collectively referred to
herein as the "Reorganization." Under the Agreement and Plan, the failure of
the shareholders of any Target Fund to approve the Agreement and Plan will not
affect the ability of the shareholders of any other Target Fund to approve the
Agreement and Plan. The consummation of any Target Fund Acquisition is not
contingent upon the consummation of any other Target Fund Acquisition.
Shareholders of the Target Funds are not entitled to appraisal rights in
connection with the applicable Target Fund Acquisition.
The Board of Directors of each of Merrill Lynch Investment Managers
Funds, Inc. ("MLIM Fund") and Corporate Fund and the Board of Trustees of each
of Global Bond and Mercury Funds II ("Mercury Trust") have fixed the close of
business on November 22, 2002 as the record date for the determination of
shareholders entitled to notice of, and to vote at, each Meeting and at any
adjournment(s) thereof.
A complete list of the shareholders of each Target Fund entitled to vote
at the applicable Meeting will be available and open to the examination of any
shareholder of such Target Fund for any purpose germane to the applicable
Meeting during ordinary business hours from and after January 3, 2003, at the
offices of that Target Fund, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting of any Target Fund in
which you owned shares on November 22, 2002. Shareholders who do not expect to
attend a Meeting in person are requested to complete, date, and sign the
enclosed form of proxy applicable to that Target Fund and return it promptly
in the envelope provided for that purpose. If you have been provided with the
opportunity on your proxy card or voting instruction form to provide voting
instructions via telephone or the Internet, please take advantage of these
prompt and efficient voting options. The enclosed proxies are being solicited
on behalf of the Boards of Directors of MLIM Fund and Corporate Fund and the
Boards of Trustees of Global Bond and Mercury Trust.
If you have any questions regarding the enclosed proxy materials or need
assistance in voting your shares, please contact our proxy solicitor,
Georgeson Shareholder, at __________________.
By Order of the Boards of Directors/Trustees,
Phillip S. Gillespie
Secretary
Merrill Lynch Investment Managers Funds, Inc.
and
Mercury Funds II
David Clayton
Secretary
Merrill Lynch Global Bond Fund for Investment and Retirement
and
The Corporate Fund Accumulation Program, Inc.
Princeton, New Jersey
Dated: [o]
The information in this prospectus is not complete and may be changed. We may
use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell
these securities and is not an offer to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY JOINT PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 22, 2002
JOINT PROXY STATEMENT OF
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT,
MERCURY TOTAL RETURN BOND FUND, a series of
MERCURY FUNDS II,
MERRILL LYNCH TOTAL RETURN BOND FUND, a series of
MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.
and
THE CORPORATE FUND ACCUMULATION PROGRAM, INC.
FOR USE AT SPECIAL MEETINGS OF SHAREHOLDERS
To Be Held On January 17, 2003
PROSPECTUS OF
CORE BOND PORTFOLIO, a series of
MERRILL LYNCH BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Joint Proxy Statement and Prospectus ("Proxy Statement and
Prospectus") is furnished to you because you are a shareholder of Merrill
Lynch Global Bond Fund for Investment and Retirement, a Massachusetts business
trust ("Global Bond"), Mercury Total Return Bond Fund ("Mercury Total Return
Bond"), a series of Mercury Funds II, a Massachusetts business trust ("Mercury
Trust"), Merrill Lynch Total Return Bond Fund ("ML Total Return Bond"), a
series of Merrill Lynch Investment Managers Funds, Inc., a Maryland
corporation ("MLIM Fund"), or The Corporate Fund Accumulation Program, Inc., a
Maryland corporation ("Corporate Fund," and together with Global Bond, Mercury
Total Return Bond and ML Total Return Bond, the "Target Funds"), and you are
being asked to consider:
(1) approval of an Agreement and Plan of Reorganization ("Agreement and
Plan") providing for the acquisition of your fund by Core Bond Portfolio
("Core Bond"), a series of Merrill Lynch Bond Fund, Inc., a Maryland
corporation ("Bond Fund"), and the issuance of shares of common stock of Core
Bond to your fund for distribution to its shareholders in liquidation of the
fund; and
(2) to transact such other business as properly may come before any
Special Meeting of Shareholders of a Target Fund (each, a "Meeting" and
collectively, the "Meetings") or any adjournment thereof.
Each acquisition of assets and assumption of liabilities of a Target Fund
by Core Bond discussed in Proposal 1 is individually referred to herein as a
"Target Fund Acquisition," and the Target Fund Acquisitions are collectively
referred to herein as the "Reorganization." Under the Agreement and Plan, the
failure of the shareholders of any Target Fund to approve the Agreement and
Plan will not affect the ability of the shareholders of any other Target Fund
to approve the Agreement and Plan. The consummation of any Target Fund
Acquisition is not contingent upon the consummation of any other Target Fund
Acquisition. The Target Funds, together with Bond Fund, are referred to herein
individually as a "Fund" and collectively as the "Funds," as the context
requires.
As promptly as practical after the consummation of the relevant Target
Fund Acquisition, the Target Fund will be either deregistered and dissolved,
or, if a series, terminated as a series of Mercury Trust or MLIM Fund.
(continued on next page)
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Proxy Statement and
Prospectus. Any representation to the contrary is a criminal offense.
The date of this Proxy Statement and Prospectus is [o], 2002
Mercury Total Return Bond and ML Total Return Bond are organized in a
master/feeder structure as "feeder" funds that invest all of their respective
assets in a corresponding master portfolio of a master trust. Mercury Total
Return Bond and ML Total Return Bond both invest in Total Return Bond Master
Portfolio ("Total Return Master"), a series of Fund Asset Management Master
Trust, a Delaware statutory trust ("FAM Trust"). The first step in the Target
Fund Acquisition of each of Mercury Total Return Bond and ML Total Return Bond
is the distribution to Mercury Total Return Bond and ML Total Return Bond of
their proportionate share of the assets and liabilities (i.e., a redemption
in-kind) of Total Return Master in return for all of the beneficial interests
in Total Return Master held by Mercury Total Return Bond and ML Total Return
Bond.
On January 17, 2003, a Special Meeting of Shareholders of each Target
Fund will be held to obtain shareholder approval of the applicable Target Fund
Acquisition. The Special Meetings of Shareholders of the Target Funds are
referred to herein individually as a "Meeting" and collectively as the
"Meetings," as the context requires.
This Proxy Statement and Prospectus sets forth concisely the information
about Core Bond that a shareholder of each Target Fund should know before
considering the applicable Target Fund Acquisition and should be retained for
future reference. Global Bond, Mercury Trust, MLIM Fund and Corporate Fund
have authorized the solicitation of proxies in connection with each Target
Fund Acquisition solely on the basis of this Proxy Statement and Prospectus
and the accompanying documents.
The Boards of Directors of MLIM Fund and Corporate Fund and the Boards of
Trustees of Global Bond and Mercury Trust have fixed the close of business on
November 22, 2002 as the record date (the "Record Date") for the determination
of shareholders entitled to notice of and to vote at each Meeting and at any
adjournment(s) thereof. Shareholders on the Record Date will be entitled to
one vote for each share held, with no share having cumulative voting rights.
As of the Record Date, each Target Fund had outstanding the number of shares
indicated below:
Target Fund Outstanding Shares
-------------------------- ---------------------------
Corporate Fund
Global Bond
Mercury Total Return Bond
ML Total Return Bond
With this Proxy Statement and Prospectus you will also receive the
following documents:
o Prospectus of Bond Fund, dated January 24, 2002 (the "Bond Fund
Prospectus"). The Bond Fund Prospectus is incorporated by
reference into this Proxy Statement and Prospectus, which means
that it is legally considered to be part of this Proxy Statement
and Prospectus; and
o Annual Report to Stockholders of Bond Fund for the fiscal year
ended September 30, 2002.
Certain other documents containing information about each Target Fund and
Bond Fund have been filed with the Securities and Exchange Commission (the
"Commission") and may be obtained, without charge, by writing to each Target
Fund or Bond Fund at the address above, or by calling 1-800-____-___________,
ext. ______. These documents are:
o Statement of Additional Information of Bond Fund, dated January
24, 2002 ("Bond Fund Statement");
o Prospectus of Global Bond, dated April 19, 2002 ("Global Bond
Prospectus");
o Prospectus of Mercury Total Return Bond, dated October [o], 2002
("Mercury Total Return Bond Prospectus");
o Prospectus of ML Total Return Bond, dated October [o], 2002
("ML Total Return Bond Prospectus");
o Prospectus of Corporate Fund, dated April 29, 2002 ("Corporate
Fund Prospectus");
o Statement of Additional Information of Global Bond, dated April
19, 2002 ("Global Bond Statement");
o Statement of Additional Information of Mercury Total Return Bond,
dated October [o], 2002 ("Mercury Total Return Bond Statement");
o Statement of Additional Information of ML Total Return Bond, dated
October [o], 2002 ("ML Total Return Bond Statement");
o Statement of Additional Information of Corporate Fund, dated April
29, 2002 ("Corporate Fund Statement"); and
o Statement of Additional Information relating to this Proxy
Statement and Prospectus, dated [o] ("Reorganization Statement").
The Global Bond Prospectus, Mercury Total Return Bond Prospectus, ML
Total Return Bond Prospectus, Corporate Fund Prospectus and Reorganization
Statement are also incorporated by reference into this Proxy Statement and
Prospectus. The Commission maintains a web site (http://www.sec.gov) that
contains the Reorganization Statement, other material incorporated herein by
reference, and other information regarding Global Bond, Mercury Trust, MLIM
Fund, Corporate Fund, and Bond Fund.
The address of the principal executive offices of each Target Fund and
Bond Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the
telephone number is (609) 282-2800.
TABLE OF CONTENTS
Page
INTRODUCTION.............................................................................................................1
SUMMARY..................................................................................................................3
The Reorganization..................................................................................................3
What will Shareholders of each Target Fund Receive in a Target Fund Acquisition?....................................3
What are the Reasons for the Reorganization?........................................................................3
Fee Tables..........................................................................................................5
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................................................................18
COMPARISON OF THE FUNDS.................................................................................................25
Financial Highlights...............................................................................................25
Investment Objectives and Policies.................................................................................33
Other Investment Policies..........................................................................................34
Investment Restrictions............................................................................................38
Management and Advisory Relationships..............................................................................39
Capital Stock......................................................................................................41
Redemption of Shares...............................................................................................41
Performance........................................................................................................42
Code of Ethics.....................................................................................................47
Shareholder Rights.................................................................................................47
Dividends..........................................................................................................47
Automatic Dividend Reinvestment Plan...............................................................................47
Tax Information....................................................................................................48
Portfolio Transactions.............................................................................................48
Portfolio Turnover.................................................................................................48
Additional Information.............................................................................................48
THE REORGANIZATION......................................................................................................50
General............................................................................................................50
Procedure..........................................................................................................51
Terms of the Agreement and Plan of Reorganization..................................................................51
Potential Benefits to Shareholders of each Fund as a Result of a Target Fund Acquisition...........................52
Tax Consequences of each Target Fund Acquisition...................................................................55
Appraisal Rights...................................................................................................56
Capitalization.....................................................................................................57
INFORMATION CONCERNING THE SPECIAL MEETINGS.............................................................................58
Date, Time and Place of Meetings...................................................................................58
Solicitation, Revocation and Use of Proxies........................................................................58
Record Date and Outstanding Shares.................................................................................58
Security Ownership of Certain Beneficial Owners and Management of the Target Funds and Core Bond...................58
Voting Rights and Required Vote....................................................................................59
ADDITIONAL INFORMATION..................................................................................................59
LEGAL PROCEEDINGS.......................................................................................................60
LEGAL OPINIONS..........................................................................................................60
EXPERTS.................................................................................................................60
SHAREHOLDERS' MEETINGS..................................................................................................61
SHAREHOLDER PROPOSALS...................................................................................................62
i
EXHIBIT I - AGREEMENT AND PLAN OF REORGANIZATION.....................................................................I-1
EXHIBIT II - DESCRIPTION OF BOND RATINGS.............................................................................II-1
EXHIBIT III - SECURITY OWNERSHIP.....................................................................................III-1
ii
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of MLIM Fund and
Corporate Fund and the Boards of Trustees of Global Bond and Mercury Trust for
use at the applicable Meetings to be held at the offices of Fund Asset
Management, L.P. ("FAM") and Merrill Lynch Investment Managers, L.P. ("MLIM"),
800 Scudders Mill Road, Plainsboro, New Jersey, on January 17, 2003, at the
following times:
Fund Meeting Time
---- ------------
Global Bond [o] a.m. Eastern time
Mercury Total Return Bond [o] a.m. Eastern time
ML Total Return Bond [o] a.m. Eastern time
Corporate Fund [o] a.m. Eastern time
The mailing address of each Target Fund is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The approximate mailing date of this Proxy Statement and
Prospectus is [o], 2002.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation
to the Secretary of the respective Target Fund at the address indicated above
or by voting in person at the applicable Meeting. All properly executed
proxies received prior to a Meeting will be voted at such Meeting in
accordance with the instructions marked thereon or otherwise as provided
therein. Unless instructions to the contrary are marked, properly executed
proxies will be voted "FOR" approval of the Agreement and Plan of
Reorganization (the "Agreement and Plan") by and among Global Bond, Mercury
Trust, on behalf of Mercury Total Return Bond, MLIM Fund, on behalf of ML
Total Return Bond, FAM Trust, on behalf of Total Return Master, Corporate Fund
and Bond Fund, on behalf of Core Bond.
Assuming a quorum is present at the applicable Meeting, consummation of a
Target Fund Acquisition with respect to a Target Fund requires, among other
things, (i) for Mercury Total Return Bond, the approval of the holders of a
majority of Mercury Total Return Bond's outstanding shares (which for this
purpose and under the Investment Company Act means the lesser of (a) 67% of
the shares represented at a meeting at which 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares), (ii) for each of
ML Total Return Bond and Corporate Fund, the affirmative vote of the
shareholders of that Fund representing a majority of the outstanding shares
entitled to be voted on the Agreement and Plan, and (iii) for Global Bond, the
affirmative vote of the shareholders of Global Bond representing two-thirds of
the outstanding shares entitled to be voted on the Agreement and Plan. All
classes of shares of Global Bond, Mercury Total Return Bond and ML Total
Return Bond will vote together as a single class in approving the Agreement
and Plan. All outstanding shares of Corporate Fund will vote together as a
single class in approving the Agreement and Plan. Under the Agreement and
Plan, the failure of any Target Fund's shareholders to approve the Agreement
and Plan will not affect the ability of any other Target Fund Acquisition to
proceed.
The Boards of Directors of MLIM Fund and Corporate Fund and the Boards of
Trustees of Mercury Trust and Global Bond know of no business other than that
described above that will be presented for consideration at the Meetings. If
any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
This Proxy Statement and Prospectus serves as a prospectus of Bond Fund
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the issuance of shares of common stock of Core Bond pursuant
to the terms of the Agreement and Plan.
Certain Defined Terms Used in this Proxy Statement and Prospectus
Bond Fund, MLIM Fund and Corporate Fund are incorporated as Maryland
corporations; Mercury Trust and Global Bond are organized as Massachusetts
business trusts; FAM Trust is organized as a Delaware statutory trust. In each
jurisdiction, nomenclature varies. For ease of reference and clarity of
presentation, shares of common stock of Core Bond, ML Total Return Bond and
Corporate Fund and beneficial interests of Global Bond and Mercury Total
Return Bond are hereinafter referred to as "shares," and holders of shares are
hereinafter referred to as "shareholders"; the Trustees of Mercury Trust, FAM
Trust and Global Bond and the Directors of Bond Fund, MLIM Fund and Corporate
Fund are referred to herein as "Board Members"; the Boards of Trustees of
Mercury Trust, FAM Trust and Global Bond and the Boards of Directors of Bond
Fund, MLIM Fund and Corporate Fund are each referred to herein as a "Board"
and collectively as the "Boards"; the Declarations of Trust of Mercury Trust,
FAM Trust and Global Bond and the Articles of Incorporation of Bond Fund, MLIM
Fund and Corporate Fund, each as amended and supplemented, are each referred
to herein as a "Charter"; FAM, in its capacity as Investment Adviser for each
of Core Bond, Total Return Master and Corporate Fund, and MLIM, in its
capacity as Investment Adviser for Global Bond, are each referred to herein as
an "Investment Adviser" and collectively as the "Investment Advisers."
Global Bond, ML Total Return Bond, Mercury Total Return Bond, Corporate
Fund and Core Bond are referred to herein individually as a "Fund" and
collectively as the "Funds," as the context requires. The fund resulting from
any Target Fund Acquisition or the Reorganization is sometimes referred to
herein as the "Combined Fund."
Mercury Total Return Bond and ML Total Return Bond are each a "feeder"
fund that invests all of its assets in a "master" portfolio, Total Return
Master, a series of FAM Trust. FAM Trust is a mutual fund that has the same
investment objective as each of the feeder funds. All investments are made by
FAM Trust. This structure is sometimes called a "master/feeder" structure. The
investment results of Mercury Total Return Bond and ML Total Return Bond will
correspond directly to the investment results of Total Return Master. For
simplicity, this Proxy Statement and Prospectus uses the terms "Mercury Total
Return Bond" and "ML Total Return Bond" to include Total Return Master and FAM
Trust.
2
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated herein
by reference) and is qualified in its entirety by reference to the more
complete information contained in this Proxy Statement and Prospectus and in
the Agreement and Plan, attached hereto as Exhibit I.
The Reorganization
The Boards of MLIM Fund, Corporate Fund, Global Bond, Mercury Trust and
FAM Trust have each unanimously approved the applicable Target Fund
Acquisition, at Board meetings held on September 30, 2002.
If the shareholders of Mercury Total Return Bond and the shareholders of
ML Total Return Bond approve the Target Fund Acquisition of that Fund, Total
Return Master will distribute to Mercury Total Return Bond and ML Total Return
Bond their proportionate share of the assets and liabilities (i.e., a
redemption in-kind) of their master portfolio, Total Return Master, in return
for all of the beneficial interests in Total Return Master held by that Fund.
If shareholders approve a Target Fund Acquisition involving your Target
Fund, your Fund will be acquired by Core Bond.
Following the applicable Target Fund Acquisition, Global Bond and
Corporate Fund will be deregistered as investment companies and dissolved
under Massachusetts law and Maryland law, respectively, and Mercury Total
Return Bond, ML Total Return Bond and Total Return Master will be terminated
as a series of Mercury Trust, MLIM Fund and FAM Trust, respectively.
What will Shareholders of each Target Fund Receive in a Target Fund
Acquisition?
If the Agreement and Plan is approved and a Target Fund Acquisition
involving your Target Fund is consummated:
o You will become a shareholder of Core Bond; and
o You will receive shares of Core Bond that are the same or an
equivalent class and that have the same aggregate net asset value
as the shares of the applicable Target Fund that you hold
immediately prior to the Target Fund Acquisition. (Corporate Fund
shareholders will receive Class A shares of Core Bond.)
No sales charge or fee of any kind will be charged to shareholders of a
Target Fund in connection with their receipt of shares of Core Bond common
stock in a Target Fund Acquisition.
Each Target Fund Acquisition has been structured with the intention that
it qualify as a tax-free reorganization for Federal income tax purposes. See
"The Reorganization--Tax Consequences of each Target Fund Acquisition." You
should consult your tax advisor regarding the tax effects of a Target Fund
Acquisition in light of your individual circumstances.
What are the Reasons for the Reorganization?
The Board of each Target Fund, including all of the Board Members who are
not "interested persons" of that Target Fund as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"), has determined
that each Target Fund Acquisition is in the best interests of such Target Fund
and its shareholders, and that the interests of such shareholders will not be
diluted as a result of effecting the applicable Target Fund Acquisition.
However, a shareholder of a Target Fund will hold a lower ownership percentage
in the Combined Fund after a Target Fund Acquisition than such shareholder
currently holds in the applicable Target Fund.
In reaching their conclusions, the Boards of MLIM Fund, Global Bond,
Mercury Trust and Corporate Fund considered a number of factors, including the
following:
o After a Target Fund Acquisition, it is expected that shareholders
of the Target Fund will remain invested in an open-end fund with a
substantially larger combined asset base;
o After a Target Fund Acquisition, shareholders of the applicable
Target Fund are likely to benefit from a lower combined investment
advisory fee/administration fee rate and reduced operating
expenses per share as shareholders of the Combined Fund;
3
o After a Target Fund Acquisition, it is expected that shareholders
of the applicable Target Fund will benefit from greater
flexibility in portfolio management as shareholders of the
Combined Fund;
o After a Target Fund Acquisition, shareholders of the applicable
Target Fund will be invested in a diversified fund; and
o After a Target Fund Acquisition, shareholders of the applicable
Target Fund can redeem their shares or exchange them into other
Merrill Lynch mutual funds.
See "Summary--Fee Tables" and "The Reorganization--Potential Benefits to
Shareholders of each Fund as a Result of a Target Fund Acquisition."
If all of the requisite approvals are obtained with respect to a Target
Fund Acquisition, it is anticipated that each Target Fund Acquisition will
occur as soon as practicable after receipt of such approvals, provided that
the Funds have obtained an opinion of counsel concerning the tax consequences
of the Reorganization (including each Target Fund Acquisition) as set forth in
the Agreement and Plan. Under the Agreement and Plan, a Target Fund
Acquisition may be abandoned at any time (whether before or after approval
thereof by the shareholders of the applicable Target Fund) prior to the
Closing Date (as defined in the Agreement and Plan), or the Closing Date may
be postponed, (i) by mutual consent of the Board of the Target Fund and the
Board of Bond Fund; (ii) as to each Target Fund, by the Board of that Target
Fund if any condition to the obligations of that Target Fund has not been
fulfilled or waived by such Board; and (iii) as to Bond Fund with respect to a
Target Fund Acquisition, by the Board of Bond Fund if any condition to the
obligations of Bond Fund with respect to the Target Fund involved in that
Target Fund Acquisition has not been fulfilled or waived by the Board of Bond
Fund. In addition, under the Agreement and Plan, the failure of any Target
Fund's shareholders to approve the Agreement and Plan will not affect the
ability of the shareholders of any other Target Fund to proceed with its
Target Fund Acquisition. The consummation of any Target Fund Acquisition is
not contingent upon the consummation of any other Target Fund Acquisition. The
Board of the applicable Target Fund and of Bond Fund may agree to amend the
Agreement and Plan to change the terms of a Target Fund Acquisition at any
time prior to the approval by the shareholders of the applicable Target Fund.
4
Fee Tables
The fee tables below provide information about the annualized fees and
expenses attributable to each class of shares of each Target Fund and Core Bond
and, assuming the Reorganization had taken place on March 31, 2002, the
estimated pro forma annualized fees and expenses attributable to each class of
shares of the Combined Fund. Future fees and expenses may be greater or less
than those indicated below.
Fee Table for Shareholders of Corporate Fund, Class A Shareholders of
Core Bond, Global Bond, ML Total Return Bond, Class I Shareholders
of Mercury Total Return Bond and Class A Shareholders of the Pro
Forma Combined Fund as of
March 31, 2002 (unaudited)
Actual
----------------------------------------------------------------------
ML Total Return Mercury Total
Core Bond Global Bond Bond Return Bond
-------------- -------------- ---------------- -------------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of
offering price) 4.00%(c) 4.00%(c) 4.25%(c) 4.25%(c)
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) None(d) None(d) None(d)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(e):
Management Fee 0.37%(f) 0.60% 0.30%(g) 0.30%(g)
Distribution and/or Service (12b-1) Fees(h) None None None None
Other Expenses (including administration and
transfer agency fees)(i) 0.22% 0.76% 1.06% 0.67%
------- ------- ------- --------
Total Annual Fund Operating Expenses 0.59% 1.36% 1.36%(k) 0.97%(k)
======= ======= ======= ========
- ---------------------------------
(See footnotes on page 9)
Actual
------------------------------------------------
Pro Forma
Corporate Fund Combined
-------------- ----------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) None 4.00%(c)
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None None(d)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None
Redemption Fee None None
Exchange Fee None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.50% 0.37%(f)
Distribution and/or Service (12b-1) Fees(h) None None
Other Expenses (including administration and
transfer agency fees)(i) 0.56% 0.22%
--------- -------
Total Annual Fund Operating Expenses 1.06% 0.59%
========= =======
- ---------------------------------
(See footnotes on page 9)
5
Fee Table for Class B Shareholders of Core Bond, Global
Bond, ML Total Return Bond and Mercury Total Return Bond
and the Pro Forma Combined Fund as of March 31, 2002
(unaudited)
Actual
--------------------------------------------------------------------------
ML Total Return Mercury Total
Core Bond(b) Global Bond(b) Bond(b) Return Bond(b)
-------------- -------------- ---------------- --------------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)(j) 4.00%(c) 4.00%(c) 4.00%(c) 4.00%(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.37%(f) 0.60% 0.30%(g) 0.30%(g)
Distribution and/or Service (12b-1) Fees(h) 0.75% 0.75% 1.00% 1.00%
Other Expenses (including administration and
transfer agency fees)(i) 0.24% 0.76% 1.06% 0.67%
------- ------- -------- -------
Total Annual Fund Operating Expenses 1.36% 2.11% 2.36%(k) 1.97%(k)
======= ======= ========
- ---------------------------------
(See footnotes on page 9)
Actual
--------------------------------------------------------------------------
Pro Forma
Combined(b)
-----------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)(j) 4.00%(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.37%(f)
Distribution and/or Service (12b-1) Fees(h) 0.75%
Other Expenses (including administration and
transfer agency fees)(i) 0.24%
-------
Total Annual Fund Operating Expenses 1.36%
=======
- ---------------------------------
(See footnotes on page 9)
6
Fee Table for Class C Shareholders of Core Bond, Global
Bond, ML Total Return Bond and Mercury Total Return Bond
and the Pro Forma Combined Fund as of March 31, 2002
(unaudited)
Actual
----------------------------------------------------------------------------------------
ML Total Return Mercury Total
Core Bond Global Bond Bond Return Bond
----------- ------------- --------------- -------------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) 1.00%(c) 1.00%(c) 1.00%(c) 1.00%(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.37%(f) 0.60% 0.30%(g) 0.30%(g)
Distribution and/or Service (12b-1) Fees(h) 0.80% 0.80% 1.00% 1.00%
Other Expenses (including administration and
transfer agency fees)(i) 0.25% 0.76% 1.06% 0.67%
------- ------- ------- -------
Total Annual Fund Operating Expenses 1.42% 2.16% 2.36%(k) 1.97%(k)
======= ======= ======= =======
- ---------------------------------
(See footnotes on page 9)
Actual
------------------------------------------------------
Pro Forma
Combined
----------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) 1.00%(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.37%(f)
Distribution and/or Service (12b-1) Fees(h) 0.80%
Other Expenses (including administration and
transfer agency fees)(i) 0.25%
-------
Total Annual Fund Operating Expenses 1.42%
=======
- ---------------------------------
(See footnotes on page 9)
7
Fee Table for Class D Shareholders of Core Bond,
Global Bond, ML Total Return Bond, Class A Shareholders of Mercury
Total Return Bond and Class D Shareholders of the Pro Forma Combined
Fund as of
March 31, 2002 (unaudited)
Actual
-----------------------------------------------------------------------------------------
ML Total Return Mercury Total
Core Bond Global Bond Bond Return Bond
----------- ------------- --------------- --------------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(c) 4.00%(c) 4.25%(c) 4.25%(c)
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) None(d) None(d) None(d)
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(e):
Management Fee 0.37%(f) 0.60% 0.30%(g) 0.30%(g)
Distribution and/or Service (12b-1) Fees(h) 0.25% 0.25% 0.25% 0.25%
Other Expenses (including administration and
transfer agency fees)(i) 0.22% 0.76% 1.06% 0.67%
------- ------- ------- -------
Total Annual Fund Operating Expenses 0.84% 1.61% 1.61%(k) 1.22%(k)
======= ======= ======= =======
- ---------------------------------
(See footnotes on page 9)
Actual
------------------------------------------------------------
Pro Forma
Combined
----------
Shareholder Fees (fees paid directly from
shareholder's investment) (a):
Maximum Sales Charge (Load) imposed on\
purchases (as a percentage of offering price) 4.00%(c)
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (e):
Management Fee 0.37%(f)
Distribution and/or Service (12b-1) Fees(h) 0.25%
Other Expenses (including administration and
transfer agency fees)(i) 0.22%
-------
Total Annual Fund Operating Expenses 0.84%
=======
- ---------------------------------
(See footnotes on page 9)
8
(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may
charge clients a processing fee (currently $5.35) when a client buys or
sells shares.
(b) Class B shares of Core Bond, Global Bond, ML Total Return Bond and the
Combined Fund automatically convert to Class D shares approximately ten
years after initial purchase. Class B shares of Mercury Total Return Bond
automatically convert to Class A shares of Mercury Total Return Bond
approximately ten years after initial purchase. After such conversion,
such shares will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) A shareholder may pay a deferred sales charge if such shareholder
purchases $1 million or more and redeems within one year.
(e) The fees and expenses of each of ML Total Return Bond and Mercury Total
Return Bond include the expenses of that Fund and that Fund's share of
the expenses of Total Return Master.
(f) Bond Fund pays FAM advisory fees at annual rates that decrease as the
total assets of its three portfolios increase above certain levels. The
fee rates are applied to the average daily net assets of each portfolio,
with the reduced rates applicable to portions of the assets of each
portfolio to the extent that the aggregate average daily net assets of
the three combined portfolios exceeds $250 million, $500 million and $750
million (each such amount being a "breakpoint level"). These annual fee
rates range from 0.50% to 0.35% for Core Bond.
(g) Paid by Total Return Master. The Investment Adviser has voluntarily
agreed to waive management/administration fees and/or reimburse expenses
so that total annual operating expenses do not exceed 0.65%, 1.65%, 1.65%
and 0.90% for Classes I/A, Class B, Class C and Classes D/A,
respectively. This waiver can be discontinued by the Investment Adviser
at any time without notice.
(h) The Funds call the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in the Prospectuses of the Funds and all
other Fund materials. If a shareholder holds Class B or Class C shares
for a long time, it may cost that shareholder more in distribution
(12b-1) fees than the maximum sales charge that such shareholder would
have paid if he or she had bought one of the other classes.
(i) Financial Data Services, Inc., an affiliate of MLIM and FAM, provides
transfer agency services to each Fund. The Funds pay a fee for these
services. ML Total Return Bond and Mercury Total Return Bond each pay an
administration fee to FAM at the annual rate of 0.25% of the relevant
Fund's average daily net assets.
(j) The maximum contingent deferred sales charge ("CDSC") on Class B shares
of Core Bond, Global Bond and ML Total Return Bond is 4.0% and is reduced
to 0.0% after four years. The maximum CDSC on Class B shares of Mercury
Total Return Bond is 4.0% and is reduced to 0.0% after six years.
Effective December 1, 2002, all newly issued Class B shares of the Funds
and the Combined Fund will be subject to the six-year CDSC schedule
except that shares of Core Bond acquired by Target Fund shareholders in a
Target Fund Acquisition will be subject to the same CDSC schedule as
shares of that Target Fund held prior to such Target Fund Acquisition.
(k) Total Annual Fund Operating Expenses in the fee table have been restated
to assume the absence of the waiver described in footnote (g) above
because the waiver can be discontinued by the Investment Adviser at any
time without notice.
9
EXAMPLES:
These examples assume that an investor invests $10,000 in the relevant Fund
for the time periods indicated, that the investment has a 5% return each year,
that the investor pays the sales charges, if any, that apply to the particular
class and that the Fund's operating expenses remain the same. This assumption
is not meant to indicate that the investor will receive a 5% annual rate of
return. The annual return may be more or less than the 5% used in these
examples. Although actual costs may be higher or lower, based on these
assumptions, an investor's costs would be:
ASSUMING THE INVESTOR REDEEMS HIS OR HER SHARES:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Corporate Fund $108 $337 $585 $1,294
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Class A/I
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Global Bond $533 $814 $1,115 $1,970
Mercury Total Return Bond $520 $721 $939 $1,564
ML Total Return Bond $558 $837 $1,138 $1,991
Core Bond $458 $581 $716 $1,108
Combined Fund* $458 $581 $716 $1,108
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Class B
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Global Bond $614 $861 $1,134 $2,441
Mercury Total Return Bond $600 $918 $1,262 $2,296
ML Total Return Bond $639 $936 $1,260 $2,696
Core Bond $538 $631 $745 $1,635
Combined Fund* $538 $631 $745 $1,635
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Class C
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Global Bond $319 $676 $1,159 $2,493
Mercury Total Return Bond $300 $618 $1,062 $2,296
ML Total Return Bond $339 $736 $1,260 $2,696
Core Bond $245 $449 $776 $1,702
Combined Fund* $245 $449 $776 $1,702
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Class D/A
- --------------------------------------- -------------------- --------------------- -------------------- ---------------------
Global Bond $557 $888 $1,241 $2,235
Mercury Total Return Bond $544 $796 $1,067 $1,840
ML Total Return Bond $582 $911 $1,264 $2,255
Core Bond $482 $657 $847 $1,396
Combined Fund* $482 $657 $847 $1,396
- -----------
* Assuming that all four Target Fund Acquisitions had been approved by
shareholders, as required, and had been consummated on March 31, 2002.
10
ASSUMING THE INVESTOR DOES NOT REDEEM HIS OR HER SHARES:
--------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Corporate Fund $108 $337 $585 $1,294
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Class A/I
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Global Bond $533 $814 $1,115 $1,970
Mercury Total Return Bond $520 $721 $939 $1,564
ML Total Return Bond $558 $837 $1,138 $1,991
Core Bond $458 $581 $716 $1,108
Combined Fund* $458 $581 $716 $1,108
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Class B
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Global Bond $214 $661 $1,134 $2,441
Mercury Total Return Bond $200 $618 $1,062 $2,296
ML Total Return Bond $239 $736 $1,260 $2,696
Core Bond $138 $431 $745 $1,635
Combined Fund* $138 $431 $745 $1,635
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Class C
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Global Bond $219 $676 $1,159 $2,493
Mercury Total Return Bond $200 $618 $1,062 $2,296
ML Total Return Bond $239 $736 $1,260 $2,696
Core Bond $145 $449 $776 $1,702
Combined Fund* $145 $449 $776 $1,702
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Class D/A
- ------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Global Bond $557 $888 $1,241 $2,235
Mercury Total Return Bond $544 $796 $1,067 $1,840
ML Total Return Bond $582 $911 $1,264 $2,255
Core Bond $482 $657 $847 $1,396
Combined Fund* $482 $657 $847 $1,396
- -----------
* Assuming that all four Target Fund Acquisitions had been approved by
shareholders, as required, and had been consummated on March 31, 2002.
The foregoing Fee Tables and Examples are intended to assist investors
in understanding the costs and expenses that a shareholder of a Target Fund or
Core Bond bears directly or indirectly as compared to the costs and expenses
that would be borne by such investors taking into account a Target Fund
Acquisition. The Examples set forth above assume reinvestment of all dividends
and utilize a 5% annual rate of return as mandated by Commission regulations.
The Examples should not be considered a representation of past or future
expenses or annual rates of return, and actual expenses or annual rates of
return may be more or less than those assumed for purposes of the Examples. See
"Summary," "The Reorganization--Potential Benefits to Shareholders of each Fund
as a Result of a Target Fund Acquisition" and "Comparison of the
Funds--Management," "--Capital Stock" and "--Redemption of Shares."
11
Mercury Total
Return Bond Mercury Total Return Bond is a series of Mercury Trust
which was organized under the laws of the Commonwealth of
Massachusetts on August 22, 1984. Mercury Total Return
Bond commenced operations on December 6, 1994 and
converted to its current master/feeder structure on
October 6, 2000 as one of eight series of Mercury Trust
and as a feeder of FAM Trust.
ML Total Return Total Return Bond is a series of MLIM Fund which ML
Bond was organized under the laws of the State of Maryland on
July 6, 2000. ML Total Return Bond commenced operations on
October 6, 2000 as one of two series of MLIM Fund and as a
feeder of FAM Trust.
Global Bond Global Bond was organized under the laws of the
Commonwealth of Massachusetts on May 28, 1986. Global Bond
commenced operations on October 3, 1988.
Corporate Fund Corporate Fund was organized under the laws of the State
of Maryland on June 9, 1976. Corporate Fund commenced
operations on June 9, 1976.
Core Bond Core Bond is a series of Bond Fund which was organized
under the laws of the State of Maryland on November 10,
1978. Core Bond commenced operations on October 31, 1980.
As a result of the Target Fund Acquisitions, the net
assets of Core Bond would increase by approximately $272.3
million (the aggregate net assets of the Target Funds).
Comparison of
the Funds The table below highlights information from this document
and may not contain all of the information that is
important to you. To understand the Reorganization fully
and for a more complete description of the legal terms of
the Reorganization, you should read carefully this entire
document and the documents that accompany this Proxy
Statement and Prospectus. In the Reorganization, Core Bond
will acquire the assets and liabilities of one or more of
the other funds.
Mercury
Total ML Total Corporate
Core Bond* Return Bond Return Bond Global Bond Fund
---------- ----------- ----------- ----------- ---------
Address of The address of each Fund is 800 Scudders Mill Road, Plainsboro, New Jersey
Funds 08536.
Type of Fund Diversified Diversified Diversified Non- Diversified
diversified
Net Assets $1,381,682,525 $137,369,243 $25,157,097 $54,419,151 $55,409,630
as of March
31, 2002
Investment High level of Maximize Maximize High total High level
Objective current income long-term long-term investment of current
and secondarily total return total return return income
capital growth
12
Mercury
Total ML Total Corporate
Core Bond* Return Bond Return Bond Global Bond Fund
---------- ----------- ----------- ----------- ----
Investment Invests in Invests in Invests in Invests in Invests in
Policies U.S. and U.S. and U.S. and U.S. and U.S. and
foreign foreign foreign foreign foreign
equity, equity, equity, equity, equity,
debt and debt and debt and debt and debt and
money money money money money
market market market market market
securities securities securities securities securities
Equities May invest May invest May invest May invest May invest
up to 10% up to 20% up to 20% up to 20% up to 20%
of total of total of total of total of total
assets assets assets assets assets
Debt Will Will Will Will Will
ordinarily ordinarily ordinarily ordinarily ordinarily
invest at invest at invest at invest at invest at
least 90% least 80% least 80% least 80% least 80%
of total of total of total of total of total
assets** assets** assets** assets** assets
Foreign Limited to Limited to Limited to May invest Limited to
Securities investing investing investing without investing
up to 25% up to 25% up to 25% limitation up to 25%
of total of total of total in foreign of total
assets in assets in assets in securities assets in
foreign foreign foreign foreign
securities securities securities securities
Junk Bonds May invest May invest May invest May not May not
up to 10% up to 15% up to 15% invest in invest in
in junk in junk in junk junk bonds junk bonds
bonds bonds bonds
Investment FAM FAM/ FAM MLIM FAM
Adviser/ Mercury
Administrator Advisors
Investment MLAM U.K. N/A N/A MLAM U.K. MLAM U.K.
Sub-Adviser
Portfolio James James James Gareth Robert
Manager Pagano and Pagano and Pagano and Fielding Peterson
Patrick Patrick Patrick and
Maldari Maldari Maldari Melinda
Raso
----------------
* Core Bond is the surviving fund in the Reorganization.
** Includes investments in preferred stock.
FAM was organized as an investment adviser in 1977 and MLIM was organized as an
investment adviser in 1976. Each offers investment advisory services to more than
50 registered investment companies. FAM, MLIM and their affiliates had
approximately $[o] billion in investment company and other portfolio assets under
management as of [o], 2002. See "Comparison of the Funds--Management."
Investment Advisory and Administration Fees. The chart below shows the investment
advisory and administration fees, if any, paid by each of the Target Funds and by
Core Bond:
13
Fees (as a % of average daily net assets)
------------------------------------------
Advisory Administration Total
Fee Fee Fee
-------- -------------- -----
ML Total Return Bond 0.30%* 0.25% 0.55%
Mercury Total Return Bond 0.30%* 0.25% 0.55%
Corporate Fund 0.50% __ 0.50%
Global Bond 0.60% __ 0.60%
Core Bond 0.37%** __ 0.37%**
--------------------------
* Paid by Total Return Master.
** Based on the calculation described below.
Prior to June 30, 2002, with respect to ML Total Return
Bond and Mercury Total Return Bond, FAM had contractually
waived the payment of investment advisory/administration
fees in order to cap the expenses of these Funds. This
contractual waiver is no longer in effect, although FAM
currently intends to continue to waive voluntarily the
payment of investment advisory/administration fees until
the consummation of the Target Fund Acquisitions involving
these two Funds.
Core Bond's investment advisory agreement with FAM provides
that as compensation for FAM's services to Core Bond, FAM
receives at the end of each month a fee at the annual rates
set forth below, which are based upon the aggregate average
daily net assets of the three portfolios of Bond Fund (In
addition to Core Bond, Bond Fund offers shares of High
Income Portfolio and Intermediate Term Portfolio). The
rates are subject to reduction to the extent that the
aggregate average daily net assets of the three portfolios
of Bond Fund exceed $250 million, $500 million and $750
million. The portion of the assets of Core Bond to which
the rate at each breakpoint level applies will be
determined on a "uniform percentage" basis. The uniform
percentage applicable to a breakpoint level is determined
by dividing the aggregate average daily net assets of the
three portfolios of Bond Fund that fall within that
breakpoint level by the aggregate average daily net assets
of the three portfolios of Bond Fund. The amount of the
advisory fee for Core Bond at each breakpoint level is
determined by multiplying the average daily net assets of
Core Bond by the uniform percentage applicable to that
breakpoint level and multiplying the product by the
applicable advisory fee rate.
As of June 30, 2002, the aggregate net assets of the three
portfolios of Bond Fund were approximately $3.8 billion.
As of that date, the aggregate net assets of Core Bond were
approximately $1.4 billion and the advisory fee rate payable
by Core Bond was approximately 0.37%.
Assuming all four Target Fund Acquisitions had taken place
on March 31, 2002, the Combined Fund would have paid, on a
pro forma basis, a monthly advisory fee at the annual rate
of 0.37% of the average daily net assets of the Combined
Fund. See "Summary--Fee Tables" and "Comparison of the
Funds--Management."
12b-1 Fees. Under separate class-specific plans adopted
pursuant to Rule 12b-1 under the 1940 Act, Global Bond, ML
Total Return Bond and Core Bond pay fees in connection with
account maintenance for each of Class B, Class C and Class
D shares and in connection with distribution for each of
Class B and Class C shares ("12b-1 fees"). Mercury Total
Return Bond pays fees in connection with account
maintenance for each of Class A, Class B and Class C shares
and in connection with distribution for each of Class B and
Class C shares. Corporate Fund does not pay 12b-1 fees. Set
forth below is a comparison of the 12b-1 fees for Global
Bond, Mercury Total Return Bond, ML Total Return Bond
14
and Core Bond:
Account Maintenance Fee
--------------------------
Mercury Total ML Total
Share Class Global Bond Return Bond Return Bond Core Bond
----------- ----------- ------------- ----------- ---------
Class B 0.25% 0.25% 0.25% 0.25%
Class C 0.25% 0.25% 0.25% 0.25%
Class D/A* 0.25% 0.25% 0.25% 0.25%
----------------------
* Class A for Mercury Total Return Bond; Class D for ML Total Return Bond
Distribution Fee
-------------------
Mercury Total ML Total
Share Class Global Bond Return Bond Return Bond Core Bond
----------- ----------- ------------- ----------- ---------
Class B 0.50% 0.75% 0.75% 0.50%
Class C 0.55% 0.75% 0.75% 0.55%
Class D/A* N/A N/A N/A N/A
----------------------
* Class A for Mercury Total Return Bond; Class D for ML Total Return Bond
Capital Stock. Core Bond, ML Total Return Bond and Global
Bond each offers four classes of shares under the Merrill
Lynch Select PricingSM System. The Class A, Class B, Class
C and Class D shares issued by Core Bond are similar to
the Class A, Class B, Class C and Class D shares,
respectively, issued by ML Total Return Bond and Global
Bond with the exception that (i) they represent ownership
interests in a different investment portfolio, (ii) the
maximum sales charge (load) imposed on purchases of Class
A and Class D shares of ML Total Return Bond is 0.25%
higher than the maximum sales charge (load) imposed on
purchases of Class A and Class D shares of Core Bond, and
(iii) the Rule 12b-1 distribution fees applicable to Class
B and Class C shares of ML Total Return Bond are 0.25% and
0.20%, respectively, higher than these fees for Core Bond.
Mercury Total Return Bond offers four different classes of
shares. The Class I, Class B, Class C and Class A shares
issued by Mercury Total Return Bond are similar to the
Class A, Class B, Class C and Class D shares,
respectively, issued by Core Bond with the exception that
(i) they represent ownership interests in a different
investment portfolio, (ii) the maximum sales charge (load)
imposed on purchases of Class I and Class A shares of
Mercury Total Return Bond is 0.25% higher than the maximum
sales charge (load) imposed on purchases of Class A and
Class D shares of Core Bond, and (iii) the Rule 12b-1
distribution fees applicable to Class B and Class C shares
of Mercury Total Return Bond are 0.25% and 0.20%,
respectively, higher than these fees for Core Bond. Shares
of Core Bond acquired by Target Fund shareholders in a
Target Fund Acquisition will be subject to the same CDSC
schedule as shares of that Target Fund held prior to such
Target Fund Acquisition. Corporate Fund offers one class
of shares. Shareholders of Corporate Fund will receive
Class A shares of Core Bond in their Target Fund
Acquisition. See "Comparison of the Funds--Capital Stock,"
"--Redemption of Shares" and "Additional
Information--Shareholder Services."
Overall Annual Expense Ratio. The tables below show (a) the
annualized total operating expense ratio for each class of
shares for each Target Fund and Core Bond for the six month
period ended March 31, 2002, and (b) estimated pro forma
annualized operating expense ratio for each class of shares
of the Combined Fund assuming only a single Target Fund
Acquisition took place, and assuming the Reorganization had
taken place on March 31, 2002, both including and excluding
any applicable fee waivers and expense reimbursements and
excluding any class specific distribution and account
maintenance fees.
15
Total Operating Expense Ratios
--------------------------------
Fund Class A/I Class B Class C Class D/A
------------ --------- ------- ------- ---------
Global Bond 1.36% 2.11% 2.16% 1.61%
Mercury Total
Return Bond* 0.97% 1.97% 1.97% 1.22%
ML Total
Return Bond* 1.36% 2.36% 2.36% 1.61%
Corporate Fund** 1.06% N/A N/A N/A
Core Bond 0.59% 1.36% 1.42% 0.84%
----------------------
* Prior to June 30, 2002, with respect to ML Total Return Bond and Mercury
Total Return Bond, FAM had contractually waived the payment of investment
advisory/administration fees and/or reimbursed expenses in order to cap the
expenses of these Funds. This contractual waiver is no longer in effect,
although FAM currently intends to continue to waive voluntarily the payment
of investment advisory/administration fees until the consummation of the
applicable Target Fund Acquisition as necessary to cap the expenses of these
Funds. See footnote (g) to the Fee Tables above.
** Corporate Fund offers only one class of shares (the equivalent of Class A).
Combined Fund Pro Forma Total Operating Expense Ratios*
Class A Class B Class C Class D
------- ------- ------- -------
Assuming Only Global
Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only Mercury
Total Return Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only ML Total
Return Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only Corporate
Fund Acquired** 0.61% 1.38% 1.44% 0.86%
Assuming All Target Funds
Acquired 0.59% 1.36% 1.42% 0.84%
----------------------
* Assumes the applicable Target Fund Acquisition and the
Reorganization had taken place on March 31, 2002. Future
fees and expenses may be higher or lower than those
indicated above.
** Corporate Fund offers only one class of shares (the
equivalent of Class A). In the event that only the
Corporate Fund Target Fund Acquisition is consummated,
FAM and its affiliates have agreed to waive voluntarily
the payment of fees and/or to reimburse expenses as
necessary for one year following the Target Fund
Acquisition so that the total operating expense ratios
of the Combined Fund would be no higher than the total
operating expense ratios of Core Bond immediately prior
to such Target Fund Acquisition.
Purchase of Shares. Shares of Core Bond are offered
continuously for sale to the public in the same manner as
shares of each of Global Bond, Mercury Total Return Bond
and ML Total Return Bond. Shares of Corporate Fund are
offered without sales charge to the holder of units of the
Corporate Income Fund, International Bond Fund and the
Corporate Investment Trust Fund. Holders of units of these
unit trust funds may elect to have their distributions
reinvested in shares of Corporate Fund rather than paid in
cash. Corporate Fund is not open to investment by persons
who are not holders of units of the participating unit
trust funds and investments in Corporate Fund are limited
to reinvestment of distributions.
Redemption of Shares. The redemption procedures for shares
of Core Bond are the same as the redemption procedures for
shares of each Target Fund. For purposes of computing any
CDSC that may
16
be payable upon disposition of shares of Core Bond
distributed to the Target Fund's shareholders in a Target
Fund Acquisition, the holding period for the shares of each
Target Fund that are outstanding on the date of a Target
Fund Acquisition will be tacked onto the holding period of
the shares of Core Bond that are distributed in such Target
Fund Acquisition. See "Comparison of the Funds--Redemption
of Shares."
Dividends. The policies of each Target Fund with respect to
dividends and distributions are identical to those of Core
Bond. See "Comparison of the Funds--Dividends."
Net Asset Value. The Target Funds and Core Bond each
determines the net asset value of each class of its shares
once daily Monday through Friday as of the close of
business on the New York Stock Exchange (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. Each Fund computes net asset value per
share in the same manner. See "Comparison of the
Funds--Additional Information--Net Asset Value."
Voting Rights. The corresponding voting rights of the
shareholders of the Target Funds and the shareholders of
Core Bond are substantially similar. See "Comparison of the
Funds--Additional Information--Capital Stock."
Other Significant Considerations. Shareholder services
available to shareholders of each Target Fund, such as the
providing of annual and semi-annual reports, are
substantially the same as those available to the
shareholders of Core Bond. See "Comparison of the
Funds--Additional Information--Shareholder Services." An
automatic dividend reinvestment plan is available to
shareholders of each Fund. Such plans are identical. See
"Comparison of the Funds--Automatic Dividend Reinvestment
Plan" and "Comparison of the Funds--Additional
Information--Shareholder Services."
Tax
Considerations Each Target Fund and Core Bond will receive an opinion of
counsel with respect to each Target Fund Acquisition to the
effect that, among other things, neither Core Bond nor any
Target Fund will recognize any gain or loss on the
transaction, and no Target Fund shareholder will recognize
any gain or loss upon receipt of shares of Core Bond in a
Target Fund Acquisition. Consummation of the Reorganization
is subject to the receipt of such opinion of counsel. See
"The Reorganization--Tax Consequences of each Target Fund
Acquisition."
17
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following table summarizes the risks of investing in Core Bond, which
will be the surviving fund in each Target Fund Acquisition. For more
information on the risks summarized below, please see "Investment Risks" in
the Core Bond Prospectus. For ease of comparison, the table also indicates
whether following the applicable Target Fund Acquisition, shareholders of each
Target Fund that approves a Target Fund Acquisition will be subject to these
risks to a potentially greater degree or to substantially the same degree as
they are now.
[ ] Substantially same level of risk than before a [X] Potentially greater level of risk than before
Target Fund Acquisition a Target Fund Acquisition
Effect of the Reorganization on Shareholders of:
-----------------------------------------------
Mercury
Total ML Total Corporate
Core Bond Risk Return Bond Return Bond Global Bond Fund
----------------- ----------- ----------- ----------- ---------
Bond Market and Selection Risk-- Bond 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 the Investment Adviser selects will underperform the
market, the relevant indices or other funds with similar
investment objectives and investment strategies.
Call and Redemption Risk-- A bond's issuer may call a bond for [ ] [ ] [ ] [ ]
redemption before it matures. If this happens to a bond a Core
Bond holds, Core Bond may lose income and may have to invest the
proceeds in bonds with lower yields.
Credit Risk-- Credit risk is the risk that the issuer will be [ ] [ ] [ ] [ ]
unable to pay the interest or principal when due. The degree of
credit risk depends on both the financial condition of the
issuer and the terms of the obligation. Issuers of high-yield
bonds generally are more subject to credit risk than issuers of
investment grade securities.
Interest Rate Risk-- Interest rate risk is the risk that prices [ ] [ ] [ ] [ ]
of fixed-income securities 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.
Borrowing and Leverage Risk--Core Bond may borrow for temporary [ ] [ ] [ ] [ ]
emergency purposes including to meet redemptions. Borrowing may
exaggerate changes in the net asset value of Core Bond's shares
and in the yield on Core Bond's portfolio. Borrowing will cost
Core Bond interest expense and other fees. The costs of
borrowing may reduce Core Bond's return. Certain securities
that Core Bond buys may create leverage including, for example,
inverse floating rate securities, when issued securities,
forward commitments and options.
18
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
[ ] [ ] [ ] [ ]
Foreign Market Risk-- Since Core Bond may invest up to 25% of its total assets
in foreign securities, it offers the potential for more diversification than
an investment only in the United States. This is because securities traded on
foreign markets have often (though not always) performed differently than
ecurities in the United States. However, such foreign investments involve
special risks not present in U.S. investments that can increase the chances
that Core Bond will lose money. In particular, investment in foreign
securities involves the following risks, which are generally greater for
investments in emerging markets.
o The economies of certain foreign markets often do
not compare favorably with the economy of the
United States with respect to such issues as
growth of gross national product, reinvestment of
capital, resources and balance of payments
position. Certain such economies may rely heavily
on particular industries or foreign capital and
are more vulnerable to diplomatic developments,
the imposition of economic sanctions against a
particular country or countries, changes in
international trading patterns, trade barriers
and other protectionist or retaliatory measures.
o Investments in foreign markets may also be adversely
affected by governmental actions such as the imposition
of capital controls, nationalization of companies
or industries, expropriation of assets or the
imposition of punitive taxes.
o The governments of certain countries may prohibit
or impose substantial restrictions on foreign
investing in their capital markets or in certain
industries. Any of these actions could severely
affect security prices, impair Core Bond's
ability to purchase or sell foreign securities or
transfer its assets or income back into the
United States, or otherwise adversely affect Core
Bond's operations.
o Other foreign market risks include foreign
exchange controls, difficulties in pricing
securities, defaults on foreign government
securities, difficulties in enforcing favorable
legal judgments in foreign courts and political
and social instability. Legal remedies available
to investors in certain foreign countries may be
less extensive than those available to investors
in the United States or other foreign countries.
19
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
o Because there are fewer investors in foreign
markets and a smaller number of securities
traded each day, it may be difficult for Core
Bond to buy and sell securities on those
exchanges. In addition, prices of foreign
securities may go up and down more than prices
of securities traded in the United States.
o Non-U.S. markets have different clearance and
settlement procedures and in certain markets,
settlements may be unable to keep pace with the
volume of securities transactions which may cause
delays. This means that Core Bond's assets may be
uninvested and not earning returns. Core Bond may
miss investment opportunities or be unable to
dispose of a security because of these delays.
Junk Bonds-- Core Bond may invest in junk bonds. Although junk [ ] [ ] [X] [X]
bonds generally pay higher rates of interest than investment
grade bonds, there is a greater risk of loss of income or
principal. Junk bonds are high-risk investments that may cause
losses in Core Bond. The major risks in junk bond investments
include:
o Junk bonds may be issued by less creditworthy
companies. Issuers of junk bonds may have a
larger amount of outstanding debt relative to
their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy,
claims of other creditors may have priority over
the claims of junk bond holders, leaving few or
no assets available to repay junk bond holders.
Prices of junk bonds are subject to extreme price
fluctuations. Adverse changes to the issuer's
industry and general economic conditions may have
a greater impact on the prices of junk bonds than
on other higher rated fixed income securities.
Issuers of junk bonds may be unable to meet their
interest or principal payment obligations because
of an economic downturn, specific issuer
developments, or the unavailability of additional
financing.
o Junk bonds frequently have redemption features
that permit an issuer to repurchase the security
from Core Bond before it matures. If the issuer
redeems junk bonds, Core Bond may have to invest
the proceeds in bonds with lower yields and may
lose income.
o Junk bonds may be less liquid than higher rated
fixed income securities, even under normal
economic conditions.
20
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
o There are fewer dealers in the junk bond market,
and there may be significant differences in the
prices quoted for junk bonds by the dealers.
Because they are less liquid, judgment may play
a greater role in valuing certain of Core Bond's
securities than is the case with securities
trading in a more liquid market.
o Core Bond may incur expenses to the extent
necessary to seek recovery upon default or to
negotiate new terms with a defaulting issuer.
Mortgage-Backed and Asset-Backed Securities -- Core Bond may [ ] [ ] [X] [ ]
invest in mortgage-backed and asset-backed securities.
Mortgage-backed and asset-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 loans earlier than scheduled. When this
happens, certain types of mortgage-backed and asset-backed
securities will be paid off more quickly than originally
anticipated and Core Bond will have 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 and asset-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
and asset-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 and asset-backed securities.
Sovereign Debt -- Core Bond may invest in sovereign debt [X] [X] [ ] [X]
securities. These securities are issued or guaranteed by foreign
government entities. Investments in sovereign debt subject Core
Bond to the risk that a government entity may delay or refuse to
pay interest or repay principal on its sovereign debt. Some of
these reasons may include: cash flow problems, insufficient
foreign currency reserves, political considerations, the
relative size of its debt position to its economy or its failure
to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government
entity defaults, it may ask for more time in which to pay, or
for further loans. There is no legal process for collecting
sovereign debts that a government does not pay.
21
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
Securities Lending-- Core Bond may lend securities 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, Core
Bond may lose money and there may be a delay in recovering the
loaned securities. Core Bond could also lose money if it does
not recover the loaned 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 Core Bond.
Hedging -- Core Bond may use derivatives for hedging purposes [X] [X] [X] [X]
including anticipatory hedges. Hedging is a strategy in which
Core Bond uses a derivative to offset the risks associated with
other Core Bond holdings. While hedging can reduce losses, it
can also reduce or eliminate gains if the market moves in a
different manner than anticipated by Core Bond 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
Core Bond, in which case any losses on the holdings being hedged
may not be reduced. There can be no assurance that Core Bond's
hedging strategy will reduce risk or that hedging transactions
will be either available or cost effective. Core Bond is not
required to use hedging and may choose not to do so.
Swap Agreements-- Core Bond may engage in swap agreements. Swap [ ] [ ] [ ] [X]
agreements are over-the-counter contracts in which one party
agrees to make periodic payments based on the change in market
value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate
or the change in market value of a different bond, basket of
bonds, or index. Swap agreements may be used to obtain exposure
to a bond or market without owning or taking physical custody of
securities.
Derivatives -- Core Bond may use derivative instruments, [ ] [ ] [ ] [X]
including indexed and inverse securities, options on portfolio
positions, options on securities or other financial indices,
financial futures and options on such futures and swap
agreements. Derivatives allow Core Bond to increase or decrease
its risk exposure more quickly and efficiently than other types
of instruments. Derivatives are volatile and involve
significant risks, including:
Credit Risk -- the risk that the counterparty (the
party on the other side of the transaction) on a
derivative transaction will be unable to honor its
financial obligation to Core Bond.
22
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
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.
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.
Indexed and Inverse Floating Rate Securities -- Core Bond may [ ] [ ] [X] [X]
invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate,
known as indexed securities. The return on indexed securities
will rise when the underlying index or interest rate rises and
fall when the index or interest rate falls. Core Bond may also
invest in securities whose return is inversely related to
changes in an interest rate (inverse floaters). In general,
income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest
rates decrease. Investments in inverse floaters may subject
Core Bond to the risks of reduced or eliminated interest
payments and losses of principal. In addition, certain indexed
securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which
effectively leverages Core Bond's investment. As a result, the
market value of such securities will generally be more volatile
than that of fixed rate, tax-exempt securities. Indexed
securities and inverse floaters are derivative securities and
can be considered speculative.
Repurchase Agreements -- Core Bond may invest in obligations [ ] [ ] [ ] [ ]
which are subject to repurchase agreements with any member bank
of the Federal Reserve System or primary dealer in U.S. Treasury
securities. The bank or dealer agrees to repurchase the security
from Core Bond at a set time and price, which sets the yield. If
the bank or dealer defaults, Core Bond may suffer time delays
and incur costs and possible losses.
Illiquid Securities -- Core Bond may invest up to 15% of its [ ] [ ] [ ] [ ]
assets in illiquid securities that it cannot easily sell within
seven days at current value or that have contractual or legal
restrictions on resale. If Core Bond buys illiquid securities
it may be unable to quickly sell them or may be able to sell
them only at a price below current value.
Restricted Securities -- Core Bond may invest up to 10% of its [ ] [ ] [ ] [ ]
total assets in restricted securities. Restricted securities
have contractual or legal restrictions on their resale and may
include "private placement" securities that Core Bond 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.
23
Mercury
Total ML Total Corporate
Return Bond Return Bond Global Bond Fund
----------- ----------- ----------- ---------
Restricted securities may be illiquid. Core Bond may be unable
to sell them on short notice or may be able to sell them only
at a price below current value. Core Bond may get only limited
information about the issuer, so it may be less able to predict
a loss. In addition, if Core Bond management receives material
adverse nonpublic information about the issuer, then Core Bond
will not be able to sell the securities.
Global Bond is subject to the following additional
principal risk:
Non-Diversification Risk -- Global Bond is a non-diversified fund. The
other Funds are diversified funds. A non-diversified fund may concentrate its
investments among fewer issuers than a diversified fund which exposes Global
Bond to credit and market risks associated with such issuers.
Except where noted, each Target Fund may be subject, to a lesser
extent, to risks associated with the following investment strategies:
Emerging Markets Risk -- Corporate Fund may invest in emerging markets.
The risks of foreign investments are usually much greater for emerging markets.
Investments in emerging markets may be considered speculative. Emerging markets
include those in countries defined as emerging or developing by the World Bank,
the International Finance Corporation, or the United Nations. Emerging markets
are riskier because they develop unevenly and may never fully develop. They are
more likely to experience hyperinflation and currency devaluations, which
adversely affects returns to U.S. investors. In addition. the securities markets
in many of these countries have far lower trading volumes and less liquidity
than developed markets. Since these markets are so small, they may be more
likely to suffer sharp and frequent price changes or long-term price depression
because of adverse publicity, investor perceptions, or the actions of a few
large investors. In addition, traditional measures of investment value used in
the United States, such as price to earnings ratios, may not apply to certain
small markets.
Many emerging markets have histories of political instability and
abrupt changes in policies. As a result, their governments are more likely to
take actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Variable Rate Demand Obligations -- Mercury Total Return Bond and ML
Total Return Bond may invest in variable rate demand obligations ("VRDOs").
VRDOs are floating rate securities that consist of an interest in a long-term
bond and the conditional right to demand payment prior to the bond's maturity
from a bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.
Corporate Loans -- Mercury Total Return Bond and ML Total Return Bond
may invest in corporate loans. Corporate loans are subject to the risk of loss
of principal and income. Borrowers do not always provide collateral for
corporate loans and the value of the collateral may not completely cover the
borrower's obligations at the time of a default. If a borrower files for
protection from its creditors under the U.S. bankruptcy laws, these laws may
limit the Fund's rights to its collateral. In addition, the value of collateral
may erode during a bankruptcy case. In the event of a bankruptcy, the holder of
a corporate loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.
Convertible Securities -- Mercury Total Return Bond and ML Total Return
Bond may invest in convertible securities. Convertibles are generally bonds or
preferred stocks that may be converted into common stock. Convertibles typically
pay current income, as either interest (bond convertibles) or dividends
(preferred stocks). A convertible's value usually reflects both the stream of
current income payments and the value of the underlying common stock. The market
value of a convertible performs like regular bonds; that is, if market interest
rates rise, the value of a convertible usually falls. Since it is convertible
into common stock, the convertible also has the same types of market and issuer
risk as the underlying common stock.
24
COMPARISON OF THE FUNDS
Financial Highlights
Core Bond. The Financial Highlights table is intended to help you
understand Core Bond's financial performance for each of the past five fiscal
years. Certain information reflects financial results for a single Core Bond
share. The total returns in the table represent the rate an investor would have
earned or lost on an investment in shares of Core Bond (assuming reinvestment of
all dividends). The information for the years ended September 30, 1998, 1999,
2000, 2001 and 2002 has been audited by [o] whose report, along with Core Bond's
financial statements, is included in Bond Fund's annual report to shareholders
that accompanies this Proxy Statement and Prospectus.
The following per share data and ratios have been derived from
information provided in the financial statements:
Class A
-------------------------------------------------------
For the Year Ended September 30,
-------------------------------------------------------
Increase (Decrease) in Net Asset 2002 2001 2000 1999 1998
Value:
- -----------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of $ 10.68 $ 10.88 $ 11.78 $ 11.40
period
- -----------------------------------------------------------------------------------------------------------------
Investment income--net .66 .72 .70 .73
- -----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net .53 (.20) (.90) .38
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 1.19 .52 (.20) 1.11
- -----------------------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.66) (.72) (.70) (.73)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.21 $ 10.68 $ 10.88 $ 11.78
- -----------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per share 11.44% 5.09% (1.70%) 10.05%
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------
Expenses .61% .57% .57% .58%
- -----------------------------------------------------------------------------------------------------------------
Investment income--net 6.03% 6.79% 6.22% 6.32%
- -----------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in $519,815 $489,778 $535,188 $600,655
thousands)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 262.47% 94.67% 79.06% 149.41%
- -----------------------------------------------------------------------------------------------------------------
----------
* Total investment returns exclude the effects of sales charges.
Class B
--------------------------------------------------------------
For the Year Ended September 30,
--------------------------------------------------------------
Increase (Decrease) in Net Asset 2002 2001 2000 1999 1998
Value:
- ------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of $10.68 $10.88 $11.78 $11.40
period
- ------------------------------------------------------------------------------------------------------
Investment income--net .57 .64 .61 .64
- ------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net .53 (.20) (.90) .38
- ------------------------------------------------------------------------------------------------------
Total from investment operations 1.10 .44 (.29) 1.02
- ------------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.57) (.64) (.61) (.64)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.21 $10.68 $10.88 $11.78
- ------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------
Based on net asset value per share 10.59% 4.29% (2.45%) 9.21%
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------
Expenses 1.38% 1.34% 1.33% 1.34%
- ------------------------------------------------------------------------------------------------------
Investment income--net 5.25% 6.02% 5.46% 5.56%
- ------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (in $511,166 $455,162 $636,115 $685,345
thousands)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover 262.47% 94.67% 79.06% 149.41%
- ------------------------------------------------------------------------------------------------------
----------
* Total investment returns exclude the effects of sales charges.
25
Core Bond-Financial Highlights (concluded)
Class C
---------------------------------------------------------------
For the Year Ended September 30,
---------------------------------------------------------------
Increase (Decrease) in Net Asset 2002 2001 2000 1999 1998
Value:
- -----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $ 10.68 $ 10.88 $ 11.79 $ 11.40
- -----------------------------------------------------------------------------------------------------
Investment income--net .57 .64 .61 .63
- -----------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net .53 (.20) (.91) .39
- -----------------------------------------------------------------------------------------------------
Total from investment operations 1.10 .44 (.30) 1.02
- -----------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.57) (.64) (.61) (.63)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.21 $ 10.68 $ 10.88 $ 11.79
- -----------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------
Based on net asset value per share 10.53% 4.23% (2.58%) 9.25%
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------
Expenses 1.44% 1.39% 1.38% 1.40%
- -----------------------------------------------------------------------------------------------------
Investment income--net 5.16% 5.96% 5.41% 5.50%
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $76,963 $55,889 $79,581 $77,464
- -----------------------------------------------------------------------------------------------------
Portfolio turnover 262.47% 94.67% 79.06% 149.41%
- -----------------------------------------------------------------------------------------------------
Class D
----------------------------------------------------------------
For the Year Ended September 30,
----------------------------------------------------------------
Increase (Decrease) in Net Asset 2002 2001 2000 1999 1998
Value:
- -----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $10.68 $10.88 $11.79 $11.41
- -----------------------------------------------------------------------------------------------------
Investment income--net .63 .70 .67 .70
- -----------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net .53 (.20) (.91) .38
- -----------------------------------------------------------------------------------------------------
Total from investment operations 1.16 .50 (.24) 1.08
- -----------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.63) (.70) (.67) (.70)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.21 $10.68 $10.88 $11.79
- -----------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------
Based on net asset value per share 11.16% 4.83% (2.03%) 9.77%
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------
Expenses .86% .82% .82% .82%
- -----------------------------------------------------------------------------------------------------
Investment income--net 5.75% 6.55% 5.98% 6.07%
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $201,269 $148,890 $135,401 $123,202
- -----------------------------------------------------------------------------------------------------
Portfolio turnover 262.47% 94.67% 79.06% 149.41%
- -----------------------------------------------------------------------------------------------------
- ---------------
* Total investment returns exclude the effects of sales charges.
26
Mercury Total Return Bond. The Financial Highlights table is intended
to help you understand Mercury Total Return Bond's financial performance for
each of the past five fiscal years. Certain information reflects financial
results for a single Mercury Total Return Bond share. The total returns in the
table represent the rate an investor would have earned or lost on an investment
in shares of Mercury Total Return Bond Fund (assuming reinvestment of all
dividends). The information for the years ended June 30, 1998, 1999, 2000, 2001
and 2002 has been audited by [o] whose report, along with Mercury Total Return
Bond's financial statements, is included in Mercury Trust's annual report to
shareholders which is available upon request.
The following per share data and ratios have been derived from
information provided in the financial statements:
Class I(1)
------------------------------------------------------------
For the Year Ended June 30,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2001(3) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.48 $12.33 $12.85 $13.46 $13.04
- ------------------------------------------------------------------------------------------------------------
Investment income--net .68*** .83 .86 .81 .89
- ------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on .15 (.54) (.49) .50
investments .40
from the Portfolio--net
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 1.08 .98 .32 .32 1.39
- ------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.70) (.83) (.84) (.83) (.97)
- ------------------------------------------------------------------------------------------------------------
Realized gain on investments--net -- -- -- (.10) --
- ------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.70) (.83) (.84) (.93) (.97)
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.86 $ 12.48 $ 12.33 $ 12.85 $ 13.46
- ------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- ------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.78% 8.18% 2.59% 2.30% 11.04%
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement(4) .65% .65% .65% .65% .65%
- ------------------------------------------------------------------------------------------------------------
Expenses(4) 1.08% .93% .92% .79% 1.02%
- ------------------------------------------------------------------------------------------------------------
Investment income--net 5.28% 6.60% 6.80% 5.78% 6.65%
- ------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $63,268 $86,849 $100,372 $124,320 $45,250
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 208.91%+++ 276.08%++ 247.00% 233.00% 195.00%
- ------------------------------------------------------------------------------------------------------------
Class A(1)
---------------------------------------------------
For the
Period June
2, 1999(2)
For the Year Ended June 30, to June 30,
------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2001(3) 2000 1999
- -------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.46 $12.33 $12.85 $12.88
- -------------------------------------------------------------------------------------------------
Investment income--net .68*** .78 .80 .06
- -------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on .38 .15 (.51) (.03)
investments
from the Portfolio--net
- -------------------------------------------------------------------------------------------------
Total from investment operations 1.06 .93 .29 .03
- -------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.67) (.80) (.81) (.06)
- -------------------------------------------------------------------------------------------------
Realized gain on investments--net -- -- -- --
- -------------------------------------------------------------------------------------------------
Total dividends and distributions (.67) (.80) (.81) (.06)
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $12.85 $12.46 $12.33 $12.85
- -------------------------------------------------------------------------------------------------
Total Investment Return:**
- -------------------------------------------------------------------------------------------------
Based on net asset value per share 8.60% 7.76% 2.37% .23%+
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------
Expenses, net of reimbursement(4) .90% .90% .90% .90%*
- -------------------------------------------------------------------------------------------------
Expenses(4) 1.32% 1.18% 1.17% 1.18%*
- -------------------------------------------------------------------------------------------------
Investment income--net 5.32% 6.31% 6.55% 6.26%*
- -------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $58,547 $66,908 $43,940 $350
- -------------------------------------------------------------------------------------------------
Portfolio turnover 208.91%+++ 276.08%++ 247.00% 233.00%
- -------------------------------------------------------------------------------------------------
- ----------
* Annualized.
** Total investment returns exclude the effects of sales charges. Total
Return Master's Investment Adviser reimbursed a portion of the Fund's
expenses. Without such reimbursement, the Fund's performance would have
been lower.
*** Based on average shares outstanding.
(1) Prior to October 6, 2000, Class I shares were designated Investor Class
shares and Class A shares were designated Distributor Class shares.
(2) Commencement of operations.
(3) On October 6, 2000, the Fund converted from a series of a stand-alone
investment company to a "feeder" fund that seeks to achieve its investment
objective by investing all of its assets in the Total Return Master, a
series of FAM Trust, that has the same investment objective as the Fund.
All investments will be made at Total Return Master's level. This
structure is sometimes called a "master/feeder" structure.
(4) Includes the Fund's share of Total Return Master's allocated expenses.
+ Aggregate total investment return.
++ Portfolio turnover from Total Return Master for the period October 6, 2000
(commencement of operations for Total Return Master) to June 30, 2001.
+++ Portfolio turnover from Total Return Master.
27
Mercury Total Return Bond - Financial Highlights (concluded)
Class B
---------------------------------------------
Increase (Decrease) in For the Period
Net Asset Value: For the Year Ended October 6, 2000 (1)
June 30, 2002 to June 30, 2001
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Per Share Operating Performance:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net asset value, beginning of period $12.42 $12.38
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Investment income - net .61*** .55
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Realized and unrealized gain on investments and from the Portfolio - net .42 .07
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Total from investment operations 1.03 .62
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Less dividends from investment income - net (.64) (.58)
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net asset value, end of period $12.81 $12.42
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Total Investment Return:**
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Based on net asset value per share 8.31% 5.08%+
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Expenses, net of reimbursement (2) 1.16% 1.40%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Expenses (2) 1.57% 1.65%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Investment income - net 4.91% 5.63%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Supplemental Data:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net assets, end of period (in thousands) $388 $146
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Portfolio turnover from the Portfolio 208.91% 276.08%
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Class C
---------------------------------------------
Increase (Decrease) in For the Period
Net Asset Value: For the Year Ended October 6, 2000 (1)
June 30, 2002 to June 30, 2001
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Per Share Operating Performance:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net asset value, beginning of period $12.26 $12.38
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Investment income - net .62*** .41
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Realized and unrealized gain on investments and from the Portfolio - net .09
.38
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Total from investment operations 1.00 .50
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Less dividends from investment income - net (.64) (.62)
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net asset value, end of period $12.62 $12.26
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Total Investment Return:**
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Based on net asset value per share 8.29% 4.10%+
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Expenses, net of reimbursement (2) .89% .43%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Expenses (2) 1.30% .43%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Investment income - net 4.93% 3.97%*
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Supplemental Data:
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Net assets, end of period (in thousands) $6 --
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
Portfolio turnover from the Portfolio 208.91% 276.08%
- ---------------------------------------------------------------------------------- ---------------------- ----------------------
- ----------
* Annualized.
** Total investment returns exclude the effects of sales charges. Total
Return Master's Investment Adviser reimbursed a portion of the Fund's
expenses. Without such reimbursement, the Fund's performance would have
been lower.
*** Based on average shares outstanding.
(1) Commencement of operations.
(2) Includes the Fund's share of Total Return Master's allocated expenses.
+ Aggregate total investment return.
28
ML Total Return Bond. The Financial Highlights table is intended to
help you understand the Total Return Bond's financial performance for the
periods shown. Certain information reflects financial results for a single ML
Total Return Bond share. The total returns in the table represent the rate an
investor would have earned or lost on an investment in shares of ML Total Return
Bond (assuming reinvestment of all dividends). The information for the period
ended June 30, 2001 and the year ended June 30, 2002 has been audited by [o]
whose report, along with ML Total Return Bond's financial statements, is
included in MLIM Fund's annual report to shareholders which is available upon
request.
The following per share data and ratios have been derived from
information provided in the financial statements:
For the Year Ended
June 30, 2002
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Class A Class B Class C Class D
Value:
- -------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $ 10.20 $ 10.18 $ 10.18 $10.19
- -------------------------------------------------------------------------------------------------------
Investment income--net .51*** .44*** .40*** .51***
- -------------------------------------------------------------------------------------------------------
Realized and unrealized gain on
investments from the
Portfolio--net .42 .39 .47 .41
- -------------------------------------------------------------------------------------------------------
Total from investment operations .93 .83 .87 .92
- -------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.57) (.47) (.51) (.56)
Realized gain on investments--net (.01) (.01) (.01) (.01)
- -------------------------------------------------------------------------------------------------------
Total dividends and distributions (.58) (.48) (.52) (.57)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.55 $10.53 $10.53 $10.54
- -------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -------------------------------------------------------------------------------------------------------
Based on net asset value per share 9.30% 8.21% 8.22% 9.03%
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement++ .65% 1.65% 1.64% .90%
- -------------------------------------------------------------------------------------------------------
Expenses++ 1.54% 2.58% 2.51% 1.80%
- -------------------------------------------------------------------------------------------------------
Investment income--net 5.07% 4.22% 4.07% 4.85%
- -------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $875 $10,113 $10,339 $10,107
- -------------------------------------------------------------------------------------------------------
Portfolio turnover from the 208.91% 208.91% 208.91% 208.91%
Portfolio
- -------------------------------------------------------------------------------------------------------
For the Period
October 6, 2000+ to June 30, 2001
- ----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Class A Class B Class C Class D
Value:
- ----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $10.00 $10.00 $10.00 $ 10.00
- ----------------------------------------------------------------------------------------------------
Investment income--net .45 .35 .36 .42
- ----------------------------------------------------------------------------------------------------
Realized and unrealized gain on
investments from the
Portfolio--net .17 .18 .17 .17
- ----------------------------------------------------------------------------------------------------
Total from investment operations .62 .53 .53 .59
- ----------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.42) (.35) (.35) (.40)
Realized gain on investments--net -- -- -- --
- ----------------------------------------------------------------------------------------------------
Total dividends and distributions (.42) (.35) (.35) (.40)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $10.20 $ 10.18 $ 10.18 $10.19
- ----------------------------------------------------------------------------------------------------
Total Investment Return:**
- ----------------------------------------------------------------------------------------------------
Based on net asset value per share 6.23%+++ 5.39%+++ 5.39%+++ 5.97%+++
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------------------------------
Expenses, net of reimbursement++ .65%* 1.65%* 1.65%* .90%*
- ----------------------------------------------------------------------------------------------------
Expenses++ 19.00%* 20.00%* 20.00%* 19.25%*
- ----------------------------------------------------------------------------------------------------
Investment income--net 6.56%* 5.32%* 5.44%* 6.19%*
- ----------------------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $64 $2,077 $259 $805
- ----------------------------------------------------------------------------------------------------
Portfolio turnover from the 276.08% 276.08% 276.08% 276.08%
Portfolio
- ----------------------------------------------------------------------------------------------------
- ----------
* Annualized.
** Total investment returns exclude the effects of sales charges. Total
Return Master's Investment Adviser reimbursed a portion of the Fund's
expenses. Without such reimbursement, the Fund's performance would have
been lower.
*** Based on average shares outstanding.
+ Commencement of operations.
++ Includes the Fund's share of Total Return Master's allocated expenses. +++
Aggregate total investment return.
29
Global Bond. The Financial Highlights table is intended to help you
understand Global Bond's financial performance for each of the past five
fiscal years and for the period January 1, 2002 to June 30, 2002. Certain
information reflects financial results for a single Global Bond share. The
total returns in the table represent the rate an investor would have earned or
lost on an investment in shares of Global Bond (assuming reinvestment of all
dividends). The information for the years ended December 31, 1997, 1998, 1999,
2000 and 2001 has been audited by [o] whose report, along with Global Bond's
financial statements, is included in Global Bond's annual report to
shareholders which is available upon request. The information for the period
January 1, 2002 to June 30, 2002 is unaudited.
The following per share data and ratios have been derived from
information provided in the financial statements:
Class A
---------------------------------------------------------------
For the Six
Months
Ended
June 30, For the Year Ended December 31,
Increase (Decrease) in 2002 --------------------------------------------------
Net Asset Value: (unaudited) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $7.61 $8.13 $8.46 $ 9.66 $9.12 $9.56
- -----------------------------------------------------------------------------------------------------
Investment income - net .08+ .22 .36 .45 .52 .54
- -----------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
- net .53 (.52) (.33) (1.20) .54 (.44)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .61 (.30) .03 (.75) 1.06 .10
- -----------------------------------------------------------------------------------------------------
Less dividends:
Investment income - net (.08) -- -- (.34) (.52) (.14)
Return of capital - net -- (.22) (.36) (.11) -- (.40)
- -----------------------------------------------------------------------------------------------------
Total dividends (.08) (.22) (.36) (.45) (.52) (.54)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $8.14 $7.61 $ 8.13 $ 8.46 $ 9.66 $9.12
- -----------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------
Based on net asset value per share 8.03%++ (3.78%) .52% (7.92%) 11.99% 1.19%
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------
Expenses 1.47%* 1.40% 1.07% 1.06% .92% .96%
- -----------------------------------------------------------------------------------------------------
Investment income--net 2.03%* 2.79% 4.50% 5.02% 5.57% 5.83%
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $9,080 $8,815 $11,517 $16,776 $26,289 $27,522
- -----------------------------------------------------------------------------------------------------
Portfolio turnover 113.08% 124.66% 221.49% 138.81% 129.20% 699.63%
- -----------------------------------------------------------------------------------------------------
Class B
--------------------------------------------------------------
For the Six
Months
Ended
June 30, For the Year Ended December 31,
Increase (Decrease) in 2002 ------------------------------------------------
Net Asset Value: (unaudited) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $7.61 $8.13 $8.47 $ 9.66 $9.12 $9.56
- ---------------------------------------------------------------------------------------------------
Investment income - net .05+ .15 .29 .38 .45 .47
- ---------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
- net .54 (.52) (.34) (1.19) .54 (.44)
- ---------------------------------------------------------------------------------------------------
Total from investment operations .59 (.37) (.05) (.81) .99 .03
- ---------------------------------------------------------------------------------------------------
Less dividends:
Investment income - net (.05) -- -- (.28) (.45) (.13)
Return of capital - net -- (.15) (.29) (.10) -- (.34)
- ---------------------------------------------------------------------------------------------------
Total dividends (.05) (.15) (.29) (.38) (.45) (.47)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $8.15 $7.61 $8.13 $ 8.47 $9.66 $9.12
- ---------------------------------------------------------------------------------------------------
Total Investment Return:**
- ---------------------------------------------------------------------------------------------------
Based on net asset value per share 7.75%++ (4.53%) (.38%) (8.53%) 11.13% .41%
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------------------------
Expenses 2.27%* 2.18% 1.86% 1.84% 1.71% 1.73%
- ---------------------------------------------------------------------------------------------------
Investment income--net 1.27%* 2.02% 3.71% 4.24% 4.80% 5.07%
- ---------------------------------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $19,877 $24,148 $38,426 $62,822 $110,620 $160,571
- ---------------------------------------------------------------------------------------------------
Portfolio turnover 113.08% 124.66% 221.49% 138.81% 129.20% 699.63%
- ---------------------------------------------------------------------------------------------------
- ----------
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding. ++ Aggregate total investment return.
30
Global Bond-Financial Highlights (concluded)
Class C
---------------------------------------------------------------
For the Six
Months
Ended
June 30, For the Year Ended December 31,
Increase (Decrease) in 2002 ---------------------------------------------------
Net Asset Value: (unaudited) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $7.16 $8.13 $8.46 $9.66 $9.12 $9.56
- -----------------------------------------------------------------------------------------------------
Investment income - net .05+ .15 .29 .37 .45 .46
- -----------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
- net .52 (.52) (.33) (1.20) .54 (.44)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .57 (.37) (.04) (.83) .99 .02
- -----------------------------------------------------------------------------------------------------
Less dividends:
Investment income - net (.04) -- -- (.28) (.45) (.12)
Return of capital - net -- (.15) (.29) (.09) -- (.34)
- -----------------------------------------------------------------------------------------------------
Total dividends (.04) (.15) (.29) (.37) (.45) (.46)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $8.14 $7.61 $8.13 $8.46 $9.66 $9.12
- -----------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------
Based on net asset value per share 7.59%++ (4.59%) (.32%) (8.69%) 11.07% .33%
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------
Expenses 2.29%* 2.26% 1.91% 1.89% 1.75% 1.82%
- -----------------------------------------------------------------------------------------------------
Investment income--net 1.20%* 1.89% 3.65% 4.19% 4.74% 4.94%
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $1,218 $565 $407 $785 $1,848 $2,284
- -----------------------------------------------------------------------------------------------------
Portfolio turnover 113.08% 124.66% 221.49% 138.81% 129.20% 699.63%
- -----------------------------------------------------------------------------------------------------
Class D
-------------------------------------------------------------------
For the Six
Months
Ended
June 30,
Increase (Decrease) in 2002 For the Year Ended December 31,
Net Asset Value: (unaudited) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $7.61 $8.13 $8.46 $9.66 $9.11 $9.55
- --------------------------------------------------------------------------------------------------------
Investment income - net .07+ .20 .32 .43 .50 .51
- --------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
- net .53 (.52) (.33) (1.20) .55 (.44)
- --------------------------------------------------------------------------------------------------------
Total from investment operations .60 (.32) (.01) (.77) 1.05 .07
- --------------------------------------------------------------------------------------------------------
Less dividends:
Investment income - net (.07) -- -- (.32) (.50) (.13)
Return of capital - net -- (.20) (.32) (.11) -- (.38)
- --------------------------------------------------------------------------------------------------------
Total dividends (.07) (.20) (.32) (.43) (.50) (.51)
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.14 $7.61 $8.13 $8.46 $9.66 $9.11
- --------------------------------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.90%++ (4.02%) .27% (8.15%) 11.84% .94%
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------
Expenses 1.72%* 1.65% 1.32% 1.31% 1.17% 1.19%
- --------------------------------------------------------------------------------------------------------
Investment income--net 1.80%* 2.52% 4.25% 4.77% 5.32% 5.66%
- --------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $27,852 $25,504 $28,181 $34,894 $48,724 $49,813
- --------------------------------------------------------------------------------------------------------
Portfolio turnover 113.08% 124.66% 221.49% 138.81% 129.20% 699.63%
- --------------------------------------------------------------------------------------------------------
- ----------
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding. ++ Aggregate total investment return.
31
Corporate Fund. The Financial Highlights table is intended to help you
understand Corporate Fund's financial performance for each of the past five
fiscal years and for the period January 1, 2002 to June 30, 2002. Certain
information reflects financial results for a single Corporate Fund share. The
total returns in the table represent the rate an investor would have earned or
lost on an investment in shares of Corporate Fund (assuming reinvestment of
all dividends). The information for the years ended December 31, 1997, 1998,
1999, 2000 and 2001 has been audited by [o] whose report, along with Corporate
Fund's financial statements, is included in Corporate Fund's annual report to
shareholders which is available upon request. The information for the period
January 1, 2002 to June 30, 2002 is unaudited.
The following per share data and ratios have been derived from
information provided in the financial statements:
For the Six
Months Ended
Increase (Decrease) in June 30, 2002
Net Asset Value: (unaudited)
- ------------------------------------------------------ -----------------
Per Share Operating Performance:
- ---------------------------------------------------------------------------
Net asset value, beginning of period $20.91
- ---------------------------------------------------------------------------
Investment income--net .50+
- ---------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments--net (.03)
- ---------------------------------------------------------------------------
Total from investment operations .47
- ---------------------------------------------------------------------------
Less dividends:
Investment income--net (.48)
In excess of investment income--net --
- ---------------------------------------------------------------------------
Total dividends (.48)
- ---------------------------------------------------------------------------
Net asset value, end of period $20.90
- ---------------------------------------------------------------------------
Total Investment Return:
- ---------------------------------------------------------------------------
Based on net asset value per share 2.28%*
- ---------------------------------------------------------------------------
Ratios to Average Net Assets:
- ---------------------------------------------------------------------------
Expenses 1.11%**
- ---------------------------------------------------------------------------
Investment income--net 4.94%**
- ---------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------
Net assets, end of period (in thousands) $54,690
- ---------------------------------------------------------------------------
Portfolio turnover 49%
- ---------------------------------------------------------------------------
For the Year Ended December 31,
Increase (Decrease) in -----------------------------------------------------------------------
Net Asset Value: 2001 2000 1999 1998 1997
- ------------------------------------------------------ -----------------------------------------------------------------------
Per Share Operating Performance:
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $20.34 $19.77 $21.62 $21.13 $20.69
- ----------------------------------------------------------------------------------------------------------------------------------
Investment income--net 1.08+ 1.21+ 1.17+ 1.19+ 1.22
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments--net .57 .58 (1.84) .50 .44
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.65 1.79 (.67) 1.69 1.66
- ----------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Investment income--net (1.08) (1.22) (1.18) (1.20) (1.22)
In excess of investment income--net -- -- --++ -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends (1.08) (1.22) (1.18) (1.20) (1.22)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $20.91 $20.34 $19.77 $21.62 $21.13
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.32% 9.21% (3.14%) 8.24% 8.30%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses 1.22% 1.10% 1.11% 1.00% .99%
- ----------------------------------------------------------------------------------------------------------------------------------
Investment income--net 5.17% 6.16% 5.69% 5.60% 5.84%
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $59,179 $58,967 $63,150 $71,131 $72,381
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 227% 127% 61% 66% 90%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------
+ Based on average shares outstanding.
++ Amount is less than $.01 per share.
* Aggregate total investment return.
** Annualized.
32
Investment Objectives and Policies
The investment objectives of each of the Funds are similar but not
identical. Mercury Total Return Bond and ML Total Return Bond both seek to
maximize long-term total return. Global Bond's investment objective is to seek
a high total investment return which combines capital appreciation with
investment income. Corporate Fund and Core Bond both seek to provide their
shareholders with a high level of current income. Core Bond also seeks growth
of capital when consistent with its primary goal of current income. The
investment objective of each Target Fund and Core Bond is a fundamental policy
that may not be changed without the vote of a majority of that Fund's
outstanding voting securities (which for this purpose under the Investment
Company Act means the lesser of (i) 67% of the respective Fund's shares
present at a meeting at which more than 50% of the outstanding shares of the
respective Fund are represented or (ii) more than 50% of the respective Fund's
outstanding shares). No assurance can be given that Core Bond or any Target
Fund will achieve its investment objective, or that the Combined Fund will
achieve its investment objective after any Target Fund Acquisition or the
Reorganization.
The principal investment policies of each of the Funds are similar but do
differ with respect to the quality and maturity criteria of the investments.
Mercury Total Return Bond and ML Total Return Bond have identical investment
policies. Both Funds primarily invest in bonds with a portfolio duration of
two to eight years. Investments are concentrated in an area of the bond market
(based on quality, sector, coupon and maturity) that the Investment Adviser to
Total Return Master believes is relatively undervalued. Both Mercury Total
Return Bond and ML Total Return Bond normally invest at least 80% of their
assets in a diversified portfolio of bonds including U.S. government
securities, corporate bonds, asset-backed securities and mortgage-backed
securities. At least 85% of their total assets are invested in investment
grade securities. Each may invest up to 15% of its total assets in securities
rated below investment grade ("junk"). Each may invest a portion of its assets
in foreign securities. Up to 25% of each of these Funds' total assets may be
invested in foreign bonds denominated in United States dollars and up to 15%
may be invested in foreign bonds not denominated in United States dollars. Up
to 15% of each of these Funds' total assets may be invested in emerging market
foreign bonds. To pursue its investment objective, each of Mercury Total
Return Bond and ML Total Return Bond actively and frequently trade their
portfolio securities.
Global Bond invests in a non-diversified global portfolio of investment
grade debt instruments denominated in various currencies and multinational
currency units. Under normal circumstances, Global Bond invests 90% of its
assets in U.S. and foreign fixed-income securities that have a long-term
credit rating of `A' or better by S&P or by Moody's, a short-term credit
rating in the highest category by either S&P or Moody's or are unrated
obligations that the Investment Adviser believes are of the same credit
quality. Under normal market conditions, Global Bond invests at least 80% of
its net assets in debt securities denominated in the currencies of at least
three different countries or in multinational currency units. Global Bond
invests mainly in obligations denominated in the currencies of the U.S.,
Japan, Canada, Western European nations (including the Euro), New Zealand and
Australia. Global Bond may buy securities of all maturities issued by
governments, corporations and certain international organizations, although
the average maturity of its portfolio is less than 10 years. When selecting
investments, the Investment Adviser considers the current yield of a security,
the likelihood that the currency in which the security is denominated will
appreciate or depreciate compared to the U.S. dollar, and the likelihood that
interest rates in that currency will change. To pursue its investment
objective, Global Bond actively and frequently trades its portfolio
securities.
Corporate Fund seeks to achieve its investment objective by investing in
a diversified portfolio of investment grade fixed-income securities. Corporate
Fund invests at least 80% of its net assets in corporate bonds or notes.
Corporate Fund invests primarily in corporate bonds with remaining maturities
of two years or more. Corporate Fund invests only in investment grade
securities and at least 75% of the securities in which Corporate Fund invests
are rated in the three highest rating categories of Moody's and S&P. Corporate
Fund may also invest up to 25% of its total assets in foreign securities that
meet Corporate Fund's investment criteria. When choosing investments, the
Investment Adviser considers various factors, including credit quality of
issuers, yield analysis and diversification.
Under normal circumstances, Core Bond invests 90% of its net assets in a
diversified portfolio of fixed-income securities of any maturity, such as
corporate bonds and notes, mortgage-backed and asset-backed securities,
convertible securities, preferred stock and government debt obligations. Core
Bond invests at least 80% of its net assets in investment grade fixed-income
securities. Core Bond may invest 10% of its total assets in fixed-income
securities rated below investment grade ("junk"). Core Bond may invest up to
25% of its net assets in foreign fixed-
33
income securities. Core Bond primarily invests in the foreign fixed-income
securities of issuers from Canada, the developed countries of Europe,
Australia, New Zealand and certain Caribbean countries, but may also invest in
issuers elsewhere, including high credit-quality sovereign and corporate
issuers in emerging markets. The Investment Adviser attempts to mitigate
adverse price changes and optimize favorable price changes through active
trading that shifts the maturity and/or quality structure of Core Bond.
Other Investment Policies
Each Fund may engage in the additional investment policies described
below.
Repurchase Agreements. Each Fund may invest in repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed-upon time
and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return for the Fund insulated from market
fluctuations during such period. 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. 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. 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 the disposition of the collateral.
Instead of the contractual fixed rate of return, the rate of return to the
Fund will be dependent upon intervening fluctuations of the market value of
such security and the accrued interest on the security. 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. From time to time, each Fund also may invest in securities
pursuant to purchase and sale contracts. While the substance of purchase and
sale contracts is similar to repurchase agreements, because of the different
treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
As a matter of operating policy, a Fund will not enter into repurchase
agreements or purchase and sale contracts with greater than seven days to
maturity if, at the time of such investment, more than 10% of the total assets
of the Fund would be so invested.
Forward Commitments. Each Fund may purchase securities on a when-issued
basis or forward commitment basis, and may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or
sold by the Fund with payment and delivery taking place in the future to
secure what is considered an advantageous yield and price to the Fund at the
time of entering into the transaction. The value of the security on the
delivery date may be more or less than its purchase price. A Fund will
establish a segregated account in connection with such transactions in which
the Fund will deposit liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss).
U.S. Government securities and corporate debt obligations may be
purchased on a forward commitment basis at fixed purchase terms with periods
of up to 45 days between the commitment and settlement dates. The purchase
will be recorded on the date the Fund enters into the commitment and the value
of the security will thereafter be reflected in the calculation of the Fund's
net asset value. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its Fund, the Fund
may dispose of a commitment prior to settlement if the Investment Adviser
deems it appropriate to do so. There can, of course, be no assurance that the
judgments upon which these techniques are based will be accurate or that such
techniques when applied will be effective. The Fund will enter into forward
commitment arrangements only with respect to securities in which it may
otherwise invest pursuant to its investment objectives and policies.
Restricted Securities. From time to time, a Fund may invest in securities
the disposition of which is subject to legal restrictions, such as
restrictions imposed by the Securities Act on the resale of securities
acquired in private placements. If registration of such securities under the
Securities Act is required, such registration may not be readily accomplished,
and if such securities may be resold without registration, such resale may be
permissible only
34
in limited quantities. In either event, a Fund may not be able to sell its
restricted securities at a time which, in the judgment of the Investment
Adviser, would be most opportune.
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 will thereafter 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.
Lending of Fund Securities. Each Fund from time to time may lend
securities to brokers, dealers and financial institutions and receive as
collateral 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. Where a Fund receives
securities as collateral for the loaned securities, the Fund typically
receives the income on both the loaned securities and the collateral and, as a
result, the Fund's yield may increase. Where a 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. The Fund may receive a fee for its
loans. Loans of securities are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days.
The Fund may pay reasonable finder's, lending agent, administration 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 where the value of
the collateral falls below the market value of the borrowed securities, in the
event of borrower default or in the event of losses on investments made with
cash collateral.
Options on Debt Securities. The Funds may write call and put options on
securities in order to increase the return on their investments and in order
to hedge optionable securities held by the Funds. The Funds will write only
covered call options on debt securities (i.e., options in which it owns the
underlying security) or fully funded put options on debt securities (i.e.,
options in which an amount of cash or short-term securities equal to the
exercise price of the put has been segregated with the Fund's custodian). By
writing covered options on securities, a Fund will be able to increase its
return on the underlying securities by the amount of the premium, if the
option expires unexercised, or by the amount of any profits earned by closing
out the option position. The Fund may be required, however, to forego benefits
which could have been obtained from an increase in the value of securities on
which a call is written or a decrease in the value of securities on which a
put is written. As a result, the Fund may receive less total return, and at
other times greater total return, than if it had not written options.
The Funds also may purchase put options on optionable securities held in
a Fund and, under certain limited circumstances, call options on such
instruments. Purchases of put options may enable the Funds to limit the risk
of declines in the value of the Fund security underlying the put, until the
expiration of the option or the closing of the option transaction. By
purchasing a put, however, a Fund will be required to pay the premium, which
will reduce the benefits obtained from the transaction.
Although options written by a Fund may be terminated prior to exercise or
expiration by entering into an offsetting transaction, the ability to do so
depends upon the presence of a liquid secondary market on the exchange on
which the option is traded. If no such market is available, the Fund may be
unable to terminate existing positions and may be subject to exercise of the
option under unfavorable circumstances. The Funds will enter into transactions
in options on debt securities only when the management of the Fund believes
that a liquid secondary market for such options is available.
A Fund may write call options which give the holder the right to buy the
underlying security covered by the option from the Fund at the stated exercise
price. A Fund also may write put options that give the holder the right to
sell the underlying security to the Fund at the stated exercise price. A Fund
will write only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the options and, in the case of put options, that the
Fund will, through its custodian, have deposited and maintained short-term
U.S. Treasury obligations with a securities depository with a value equal to
or greater than the
35
exercise price of the underlying securities. The writer of a covered call
option has no control over when he may be required to sell his securities
since he may be assigned an exercise notice at any time prior to the
termination of his obligation as a writer. If an option expires unexercised,
the writer realizes a gain in the amount of the premium. Such a gain, of
course, may be offset by a decline in the market value of the underlying
security during the option period. If a call option is exercised, the writer
realizes a gain or loss from the sale of the underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. In the former instance, the
Fund increases its return by retaining the premium without being required to
purchase or sell the underlying security. In the latter case, the Fund
increases its return by liquidating the option position at a profit. The
amount of the premium will reflect, among other factors, the current market
price of the underlying security, the relationship of the exercise price to
the market price, the time period until the expiration of the option and
interest rates. By writing a call, the Fund limits its opportunity to profit
from an increase in the market value of the underlying security above the
exercise price of the option for so long as the Fund's obligation as a writer
continues. 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 as long as the option is
outstanding. In addition, in closing out an option position, the Fund may
incur a loss. Thus, in some periods the Fund will receive less total return
and in other periods greater total return from its option positions than it
otherwise would have received from the underlying securities. To the extent
that such transactions are engaged in for hedging purposes, any gain (or loss)
thereon may offset, in whole or in part, gains (or losses) on securities held
in a Fund or increases in the value of securities the Fund intends to acquire.
The Fund will attempt to achieve, through the receipt of premiums on covered
options, a more consistent average total return than it would otherwise
realize from holding the underlying securities alone. To facilitate closing
transactions, as described below, the Fund will ordinarily only write options
for which a liquid secondary market appears to exist.
A Fund may engage in closing transactions in order to terminate
outstanding options that it has written. To effect a closing transaction, the
Fund purchases, prior to the exercise of an outstanding option that it has
written, an option of the same series as that on which it desires to terminate
its obligation. Profit or loss from a closing purchase transaction will depend
on whether the cost of the transaction is more or less than the premium
received on the sale of the option plus the related transaction costs.
A Fund will typically purchase a call option only where the market price
of the underlying security declines substantially following the writing of a
call option, and the Fund either re-hedges the security by writing a second
call option at a lower exercise price or disposes of the security. In such
event, the Fund would usually enter into a closing transaction in connection
with the first option it wrote. However, if the first option has been held
less than three months, the Fund may desire not to enter into a closing
transaction in order to comply with certain provisions of the Internal Revenue
Code (the "Code"). In such circumstances, the Fund may purchase a call option
in an opening transaction with the same exercise price and expiration date as
the option it sold.
Swaps. Each Fund may enter into swap agreements, including interest rate
and index swap agreements, for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded the desired return. Swap agreements are
two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional amount," i.e., the dollar
amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. Each Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). Each Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by marking as segregated cash, U.S. government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, to
avoid any potential leveraging of the Fund's portfolio. No Fund will enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Fund's assets.
36
Each Fund may also enter into credit default swap agreements. The "buyer"
in a credit default contract is obligated to pay the "seller" a periodic
stream of payments over the term of the contract provided that no credit event
with respect to any underlying reference obligation has occurred. If a credit
event occurs, the seller typically must pay the buyer the "par value" (full
notional value) of the reference obligation in exchange for the reference
obligation. The Fund may either be the buyer or the seller in the transaction.
If a Fund is a buyer and no credit event occurs, the Fund loses its investment
and recovers nothing. However, if a credit event occurs, the buyer receives
full notional value for a reference obligation that may have little or no
value. As a seller, the Fund typically receives a fixed rate of income
throughout the term of the contract, which typically is between six months and
three years, provided a credit event does not occur. If a credit event occurs,
the seller typically must pay the buyer the full notional amount of the
reference obligation. Credit default swaps involve more risk than if the Fund
had invested in the reference obligation directly.
Whether each Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Investment Adviser's
ability to correctly predict whether certain types of investments are likely
to produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, the Fund bears the risk
of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty.
Restrictions imposed by the Code, may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated. It is possible that
development in the swap market, including potential government regulation,
could adversely affect each Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Indexed and Inverse Securities. Each Fund may invest in securities whose
potential returns are directly related to changes in an underlying index or
interest rate, known as indexed securities. The return on indexed securities
will rise when the underlying index or interest rate rises and fall when the
index or interest rate falls. Each Fund may also invest in securities whose
return is inversely related to changes in an interest rate ("inverse
floaters"). In general, inverse floaters change in value in a manner that is
opposite to most bonds -- that is, interest rates on inverse floaters will
decrease when short-term rates increase and increase when short-term rates
decrease. Investments in indexed securities and inverse floaters may subject
each Fund to the risk of reduced or eliminated interest payments. Investments
in indexed securities also may subject each Fund to loss of principal. In
addition, certain indexed securities and inverse floaters may increase or
decrease in value at a greater rate than the underlying interest rate, which
effectively leverages each Fund's investment. As a result, the market value of
such securities will generally be more volatile than that of fixed rate
securities. Both indexed securities and inverse floaters can be derivative
securities and can be considered speculative.
Corporate Fund and Core Bond may engage in the additional investment
strategy described below.
Borrowing and Leverage. The use of leverage by a 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 and other distributions 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.
Corporate Fund may engage in the additional investment strategy described
below.
Collateralized Mortgage Obligations. The Fund may invest in
collateralized mortgage obligations ("CMOs"), which are mortgage pass-through
securities collateralized by mortgage pools. CMOs are issued in several
classes with different maturities by governmental or non-governmental entities
such as banks and other mortgage lenders. Many issuers or servicers of CMOs
guarantee timely payment of interest and principal on the
37
securities, whether or not payments are made when due on the underlying
mortgages. This kind of guarantee generally increases the quality of a
security, but does not mean that the security's market value and yield will
not change. 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.
Although certain CMOs technically may be regarded as investment companies
under the Investment Company Act, they will not be regarded as investment
companies for purposes of the investment restriction which prohibits the Fund
from investing in securities of other investment companies, except as part of
a merger, consolidation, purchase of assets or similar transaction approved by
the Fund's shareholders.
In general, mortgage-backed securities are "pass-through" securities,
meaning that principal and interest payments made by the borrower on the
underlying mortgages are passed through to the Fund. The value of
mortgage-backed securities, like that of traditional fixed-income securities,
typically increases when interest rates fall and decreases when interest rates
rise. However, mortgage-backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The
price paid by the Fund for its mortgage-backed securities, the yield the Fund
expects to receive from such securities and the average life of the securities
are based on a number of factors, including the anticipated rate of prepayment
of the underlying mortgages. In a period of declining interest rates,
borrowers may prepay the underlying mortgages more quickly than anticipated,
thereby reducing the yield to maturity and the average life of the
mortgage-backed securities. Moreover, when the Fund reinvests the proceeds of
a prepayment in these circumstances, it will likely receive a rate of interest
that is lower than the rate on the security that was prepaid. To the extent
that the Fund purchases mortgage-backed securities at a premium, mortgage
foreclosures and principal prepayments may result in a loss to the extent of
the premium paid. If the Fund buys such securities at a discount, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying mortgages may
occur at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Fund.
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. Interest rates on inverse floaters,
for example, vary inversely with a short-term floating rate (which may be
reset periodically by a dutch auction, a remarketing agent or by reference to
a short-term interest rate index). Interest rates on inverse floaters will
decrease when short-term rates increase, and will increase when short-term
rates decrease. These securities have the effect of providing a degree of
investment leverage. In response to changes in market interest rates or other
market conditions, the value of an inverse floater may increase or decrease at
a multiple of the increase or decrease in the value of the underlying
securities. The values of inverse floaters are therefore more volatile than
their underlying securities. 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.
Investment Restrictions
Other than as noted below, Core Bond and each Target Fund have
substantially similar investment restrictions. As an additional fundamental
restriction, each of Core Bond, Mercury Total Return Bond, ML Total Return
Bond and Corporate Fund (the "Diversified Funds"), will not make any
investment inconsistent with its classification as a diversified fund under
the Investment Company Act. A fund that elects to be classified as a
"diversified" fund under the Investment Company Act, such as the Diversified
Funds, must satisfy the requirements that (i) with respect to 75% of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer, and (ii) with respect to 75% of
its total assets, it will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of this restriction, each of the
Diversified Funds will regard each state and each political subdivision,
agency or instrumentality of such state and each multi-state agency of which
such state is a member and each public authority that issues securities on
behalf of a private entity as a separate issuer. If the security is backed
only by the assets and revenues of a non-governmental entity, then the entity
with the ultimate responsibility for payment of interest and principal may be
regarded as the sole
38
issuer. See "Investment Restrictions" in the Bond Fund
Statement. Global Bond is classified as a "non-diversified" fund within the
meaning of the Investment Company Act, which means that Global Bond is not
limited by the Investment Company Act in the proportion of its assets that it
may invest in securities of a single issuer. To the extent that Global Bond
assumes a large position in securities of a small number of issuers, its
respective net asset value may fluctuate to a greater extent than that of a
diversified fund as a result of changes in the financial condition or in the
market's assessment of the issuers, and Global Bond may be more susceptible to
any single, economic, political or regulatory occurrence than the Diversified
Funds.
As additional fundamental restrictions, neither Mercury Total Return Bond
nor ML Total Return Bond may (i) make short sales of securities or maintain a
short position, unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short (short
sale against-the-box), and unless not more than 25% of the Fund's net assets
(taken at current value) is held as collateral for such sales at any one time,
or (ii) participate on a joint or joint and several basis in any trading
account in securities.
As additional fundamental restrictions, Corporate Fund may not: (i)
invest in securities or other investments other than long- and
intermediate-term fixed interest bearing debt obligations and temporary
investments; (ii) invest in securities of other investment companies, except
as part of a merger, consolidation, purchase of assets or similar transaction
approved by the Fund's shareholders; (iii) purchase a restricted security if
as a result more than 10% of the Fund's total assets (taken at current value)
would be invested in restricted securities; (iv) purchase a security issued by
an obligor which is not incorporated in the United States or any state thereof
if as a result more than 25% of the Fund's total assets (taken at current
value) would be invested in such securities; (v) participate on a joint (or a
joint and several) basis in any trading account in securities (the "bunching"
of orders for the sale or purchase of portfolio securities with other funds or
accounts advised or sponsored by the Investment Adviser or any of its
affiliates to reduce brokerage commissions or otherwise to achieve best
overall execution not being considered participation in a trading account in
securities); (vi) purchase or retain securities of an issuer if, to the
knowledge of the Fund, an officer or director of the Fund or the Investment
Adviser owns beneficially more than 1/2 of 1% of the shares or securities of
such issuer and all such directors and officers owning more than 1/2 of 1% of
such shares or securities together own more than 5% of such shares or
securities; or (vii) purchase securities of any company which has (with
predecessors) a record of less than three years' continuing operations if as a
result more than 5% of the total assets of the Fund (taken at current value)
would be invested in such securities.
Management and Advisory Relationships
Investment Advisory and Administration Arrangements. Mercury Total Return
Bond and ML Total Return Bond do not invest directly in portfolio securities
and do not require investment advisory services because all portfolio
management occurs at the Total Return Master level. The chart below shows the
various investment advisory and administration fees paid by each of the Target
Funds:
39
Comparison of Investment Advisory/Administration Fees of the Target Funds
-------------------------------------------------------------------------
Adviser/ Fund Type of Agreement Rate (as a % of average daily net assets)
-------- ---- ----------------- -----------------------------------------
Administrator
Advisory Fee Administration Fee Total
------------ ------------------ -----
FAM ML Total Return Administration 0.30%* 0.25% 0.55%
Bond
FAM/Mercury Advisors Mercury Total Administration 0.30%* 0.25% 0.55%
Return Bond
FAM Corporate Fund Advisory 0.50% -- 0.50%
MLIM Global Bond Advisory 0.60% -- 0.60%
- -----------------------
* Paid by Total Return Master
Core Bond's investment advisory agreement with FAM provides that as
compensation for FAM's services to Core Bond, FAM receives at the end of each
month a fee at the annual rates set forth below, which are based upon the
aggregate average daily net assets of the three portfolios of Bond Fund. The
rates are subject to reduction to the extent that the aggregate average daily
net assets of the three portfolios of Bond Fund exceed $250 million, $500
million and $750 million. The portion of the assets of Core Bond to which the
rate at each breakpoint level applies will be determined on a "uniform
percentage" basis. The uniform percentage applicable to a breakpoint level is
determined by dividing the aggregate average daily net assets of the three
portfolios of Bond Fund that fall within that breakpoint level by the
aggregate average daily net assets of the three portfolios of Bond Fund. The
amount of the advisory fee for Core Bond at each breakpoint level is
determined by multiplying the average daily net assets of Core Bond by the
uniform percentage applicable to that breakpoint level and multiplying the
product by the applicable advisory fee rate.
Stated otherwise, the advisory fee for Core Bond is computed as follows:
[OBJECT OMITTED]
For example, as of June 30, 2002, the aggregate net assets of the three
portfolios of Bond Fund were approximately $3.8 billion. As of that date, the
aggregate net assets of Core Bond were approximately $1.4 billion. The
advisory fee for Core Bond would be computed as follows:
Computation of Investment Advisory Fee for Core Bond
-----------------------------------------------------------------
Investment Approximate
Breakpoint Uniform Advisory Fee Amount of
Average Daily Net Assets of Portfolios Asset Level Percentage Rate Advisory Fee
- ---------------------------------------------------- ----------------- ------------- -------------- ------------------
Not exceeding $250 million $250,000,000 6.58% 0.50% $ 460,600
In excess of $250 million but not exceeding $500 250,000,000 6.58 0.45 414,540
million
In excess of $500 million but not exceeding $750 250,000,000 6.58 0.40 368,480
million
In excess of $750 million 3,050,000,000 80.26 0.35 3,932,740
--------- ----------------
100.00% $ 5,176,360
========= ================
40
In this example, the aggregate advisory fee for Core Bond is
approximately $5,176,360 and the effective advisory fee rate is approximately
0.37%.
After the Reorganization, the advisory fee rate applicable to the
Combined Fund is expected to be lower than the aggregate of each Target Fund's
currently effective advisory and administration fee rates.
12b-1 Fees. Under separate class-specific plans adopted pursuant to Rule
12b-1 under the Investment Company Act, Global Bond, ML Total Return Bond and
Core Bond pay fees in connection with account maintenance for each of Class B,
Class C and Class D shares and in connection with distribution for each of
Class B and Class C shares ("12b-1 fees"). Mercury Total Return Bond pays fees
in connection with account maintenance for each of Class A, Class B and Class
C shares and in connection with distribution for each of Class B and Class C
shares. Corporate Fund does not pay 12b-1 fees. Set forth below is a
comparison of the 12b-1 fees for Global Bond, Mercury Total Return Bond, ML
Total Return Bond and Core Bond:
12b-1 Annual Fee Rates (as a % of average daily net assets of the applicable share class)
-----------------------------------------------------------------------------------------
Account Maintenance Fee Distribution Fee
------------------------------------------- --------------------------------------------
Mercury Mercury
Total ML Total Total ML Total
Global Return Return Global Return Return
Share Class Bond Bond Bond Core Bond Bond Bond Bond Core Bond
- ------------------------- ----- ------ -------- --------- -------- --------- -------- ---------
Class B 0.25% 0.25% 0.25% 0.25% 0.50% 0.75% 0.75% 0.50%
Class C 0.25% 0.25% 0.25% 0.25% 0.55% 0.75% 0.75% 0.55%
Class D/A* 0.25% 0.25% 0.25% 0.25% N/A N/A N/A N/A
- -------------------------
* Class A for Mercury Total Return Bond; Class D for ML Total Return Bond
Capital Stock
Core Bond, ML Total Return Bond and Global Bond each offers four classes
of shares under the Merrill Lynch Select PricingSM System. The Class A, Class
B, Class C and Class D shares issued by Core Bond similar to the Class A,
Class B, Class C and Class D shares issued by ML Total Return Bond and Global
Bond with the exception that (i) they represent ownership interests in a
different investment portfolio, (ii) the maximum sales charge (load) imposed
on purchases of Class A and Class D shares of ML Total Return Bond are 0.25%
higher than the maximum sales charge (load) imposed on purchases of Class A
and Class D shares of Core Bond, and (iii) the Rule 12b-1 distribution fees
applicable to Class B and Class C shares of ML Total Return Bond are 0.25% and
0.20%, respectively, higher than these fees for Core Bond. Mercury Total
Return Bond offers four different classes of shares. The Class I, Class B,
Class C and Class A shares issued by Mercury Total Return Bond are similar to
the Class A, Class B, Class C and Class D shares issued by Core Bond with the
exception that (i) they represent ownership interests in a different
investment portfolio, (ii) the maximum sales charge (load) imposed on
purchases of Class I and Class A shares of Mercury Total Return Bond are 0.25%
higher than the maximum sales charge (load) imposed on purchases of Class A
and Class D shares of Core Bond, and (iii) the Rule 12b-1 distribution fees
applicable to Class B and Class C shares of Mercury Total Return Bond are
0.25% and 0.20%, respectively, higher than these fees for Core Bond. Shares of
Core Bond acquired by Target Fund shareholders in a Target Fund Acquisition
will be subject to the same CDSC schedule as shares of that Target Fund held
prior to such Target Fund Acquisition. Corporate Fund offers one class of
shares with no sales charges or 12b-1 fees. In the Reorganization,
shareholders of Corporate Fund will receive Class A shares of Core Bond.
Redemption of Shares
The procedure for redeeming shares of Core Bond is the same as the
procedure for redeeming shares of each Target Fund. For purposes of computing
any CDSC that may be payable upon disposition of shares of Core Bond acquired
by the Target Fund's shareholders in a Target Fund Acquisition, the holding
period for the shares of each Target Fund that are outstanding on the date of
such Target Fund Acquisition will be tacked onto the holding period of the
shares of Core Bond that are distributed in such Target Fund Acquisition. See
"Your Account--
41
Merrill Lynch Select PricingSM System," "Your Account--How to Buy, Sell,
Transfer and Exchange Shares" and "Your Account--Participation in Fee Based
Programs" in the Prospectus of each Target Fund and "Your Account--Merrill
Lynch Select PricingSM System" and "Your Account--How to Buy, Sell, Transfer
and Exchange Shares" in the Bond Fund Prospectus.
Performance
General. The following tables provide performance information for each
class of shares of each Target Fund and Core Bond, including and excluding
maximum applicable sales charges, for the periods indicated. Past performance
does not indicate future performance.
Mercury Total Return Bond
Average Annual Total Return
Class I Shares Class B Shares Class C Shares Class A Shares
------------------- ------------------- ------------------ ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge
- --------------------------- ------ ------ ------- ------ ------- ------- ------- -------
Year ended 3/31/02 0.71% 5.18% 0.68% 4.65% 3.06% 4.05% 0.53% 4.99%
Inception** through 3/31/02 7.35% 7.99% 4.08% 6.71% 6.05% 6.05% 3.83% 5.43%
- ----------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class I and Class A shares is 4.25%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0.0% after six years. Class C shares are
subject to a 1.0% CDSC for one year.
** Class I, Class B, Class C and Class A shares of Mercury Total Return Bond began investing in Total Return Master on
October 6, 2000.
Mercury Total Return Bond
Yield and Tax Equivalent Yield*
Class I Shares Class B Shares Class C Shares Class A Shares
------------------- ------------------ ------------------ ------------------
Tax Tax Tax Tax
Equivalent Equivalent Equivalent Equivalent
Period Yield Yield** Yield Yield** Yield Yield** Yield Yield**
- --------------------- ------ ---------- ----- ---------- ----- ---------- ----- ----------
30 days ended 3/31/02 5.08% 7.06% 4.84% 6.72% 5.16% 7.17% 4.84% 6.72%
- ----------------
* Assumes the maximum applicable sales charge currently in effect.
** Assumes a Federal income tax rate of 28%.
42
ML Total Return Bond
Average Annual Total Return
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------- ------------------ ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge
- --------------------------- ------ ------ ------- ------ ------- ------- ------- -------
Year ended 3/31/02 1.22% 5.72% 0.70% 4.69% 3.60% 4.60% 0.88% 5.35%
Inception** through 3/31/02 5.01% 8.12% 5.03% 7.00% 7.01% 7.01% 4.70% 7.81%
- ----------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 4.25%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0.0% after four years. Effective December
1, 2002, newly issued Class B shares of ML Total Return Bond will be
subject to a six-year CDSC schedule. Class C shares are subject to a 1.0%
CDSC for one year.
** Class A, Class B, Class C and Class D shares commenced operations on October
6, 2000.
ML Total Return Bond
Yield and Tax Equivalent Yield*
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------ ------------------ ------------------
Tax Tax Tax Tax
Equivalent Equivalent Equivalent Equivalent
Period Yield Yield** Yield Yield** Yield Yield** Yield Yield**
- --------------------- ------ ---------- ----- ---------- ----- ---------- ----- ----------
30 days ended 3/31/02 5.09% 7.07% 4.32% 6.00% 4.32% 6.00% 4.85% 6.74%
- ----------------
* Assumes the maximum applicable sales charge currently in effect.
** Assumes a Federal income tax rate of 28%.
43
Global Bond
Average Annual Total Return
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------- ------------------ ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge
- --------------------------- ------ ------ ------- ------ ------- ------- ------- -------
Year ended 3/31/02 -6.59% -2.70% -7.26% -3.47% -4.46% -3.51% -6.83% -2.94%
Three years ended 3/31/02 -4.73% -3.43% -4.77% -4.18% -4.24% -4.24% -4.94% -3.63%
Five years ended 3/31/02 -0.11% 0.71% -0.07% -0.07% -0.13% -0.13% -0.35% 0.46%
Ten years/Inception**
through 3/31/02 2.92% 3.34% 2.55% 2.55% 1.32% 1.32% 1.36% 1.92%
- ----------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 4.00%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0.0% after four years. Effective December
1, 2002, newly issued Class B shares of Global Bond will be subject to a
six-year CDSC schedule. Class C shares are subject to a 1.0% CDSC for one
year.
** Class A and Class B shares commenced operations on October 3, 1988 and
Class C and Class D shares commenced operations on October 21, 1994.
Global Bond
Yield and Tax Equivalent Yield*
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------ ------------------ ------------------
Tax Tax Tax Tax
Equivalent Equivalent Equivalent Equivalent
Period Yield Yield** Yield Yield** Yield Yield** Yield Yield**
- --------------------- ------ ---------- ----- ---------- ----- ---------- ----- ----------
30 days ended 3/31/02 2.18% 3.03% 1.47% 2.04% 1.43% 1.99% 1.94% 2.69%
- ----------------
* Assumes the maximum applicable sales charge currently in effect.
** Assumes a Federal income tax rate of 28%.
44
Corporate Fund
Average Annual Total Return*
- --------------------------------------------------------------
Period Shares
- ------------------------------------- ------------------------
Year ended 3/31/02 3.93%
- ------------------------------------- ------------------------
Three years ended 3/31/02 4.63%
- ------------------------------------- ------------------------
Five years ended 3/31/02 5.99%
- ------------------------------------- ------------------------
Inception * through 3/31/02 6.38%
- --------------------------------------------------------------
* Corporate Fund commenced operations on June 9, 1976.
Corporate Fund
Yield and Tax Equivalent Yield*
- --------------------- ------------------- ----------------------
Period Yield Tax Equivalent
Yield**
- --------------------- ------------------- ----------------------
30 days ended
3/31/02 4.95% 6.88%
- --------------------- ------------------- ----------------------
* Assumes the maximum applicable sales charge currently in effect.
** Assumes a Federal income tax rate of 28%.
45
Core Bond
Average Annual Total Return
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------- ------------------ ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge
- --------------------------- ------ ------ ------- ------ ------- ------- ------- -------
Year ended 3/31/02 -0.06% 4.11% -0.64% 3.31% 2.18% 3.16% -0.30% 3.85%
Three years ended 3/31/02 3.41% 4.83% 3.44% 4.03% 3.97% 3.97% 3.19% 4.60%
Five years ended 3/31/02 5.26% 6.12% 5.31% 5.31% 5.26% 5.26% 5.02% 5.88%
Ten years/Inception**
through 3/31/02 6.31% 6.74% 5.93% 5.93% 6.12% 6.12% 6.16% 6.74%
- ----------------
* Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The
maximum CDSC on Class B shares is 4.0% and is reduced to 0.0% after four years. Effective December 1, 2002, newly issued
Class B shares of Core Bond will be subject to a six-year CDSC schedule. Class C shares are subject to a 1.0% CDSC for one
year.
** Class A and Class B shares commenced operations on October 31, 1980 and Class C and Class D shares commenced operations on
October 21, 1994.
Core Bond
Yield and Tax Equivalent Yield*
Class A Shares Class B Shares Class C Shares Class D Shares
------------------- ------------------ ------------------ ------------------
Tax Tax Tax Tax
Equivalent Equivalent Equivalent Equivalent
Period Yield Yield** Yield Yield** Yield Yield** Yield Yield**
- --------------------- ------ ---------- ----- ---------- ----- ---------- ----- ----------
30 Days Ended 3/31/02 4.40% 6.11% 3.82% 5.31% 3.76% 5.22% 4.15% 5.76%
- ----------------
* Assumes the maximum applicable sales charge currently in effect.
** Assumes a Federal income tax rate of 28%.
46
Code of Ethics
The Board of each Fund has approved the same Code of Ethics under Rule
17j-1 of the Investment Company Act, which covers each Fund, FAM, MLIM and FAM
Distributors, Inc. ("FAMD"). The Code of Ethics establishes procedures for
personal investing and restricts certain transactions. Employees subject to
the Code of Ethics may invest in securities for their personal investment
accounts, including securities that may be purchased or held by the respective
Fund.
Shareholder Rights
Voting rights for Board Members are not cumulative. Shares of Core Bond
to be issued to a Target Fund in a Target Fund Acquisition and thereafter
distributed to the shareholders of such Target Fund will be fully paid and
non-assessable, will have no preemptive rights and will have the conversion
rights described in this Prospectus and Proxy Statement and in the Bond Fund
Prospectus. Each share of Core Bond is entitled to participate equally in
dividends declared with respect to Core Bond and in the net assets of Core
Bond on liquidation or dissolution after satisfaction of outstanding
liabilities, except that Class B, Class C and Class D shares bear certain
additional expenses. The Class A, Class B, Class C and Class D shares issued
by Core Bond are similar to the Class A, Class B, Class C and Class D shares
issued by ML Total Return Bond and Global Bond with the exception that (i)
they represent ownership interests in a different investment portfolio, (ii)
the maximum sales charge (load) imposed on purchases of Class A and Class D
shares of ML Total Return Bond are 0.25% higher than the maximum sales charge
(load) imposed on purchases of Class A and Class D shares of Core Bond, and
(iii) the Rule 12b-1 distribution fees applicable to Class B and Class C
shares of ML Total Return Bond are 0.25% and 0.20%, respectively, higher than
these fees for Core Bond. Mercury Total Return Bond offers four different
classes of shares. The Class I, Class B, Class C and Class A shares issued by
Mercury Total Return Bond are similar to the Class A, Class B, Class C and
Class D shares issued by Core Bond with the exception that (i) they represent
ownership interests in a different investment portfolio, (ii) the maximum
sales charge (load) imposed on purchases of Class I and Class A shares of
Mercury Total Return Bond are 0.25% higher than the maximum sales charge
(load) imposed on purchases of Class A and Class D shares of Core Bond, and
(iii) the Rule 12b-1 distribution fees applicable to Class B and Class C
shares of Mercury Total Return Bond are 0.25% and 0.20%, respectively, higher
than these fees for Core Bond. Shares of Core Bond acquired by Target Fund
shareholders in a Target Fund Acquisition will be subject to the same CDSC
schedule as shares of that Target Fund held prior to such Target Fund
Acquisition.
Dividends
The current policy of each Target Fund with respect to dividends is
substantially similar to the current dividend policy of Core Bond. It is the
intention of each Fund to distribute net investment income, if any, monthly.
In addition, each Fund declares and distributes all net realized capital
gains, if any, to shareholders at least annually. Capital gains distributions
will be automatically reinvested in shares unless the shareholder elects to
receive such distributions in cash.
Automatic Dividend Reinvestment Plan
Each Fund offers its shareholders an Automatic Dividend Reinvestment Plan
(each, a "Plan" and collectively, the "Plans") with the same terms. Pursuant
to the Plans, dividends will be automatically reinvested, without a sales
charge, in additional full and fractional shares of the relevant Fund unless a
shareholder has elected to receive such dividends in cash. For further
information about the Plans, see "Shareholder Services--Automatic Reinvestment
of Dividends" in the Bond Fund Statement.
After a Target Fund Acquisition, prior shareholders of the applicable
Target Fund who had elected to receive dividends of that Target Fund in cash
will as shareholders of the Combined Fund continue to receive dividends in
cash from the Combined Fund; all other shareholders of the applicable Target
Fund will as shareholders of the Combined Fund have their dividends
automatically reinvested in shares of the Combined Fund. However, if a
shareholder owns shares of both a Target Fund and Core Bond, after the
applicable Target Fund Acquisition, the shareholder's election with respect to
the dividends of Core Bond will control unless the shareholder specifically
elects a different option at that time.
47
Tax Information
The tax consequences associated with an investment in shares of a Target
Fund are substantially similar to the tax consequences associated with an
investment in shares of Core Bond. See "Your Account--Dividends and Taxes" in
the Bond Fund Prospectus.
Portfolio Transactions
The procedures for engaging in portfolio transactions are generally the
same for each Target Fund and Core Bond. For a discussion of these procedures,
see "Portfolio Transactions and Brokerage" in the Bond Fund Statement.
Portfolio Turnover
Core Bond's ability to enter into certain short-term transactions will be
limited by the requirement that gains on certain securities held by Core Bond
for less than three months may not exceed 30% of its annual gross income for
federal income tax purposes. Generally, neither Global Bond nor Corporate Fund
purchase securities for short-term trading profits, while Mercury Total Return
Bond and ML Total Return Bond actively and frequently trade their portfolio
securities. However, each Target Fund and Core Bond may dispose of securities
without regard to the time that they have been held when such action, for
defensive or other reasons, appears advisable to that Fund's Investment
Adviser. None of the Funds has any limit on its rate of portfolio turnover. A
high portfolio turnover may result in negative tax consequences, such as an
increase in capital gain dividends and/or ordinary income dividends. High
portfolio turnover also may involve correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions that are borne
directly by the Funds. The following table illustrates the portfolio turnover
rates for each Fund for the most recent two fiscal years:
Portfolio Turnover Rate for Portfolio Turnover Rate for
Fund Fiscal Year End 2002/2001* Fiscal Year End 2001/2000*
- ---- --------------------------- ----------------------------
Mercury Total Return Bond 208.91% 276.08%
ML Total Return Bond+ 208.91% 276.08%
Global Bond 124.66% 221.49%
Corporate Fund 227.00% 127.00%
Core Bond 262.47% 94.67%
- ----------------------
* The fiscal year end for Mercury Total Return Bond and ML Total Return Bond
is June 30. The fiscal year end for Global Bond and Corporate Fund is
December 31. The fiscal year end for Core Bond is September 30.
+ ML Total Return Bond commenced operations on October 6, 2000.
Additional Information
Net Asset Value. The Target Funds and Core Bond determine net asset value
of each class of their shares once daily 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. Net asset value
is computed by dividing the market value of the securities held by a Fund plus
any cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Boards, including
valuations furnished by a pricing service retained by a Fund which may use a
matrix system for valuations. These procedures of the pricing service and its
valuations are reviewed by the officers of a Fund under the general
supervision of the Board. For a discussion of these procedures, see "Pricing
of Shares-Determination of Net Asset Value" in the Bond Fund Statement.
Shareholder Services. Bond Fund offers a number of shareholder services
and investment plans designed to facilitate investment in shares of Bond Fund.
For a description of these services, see "Shareholder Services" in the Bond
Fund Statement.
48
Custodian. State Street Bank and Trust Company ("State Street") acts as
custodian of Core Bond and Global Bond. The principal business address of
State Street in such capacity is P.O. Box 351, 225 Franklin Street, Boston,
Massachusetts 02101. The Bank of New York ("BONY") acts as custodian of
Corporate Fund. The principal business address of BONY in such capacity is 90
Washington Street, New York, New York 10286. Brown Brothers Harriman & Co.
("Brown Brothers") acts as the custodian for Mercury Total Return Bond and ML
Total Return Bond. The principal business address of Brown Brothers in such
capacity is 40 Water Street, Boston, Massachusetts 02109. It is presently
anticipated that State Street will serve as the custodian of the Combined
Fund.
Accounting Services. Each of Mercury Trust, on behalf of Mercury Total
Return Bond, MLIM Fund, on behalf of ML Total Return Bond, Corporate Fund,
Global Bond and Bond Fund, on behalf of Core Bond, have entered into an
agreement with State Street, pursuant to which State Street provides certain
accounting services to each Fund. Each Fund pays a fee for these services.
Prior to January 1, 2001, FAM and MLIM provided accounting services to the
Funds and were reimbursed by the Funds for such services. FAM and MLIM
continue to provide certain accounting services to the Funds and the Funds
reimburse FAM and MLIM for these services.
The tables below show the amounts paid by each Target Fund and Core Bond
to State Street and to the Investment Adviser/Administrator for the three most
recent fiscal years:
Fees for Accounting Services
----------------------------
Fiscal Year End 2002/2001* Fiscal Year End 2001/2000* Fiscal Year End 2000/1999*
-------------------------------------------------------------------------------------
Paid to the Paid to the Paid to the
Investment Investment Investment
Paid to State Adviser/ Paid to State Adviser/ Paid to State Adviser/
Street** Administrator+ Street** Administrator+ Street Administrator+
-------------------------------------------------------------------------------------
Total Return Master++ $146,628 $22,514 $69,405 $36,178 N/A N/A
Mercury Total Return Bond $0 $0 $0 $31,270 N/A N/A
ML Total Return Bond++ $0 $0 $0 $778 N/A N/A
Global Bond $77,674 $16,717 N/A $59,832 N/A $101,099
Corporate Fund $24,377 $5,169 N/A $77,292 N/A $40,381
Core Bond $244,725 $139,888 N/A $100,752 N/A $133,078
- -----------------------
* The fiscal year end for each of Mercury Total Return Bond and ML Total
Return Bond is June 30. The fiscal year end for each of Global Bond and
Corporate Fund is December 31. The fiscal year end for Core Bond is
September 30.
** Represents payments pursuant to the agreement with State Street commencing
January 1, 2001.
+ FAM/Mercury Advisors is the Administrator for Mercury Total Return Bond.
FAM is the Administrator for ML Total Return Bond. FAM is the Investment
Adviser for Corporate Fund and Core Bond. MLIM is the Investment Adviser
for Global Bond.
++ Total Return Master and ML Total Return Bond commenced operations on
October 6, 2000.
Transfer Agent. Financial Data Services, Inc. ("FDS"), 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484, an affiliate of FAM and MLIM,
serves as the transfer agent, dividend disbursing agent and shareholder
servicing agent with respect to Mercury Total Return Bond, ML Total Return
Bond, Global Bond and Core Bond. It is presently anticipated that FDS will
continue to provide these services to the Combined Fund. BONY serves as the
transfer agent, program agent and dividend disbursing agent for Corporate
Fund. The following table sets forth the transfer agent fees paid by each Fund
to its transfer agent for the most recent two fiscal years:
49
Fund Transfer Agent Fees*
---- -----------------------------------------------------------
Fiscal Year End 2002/2001** Fiscal Year End 2001/2000**
--------------------------- ----------------------------
Mercury Total Return Bond $ 310,825 $ 223,870
ML Total Return Bond+ $ 11,356 $ 1,466
Global Bond $ 175,055 $ 172,662
Corporate Fund $ 215,475 $ 144,637
Core Bond $ 2,186,480 $ 2,304,808
- ---------------------
* For the periods shown, Mercury Total Return Bond, ML Total Return Bond,
Global Bond and Core Bond paid fees to FDS at a rate lower than the rates
currently paid.
** The fiscal year end for Mercury Total Return Bond and ML Total Return Bond
is June 30. The fiscal year end for Global Bond and Corporate Fund is
December 31. The fiscal year end for Core Bond is September 30.
+ ML Total Return Bond commenced operations on October 6, 2000.
Shares of Beneficial Interest/Capital Stock. Core Bond is authorized to
issue 700,000,000 shares of common stock, par value $.10 per share, divided
into four classes, designated Class A, Class B, Class C and Class D. Class A
and Class B each consist of 250,000,000 shares and Class C and Class D each
consist of 100,000,000 shares. Global Bond is authorized to issue an unlimited
number of shares of beneficial interest, par value $.10 per share, divided
into four classes, designated Class A, Class B, Class C and Class D. ML Total
Return Bond is authorized to issue 500,000,000 shares of common stock, par
value $.01 per share, divided into four classes, designated Class A, Class B,
Class C and Class D. Class A consists of 100,000,000 shares, Class B consists
of 200,000,000 shares, Class C consists of 100,000,000 shares and Class D
consists of 100,000,000 shares. Mercury Total Return Bond is authorized to
issue an unlimited number of shares of common stock, with no par value,
divided into four classes, designated Class I, Class B, Class C and Class A.
Corporate Fund is authorized to issue 50,000,000 shares of common stock, par
value $.01 per share. See "Summary--Fee Tables."
Shareholder Inquiries. Shareholder inquiries with respect to each Fund
may be addressed to the respective Fund by telephone at (609) 282-2800 or at
the address set forth on the cover page of this Proxy Statement and
Prospectus.
THE REORGANIZATION
General
Under the Agreement and Plan (attached hereto as Exhibit I), Total Return
Master will distribute to Mercury Total Return Bond and ML Total Return Bond
their proportionate share of the assets and liabilities (i.e., a redemption
in-kind) of Total Return Master in return for all of their beneficial
interests in Total Return Master. Next, Global Bond, Mercury Total Return
Bond, ML Total Return Bond and Corporate Fund will transfer all of their
assets and all of their liabilities to Core Bond in return solely for an equal
aggregate value of newly issued shares of Core Bond to be distributed to the
shareholders of Global Bond, Mercury Total Return Bond, ML Total Return Bond
and Corporate Fund. Global Bond and Corporate Fund will thereafter dissolve as
a matter of state law and deregister as investment companies and Mercury Total
Return Bond, ML Total Return Bond and Total Return Master will thereafter
terminate as series of Mercury Trust, MLIM Fund and FAM Trust, respectively.
More specifically:
o Holders of shares in Global Bond will receive that class of shares of
Core Bond having the same letter designation (i.e., Class A, Class B,
Class C or Class D) and the same distribution fees, account maintenance
fees and sales charges (including contingent deferred sales charges), if
any, as the shares of Global Bond held by them immediately prior to the
Reorganization.
o Holders of shares in ML Total Return Bond will receive that class of
shares of Core Bond having the same letter designation (i.e., Class A,
Class B, Class C or Class D), with the same account maintenance fees and
contingent deferred sales charges as the shares of ML Total Return Bond
held by them
50
immediately prior to the Reorganization but with lower distribution fees
and lower initial sales charges. See "Summary--Fee Tables."
o In exchange for their Class I, Class B, Class C and Class A shares of
Mercury Total Return Bond, holders of shares of Mercury Total Return Bond
will receive Class A, Class, B, Class C and Class D shares, respectively,
of Core Bond, with the same account maintenance fees and contingent
deferred sales charges as the shares of Mercury Total Return Bond held by
them immediately prior to the Reorganization but with lower distribution
fees and lower initial sales charges. See "Summary--Fee Tables."
Holders of shares of Corporate Fund will receive Class A shares of Core
Bond which have no ongoing account maintenance or distribution fees.
Under the Agreement and Plan, the failure of the shareholders of any
Target Fund to approve the Agreement and Plan as described herein will not
affect the ability of any other Target Fund to proceed with its Target Fund
Acquisition. The consummation of any Target Fund Acquisition is not contingent
upon the consummation of any other Target Fund Acquisition.
Procedure
On September 30, 2002, the Boards of each of the Target Funds and FAM
Trust, including all of the Board Members who are not "interested persons" of
such Target Fund, as defined in the Investment Company Act, unanimously
approved the Agreement and Plan and the submission of such Agreement and Plan
to the shareholders of the Target Funds for approval. The Board of Bond Fund,
including all of the Board Members who are not "interested persons" of such
Fund or Trust, as defined in the Investment Company Act, unanimously approved
the Agreement and Plan on September 30, 2002.
If the shareholders of the Target Funds approve the Agreement and Plan at
the Meetings, all required regulatory approvals are obtained and certain
conditions are either met or waived, it is presently anticipated that the
applicable Target Fund Acquisition will take place as soon as practicable
after such approvals.
THE BOARDS RECOMMEND THAT THE SHAREHOLDERS OF EACH TARGET FUND APPROVE
THE AGREEMENT AND PLAN.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, attached hereto as Exhibit I.
Valuation of Assets. The assets of each Target Fund will be valued at the
close of business on the business day prior (the "Valuation Time") to the date
on which such Target Fund Acquisition will take place (the "Closing Date").
The assets of each Target Fund will be valued according to the procedures
described in the most recent prospectus of Core Bond in effect as of the
Valuation Time. These procedures are generally identical to those used by each
Target Fund to value its assets.
Distribution of Shares of Core Bond. As soon as practicable after the
Closing Date, each Target Fund will liquidate and distribute the shares of
Core Bond received by it pro rata to its shareholders in proportion to such
shareholders' proportional interests in that Target Fund. The shares of Core
Bond received by each shareholder of each Target Fund will be of the same or
an equivalent class and have the same aggregate net asset value as such
shareholder's interest in that Target Fund held on the Closing Date. (See
"Valuation of Assets," above, for information about the calculation of net
asset value.) Generally, the liquidation and distribution will be accomplished
by opening new accounts on the books of Core Bond in the names of the
shareholders of each Target Fund and transferring to those shareholders'
accounts the shares of Core Bond representing such shareholders' interests in
such Target Fund.
No sales charge or fee of any kind will be charged to shareholders of a
Target Fund in connection with their receipt of shares of Core Bond common
stock in a Target Fund Acquisition.
51
Expenses. The expenses of each Target Fund Acquisition that are directly
attributable to each Target Fund and the conduct of its business will be
deducted from the assets of such Target Fund as of the Valuation Time. These
expenses are expected to include the expenses incurred in preparing, printing
and mailing the proxy materials to be utilized in connection with the meeting
of the shareholders of each Target Fund to consider the Reorganization, the
expenses related to the solicitation of proxies to be voted at that meeting
and a portion of the expenses in connection with (a) obtaining the opinion of
counsel with respect to certain tax matters, (b) the preparation of the
Agreement and Plan and (c) legal fees. The expenses of the Reorganization that
are directly attributable to Core Bond and the conduct of its business will be
paid by FAM. The expenses attributable to Core Bond include expenses incurred
in printing sufficient copies of its Prospectus, Statement of Additional
Information and its most recent Annual Report and Semi-Annual Report that will
accompany this Proxy Statement and Prospectus and a portion of the expenses in
connection with (a) obtaining the opinion of counsel with respect to certain
tax matters, (b) the preparation of the Agreement and Plan and (c) legal fees.
The expenses of the Reorganization, including transfer agent and audit fees,
will be borne equally by each Target Fund and FAM. It is not anticipated that
Total Return Master will incur any significant expenses in the Reorganization.
The expenses of the Reorganization are currently estimated to be
approximately:
Fund Estimated Expenses
---- ------------------
Corporate Fund $ 127,900
Global Bond $ 93,700
Mercury Total Return Bond $ 100,000
ML Total Return Bond $ 56,800
Core Bond (to be paid by FAM) $ 100,900
Required Approvals. Consummation of each Target Fund Acquisition is
conditioned upon the approval of that Target Fund Acquisition by the Board of
the relevant Target Fund, and by the Board of Bond Fund, as well as the
receipt of certain regulatory approvals, as may be necessary. In addition,
approval of the Agreement and Plan with respect to a Target Fund requires (i)
for Mercury Total Return Bond, the approval of the holders of a majority of
Mercury Total Return Bond's outstanding shares (which for this purpose and
under the Investment Company Act means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares, (ii) for ML Total
Return Bond and Corporate Fund, the affirmative vote of the shareholders of
that Fund representing a majority of the outstanding shares entitled to be
voted on the Agreement and Plan and (iii) for Global Bond, the affirmative vote
of the shareholders of Global Bond representing two-thirds of the outstanding
shares entitled to be voted on the Agreement and Plan. All classes of shares
of Global Bond, Mercury Total Return Bond and ML Total Return Bond will vote
together as a single class in approving the Agreement and Plan. Under the
Agreement and Plan, the failure of any Target Fund's shareholders to approve
the Agreement and Plan will not affect the ability of the other Target Fund
Acquisitions to proceed.
Deregistration and Dissolution. Following the completion of its Target
Fund Acquisition, Global Bond will terminate its registration under the
Investment Company Act and its organization under Massachusetts law, Corporate
Fund will terminate its registration under the Investment Company Act and its
incorporation under Maryland law, Mercury Total Return Bond will be terminated
as a series of Mercury Trust, ML Total Return Bond will be terminated as a
series of MLIM Fund and Total Return Master will be terminated as a series of
FAM Trust.
Termination, Postponement and Waivers. Under the Agreement and Plan, a
Target Fund Acquisition may be abandoned at any time (whether before or after
adoption thereof by the shareholders of the Target Fund) prior to the Closing
Date, or the Closing Date may be postponed, (i) by mutual consent of the
Boards of the parties involved in that Target Fund Acquisition or (ii) by the
Board of a party to a Target Fund Acquisition if any condition of such party's
obligations has not been fulfilled or waived by such Board.
Potential Benefits to Shareholders of each Fund as a Result of a Target Fund
Acquisition
The Investment Advisers believe that the Target Fund Acquisitions will
benefit the shareholders of the Target Funds because (i) the Combined Fund
would be subject to Core Bond's lower combined investment advisory and
administration fees, and (ii) certain fixed costs, such as printing
shareholder reports, legal expenses, audit fees, registration fees, mailing
costs and other expenses would be spread across a substantially larger asset
base, thereby lowering the expense ratio borne by shareholders of the Target
Funds. Following the Target Fund Acquisitions, (i) Core Bond shareholders will
remain invested in a diversified, open-end fund with no changes to its current
investment objectives and investment advisory arrangements and (ii) the Target
Funds' shareholders will become
52
invested in a diversified, open-end fund that has similar investment
objectives and a lower expense ratio. Due to the larger net assets of the
Combined Fund, each Fund also may experience greater flexibility in portfolio
management and certain economies of scale. See "Comparison of the
Funds--Redemption of Shares" and "--Additional Information--Shareholder
Services."
Specifically, after a Target Fund Acquisition, on a pro forma basis, it
is expected that the investment advisory fee rate for the Combined Fund will
be lower than the combined investment advisory and administration fee rate for
each Target Fund. After a Target Fund Acquisition or the Reorganization, the
pro forma total operating expense ratio of the Combined Fund, as a percentage
of its net assets, is also expected to be lower than the current total
operating expense ratio for each Target Fund. In the past, with respect to ML
Total Return Bond and Mercury Total Return Bond, FAM had contractually waived
the payment of investment advisory/administration fees in order to cap the
expenses of these Funds. This contractual waiver is no longer in effect,
although FAM currently intends to continue to voluntarily waive the payment of
investment advisory/administration fees until the consummation of the
applicable Target Fund Acquisition.
Although it is not anticipated that consummation of any or all Target
Fund Acquisitions will result in a lower operating expense ratio for Core
Bond, Core Bond will have a larger asset base as a result of the Target Fund
Acquisitions and MLIM has agreed to bear all of Core Bond's Reorganization
expenses.
To illustrate the potential economies of scale, the tables below show the
total operating expense ratio for each class of shares for each Target Fund
and Core Bond as of March 31, 2002 and, assuming the applicable Target Fund
Acquisition had taken place on March 31, 2002, the estimated pro forma
operating expense ratio for each class of shares of the Combined Fund, both
including and excluding any applicable fee waivers and expense reimbursements
and excluding any class specific distribution and account maintenance fees.
53
Total Operating Expense Ratios
------------------------------
Fund Class A/I Class B Class C Class D/A
- --------------- --------- ------- ------- ---------
Global Bond 1.36% 2.11% 2.16% 1.61%
Mercury Total Return Bond* 0.97% 1.97% 1.97% 1.22%
ML Total Return Bond* 1.36% 2.36% 2.36% 1.61%
Corporate Fund** 1.06% N/A N/A N/A
Core Bond 0.59% 1.36% 1.42% 0.84%
Combined Fund 0.59% 1.36% 1.42% 0.84%
- ---------------------------
* Prior to June 30, 2002, with respect to ML Total Return Bond and Mercury
Total Return Bond, FAM had contractually waived the payment of investment
advisory/administration fees and or reimbursed expenses in order to cap
the expenses of these Funds. This contractual waiver is no longer in
effect, although FAM currently intends to continue to waive voluntarily
the payment of investment advisory/administration fees until the
consummation of the applicable Target Fund Acquisition.
** Corporate Fund offers only one class of shares (the equivalent of Class
A).
Combined Fund Pro Forma Total Operating Expense Ratios*
-------------------------------------------------------
Class A/I Class B Class C Class D/A
--------- ------- ------- ---------
Assuming Only Global
Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only Mercury Total Return
Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only ML Total
Return Bond Acquired 0.59% 1.36% 1.42% 0.84%
Assuming Only Corporate Fund
Acquired** 0.61% 1.38% 1.44% 0.86%
Assuming All Target Funds
Acquired 0.59% 1.36% 1.42% 0.84%
- ------------------------------
* Assumes the applicable Target Fund Acquisition and the Reorganization had
taken place on March 31, 2002.
** Corporate Fund offers only one class of shares
(the equivalent of Class A).
As shown in the table above, in the event that only the Corporate Fund
Target Fund Acquisition is consummated, the total operating expense ratios of
the Combined Fund will increase by .02 as compared to the total operating
expense ratios of Core Bond immediately prior to such Target Fund Acquisition.
Therefore, if Corporate Fund is the only Target Fund acquired by Core Bond,
FAM and its affiliates have agreed to waive voluntarily the payment of fees
and/or to reimburse expenses as necessary for one year following the Corporate
Fund Target Fund Acquisition so that the total operating expense ratios of the
Combined Fund would be no higher than the total operating expense ratios of
Core Bond immediately prior to such Target Fund Acquisition.
54
The following table sets forth the net assets of each Fund as of the
dates indicated.
Net Assets
----------
Fiscal Year End As of March 31, Fiscal Year End Fiscal Year End
2002* 2002 2001* 2000*
----------------- --------------- --------------- ----------------
Global Bond N/A $ 54,419,151 $ 59,031,911 $ 78,530,779
Mercury Total Return
Bond $ 131,221,360 $ 137,369,243 $ 153,902,660 N/A
ML Total Return Bond $ 31,315,239 $ 25,157,077 $ 3,204,977 N/A
Corporate Fund N/A $ 55,409,630 $ 59,178,854 $ 58,966,775
Core Bond N/A $ 1,381,682,525 $ 1,309,213,373 $1,149,719,286
- ------------------------------
* The fiscal year end for each of Mercury Total Return Bond and ML Total
Return Bond is June 30. The fiscal year end for each of Global Bond and
Corporate Fund is December 31. The fiscal year end for Core Bond is
September 30.
The preceding table illustrates that the Target Funds have not
experienced significant growth over the periods shown and have not attained
the asset size necessary for the efficient operation of the Fund. The
Investment Advisers anticipate that under these circumstances, each Target
Fund might experience higher operating expense ratios. Conversely, the
Investment Advisers anticipate that the Target Funds and Core Bond as a
combined entity might experience certain economies of scale, which might in
turn result in a substantially lower total operating expense ratio for
shareholders of the Target Funds as shareholders of the Combined Fund.
Although no assurance can be given that the foregoing would in fact occur, the
Investment Advisers believe that the economies of scale that may be realized
as a result of each Target Fund Acquisition would be beneficial to
shareholders of each Target Fund.
Based on the foregoing, the Boards concluded that no Target Fund
Acquisition presents any significant risks or costs (including legal,
accounting and administrative costs) that would outweigh the benefits
described above. In approving each Target Fund Acquisition, the Boards
determined that the interests of existing shareholders of each Target Fund and
the existing shareholders of Core Bond with respect to net asset value would
not be diluted as a result of the applicable Target Fund Acquisition.
Tax Consequences of each Target Fund Acquisition
Summary. Core Bond and the Target Funds will receive an opinion of
counsel with respect to each Target Fund Acquisition to the effect that, among
other things, neither the Target Funds nor Core Bond will recognize any gain
or loss on the transaction, and no shareholder of a Target Fund will recognize
any gain or loss upon receipt of shares of Core Bond in a Target Fund
Acquisition.
General. Each Target Fund Acquisition has been structured with the
intention that it qualify for Federal income tax purposes as a tax-free
reorganization under Section 368(a)(1)(C) of the Code. Each Fund has elected
and qualified for the special tax treatment afforded regulated investment
companies ("RICs") under the Code, and Core Bond intends to continue to so
qualify after each Target Fund Acquisition. The Funds will receive an opinion
of counsel to the effect that for Federal income tax purposes: (i) the
transfer of all of the assets of each Target Fund to Core Bond in return
solely for shares of Core Bond Common Stock as provided in the Agreement and
Plan will each constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and each Target Fund and Bond Fund will each be
deemed to be a "party" to a reorganization within the meaning of Section
368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no
gain or loss will be recognized to a Target Fund as a result of the asset
transfer solely in return for Core Bond shares or on the distribution of the
Core Bond shares to each Target Fund's shareholders under Section 361(c)(1) of
the Code; (iii) under Section 1032 of the Code, no gain or loss will be
recognized to Core Bond on the receipt of assets of any Target Fund in return
for Core Bond shares; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized to the shareholders of any Target Fund on
the receipt of Corresponding Shares of Core Bond in return for their
respective shares of the Target Fund; (v) in accordance with Section 362(b) of
the Code, the tax basis of the assets of each Target Fund in the hands of Core
Bond will be the same as the tax basis of such assets in the hands of the
respective Target Fund immediately prior to the consummation of a Target Fund
Acquisition; (vi) in accordance with Section 358 of the Code,
55
immediately after the applicable Target Fund Acquisition, the tax basis of the
Corresponding Shares of Core Bond received by the shareholders of a Target
Fund in the applicable Target Fund Acquisition will be equal to the tax basis
of the shares of the Target Fund surrendered in exchange; (vii) in accordance
with Section 1223 of the Code, a shareholder's holding period for the
Corresponding Shares of Core Bond will be determined by including the period
for which such shareholder held the shares of the Target Fund exchanged
therefor provided, that such Target Fund shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, Core Bond's holding period
with respect to each Target Fund's assets transferred will include the period
for which such assets were held by the respective Target Fund; and (ix) the
taxable year of each Target Fund will end on the effective date of the
applicable Target Fund Acquisition, and pursuant to Section 381(a) of the Code
and regulations thereunder, Core Bond will succeed to and take into account
certain tax attributes of the Target Fund, such as earnings and profits,
capital loss carryovers and method of accounting.
Under Section 381(a) of the Code, Core Bond will succeed to and take into
account certain tax attributes of each Target Fund including, but not limited
to, earnings and profits, any net operating loss carryovers, any capital loss
carryovers and method of accounting. The Code, however, contains special
limitations with regard to the use of net operating losses, capital losses,
and other similar items in the context of certain reorganizations, including a
tax-free reorganization pursuant to Section 368(a)(1)(C) of the Code, which
could reduce the benefit of these attributes to Core Bond. As of [?], 2002,
each Target Fund had net realized capital losses. As of that date, each Fund
also had net unrealized capital gains. As a result of a Target Fund
Acquisition, shareholders of the Target Fund may benefit from the ability of
the Combined Fund to use the net realized capital losses of the Target Fund to
offset future net realized capital gains, if any, of the Combined Fund.
Shareholders should consult their tax advisers regarding the effect of a
Target Fund Acquisition in light of their individual circumstances. As the
foregoing relates only to Federal income tax consequences, shareholders also
should consult their tax advisers as to the foreign, state and local tax
consequences of each Target Fund Acquisition. As set forth under the heading
"Investment Objectives and Policies--Tax Information," dividends received by
shareholders of the Combined Fund will not be exempt from state taxes.
Status as a Regulated Investment Company. Each Target Fund and Core Bond
have elected and qualified to be taxed as RICs under Sections 851-855 of the
Code, and, after each Target Fund Acquisition, Core Bond intends to continue
to operate so as to qualify as a RIC.
Appraisal Rights
Shareholders of the Target Funds are not entitled to appraisal rights in
connection with any Target Fund Acquisition.
56
Capitalization
The following tables set forth as of March 31, 2002: (i) the
capitalization of each Fund and (ii) the pro forma capitalization of the
Combined Fund as adjusted to give effect to the Reorganizations.
Capitalization of Each Fund and Pro Forma
Capitalization of the Combined Fund as of March 31, 2002
--------------------------------------------------------
Fund and Class Total Net Assets Shares Outstanding Net Asset Value Per Share
-------------- ---------------- ------------------ -------------------------
Corporate Fund $ 55,409,630 2,708,295 $ 20.46
Mercury Total Return Bond
Class I $ 72,266,443 5,737,927 $ 12.59
Class B $ 307,607 24,531 $ 12.54
Class C $ 6,216 503 $ 12.36
Class A $ 64,788,977 5,149,239 $ 12.58
ML Total Return Bond
Class A $ 680,384 65,848 $ 10.33
Class B $ 7,934,602 769,717 $ 10.31
Class C $ 6,250,125 606,075 $ 10.31
Class D $ 10,291,986 997,190 $ 10.32
Global Bond
Class A $ 8,320,622 1,122,624 $ 7.41
Class B $ 20,151,780 2,718,089 $ 7.41
Class C $ 554,849 74,873 $ 7.41
Class D $ 25,391,900 3,426,521 $ 7.41
Core Bond
Class A $ 560,812,500 51,311,863 $ 10.93
Class B $ 484,217,981 44,303,697 $ 10.93
Class C $ 95,876,217 8,769,209 $ 10.93
Class D $ 240,775,827 22,015,951 $ 10.94
Combined Fund*
Class A $ 697,489,579 63,814,234 $ 10.93
Class B $ 512,611,970 46,899,540 $ 10.93
Class C $ 102,687,407 9,395,005 $ 10.93
Class D $ 341,248,690 31,192,750 $ 10.94
- ---------------------
* Total Net Assets and Net Asset Value Per Share include the aggregate value
of the net assets of Core Bond as of March 31, 2002 and the aggregate value
of the net assets of each Target Fund that would have been transferred to
Core Bond had the Reorganizations been consummated on March 31, 2002. The
data does not take into account expenses incurred in connection with the
Reorganization or the actual number of shares that would have been issued
to each Target Fund. No assurance can be given as to how many shares of
Core Bond the shareholders of a Target Fund will receive on the date of the
Reorganization. The foregoing should not be relied upon to reflect the
number of shares of Core Bond that actually will be received by the
shareholder of that Target Fund on or after such date.
57
INFORMATION CONCERNING THE SPECIAL MEETINGS
Date, Time and Place of Meetings
The Meetings will be held at the offices of FAM and MLIM, 800 Scudders
Mill Road, Plainsboro, New Jersey on January 17, 2003, at the following times:
Fund Meeting Time
---- ------------
Global Bond [o] a.m. Eastern time
Mercury Total Return Bond [o] a.m. Eastern time
ML Total Return Bond [o] a.m. Eastern time
Corporate Fund [o] a.m. Eastern time
Solicitation, Revocation and Use of Proxies
A shareholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of the respective Target
Fund. Although mere attendance at a Meeting for a Target Fund in which you own
shares will not revoke a proxy, a shareholder present at such a Meeting may
withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the applicable Meeting in
accordance with the directions on the proxies; if no direction is indicated on
a properly executed proxy, such shares will be voted "FOR" approval of the
Agreement and Plan.
It is not anticipated that any other matters will be brought before the
Meetings. If, however, any other business properly is brought before any
Meeting, proxies will be voted in accordance with the judgment of the persons
designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of a Target Fund as of the close of
business on the Record Date are entitled to vote at the applicable Meeting or
any adjournment thereof. As of the close of business on the Record Date, the
number of shares of each class issued, outstanding and entitled to vote is set
forth below for each Target Fund:
Target Fund Outstanding Shares
----------- ------------------
Corporate Fund
Mercury Total Return Bond
ML Total Return Bond
Global Bond
Security Ownership of Certain Beneficial Owners and Management of the Target
Funds and Core Bond
At the Record Date, the Board Members and officers of Corporate Fund as a
group (8 persons) owned an aggregate of less than 1% of the outstanding shares
of Corporate Fund and owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
As of the Record Date, the Board Members and officers of Global Bond as a
group (8 persons) owned an aggregate of less than 1% of the outstanding shares
of Global Bond and owned less than 1% of the outstanding shares of common
stock of ML & Co.
As of the Record Date, the Board Members and officers of Mercury Trust as
a group (9 persons) owned an aggregate of less than 1% of the outstanding
shares of Mercury Total Return Bond and owned less than 1% of the outstanding
shares of common stock of ML & Co.
58
As of the Record Date, the Board Members and officers of MLIM Fund as a
group (9 persons) owned an aggregate of less than 1% of the outstanding shares
of ML Total Return Bond and owned less than 1% of the outstanding shares of
common stock of ML & Co.
As of the Record Date, the Board Members and officers of Bond Fund as a
group (8 persons) owned an aggregate of less than 1% of the outstanding shares
of Core Bond and owned less than 1% of the outstanding shares of common stock
of ML & Co.
To the knowledge of Mercury Trust, as of the Record Date, except as set
forth in Exhibit III to this Proxy Statement and Prospectus, no person or
entity owned of record or beneficially 5% or more of any class of the
outstanding shares of Mercury Total Return Bond.
To the knowledge of MLIM Fund, as of the Record Date, except as set forth
in Exhibit III to this Proxy Statement and Prospectus, no person or entity
owned of record or beneficially 5% or more of any class of the outstanding
shares of ML Total Return Bond.
To the knowledge of Bond Fund, as of the Record Date, except as set forth
in Exhibit III to this Proxy Statement and Prospectus, no person or entity
owned of record or beneficially 5% or more of any class of the outstanding
shares of Core Bond.
To the knowledge of Global Bond, as of the Record Date, except as set
forth in Exhibit III to this Proxy Statement and Prospectus, no person or
entity owned of record or beneficially 5% or more of any class of the
outstanding shares of Global Bond.
To the knowledge of Corporate Fund, as of the Record Date, except as set
forth in Exhibit III to this Proxy Statement and Prospectus, no person or
entity owned of record or beneficially 5% or more of the outstanding shares of
Corporate Fund.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of each
class of a Target Fund's outstanding shares is entitled to one vote as
described herein. Assuming a quorum is present at the applicable Meeting,
approval of a Target Fund Acquisition requires, among other things, with
respect to Mercury Total Return Bond, the approval of the holders of a
majority of Mercury Total Return Bond's outstanding shares voting together as
a single class (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (b) more than 50%
of the outstanding shares), with respect to ML Total Return Bond and Corporate
Fund, the affirmative vote of shareholders voting together as a single class,
representing a majority of the outstanding shares entitled to be voted
thereon, and with respect to Global Bond, the affirmative vote of the
shareholders voting together as a single class, representing two-thirds of the
outstanding shares entitled to be voted thereon. Under the Agreement and Plan,
the failure of the shareholders of a Target Fund to approve the Agreement and
Plan will not affect the ability of any other Target Fund to proceed with its
Target Fund Acquisition. The consummation of any Target Fund Acquisition is
not contingent upon the consummation of any other Target Fund Acquisition.
A quorum for purposes of each Meeting consists of one-third of the shares
of the applicable Target Fund entitled to vote at the Meeting, present in
person or by proxy. If, by the time scheduled for a Meeting, the required
quorum of a Target Fund's shareholders is not present or if a quorum is
present but sufficient votes to approve or disapprove the Agreement and Plan
are not received, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
shareholders. Any such adjournment will require the affirmative vote of a
majority of the shares of the applicable Target Fund present in person or by
proxy and entitled to vote at the session of the Meeting to be adjourned. The
persons named as proxies will vote in favor of any such adjournment if they
determine that adjournment and additional solicitation are reasonable and in
the interests of the shareholders of such Target Fund.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by the applicable Target Fund for its shareholders. The Target Funds
will reimburse banks, brokers and others for their reasonable expenses in
forwarding proxy solicitation materials to the beneficial owners of its shares
and will reimburse certain persons that may be employed for their
59
reasonable expenses in assisting in the solicitation of proxies. See "The
Reorganization--Terms of the Agreement and Plan of Reorganization--Expenses."
In order to obtain the necessary quorum at each Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by the officers of the Target Funds. Each Target Fund has retained Georgeson
Shareholder, _______________, _______, _________ _____, to assist in the
solicitation of proxies at a cost to each Target Fund of approximately $[o]
plus out-of-pocket expenses, which are estimated to be approximately $[o] per
Target Fund.
Broker-dealer firms, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), holding shares of a Target Fund in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares before
the Meetings. Broker-dealer firms, including Merrill Lynch, will not be
permitted to vote without instructions with respect to the approval of the
Agreement and Plan and a Target Fund Acquisition. Properly executed proxies
that are returned but that are marked "abstain" or with respect to which a
broker-dealer has received no instructions and therefore has declined to vote
on the proposal ("broker non-votes") will be counted as present for the
purposes of determining a quorum. However, such abstentions and broker
non-votes will have the same effect as a vote against approval of the
Agreement and Plan and a Target Fund Acquisition.
The Boards of the Target Funds know of no other matters to be presented
at the Meetings. However, if other matters are presented for a vote at a
Meeting or any adjournment thereof, the persons named as proxies will vote the
shares represented by properly executed proxies in accordance with their best
judgment on these matters.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statements and the exhibits relating
thereto, which each Fund has filed with the Commission under the Securities
Act and the Investment Company Act, to which reference is hereby made.
Each Target Fund and Bond Fund, on behalf of Core Bond, file reports and
other information with the Commission. Reports, proxy statements, registration
statements and other information filed by each Fund, can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
such materials can be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including each Fund, that file electronically with the
Commission.
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Target Fund, Bond
Fund, MLIM Fund, Mercury Trust or FAM Trust is a party.
LEGAL OPINIONS
Certain legal matters in connection with each Target Fund Acquisition
will be passed upon for Bond Fund, Mercury Total Return Bond, ML Total Return
Bond and Corporate Fund by Clifford Chance US LLP ("Clifford Chance"), 200
Park Avenue, New York, New York 10166 and for Global Bond by Sidley Austin
Brown & Wood LLP ("Sidley Austin"), 787 Seventh Avenue, New York, New York
10019. Clifford Chance will rely as to matters of Maryland law on the opinion
of Sidley Austin Brown & Wood LLP, 1501 K Street NW, Washington, D.C. 20005.
Sidley Austin and Clifford Chance will rely as to matters of Massachusetts law
on the opinion of Bingham McCutchen LLP, 150 Federal Street, Boston,
Massachusetts 02110-1726. Certain tax matters in connection with each Target
Fund Acquisition will be passed upon by Sidley Austin, counsel to Global Bond
and special tax counsel to Bond Fund, Mercury Total Return Bond, ML Total
Return Bond and Corporate Fund.
EXPERTS
The financial highlights of the Funds included in this Proxy Statement
and Prospectus have been so included in reliance on the reports of [o] and
[o], independent auditors, given on their authority as experts in
60
auditing and accounting. The principal business address of [o] is [o]. The
principal business address of [o] is [o]. [o] will serve as the independent
auditors for the Combined Fund after the Reorganization.
SHAREHOLDERS' MEETINGS
Shareholders of the Target Funds are entitled to one vote for each share
held and fractional votes for fractional shares held and will vote on any
matter submitted to a shareholder vote. MLIM Fund and Corporate Fund, as
Maryland corporations, and Mercury Trust and Global Bond, as Massachusetts
business trusts, do not intend to hold annual meetings of shareholders under
most circumstances. The Charters of MLIM Fund and Mercury Trust do not require
MLIM Fund or Mercury Trust, respectively, to hold an annual meeting of
shareholders of ML Total Return Bond and Mercury Total Return Bond,
respectively. The Charters of Corporate Fund and Global Bond do not require
Corporate Fund or Global Bond, respectively, to hold an annual meeting of
shareholders. The Target Funds will be required, however, to call special
meetings in accordance with the requirements of the Investment Company Act to
seek approval of new management and advisory arrangements or of a change in
the fundamental policies, objectives or restrictions of any Target Fund. The
Target Funds also would be required to hold a shareholders' meeting to elect
new Board Members at such time as less than a majority of the Board Members
holding office have been elected by shareholders. In addition, each Target
Fund may hold shareholder meetings for approval of certain other matters as
required by the Charter of each Target Fund. The by-laws of MLIM Fund provide
that a shareholders' meeting may be called with respect to ML Total Return
Bond at any time by a majority of the Board, the President, or on the written
request of the holders of at least a majority of the outstanding shares of ML
Total Return Bond entitled to vote at such meeting. The by-laws of Mercury
Trust provides that a shareholders' meeting may be called with respect to
Mercury Total Return Bond at any time by the Chairman of the Board, the
President or the Board, and shall be called by the Secretary of Mercury Trust
upon written request of shareholders of Mercury Total Return Bond holding in
the aggregate not less than one-third of the outstanding shares of Mercury
Total Return Bond having voting rights. The Charter of Mercury Trust provides
that the Board of Mercury Trust must call a meeting to remove a Board Member if
10% of the outstanding shares request it. The by-laws of Corporate Fund
provide that a shareholders' meeting may be called with respect to Corporate
Fund at any time by a majority of the Board, the President, or on the written
request of the holders of at least 10% of the outstanding shares of ML Total
Return Bond entitled to vote at such meeting. The Charter of Global Bond
provides that a shareholders' meeting may be called with respect to Global
Bond at any time by a majority of the Board and shall be called by any Board
Member upon the written request of the holders of at least 10% of the
outstanding shares of Global Bond entitled to vote at such meeting.
61
SHAREHOLDER PROPOSALS
A shareholder proposal intended to be presented at a subsequent meeting
of shareholders of a Target Fund must be received by the applicable Target
Fund a reasonable time before the solicitation relating to such meeting is to
be made by the Board of such Target Fund in order to be considered in that
Target Fund's proxy statement and form of proxy relating to the meeting. Any
shareholder of a Target Fund who desires to bring a proposal at any subsequent
meeting of the shareholders of the Target Fund without including such proposal
in the Target Fund's proxy statement relating to the meeting must deliver
notice of such proposal to the Target Fund a reasonable time before the Target
Fund begins to print and mail the proxy solicitation materials to be used in
connection with such meeting.
By Order of the Boards of Directors/Trustees,
Phillip S. Gillespie
Secretary
Merrill Lynch Investment Managers Funds, Inc.
and
Mercury Funds II
David Clayton
Secretary
Merrill Lynch Global Bond Fund for Investment and Retirement
and
The Corporate Fund Accumulation Program, Inc
62
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of the ___ day of _______, 200_, by and among Merrill Lynch Global Bond Fund
for Investment and Retirement, a Massachusetts business trust ("Global Bond"),
Mercury Funds II, a Massachusetts business trust ("Mercury Trust"), on behalf
of Mercury Total Return Bond Fund, a series of Mercury Trust ("Mercury Total
Return Bond"), Merrill Lynch Investment Managers Funds, Inc., a Maryland
corporation ("MLIM Fund"), on behalf of Merrill Lynch Total Return Bond Fund,
a series of MLIM Fund ("ML Total Return Bond"), Fund Asset Management Master
Trust, a Delaware statutory trust ("FAM Trust"), on behalf of Total Return
Bond Master Portfolio, a series of FAM Trust ("Total Return Master,"), The
Corporate Fund Accumulation Program, Inc., a Maryland corporation ("Corporate
Fund"), and Merrill Lynch Bond Fund, Inc., a Maryland corporation ("Bond
Fund"), on behalf of Core Bond Portfolio, a series of Bond Fund ("Core Bond,"
and together with Global Bond, Mercury Trust, Mercury Total Return Bond, MLIM
Fund, ML Total Return Bond, FAM Trust and Corporate Fund, the "Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the following:
(a)(i) the distribution by Total Return Master to Mercury Total Return
Bond and ML Total Return Bond of their proportionate share of the assets
and liabilities (i.e., a redemption in-kind), in return for all of the
beneficial interests in Total Return Master held by Mercury Total Return
Bond and ML Total Return Bond;
(a)(ii)(A) (1) the subsequent acquisition by Core Bond of substantially
all of the assets and the assumption by Core Bond of substantially all of
the liabilities of Mercury Total Return Bond, (2) the issuance by Bond
Fund of newly issued shares of Core Bond common stock, par value of $.10
per share ("Core Bond Common Stock"), to Mercury Total Return Bond with
an aggregate net asset value equal to the aggregate value of the assets
acquired by Core Bond, reduced by the amount of the liabilities assumed
by Core Bond, and (3) the subsequent distribution of Corresponding Shares
(defined below) of Core Bond to the shareholders of Mercury Total Return
Bond in an amount in proportion to their shares of beneficial interest,
without par value, of Mercury Total Return Bond, including shares of
beneficial interest of Mercury Total Return Bond representing the
Dividend Reinvestment Plan ("DRIP") shares held in the book deposit
accounts of the holders of shares of beneficial interest of Mercury Total
Return Bond, in liquidation of Mercury Total Return Bond;
(a)(ii)(B) (1) the subsequent acquisition by Core Bond of substantially
all of the assets and the assumption by Core Bond of substantially all of
the liabilities of ML Total Return Bond, (2) the issuance by Bond Fund of
newly issued shares of Core Bond Common Stock to ML Total Return Bond
with an aggregate net asset value equal to the aggregate value of the
assets acquired by Core Bond, reduced by the amount of the liabilities
assumed by Core Bond, and (3) the subsequent distribution of
Corresponding Shares of Core Bond to the stockholders of ML Total Return
Bond in an amount in proportion to their shares of common stock, par
value $.01 per share, of ML Total Return Bond, including shares of common
stock of ML Total Return Bond representing the DRIP shares held in the
book deposit accounts of the holders of shares of common stock of ML
Total Return Bond, in liquidation of ML Total Return Bond;
(b) (1) the acquisition by Core Bond of substantially all of the assets
and the assumption by Core Bond of substantially all of the liabilities
of Global Bond, (2) the issuance by Bond Fund of newly issued shares of
Core Bond Common Stock to Global Bond with an aggregate net asset value
equal to the aggregate value of the assets acquired by Core Bond, reduced
by the amount of the liabilities assumed by Core Bond, and (3) the
subsequent distribution of Corresponding Shares of Core Bond to the
shareholders of Global Bond in an amount in proportion to their shares of
beneficial interest, par value $.10 per share, of Global Bond, including
shares of beneficial interest of Global Bond representing the DRIP shares
held in the book deposit accounts of the holders of shares of beneficial
interest of Global Bond, in liquidation of Global Bond; and
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(c) (1) the acquisition by Core Bond of substantially all of the assets
and the assumption by Core Bond of substantially all of the liabilities
of Corporate Fund, (2) the issuance by Bond Fund of newly issued shares
of Core Bond Common Stock to Corporate Fund with an aggregate net asset
value equal to the aggregate value of the assets acquired by Core Bond,
reduced by the amount of the liabilities assumed by Core Bond, and (3)
the subsequent distribution of Corresponding Shares of Core Bond to the
stockholders of Corporate Fund in an amount in proportion to all of their
shares of common stock, par value $.01 per share, of Corporate Fund, in
liquidation of Corporate Fund.
The transactions described in any of paragraphs (a)(ii)(A), (a)(ii)(B), (b) and
(c) above may be consummated upon and subject to the terms hereinafter set forth
without the consummation of the transactions described in any other of those
paragraphs. The transactions described in any such paragraph will be referred to
herein individually as a "Target Fund Acquisition," and the Target Fund
Acquisitions are collectively referred to herein as the "Reorganization." Global
Bond, Mercury Total Return Bond, ML Total Return Bond and Corporate Fund are
sometimes referred to herein together as the "Target Funds." Any reference to
any Target Fund hereunder shall be deemed to include only those Target Funds
that participate in the Reorganization.
As stated above, Mercury Trust and Global Bond are organized as Massachusetts
business trusts; Bond Fund, MLIM Fund and Corporate Fund are organized as
Maryland corporations; FAM Trust is organized as a Delaware statutory trust. In
each jurisdiction, nomenclature varies. For ease of reference and clarity of
presentation, shares of common stock of Core Bond, ML Total Return Bond and
Corporate Fund, and shares of beneficial interest of Global Bond and Mercury
Total Return Bond are hereinafter referred to as "shares," and holders of shares
are hereinafter referred to as "shareholders."
In the course of the relevant Target Fund Acquisition, shares of Core
Bond Common Stock will be distributed to each Target Fund's shareholders as
follows: each holder of Global Bond shares and ML Total Return Bond shares
will be entitled to receive the same class of shares of Core Bond (i.e., Class
A, Class B, Class C or Class D) as they held in Global Bond and ML Total
Return Bond immediately prior to the Reorganization; each holder of Class I,
Class B, Class C and Class A shares of Mercury Total Return Bond will be
entitled to receive Class A, Class B, Class C, and Class D shares of Core
Bond, respectively; each holder of shares of Corporate Fund will be entitled
to receive Class A shares of Core Bond (collectively, the "Corresponding
Shares"). The aggregate net asset value of the Corresponding Shares of Core
Bond to be received by each shareholder of a Target Fund will equal the
aggregate net asset value of the shares of such Target Fund owned by such
shareholder as of the Valuation Time (defined in Section 7(c) herein). It is
intended that each Target Fund Acquisition described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
As promptly as practicable after the consummation of the relevant Target Fund
Acquisition, (i) the Board of Trustees of Global Bond shall take or shall cause
officers of Global Bond to take such action as necessary to dissolve Global Bond
in accordance with Global Bond's Declaration of Trust, as amended, and the laws
of the Commonwealth of Massachusetts, and will terminate Global Bond's
registration under the Investment Company Act of 1940, as amended (the "1940
Act"); (ii) the Board of Directors of Corporate Fund shall take or shall cause
officers of Corporate Fund to take such action as necessary to dissolve
Corporate Fund in accordance with Corporate Fund's Articles of Incorporation, as
amended and restated, and the laws of the State of Maryland, and will terminate
Corporate Fund's registration under the 1940 Act; (iii) the Board of Trustees of
Mercury Trust shall take or shall cause officers of Mercury Trust to take such
action as necessary to terminate Mercury Total Return Bond as a series of
Mercury Trust in accordance with Mercury Trust's Declaration of Trust, as
amended and restated, and the laws of the Commonwealth of Massachusetts; (iv)
the Board of Directors of MLIM Fund shall take or shall cause officers of MLIM
Fund to take such action as necessary to terminate ML Total Return Bond as a
series of MLIM Fund in accordance with MLIM Fund's Articles of Incorporation, as
amended, and the laws of the State of Maryland; and (v) the Board of Trustees of
FAM Trust shall take or shall cause officers of FAM Trust to take such action as
necessary to terminate Total Return Master as a series of FAM Trust in
accordance with FAM Trust's Declaration of Trust, as amended and restated, and
the laws of the State of Delaware.
Mercury Total Return Bond and ML Total Return Bond are each "feeder"
funds that invest all of their respective assets in a corresponding "master"
portfolio, Total Return Master. This structure is sometimes called a
"master/feeder" structure.
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AGREEMENT
In order to consummate the Reorganization, and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Global Bond, Mercury Trust, on behalf of Mercury Total
Return Bond, MLIM Fund, on behalf of ML Total Return Bond Fund, FAM Trust, on
behalf of Total Return Master, Corporate Fund and Bond Fund, on behalf of Core
Bond, hereby agree as follows:
1. Representations and Warranties of Bond Fund.
Bond Fund represents and warrants to, and agrees with, Global Bond,
Mercury Trust, MLIM Fund, FAM Trust and Corporate Fund, that:
(a) Bond Fund is a corporation duly incorporated, validly existing
and in good standing in conformity with the laws of the State of
Maryland, and has the corporate power to own all of its assets and to
carry out this Agreement. Core Bond is a duly authorized series of Bond
Fund. Bond Fund has all necessary Federal, state and local authorizations
to carry on its business as it is now being conducted and to carry out
this Agreement.
(b) Bond Fund is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-02857),
and such registration has not been revoked or rescinded and is in full
force and effect. Bond Fund has elected and qualified at all times since
its inception for the special tax treatment afforded regulated investment
companies ("RICs") under Sections 851-855 of the Code and intends to
continue to so qualify until consummation of the Reorganization and
thereafter.
(c) Each Target Fund has been furnished with a statement of assets
and liabilities and a schedule of investments of Core Bond, each as of
September 30, 2002, said financial statements having been audited by [o],
independent public accountants. An unaudited statement of assets and
liabilities of Core Bond and an unaudited schedule of investments of Core
Bond, each as of the Valuation Time (defined in Section 7(c) herein),
will be furnished to each Target Fund at or prior to the Closing Date for
the purpose of determining the number of shares of Core Bond Common Stock
to be issued pursuant to Section 8 of this Agreement; and each will
fairly present the financial position of Core Bond as of the Valuation
Time in conformity with generally accepted accounting principles applied
on a consistent basis.
(d) Each Target Fund has been furnished with Bond Fund's annual
report to shareholders for the fiscal year ended September 30, 2002 and
the financial statements appearing therein fairly present the financial
position of Core Bond as of the dates indicated in conformity with
generally accepted accounting principles applied on a consistent basis.
(e) Each Target Fund has been furnished with the prospectus and
statement of additional information of Bond Fund, each dated January 24,
2002, and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(f) Bond Fund has the corporate power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement on behalf of Core Bond has been duly
authorized by all necessary action of Bond Fund's Board of Directors, and
this Agreement constitutes a valid and binding contract enforceable in
accordance with its terms, subject to the effects of bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating
to or affecting creditors' rights generally and court decisions with
respect thereto.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Bond Fund, threatened against it or Core
Bond, which assert liability on the part of Bond Fund or Core Bond or
which materially affect their financial condition or their ability to
consummate the Reorganization. Neither Bond Fund nor Core Bond is charged
with or, to the best of the knowledge of Bond Fund or Core
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Bond, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its
business.
(h) Bond Fund is not a party to nor obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, or any
contract or other commitment or obligation to which it is a party, and is
not subject to any order or decree which would be violated by its
execution of or performance under this Agreement.
(i) There are no material contracts outstanding to which Bond Fund
is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (m) below) or will not otherwise be
disclosed to each Target Fund prior to the Valuation Time.
(j) Bond Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets and liabilities referred to above, those incurred in the ordinary
course of its business as an investment company since the date of Bond
Fund's most recent annual or semi-annual report to shareholders, and
those incurred in connection with the Reorganization. As of the Valuation
Time, Bond Fund will advise each Target Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time, of Core
Bond.
(k) Bond Fund, on behalf of Core Bond, has filed, or has obtained
extensions to file, all Federal, state and local tax returns that are
required to be filed by it, and has paid or has obtained extensions to
pay, all Federal, state and local taxes shown on said returns to be due
and owing and all assessments received by it, up to and including the
taxable year in which the Closing Date occurs. All tax liabilities of
Core Bond have been adequately provided for on its books, and no tax
deficiency or liability of Core Bond has been asserted and no question
with respect thereto has been raised by the Internal Revenue Service
("IRS") or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the
Closing Date occurs.
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Bond Fund of
the Reorganization, except such as may be required under the Securities
Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of
1934, as amended (the "1934 Act"), the 1940 Act or state securities laws
(which term as used herein shall include the laws of the District of
Columbia and Puerto Rico).
(m) The registration statement filed by Bond Fund on Form N-14
relating to the shares of Core Bond Common Stock to be issued pursuant to
this Agreement, which includes the combined proxy statement of the Target
Funds and the prospectus of Bond Fund with respect to the transaction
contemplated herein, and any supplement or amendment thereto or to the
documents therein (as amended or supplemented, the "N-14 Registration
Statement"), on its effective date, at the time of the shareholders'
meetings referred to in Section 10(a) of this Agreement and at the
Closing Date, insofar as it relates to Bond Fund and Core Bond, (i)
complied or will comply in all material respects with the provisions of
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and
the prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Bond Fund
with respect to itself and to Core Bond for use in the N-14 Registration
Statement as provided in Section 10(e) of this Agreement.
(n) Bond Fund is authorized to issue 3,650,000,000 shares of common
stock, par value $.10 per share, of which Core Bond is authorized to
issue 700,000,000 shares divided into four classes, designated Class A,
Class B, Class C and Class D Common Stock; Class A and Class B shares of
Core Bond Common Stock each consist of 250,000,000 shares and Class C and
Class D shares of Core Bond Common Stock
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each consist of 100,000,000 shares; each outstanding share is fully paid
and nonassessable and has full voting rights.
(o) The shares of Core Bond Common Stock to be issued to each Target
Fund pursuant to this Agreement will have been duly authorized and, when
issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable and will have
full voting rights, and no shareholder of Core Bond will have any
preemptive right of subscription or purchase in respect thereof.
(p) At or prior to the Closing Date, shares of Core Bond Common
Stock to be transferred to each Target Fund for distribution to the
shareholders of each Target Fund on the Closing Date will be duly
qualified for offering to the public in all states of the United States
in which the sale of shares of each Target Fund presently are qualified,
and there will be sufficient number of such shares registered as may be
necessary, with each pertinent state securities commission to permit the
transfers contemplated by this Agreement to be consummated.
(q) At or prior to the Closing Date, Bond Fund will have obtained
any and all approvals, including regulatory and director approvals,
necessary to issue the shares of Core Bond Common Stock to each Target
Fund for distribution to each Target Fund's shareholders.
(r) The books and records of Bond Fund relating to Core Bond made
available to each Target Fund and/or its counsel are substantially true
and correct and contain no material misstatements or omissions with
respect to the operations of Bond Fund relating to Core Bond.
2. Representations and Warranties of Global Bond.
Global Bond represents and warrants to, and agrees with, Bond Fund that:
(a) Global Bond is a trust with transferable shares duly organized,
validly existing and in good standing in conformity with the laws of the
Commonwealth of Massachusetts. Global Bond has the power to own all of
its assets and to carry out this Agreement. Global Bond has all the
necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) Global Bond is duly registered under the 1940 Act as a
non-diversified, open-end management investment company (File No.
811-04684), and such registration has not been revoked or rescinded and
is in full force and effect. Global Bond has elected and qualified at all
times since its inception for the special tax treatment afforded RICs
under Sections 851-855 of the Code and intends to continue to so qualify
through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Global Bond Investments"
shall mean (i) the investments of Global Bond shown on the schedule of
its investments as of the Valuation Time furnished to Bond Fund, and (ii)
all other assets owned by Global Bond as of the Valuation Time.
(d) Global Bond has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary
action of its Board of Trustees and this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(e) Bond Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Global Bond, each as of
December 31, 2001, said financial statements having been audited by [o],
independent public accountants. Bond Fund has also been furnished with an
unaudited statement of assets and liabilities and an unaudited schedule
of investments of Global Bond, each as of June 30, 2002. An unaudited
statement of assets and liabilities of Global Bond and an unaudited
schedule of investments
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of Global Bond, each as of the Valuation Time, will be furnished to Bond
Fund at or prior to the Closing Date for the purpose of determining the
number of shares of Core Bond Common Stock to be issued to Global Bond
pursuant to Section 8 of this Agreement; and each will fairly present the
financial position of Global Bond as of the Valuation Time in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) Bond Fund has been furnished with Global Bond's annual report to
shareholders for the fiscal year ended December 31, 2001 and Global
Bond's semi-annual report to shareholders for the six months ended June
30, 2002, and the financial statements appearing therein fairly present
the financial position of Global Bond as of the dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(g) Bond Fund has been furnished with the prospectus and statement
of additional information of Global Bond, each dated April 19, 2002, and
said prospectus and statement of additional information do not contain
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Global Bond, threatened against it which
assert liability on the part of Global Bond or which materially affect
its financial condition or its ability to consummate the Reorganization.
Global Bond is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation
of any provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which Global Bond
is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to Bond Fund prior to the
Valuation Time.
(j) Global Bond is not a party to nor obligated under any provision
of its Declaration of Trust, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation to which it is a party,
and is not subject to any order or decree which would be violated by its
execution of or performance under this Agreement.
(k) Global Bond has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets and liabilities referred to above, those incurred in the ordinary
course of its business as an investment company since the date of Global
Bond's most recent annual or semi-annual report to shareholders and those
incurred in connection with the Reorganization. As of the Valuation Time,
Global Bond will advise Bond Fund in writing of all known liabilities,
incurred by Global Bond, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of such time.
(l) Global Bond has filed, or has obtained extensions to file, all
Federal, state and local tax returns that are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Closing
Date occurs. All tax liabilities of Global Bond have been adequately
provided for on its books, and no tax deficiency or liability of Global
Bond has been asserted and no question with respect thereto has been
raised by the IRS or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in
which the Closing Date occurs.
(m) At both the Valuation Time and the Closing Date, Global Bond
will have full right, power and authority to sell, assign, transfer and
deliver the Global Bond Investments. At the Closing Date, subject only to
the delivery of the Global Bond Investments as contemplated by this
Agreement, Global Bond will have good and marketable title to all of the
Global Bond Investments, and Bond Fund will acquire all of the Global
Bond Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state
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securities laws and those imperfections of title or encumbrances as do not
materially detract from the value or use of the Global Bond Investments or
materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Global Bond of
the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings referred to in Section 10(a) of this
Agreement and on the Closing Date, insofar as it relates to Global Bond,
(i) complied or will comply in all material respects with the provisions
of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder, and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by Global Bond for use in the N-14 Registration Statement as
provided in Section 10(e) of this Agreement.
(p) Global Bond is authorized to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class
D shares of beneficial interest; each outstanding share is fully paid and
nonassessable and has full voting rights.
(q) The books and records of Global Bond made available to Bond Fund
and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of
Global Bond.
(r) Global Bond will not sell or otherwise dispose of any of the
shares of Core Bond Common Stock to be received in the Reorganization,
except in distribution to the shareholders of Global Bond.
(s) At or prior to the Closing Date, Global Bond will have obtained
any and all approvals, including regulatory, trustee and shareholder
approvals, necessary to effect the Reorganization as set forth herein.
3. Representations and Warranties of Mercury Trust.
Mercury Trust represents and warrants to, and agrees with, Bond Fund
that:
(a) Mercury Trust is a trust with transferable shares duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth of Massachusetts. Mercury Trust has the power to
own all of its assets and to carry out this Agreement. Mercury Trust has
all the necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) Mercury Trust is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-04182),
and such registration has not been revoked or rescinded and is in full
force and effect. Mercury Trust has elected and qualified Mercury Total
Return Bond at all times since its inception for the special tax
treatment afforded RICs under Sections 851-855 of the Code and intends to
continue to so qualify through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Mercury Total Return Bond
Investments" shall mean (i) the investments of Mercury Total Return Bond
shown on the schedule of its investments as of the
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Valuation Time furnished to Bond Fund, and (ii) all other assets owned by
Mercury Total Return Bond as of the Valuation Time.
(d) Mercury Trust has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of Mercury Trust's Board of Trustees and this Agreement
constitutes a valid and binding contract enforceable in accordance with
its terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(e) Bond Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Mercury Total Return Bond,
each as of June 30, 2002, said financial statements having been audited
by [o], independent public accountants. An unaudited statement of assets
and liabilities of Mercury Total Return Bond and an unaudited schedule of
investments of Mercury Total Return Bond, each as of the Valuation Time,
will be furnished to Bond Fund at or prior to the Closing Date for the
purpose of determining the number of shares of Core Bond Common Stock to
be issued to Mercury Total Return Bond pursuant to Section 8 of this
Agreement; and each will fairly present the financial position of Mercury
Total Return Bond as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(f) Bond Fund has been furnished with Mercury Total Return Bond's
annual report to shareholders for the fiscal year ended June 30, 2002,
and the financial statements appearing therein fairly present the
financial position of Mercury Total Return Bond as of the dates
indicated, in conformity with generally accepted accounting principles
applied on a consistent basis.
(g) Bond Fund has been furnished with the prospectus and statement
of additional information of Mercury Trust, each dated October [o], 2002,
and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Mercury Trust, threatened against it or
Mercury Total Return Bond which assert liability on the part of Mercury
Trust or Mercury Total Return Bond or which materially affect their
financial condition or their ability to consummate the Reorganization.
Neither Mercury Trust nor Mercury Total Return Bond are charged with or,
to the best of their knowledge, threatened with any violation or
investigation of any possible violation of any provisions of any Federal,
state or local law or regulation or administrative ruling relating to any
aspect of its business.
(i) There are no material contracts outstanding to which Mercury
Trust or Mercury Total Return Bond is a party that have not been
disclosed in the N-14 Registration Statement or will not otherwise be
disclosed to Bond Fund prior to the Valuation Time.
(j) Mercury Trust is not a party to nor obligated under any
provision of its Declaration of Trust, as amended and restated, or its
by-laws, as amended, or any contract or other commitment or obligation to
which it is a party, and is not subject to any order or decree which
would be violated by its execution of or performance under this
Agreement.
(k) Mercury Total Return Bond has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements
of assets and liabilities referred to above, those incurred in the
ordinary course of its business as an investment company since the date
of Mercury Trust's most recent annual or semi-annual report to
shareholders and those incurred in connection with the Reorganization. As
of the Valuation Time, Mercury Trust will advise Bond Fund in writing of
all known liabilities, incurred by Mercury Total Return Bond, contingent
or otherwise, whether or not incurred in the ordinary course of business,
existing or accrued as of such time.
I-8
(l) Mercury Trust, on behalf of Mercury Total Return Bond, has
filed, or has obtained extensions to file, all Federal, state and local
tax returns that are required to be filed by it, and has paid or has
obtained extensions to pay, all Federal, state and local taxes shown on
said returns to be due and owing and all assessments received by it, up
to and including the taxable year in which the Closing Date occurs. All
tax liabilities of Mercury Total Return Bond have been adequately
provided for on its books, and no tax deficiency or liability of Mercury
Total Return Bond has been asserted and no question with respect thereto
has been raised by the IRS or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(m) At both the Valuation Time and the Closing Date, Mercury Trust
will have full right, power and authority to sell, assign, transfer and
deliver the Mercury Total Return Bond Investments. At the Closing Date,
subject only to the delivery of the Mercury Total Return Bond Investments
as contemplated by this Agreement, Mercury Total Return Bond will have
good and marketable title to all of the Mercury Total Return Bond
Investments, and Bond Fund will acquire all of the Mercury Total Return
Bond Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the Mercury Total Return Bond Investments or
materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Mercury Trust
of the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings referred to in Section 10(a) of this
Agreement and on the Closing Date, insofar as it relates to Mercury Total
Return Bond, (i) complied or will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations thereunder, and (ii) did not or will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; and the prospectus included therein did not or
will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with
information furnished by Mercury Trust, with respect to itself and to
Mercury Total Return Bond, for use in the N-14 Registration Statement as
provided in Section 10(e) of this Agreement.
(p) Mercury Trust is authorized to issue an unlimited number of full
and fractional shares of beneficial interest, without par value, of which
Mercury Total Return Bond is authorized to issue an unlimited number of
full and fractional shares of beneficial interest, without par value,
divided into four classes, designated Class I, Class A, Class B and Class
C shares of beneficial interest; each outstanding share is fully paid and
nonassessable and has full voting rights.
(q) The books and records of Mercury Trust relating to Mercury Total
Return Bond made available to Bond Fund and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of Mercury Trust relating to
Mercury Total Return Bond.
(r) Mercury Trust will not sell or otherwise dispose of any of the
shares of Core Bond Common Stock to be received by Mercury Total Return
Bond in the Reorganization, except in distribution to the shareholders of
Mercury Total Return Bond.
(s) At or prior to the Closing Date, Mercury Trust will have
obtained any and all approvals, including regulatory, trustee and
shareholder approvals, necessary to effect the Reorganization as set
forth herein.
I-9
4. Representations and Warranties of MLIM Fund.
MLIM Fund represents and warrants to, and agrees with, Bond Fund that:
(a) MLIM Fund is a corporation duly incorporated, validly existing
and in good standing in conformity with the laws of the State of
Maryland, and has the corporate power to own all of its assets and to
carry out this Agreement. ML Total Return Bond is a duly authorized
series of MLIM Fund. MLIM Fund has all the necessary Federal, state and
local authorizations to carry on its business as it is now being
conducted and to carry out this Agreement.
(b) MLIM Fund is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-10053),
and such registration has not been revoked or rescinded and is in full
force and effect. MLIM Fund has elected and qualified ML Total Return
Bond at all times since its inception for the special tax treatment
afforded RICs under Sections 851-855 of the Code and intends to continue
to so qualify ML Total Return Bond Fund through its taxable year ending
upon liquidation.
(c) As used in this Agreement, the term "ML Total Return Bond
Investments" shall mean (i) the investments of ML Total Return Bond shown
on the schedule of its investments as of the Valuation Time furnished to
Bond Fund, and (ii) all other assets owned by ML Total Return Bond as of
the Valuation Time.
(d) MLIM Fund has the corporate power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement has been duly authorized by all
necessary action of MLIM Fund's Board of Directors and this Agreement
constitutes a valid and binding contract enforceable in accordance with
its terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(e) Bond Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of ML Total Return Bond, each
as of June 30, 2002, said financial statements having been audited by
[o], independent public accountants. An unaudited statement of assets and
liabilities of ML Total Return Bond and an unaudited schedule of
investments of ML Total Return Bond, each as of the Valuation Time, will
be furnished to Bond Fund at or prior to the Closing Date for the purpose
of determining the number of shares of Core Bond Common Stock to be
issued to ML Total Return Bond pursuant to Section 8 of this Agreement;
and each will fairly present the financial position of ML Total Return
Bond as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(f) Bond Fund has been furnished with ML Total Return Bond's annual
report to shareholders for the fiscal year ended June 30, 2002, and the
financial statements appearing therein fairly present the financial
position of ML Total Return Bond as of the dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(g) Bond Fund has been furnished with the prospectus and statement
of additional information of MLIM Fund, each dated October [o], 2002, and
said prospectus and statement of additional information do not contain
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MLIM Fund, threatened against it or ML
Total Return Bond which assert liability on the part of MLIM Fund or ML
Total Return Bond or which materially affect their financial condition or
their ability to consummate the Reorganization. Neither MLIM Fund nor ML
Total Return Bond are charged with or, to the best of their knowledge,
threatened with any violation or investigation of any possible violation
of any provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
I-10
(i) There are no material contracts outstanding to which MLIM Fund
or ML Total Return Bond is a party that have not been disclosed in the
N-14 Registration Statement or will not otherwise be disclosed to Bond
Fund prior to the Valuation Time.
(j) MLIM Fund is not a party to nor obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation to which it is a party,
and is not subject to any order or decree which would be violated by its
execution of or performance under this Agreement.
(k) ML Total Return Bond has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements
of assets and liabilities referred to above, those incurred in the
ordinary course of its business as an investment company since the date
of MLIM Fund's most recent annual or semi-annual report to shareholders
and those incurred in connection with the Reorganization. As of the
Valuation Time, MLIM Fund will advise Bond Fund in writing of all known
liabilities, incurred by ML Total Return Bond, contingent or otherwise,
whether or not incurred in the ordinary course of business, existing or
accrued as of such time.
(l) MLIM Fund, on behalf of ML Total Return Bond, has filed, or has
obtained extensions to file, all Federal, state and local tax returns
that are required to be filed by it, and has paid or has obtained
extensions to pay, all Federal, state and local taxes shown on said
returns to be due and owing and all assessments received by it, up to and
including the taxable year in which the Closing Date occurs. All tax
liabilities of ML Total Return Bond have been adequately provided for on
its books, and no tax deficiency or liability of ML Total Return Bond has
been asserted and no question with respect thereto has been raised by the
IRS or by any state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which the Closing
Date occurs.
(m) At both the Valuation Time and the Closing Date, MLIM Fund will
have full right, power and authority to sell, assign, transfer and
deliver the ML Total Return Bond Investments. At the Closing Date,
subject only to the delivery of the ML Total Return Bond Investments as
contemplated by this Agreement, ML Total Return Bond will have good and
marketable title to all of the ML Total Return Bond Investments, and Bond
Fund will acquire all of the ML Total Return Bond Investments free and
clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the
Federal or state securities laws and those imperfections of title or
encumbrances as do not materially detract from the value or use of the ML
Total Return Bond Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MLIM Fund of
the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings referred to in Section 10(a) of this
Agreement and on the Closing Date, insofar as it relates to ML Total
Return Bond, (i) complied or will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations thereunder, and (ii) did not or will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; and the prospectus included therein did not or
will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with
information furnished by MLIM Fund, with respect to itself and to ML
Total Return Bond, for use in the N-14 Registration Statement as provided
in Section 10(e) of this Agreement.
(p) MLIM Fund is authorized to issue 1,000,000,000 shares of common
stock, par value $.01 per share, of which ML Total Return Bond is
authorized to issue 500,000,000 shares divided into four classes,
designated Class A, Class B, Class C and Class D common stock; Class A,
Class C and Class D shares of
I-11
ML Total Return Bond each consist of 100,000,000 shares and Class B
consists of 200,000,000 shares; each outstanding share is fully paid and
nonassessable and has full voting rights.
(q) The books and records of MLIM Fund relating to ML Total Return
Bond made available to Bond Fund and/or its counsel are substantially
true and correct and contain no material misstatements or omissions with
respect to the operations of MLIM Fund relating to ML Total Return Bond.
(r) MLIM Fund will not sell or otherwise dispose of any of the
shares of Core Bond Common Stock to be received by ML Total Return Bond
in the Reorganization, except in distribution to the shareholders of ML
Total Return Bond.
(s) At or prior to the Closing Date, MLIM Fund will have obtained
any and all approvals, including regulatory director and shareholder
approvals, necessary to effect the Reorganization as set forth herein.
5. Representations and Warranties of FAM Trust.
FAM Trust represents and warrants to, and agrees with, Bond Fund that:
(a) FAM Trust is a statutory trust duly formed, validly existing and
in good standing in conformity with the laws of the State of Delaware.
Total Return Master is a duly authorized series of FAM Trust. FAM Trust
has the power to own all of its assets and to carry out this Agreement.
FAM Trust has all the necessary Federal, state and local authorizations
to carry on its business as it is now being conducted and to carry out
this Agreement. FAM Trust has elected that Total Return Master be treated
as a partnership under the Code at all times since inception and
continuing through its taxable year ending upon liquidation.
(b) FAM Trust is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-10089),
and such registration has not been revoked or rescinded and is in full
force and effect. The assets of Total Return Master have been managed to
meet the requirements for the special tax treatment afforded RICs under
the Code as if those requirements applied at the Total Return Master
level at all times since its inception.
(c) FAM Trust has full power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary
action of its Board of Trustees and this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(d) Bond Fund has been furnished with the Registration Statement on
Form N-1A of FAM Trust, dated October [o], 2002 in the form as filed with
the Securities and Exchange Commission (the "Commission"), and said
registration statement does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of FAM Trust, threatened against it which
assert liability on the part of Total Return Master or which materially
affect its financial condition or its ability to consummate the
Reorganization. FAM Trust is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of Total
Return Master's business.
I-12
(f) There are no material contracts outstanding to which FAM Trust
or Total Return Master, is a party that have not been disclosed in the
N-14 Registration Statement or will not otherwise be disclosed to Bond
Fund prior to the Valuation Time.
(g) FAM Trust is not a party to nor obligated under any provision of
its Declaration of Trust, as amended and restated, or its by-laws or any
contract or other commitment or obligation to which it is a party, and is
not subject to any order or decree which would be violated by its
execution of or performance under this Agreement.
(h) FAM Trust has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets and liabilities referred to above, those incurred in the ordinary
course of its business as an investment company since the date of FAM
Trust's most recent financial statements and those incurred in connection
with the Reorganization. As of the Valuation Time, FAM Trust will advise
Bond Fund in writing of all known liabilities, contingent or otherwise,
whether or not incurred in the ordinary course of business, existing or
accrued as of such time, relating to Total Return Master.
(i) FAM Trust has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it
for Total Return Master.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FAM Trust of
the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(k) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings referred to in Section 10(a) of this
Agreement and on the Closing Date, insofar as it relates to Total Return
Master, (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder, and (ii) did not or will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by FAM Trust, with respect to itself and to Total Return
Master, for use in the N-14 Registration Statement as provided in Section
10(e) of this Agreement.
(l) The books and records of FAM Trust relating to Total Return
Master made available to Bond Fund and/or its counsel are substantially
true and correct and contain no material misstatements or omissions with
respect to the operations of FAM Trust relating to itself and to Total
Return Master.
(m) At or prior to the Closing Date, FAM Trust will have obtained
any and all approvals, including regulatory and trustee approvals,
necessary to effect the Reorganization as set forth herein.
6. Representations and Warranties of Corporate Fund.
Corporate Fund represents and warrants to, and agrees with, Bond Fund
that:
(a) Corporate Fund is a corporation duly incorporated, validly
existing and in good standing in conformity with the laws of the State of
Maryland. Corporate Fund has the corporate power to own all of its assets
and to carry out this Agreement. Corporate Fund has all the necessary
Federal, state and local authorizations to carry on its business as it is
now being conducted and to carry out this Agreement.
(b) Corporate Fund is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-02642),
and such registration has not been revoked or rescinded and is
I-13
in full force and effect. Corporate Fund has elected and qualified at all
times since its inception for the special tax treatment afforded RICs
under Sections 851-855 of the Code and intends to continue to so qualify
through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Corporate Fund Investments"
shall mean (i) the investments of Corporate Fund shown on the schedule of
its investments as of the Valuation Time furnished to Bond Fund, and (ii)
all other assets owned by Corporate Fund as of the Valuation Time.
(d) Corporate Fund has the corporate power and authority to enter
into and perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement have been duly authorized by
all necessary action of its Board of Directors and this Agreement
constitutes a valid and binding contract enforceable in accordance with
its terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(e) Bond Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Corporate Fund, each as of
December 31, 2001, said financial statements having been audited by [o],
independent public accountants. Bond Fund has also been furnished with an
unaudited statement of assets and liabilities and an unaudited schedule
of investments of Corporate Fund, each as of June 30, 2002. An unaudited
statement of assets and liabilities of Corporate Fund and an unaudited
schedule of investments of Corporate Fund, each as of the Valuation Time,
will be furnished to Bond Fund at or prior to the Closing Date for the
purpose of determining the number of shares of Core Bond Common Stock to
be issued to Corporate Fund pursuant to Section 8 of this Agreement; and
each will fairly present the financial position of Corporate Fund as of
the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(f) Bond Fund has been furnished with Corporate Fund's annual report
to shareholders for the fiscal year ended December 31, 2001, and
Corporate Fund's semi-annual report to shareholders for the six months
ended June 30, 2002, and the financial statements appearing therein
fairly present the financial position of Corporate Fund as of the dates
indicated, in conformity with generally accepted accounting principles
applied on a consistent basis.
(g) Bond Fund has been furnished with the prospectus and statement
of additional information of Corporate Fund, each dated April 29, 2002,
and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Corporate Fund, threatened against it
which assert liability on the part of Corporate Fund or which materially
affect its financial condition or its ability to consummate the
Reorganization. Corporate Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its
business.
(i) There are no material contracts outstanding to which Corporate
Fund is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to Bond Fund prior to the
Valuation Time.
(j) Corporate Fund is not a party to nor obligated under any
provision of its Articles of Incorporation, as amended and restated, or
its by-laws, as amended, or any contract or other commitment or
obligation to which it is a party, and is not subject to any order or
decree which would be violated by its execution of or performance under
this Agreement.
(k) Corporate Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets and liabilities referred to above, those incurred in the ordinary
I-14
course of its business as an investment company since the date of
Corporate Fund's most recent annual or semi-annual report to shareholders
and those incurred in connection with the Reorganization. As of the
Valuation Time, Corporate Fund will advise Bond Fund in writing of all
known liabilities, incurred by Corporate Fund, contingent or otherwise,
whether or not incurred in the ordinary course of business, existing or
accrued as of such time.
(l) Corporate Fund has filed, or has obtained extensions to file,
all Federal, state and local tax returns that are required to be filed by
it, and has paid or has obtained extensions to pay, all Federal, state
and local taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which
the Closing Date occurs. All tax liabilities of Corporate Fund have been
adequately provided for on its books, and no tax deficiency or liability
of Corporate Fund has been asserted and no question with respect thereto
has been raised by the IRS or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(m) At both the Valuation Time and the Closing Date, Corporate Fund
will have full right, power and authority to sell, assign, transfer and
deliver the Corporate Fund Investments. At the Closing Date, subject only
to the delivery of the Corporate Fund Investments as contemplated by this
Agreement, Corporate Fund will have good and marketable title to all of
the Corporate Fund Investments, and Bond Fund will acquire all of the
Corporate Fund Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer thereof
(except those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the Corporate Fund Investments or materially affect
title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Corporate Fund
of the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings referred to in Section 10(a) of this
Agreement and on the Closing Date, insofar as it relates to Corporate
Fund, (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder, and (ii) did not or will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by Corporate Fund for use in the N-14 Registration Statement as
provided in Section 10(e) of this Agreement.
(p) Corporate Fund is authorized to issue 50,000,000 shares of
common stock, par value $.01 per share; each outstanding share is fully
paid and nonassessable and has full voting rights.
(q) The books and records of Corporate Fund made available to Bond
Fund and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of
Corporate Fund.
(r) Corporate Fund will not sell or otherwise dispose of any of the
shares of Core Bond Common Stock to be received in the Reorganization,
except in distribution to the shareholders of Corporate Fund.
(s) At or prior to the Closing Date, Corporate Fund will have
obtained any and all approvals, including regulatory, director and
shareholder approvals, necessary to effect the Reorganization as set
forth herein.
I-15
7. The Reorganization.
(a) Subject to receiving the requisite approval of the shareholders
of each Target Fund for the applicable Target Fund Acquisition, and to
the other terms and conditions contained herein, each Target Fund agrees
to convey, transfer and deliver to Bond Fund, for the benefit of Core
Bond, and Bond Fund agrees to acquire from each Target Fund for the
benefit of Core Bond, on the Closing Date, all of the Global Bond
Investments, Mercury Total Return Bond Investments, ML Total Return Bond
Investments and the Corporate Fund Investments (collectively, the
"Investments") (including dividends and interest accrued as of the
Valuation Time), and shall cause Core Bond to assume all of the known
liabilities of each Target Fund (as provided in Section 7(d) hereof), in
return solely for that number of shares of Core Bond Common Stock
provided in Section 8 of this Agreement. Pursuant to this Agreement, as
soon as practicable on or after the Closing Date, each Target Fund will
distribute pro rata all shares of Core Bond Common Stock received by it
to its respective shareholders in proportion to their Corresponding Shares
in complete liquidation of such Target Fund. Such distribution shall be
accomplished by the opening of shareholder accounts on the stock ledger
records of Core Bond in the amounts due the shareholders of each Target
Fund based on their respective holdings in such Target Fund as of the
Valuation Time.
(b) Each Target Fund will pay or cause to be paid to Bond Fund, for
the benefit of Core Bond, any interest or dividends it receives on or
after the Closing Date.
(c) The Valuation Time shall be 4:00 p.m., Eastern time, on January
17, 2003, or such earlier or later day and time as may be agreed upon by
the parties hereto in writing (the "Valuation Time").
(d) Core Bond will acquire all of the assets of, and assume all of
the known liabilities of, each Target Fund, except that recourse for such
liabilities will be limited to the net assets of such Target Fund
acquired by Core Bond. The known liabilities of each Target Fund as of
the Valuation Time shall be confirmed in writing to Bond Fund by such
Target Fund pursuant to Sections 2(k), 3(k), 4(k), 5(h) and 6(k) of this
Agreement.
(e) Bond Fund and each Target Fund will jointly file Articles of
Transfer with the State Department of Assessments and Taxation of
Maryland ("SDAT") and any other such instrument as may be required by the
State of Maryland to effect the transfer of the Investments of such
Target Fund to Core Bond.
(f) Corporate Fund will be dissolved following the Closing Date by
filing Articles of Dissolution, together with any required tax or other
reports, with SDAT and will terminate its registration under the 1940 Act
by filing a Form N-8F application for an order under Section 8(f) of the
1940 Act. Global Bond will be dissolved following the Closing Date by
filing a Certificate of Termination, together with any required tax or
other reports, with the Office of the Secretary of the Commonwealth of
Massachusetts ("Massachusetts Secretary of State") and will terminate its
registration under the 1940 Act by filing a Form N-8F application for an
order under Section 8(f) of the 1940 Act. MLIM Fund will file Articles
Supplementary with SDAT terminating ML Total Return Bond as a series of
MLIM Fund. Mercury Trust will file a Certificate of Termination of Series
with the Massachusetts Secretary of State terminating Mercury Total
Return Bond as a series of Mercury Trust. In accordance with FAM Trust's
Declaration of Trust, as amended and restated, a majority of the trustees
of FAM Trust shall execute and lodge among the records of FAM Trust a
certificate setting forth the termination of Total Return Master as a
series of FAM Trust.
8. Issuance and Valuation of Shares of Core Bond Common Stock in the
Reorganization.
Full shares of Core Bond Common Stock, and to the extent necessary,
fractional shares of Core Bond Common Stock, of an aggregate net asset value
equal to the value of the assets of each Target Fund acquired net of the
liabilities assumed, determined as hereinafter provided, shall be issued by
Core Bond, in return for such assets of each Target Fund. The net asset value
of each Target Fund and Core Bond shall be determined in accordance with the
procedures described in the prospectuses of each Target Fund and Core Bond,
respectively, in effect as of the Valuation Time. Such valuation and
determination shall be made by Bond Fund in cooperation with each Target
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Fund. Core Bond shall issue Class A, Class B, Class C and Class D shares of
Core Bond Common Stock to each Target Fund (Corporate Fund will only receive
Class A shares of Core Bond Common Stock) by the opening of a shareholder
account (one in respect of each class, as applicable) on the stock ledger
records of Core Bond registered in the name of each Target Fund. Each Target
Fund shall distribute Corresponding Shares of Core Bond to its shareholders by
indicating to Core Bond the registration of such shares in the name of such
Target Fund shareholders in the amounts due such shareholders based on their
respective holdings in such Target Fund as of the Valuation Time.
9. Payment of Expenses.
(a) The expenses of each Target Fund Acquisition that are directly
attributable to each Target Fund and the conduct of its business will be
deducted from the assets of such Target Fund as of the Valuation Time.
These expenses are expected to include the expenses incurred in
preparing, printing and mailing the proxy materials to be utilized in
connection with the meeting of the shareholders of each Target Fund to
consider the Reorganization, the expenses related to the solicitation of
proxies to be voted at that meeting and a portion of the expenses in
connection with (a) obtaining the opinion of counsel with respect to
certain tax matters, (b) the preparation of the Agreement and Plan and
(c) legal fees. The expenses of the Reorganization that are directly
attributable to Core Bond and the conduct of its business will be paid by
Fund Asset Management, L.P. ("FAM"). The expenses attributable to Core
Bond include expenses incurred in printing sufficient copies of its
Prospectus, its most recent annual and semi-annual reports to accompany
the Proxy Statement and Prospectus and its Statement of Additional
Information to accompany the statement of additional information
contained in the N-14 Registration Statement and a portion of the
expenses in connection with (a) obtaining the opinion of counsel with
respect to certain tax matters, (b) the preparation of the Agreement and
Plan and (c) legal fees. The expenses of the Reorganization, including
transfer agent and audit fees, will be borne equally by each Target Fund
and FAM. It is not anticipated that Total Return Master will incur any
significant expenses in the Reorganization.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting
therefrom, including, without limitation, consequential damages.
(c) Each party represents and warrants to the other that there is no
person or entity entitled to receive any brokers' fee or concession
payments in connection with the transactions provided for herein.
10. Covenants of Bond Fund, Global Bond, Mercury Trust, MLIM Fund, FAM Trust
and Corporate Fund.
(a) Each Target Fund agrees to call a special meeting of its
shareholders to be held as soon as is practicable after the effective
date of the N-14 Registration Statement for the purpose of considering
the relevant Target Fund Acquisition as described in this Agreement, and
it shall be a condition to the obligations of each of the parties hereto
that, (i) in the case of Mercury Trust, the approval of the holders of a
majority of Mercury Total Return Bond's outstanding shares voting
together as a single class (which for this purpose and under the 1940 Act
means the lesser of (a) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (b)
more than 50% of the outstanding shares), (ii) in the case of MLIM
Fund, the holders of a majority of the shares issued and outstanding and
entitled to vote thereon, voting together as a single class, shall have
approved this Agreement at such special meeting at or prior to the
Valuation Time, (iii) in the case of Global Bond, the holders of not less
than two-thirds of the shares issued and outstanding and entitled to vote
thereon, voting together as a single class, shall have approved this
Agreement at such special meeting at or prior to the Valuation Time and
(iv) in the case of Corporate Fund, the holders of a majority of the
shares present in person or represented at such special meeting, shall
have approved this Agreement at such special meeting at or prior to the
Valuation Time.
(b) Bond Fund, Mercury Trust, MLIM Fund, FAM Trust, Global Bond and
Corporate Fund each covenants to operate the business of Core Bond,
Mercury Total Return Bond, ML Total Return Bond, Total Return Master,
Global Bond and Corporate Fund, respectively, as presently conducted
between the date hereof and the Closing Date.
(c) Global Bond agrees that following the Closing Date it will
dissolve in accordance with the laws of the Commonwealth of Massachusetts
and any other applicable law. Corporate Fund agrees that following the
Closing Date it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law. Mercury Trust agrees that
following the Closing Date it will terminate Mercury Total
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Return Bond as a series of Mercury Trust in accordance with its
Declaration of Trust, as amended and restated, the laws of the
Commonwealth of Massachusetts and any other applicable law. MLIM Fund
agrees that following the Closing Date it will terminate ML Total Return
Bond as a series of MLIM Fund in accordance with its Articles of
Incorporation, as amended, the laws of the State of Maryland and any
other applicable law. FAM Trust agrees that following the Closing Date
it will terminate Total Return Master as a series of FAM Trust in
accordance with its Declaration of Trust, as amended and restated, the
laws of the State of Delaware and any other applicable law. Each Target
Fund agrees that it will not make any distributions of any Core Bond
shares other than the distribution by each Target Fund to its
shareholders without first paying or adequately providing for the
payment of all of the respective liabilities not assumed by Bond Fund,
if any, and on and after the Closing Date shall not conduct any business
except in connection with its dissolution.
(d) Each of Global Bond and Corporate Fund undertake that following
the Closing Date it will file an application pursuant to Section 8(f) of
the 1940 Act for an order declaring that such Fund has ceased to be a
registered investment company.
(e) Bond Fund will file the N-14 Registration Statement with the
Commission and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable. Bond
Fund, Mercury Trust, MLIM Fund, FAM Trust, Global Bond and Corporate Fund
agree to cooperate fully with each other, and each will furnish to the
other the information relating to itself to be set forth in the N-14
Registration Statement as required by the 1933 Act, the 1934 Act and the
1940 Act, and the rules and regulations thereunder and the state
securities laws.
(f) Bond Fund, Mercury Trust, on behalf of Mercury Total Return
Bond, MLIM Fund, on behalf of ML Total Return Bond, FAM Trust, on behalf
of Total Return Master, Global Bond and Corporate Fund each agrees that
by the Closing Date all Federal and other tax returns and reports
required to be filed by each such Fund on or before such date shall have
been filed and all taxes shown as due on each Fund's returns either have
been paid or adequate liability reserves have been provided for the
payment of such taxes. In connection with this covenant, the Funds agree
to cooperate with each other in filing any tax return, amended return or
claim for refund, determining a liability for taxes or a right to a
refund of taxes or participating in or conducting any audit or other
proceeding in respect of taxes. Bond Fund agrees to retain for a period
of ten (10) years following the Closing Date all returns, schedules and
work papers and all material records or other documents relating to tax
matters of each Target Fund for its taxable period first ending after the
Closing Date and for all prior taxable periods. Any information obtained
under this subsection shall be kept confidential except as otherwise may
be necessary in connection with the filing of returns or claims for
refund or in conducting an audit or other proceeding. After the Closing
Date, each Target Fund shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required
to be filed by such Target Fund with respect to its final taxable year
ending with its complete liquidation and for any prior periods or taxable
years and further shall cause such tax returns and Forms 1099 to be duly
filed with the appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses incurred by
each Target Fund in connection with the preparation and filing of said
tax returns and Forms 1099 after the Closing Date shall be borne by such
Target Fund, to the extent such expenses have been accrued by such Target
Fund in the ordinary course without regard to the Reorganization; any
excess expenses (other than for payment of taxes) shall be borne by Bond
Fund at the time such tax returns and Forms 1099 are prepared.
(g) Each Target Fund agrees to mail to its shareholders of record
entitled to vote at the meeting of shareholders at which action is to be
considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined Proxy Statement and
Prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940
Act, and the rules and regulations, respectively, thereunder.
(h) Following the consummation of the Reorganization, Bond Fund
expects to stay in existence and continue its business as a diversified,
open-end management investment company registered under the 1940 Act.
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11. Closing Date.
(a) Delivery of the assets of each Target Fund to be transferred,
together with any other Investments, and the shares of Core Bond Common
Stock to be issued, shall be made at the offices of Sidley Austin Brown &
Wood LLP, 787 Seventh Avenue, New York, New York 10019, at 10:00 a.m.
Eastern time on the next full business day following the Valuation Time,
or at such other place, time and date agreed to by Bond Fund, Mercury
Trust, MLIM Fund, FAM Trust, Global Bond and Corporate Fund, the date and
time upon which such delivery is to take place being referred to herein
as the "Closing Date." To the extent that any Investments, for any
reason, are not transferable to Core Bond on the Closing Date, each
Target Fund shall cause such Investments to be transferred to Bond Fund's
account with State Street Bank and Trust Company, on behalf of Core Bond,
at the earliest practicable date thereafter.
(b) Each Target Fund will deliver to Bond Fund, on behalf of Core
Bond, on the Closing Date confirmations or other adequate evidence as to
the tax basis of each of the Investments delivered to Bond Fund, on
behalf of Core Bond, hereunder, certified by [o] (with respect to Mercury
Total Return Bond Investments and ML Total Return Bond Investments) and
[o] (with respect to Global Bond Investments and Corporate Fund
Investments).
(c) As soon as practicable after the close of business on the
Closing Date, each Target Fund shall deliver to Bond Fund a list of the
names and addresses of all of the shareholders of record of such Target
Fund on the Closing Date and the number of shares of such Target Fund
owned by each such shareholder, certified to the best of its knowledge
and belief by the transfer agent for such Target Fund.
12. Global Bond Conditions.
The obligations of Global Bond hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of a
majority of the members of the Board of Trustees of Global Bond and by
the affirmative vote of the holders of not less than two-thirds of the
shares of beneficial interest of Global Bond issued and outstanding and
entitled to vote thereon, voting together as a single class, at a meeting
of the shareholders of Global Bond, at or prior to the Valuation Time. In
addition, this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of a majority of the
members of the Board of Directors of Bond Fund; and that Bond Fund shall
have delivered to Global Bond a copy of the resolution approving this
Agreement adopted by Bond Fund's Board of Directors, certified by the
Secretary of Bond Fund.
(b) That Bond Fund shall have furnished to Global Bond a statement
of Core Bond's assets and liabilities held, with values determined as
provided in Section 8 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on Bond Fund's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Core Bond since the date of
Bond Fund's most recent annual or semi-annual report to shareholders,
other than changes in its portfolio securities since the date of such
report or changes in the market value of its portfolio securities.
(c) That Bond Fund shall have furnished to Global Bond a certificate
signed by Bond Fund's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that, as of the
Valuation Time and as of the Closing Date all representations and
warranties of Bond Fund, on behalf of Core Bond, made in this Agreement
are true and correct in all material respects with the same effect as if
made at and as of such dates, and that Bond Fund has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
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(e) That Global Bond shall have received an opinion of Sidley Austin
Brown & Wood LLP, special Maryland counsel to Bond Fund, in form
satisfactory to Global Bond and dated as of the Closing Date, to the
effect that (i) Bond Fund is a corporation duly organized, validly
existing, and in good standing in conformity with the laws of the State
of Maryland; (ii) the Corresponding Shares of Core Bond to be delivered
to the shareholders of Global Bond as provided for by this Agreement are
duly authorized and, upon delivery, will be validly issued and
outstanding and fully paid and nonassessable by Bond Fund, and no
shareholder of Core Bond has any preemptive right to subscription or
purchase in respect thereof (pursuant to the Articles of Incorporation of
Bond Fund, as amended and supplemented, or the by-laws of Bond Fund, as
amended, or, to the best of such counsel's knowledge, otherwise); (iii)
this Agreement has been duly authorized, executed, and delivered by Bond
Fund; (iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate the Articles of
Incorporation of Bond Fund, as amended and supplemented, the by-laws of
Bond Fund, as amended, or, to the best of such counsel's knowledge,
Maryland law; (v) to the best of such counsel's knowledge, no consent,
approval, authorization or order of any Maryland state court or
governmental authority is required for the consummation by Bond Fund of
the Reorganization, except such as have been obtained under Maryland law;
and (vi) such opinion is solely for the benefit of Global Bond and its
trustees and officers. In giving the opinion set forth above, Sidley
Austin Brown & Wood LLP may state that it is relying on certain
certificates of officers of FAM, Merrill Lynch Investment Managers, L.P.
("MLIM"), Financial Data Services, Inc. ("FDS"), and Bond Fund with
regard to matters of fact and certain certificates and written statements
of government officials with respect to the organization, existence, and
good standing of Bond Fund.
(f) That Global Bond shall have received an opinion of Clifford
Chance US LLP, as counsel to Bond Fund, in form satisfactory to Global
Bond and dated the Closing Date, to the effect that (i) this Agreement
represents a valid and binding contract of Bond Fund, enforceable against
Bond Fund in accordance with its terms, except as enforceability thereof
may be limited by bankruptcy, insolvency, reorganization or other similar
laws pertaining to the enforcement of creditors' rights generally and
court decisions with respect thereto; provided, such counsel shall
express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (ii) no
consent, approval, authorization or order of any United States Federal
court or governmental authority is required for the consummation by Bond
Fund of the Reorganization, except such as have been obtained under the
1933 Act, the 1934 Act, and the 1940 Act and the published rules and
regulations of the Commission thereunder, and under applicable state
securities laws, if any; (iii) to such counsel's knowledge, the N-14
Registration Statement has become effective under the 1933 Act, no stop
order suspending the effectiveness of the N-14 Registration Statement has
been issued and no proceedings for that purpose have been instituted or
are pending or contemplated under the 1933 Act, and the N-14 Registration
Statement, as of its effective date, insofar as it relates to Bond Fund,
appears on its face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act, and the 1940
Act and the published rules and regulations of the Commission thereunder;
(iv) the descriptions in the N-14 Registration Statement of statutes,
legal and governmental proceedings and contracts and other documents,
insofar as it relates to Bond Fund, are accurate and fairly present the
information required to be shown; (v) such counsel does not know of any
statutes, legal or governmental proceedings or contracts or other
documents related to the Reorganization, insofar as it relates to Bond
Fund, of a character required to be described in the N-14 Registration
Statement which are not described therein or, if required to be filed,
filed as required; (vi) the execution and delivery of this Agreement does
not, and the consummation of the Reorganization will not, violate any
material provision of any agreement (known to such counsel) to which Bond
Fund is a party or by which Bond Fund is bound; (vii) Bond Fund, to the
knowledge of such counsel, is not required to qualify to do business as a
foreign corporation in any jurisdiction, except as may be required by
state securities laws, and except where it has so qualified or the
failure so to qualify would not have a material adverse effect on Core
Bond, or its shareholders; (viii) such counsel does not have knowledge of
any material suit, action or legal or administrative proceeding pending
or threatened against Bond Fund, the unfavorable outcome of which would
materially and adversely affect Bond Fund; (ix) all corporate actions
required to be taken by Bond Fund to authorize this Agreement and to
effect the Reorganization have been duly authorized by all necessary
corporate actions on the part of Bond Fund; and (x) such opinion is
solely for the benefit of Global Bond and its trustees and officers.
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(g) That Global Bond shall have received a letter from Clifford
Chance US LLP, as counsel to Bond Fund, in form and in substance
satisfactory to Global Bond and dated the Closing Date, to the effect
that, (i) while such counsel cannot make any representation as to the
accuracy or completeness of statements of fact in the N-14 Registration
Statement or any amendment or supplement thereto, nothing has come to
their attention that caused them to believe that, on the effective date
of the N-14 Registration Statement, (1) the N-14 Registration Statement,
insofar as it relates to Bond Fund, contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and
(2) the Proxy Statement and Prospectus included in the N-14 Registration
Statement, insofar as it relates to Bond Fund, contained any untrue
statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; (ii) such
counsel does not express any opinion or belief as to the financial
statements or other financial or statistical data contained or
incorporated by reference in the N-14 Registration Statement; and (iii)
such letter is solely for the benefit of Global Bond and its trustees and
officers. In giving the letter set forth above, Clifford Chance US LLP
may state that it is relying on certain certificates of officers of FAM,
MLIM, FDS, and Bond Fund with regard to matters of fact and the opinion
of Sidley Austin Brown & Wood LLP as to matters of Maryland law.
(h) That Global Bond shall have received an opinion of Sidley Austin
Brown & Wood LLP, as special tax counsel to Bond Fund, in form and in
substance satisfactory to Global Bond and dated the Closing Date, to the
effect that for Federal income tax purposes (i) the transfer of all of
the assets of Global Bond to Core Bond in return solely for shares of
Core Bond Common Stock as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code,
and Global Bond and Bond Fund will each be deemed to be a "party" to a
reorganization within the meaning of Section 368(b) of the Code; (ii) in
accordance with Section 361(a) of the Code, no gain or loss will be
recognized to Global Bond as a result of the asset transfer solely in
return for Core Bond shares or on the distribution of the Core Bond
shares to Global Bond shareholders under Section 361(c)(1) of the Code;
(iii) under Section 1032 of the Code, no gain or loss will be recognized
to Core Bond on the receipt of assets of Global Bond in return for Core
Bond shares; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the shareholders of Global Bond on the
receipt of Corresponding Shares of Core Bond in return for their shares
of Global Bond; (v) in accordance with Section 362(b) of the Code, the
tax basis of the Global Bond assets in the hands of Core Bond will be the
same as the tax basis of such assets in the hands of Global Bond
immediately prior to the consummation of the Reorganization; (vi) in
accordance with Section 358 of the Code, immediately after the
Reorganization, the tax basis of the Corresponding Shares of Core Bond
received by the shareholders of Global Bond in the Reorganization will be
equal to the tax basis of the shares of Global Bond surrendered in
exchange; (vii) in accordance with Section 1223 of the Code, a
shareholder's holding period for the Corresponding Shares of Core Bond
will be determined by including the period for which such shareholder
held the shares of Global Bond exchanged therefor provided, that such
Global Bond shares were held as a capital asset; (viii) in accordance
with Section 1223 of the Code, Core Bond's holding period with respect to
the Global Bond assets transferred will include the period for which such
assets were held by Global Bond; and (ix) the taxable year of Global Bond
will end on the effective date of the Reorganization, and pursuant to
Section 381(a) of the Code and regulations thereunder, Core Bond will
succeed to and take into account certain tax attributes of Global Bond,
such as earnings and profits, capital loss carryovers and method of
accounting.
(i) That all proceedings taken by Bond Fund in connection with the
Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to Global Bond.
(j) That the N-14 Registration Statement shall have been declared
effective under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Bond
Fund, be contemplated by the Commission.
(k) That Global Bond shall have received from [o] a letter dated
within three days prior to the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Closing Date, in form and substance satisfactory to Global Bond, to the
effect that (i) they are independent public accountants with respect to
Bond Fund within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder; (ii) in their opinion, the financial
statements and supplementary
I-21
information for Core Bond included or incorporated by reference in the
N-14 Registration Statement and reported on by them comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; and (iii) on
the basis of limited procedures agreed upon by Global Bond and Bond Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited interim financial statements and unaudited supplementary
information of Core Bond included in the N-14 Registration Statement, and
inquiries of certain officials of Bond Fund responsible for financial and
accounting matters, nothing came to their attention that caused them to
believe that (a) such unaudited financial statements and related
unaudited supplementary information do not comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity
with generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements,
or (c) such unaudited supplementary information is not fairly stated in
all material respects in relation to the unaudited financial statements
taken as a whole; and (iv) on the basis of limited procedures agreed upon
by Global Bond and Bond Fund and described in such letter (but not an
examination in accordance with generally accepted auditing standards),
the information relating to Core Bond appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages
derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting
records of Bond Fund or from schedules prepared by officials of Bond Fund
having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of Bond
Fund or would prohibit the Reorganization.
13. Mercury Trust Conditions.
The obligations of Mercury Trust hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of a
majority of the members of the Board of Trustees of Mercury Trust and by
the approval of the holders of a majority of Mercury Total Return Bond's
outstanding shares (which for this purpose and under the 1940 Act means
the lesser of (a) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (b) more than
50% of the outstanding shares), voting together as a single class, at a
meeting of the shareholders of Mercury Total Return Bond, at or prior to
the Valuation Time. In addition, this Agreement shall have been adopted,
and the Reorganization shall have been approved, by the affirmative vote
of a majority of the members of the Board of Directors of Bond Fund; and
that Bond Fund shall have delivered to Mercury Trust a copy of the
resolution approving this Agreement adopted by Bond Fund's Board of
Directors, certified by the Secretary of Bond Fund.
(b) That Bond Fund shall have furnished to Mercury Trust a statement
of Core Bond's assets and liabilities held, with values determined as
provided in Section 8 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on Bond Fund's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Core Bond since the date of
Bond Fund's most recent annual or semi-annual report to shareholders,
other than changes in its portfolio securities since the date of such
report or changes in the market value of its portfolio securities.
(c) That Bond Fund shall have furnished to Mercury Trust a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that, as of the
Valuation Time and as of the Closing Date all representations and
warranties of Bond Fund, on behalf of Core Bond, made in this Agreement
are true and correct in all material respects with the same effect as if
I-22
made at and as of such dates, and that Bond Fund has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Mercury Trust shall have received an opinion of Sidley
Austin Brown & Wood LLP, as special Maryland counsel to Bond Fund, in
form and substance satisfactory to Mercury Trust and dated as of the
Closing Date, with respect to matters specified in Section 12(e) of this
Agreement.
(f) That Mercury Trust shall have received the opinion of Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to Mercury Trust and dated the Closing Date, with respect to
matters specified in Section 12(f) of this Agreement.
(g) That Mercury Trust shall have received a letter from Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to Mercury Trust and dated the Closing Date, with respect to
matters specified in Section 12(g) of this Agreement.
(h) That Mercury Trust shall have received an opinion of Sidley
Austin Brown & Wood LLP, as special tax counsel to Bond Fund, in form and
in substance satisfactory to Mercury Trust and dated the Closing Date,
with respect to matters specified in Section 12(h) of this Agreement.
(i) That all proceedings taken by Bond Fund in connection with the
Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to Mercury Trust.
(j) That the N-14 Registration Statement shall have been declared
effective under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Bond
Fund, be contemplated by the Commission.
(k) That Mercury Trust shall have received from [o] a letter dated
within three days prior to the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Closing Date, in form and substance satisfactory to Mercury Trust, with
respect to matters specified in Section 12(k) of this Agreement.
(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of Bond
Fund or would prohibit the Reorganization.
14. MLIM Fund Conditions.
The obligations of MLIM Fund hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of a
majority of the members of the Board of Directors of MLIM Fund and by the
affirmative vote of the holders of a majority of the shares of common
stock of ML Total Return Bond issued and outstanding and entitled to vote
thereon, voting together as a single class, at a meeting of the
shareholders of ML Total Return Bond, at or prior to the Valuation Time.
In addition, this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of a
majority of the members of the Board of Directors of Bond Fund; and that
Bond Fund shall have delivered to MLIM Fund a copy of the resolution
approving this Agreement adopted by Bond Fund's Board of Directors,
certified by the Secretary of Bond Fund.
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(b) That Bond Fund shall have furnished to MLIM Fund a statement of
Core Bond's assets and liabilities held, with values determined as
provided in Section 8 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on Bond Fund's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Core Bond since the date of
Bond Fund's most recent annual or semi-annual report to shareholders,
other than changes in its portfolio securities since the date of such
report or changes in the market value of its portfolio securities.
(c) That Bond Fund shall have furnished to MLIM Fund a certificate
signed by Bond Fund's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that, as of the
Valuation Time and as of the Closing Date all representations and
warranties of Bond Fund, on behalf of Core Bond, made in this Agreement
are true and correct in all material respects with the same effect as if
made at and as of such dates, and that Bond Fund has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That MLIM Fund shall have received an opinion of Sidley Austin
Brown & Wood LLP, as special Maryland counsel to Bond Fund, in form and
substance satisfactory to MLIM Fund and dated as of the Closing Date,
with respect to matters specified in Section 12(e) of this Agreement.
(f) That MLIM Fund shall have received the opinion of Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to MLIM Fund and dated the Closing Date, with respect to
matters specified in Section 12(f) of this Agreement.
(g) That MLIM Fund shall have received a letter from Clifford Chance
US LLP, as counsel to Bond Fund, in form and substance satisfactory to
MLIM Fund and dated the Closing Date, with respect to matters specified
in Section 12(g) of this Agreement.
(h) That MLIM Fund shall have received an opinion of Sidley Austin
Brown & Wood LLP, as special tax counsel to Bond Fund in form and
substance satisfactory to MLIM Fund and dated as of the Closing Date,
with respect to matters specified in Section 12(h) of this Agreement.
(i) That all proceedings taken by Bond Fund in connection with the
Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to MLIM Fund.
(j) That the N-14 Registration Statement shall have been declared
effective under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Bond
Fund, be contemplated by the Commission.
(k) That MLIM Fund shall have received from [o] a letter dated
within three days prior to the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Closing Date, in form and substance satisfactory to MLIM Fund, with
respect to matters specified in Section 12(k) of this Agreement.
(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of Bond
Fund or would prohibit the Reorganization.
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15. FAM Trust Conditions.
The obligations of FAM Trust hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of
two-thirds of the members of the Board of Trustees of FAM Trust. In
addition, this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of a majority of the
members of the Board of Directors of Bond Fund; and that Bond Fund shall
have delivered to FAM Trust a copy of the resolution approving this
Agreement adopted by Bond Fund's Board of Directors, certified by the
Secretary of Bond Fund.
(b) That Bond Fund shall have furnished to FAM Trust a statement of
Core Bond's assets and liabilities, with values determined as provided in
Section 8 of this Agreement, together with a schedule of its investments,
all as of the Valuation Time, certified on Bond Fund's behalf by its
President (or any Vice President) and its Treasurer, and a certificate
signed by Bond Fund's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Core Bond since the date of
Bond Fund's most recent annual or semi-annual report to shareholders,
other than changes in its portfolio securities since the date of such
report or changes in the market value of its portfolio securities.
(c) That Bond Fund shall have furnished to FAM Trust a certificate
signed by Bond Fund's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that, as of the
Valuation Time and as of the Closing Date all representations and
warranties of Bond Fund, on behalf of Core Bond, made in this Agreement
are true and correct in all material respects with the same effect as if
made at and as of such dates, and that Bond Fund has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That FAM Trust shall have received an opinion of Sidley Austin
Brown & Wood LLP, as special Maryland counsel to Bond Fund, in form and
substance satisfactory to FAM Trust and dated as of the Closing Date,
with respect to matters specified in Section 12(e) of this Agreement.
(f) That FAM Trust shall have received the opinion of Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to FAM Trust and dated the Closing Date, with respect to
matters specified in Section 12(f) of this Agreement.
(g) That FAM Trust shall have received a letter from Clifford Chance
US LLP, as counsel to Bond Fund, in form and substance satisfactory to
FAM Trust and dated the Closing Date, with respect to matters specified
in Section 12(g) of this Agreement.
(h) That all proceedings taken by Bond Fund in connection with the
Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to FAM Trust.
(i) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Bond Fund, be contemplated
by the Commission.
(j) That FAM Trust shall have received from [o] a letter dated
within three days prior to the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Closing Date, in form and substance satisfactory to FAM Trust, with
respect to matters specified in Section 12(k) of this Agreement.
I-25
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of Bond
Fund or would prohibit the Reorganization.
16. Corporate Fund Conditions.
The obligations of Corporate Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of a
majority of the members of the Board of Directors of Corporate Fund and
by the affirmative vote of the holders of a majority of the shares of
common stock of Corporate Fund issued and outstanding and entitled to
vote thereon, at a meeting of the shareholders of Corporate Fund, at or
prior to the Valuation Time. In addition, this Agreement shall have been
adopted, and the Reorganization shall have been approved, by the
affirmative vote of a majority of the members of the Board of Directors
of Bond Fund; and that Bond Fund shall have delivered to Corporate Fund a
copy of the resolution approving this Agreement adopted by Bond Fund's
Board of Directors, certified by the Secretary of Bond Fund.
(b) That Bond Fund shall have furnished to Corporate Fund a
statement of Core Bond's assets and liabilities, with values determined
as provided in Section 8 of this Agreement, together with a schedule of
its investments, all as of the Valuation Time, certified on Bond Fund's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Core Bond since the date of
Bond Fund's most recent annual or semi-annual report to shareholders,
other than changes in its portfolio securities since the date of such
report or changes in the market value of its portfolio securities.
(c) That Bond Fund shall have furnished to Corporate Fund a
certificate signed by Bond Fund's President (or any Vice President) and
its Treasurer, dated as of the Closing Date, certifying that, as of the
Valuation Time and as of the Closing Date all representations and
warranties of Bond Fund, on behalf of Core Bond, made in this Agreement
are true and correct in all material respects with the same effect as if
made at and as of such dates, and that Bond Fund has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Corporate Fund shall have received an opinion of Sidley
Austin Brown & Wood LLP, as special Maryland counsel to Bond Fund, in
form and substance satisfactory to Corporate Fund and dated as of the
Closing Date, with respect to matters specified in Section 12(e) of this
Agreement.
(f) That Corporate Fund shall have received the opinion of Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to Corporate Fund and dated the Closing Date, with respect
to matters specified in Section 12(f) of this Agreement.
(g) That Corporate Fund shall have received a letter from Clifford
Chance US LLP, as counsel to Bond Fund, in form and substance
satisfactory to Corporate Fund and dated the Closing Date, with respect
to matters specified in Section 12(g) of this Agreement.
(h) That Corporate Fund shall have received an opinion of Sidley
Austin Brown & Wood LLP, as special tax counsel to Bond Fund in form and
substance satisfactory to Corporate Fund and dated as of the Closing
Date, with respect to matters specified in Section 12(h) of this
Agreement.
I-26
(i) That all proceedings taken by Bond Fund in connection with the
Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to Corporate Fund.
(j) That the N-14 Registration Statement shall have been declared
effective under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of Bond
Fund, be contemplated by the Commission.
(k) That Corporate Fund shall have received from [o] a letter dated
within three days prior to the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Closing Date, in form and substance satisfactory to Corporate Fund, with
respect to matters specified in Section 12(k) of this Agreement.
(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of Bond
Fund or would prohibit the Reorganization.
17. Bond Fund Conditions.
The obligations of Bond Fund hereunder with respect to each Target Fund
shall be subject to the following conditions, as applicable to each Target
Fund:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by (i) the affirmative vote of a
majority of the Board of Directors/Trustees of Global Bond, Mercury
Trust, MLIM Fund, Corporate Fund and Bond Fund and by the affirmative
vote of two-thirds of the members of the Board of Trustees of FAM Trust,
(ii) the approval of the holders of a majority of Mercury Total Return
Bond's outstanding shares (which for this purpose and under the 1940 Act
means the lesser of (a) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (b) more
than 50% of the outstanding shares) voting together as a single class at
a special meeting of shareholders called for the purpose of considering
the Reorganization, at or prior to Valuation Time, (iii) affirmative vote
of the holders of a majority of the shares of each of MLIM Fund and
Corporate Fund issued and outstanding and entitled to vote thereon,
voting together as a single class at a special meeting of shareholders
called for the purpose of considering the Reorganization of each of MLIM
Fund and Corporate Fund, at or prior to the Valuation Time and the
affirmative vote of the holders of not less than two-thirds of the shares
of Global Bond issued and outstanding and entitled to vote thereon,
voting together as a single class at a special meeting of shareholders of
Global Bond called for the purpose of considering the Reorganization, at
or prior to the Valuation Time. In addition, each Target Fund and FAM
Trust shall have delivered to Bond Fund a copy of the resolution
approving this Agreement adopted by each Target Fund's Board of
Directors/Trustees and the Board of Trustees of FAM Trust, respectively,
each certified by its Secretary, and a certificate setting forth the vote
of such Target Fund's shareholders obtained, certified by the Secretary
of such Target Fund.
(b) That each Target Fund shall have furnished to Bond Fund a
statement of such Target Fund's assets and liabilities with values
determined as provided in Section 8 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and
tax costs, all as of the Valuation Time, certified on such Target Fund's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by such Target Fund's President (or any Vice
President) and its Treasurer, dated as of the Closing Date, certifying
that as of the Valuation Time and as of the Closing Date there has been
no material adverse change in the financial position of such Target Fund
since the date of such Target Fund's most recent annual or semi-annual
report to shareholders, other than changes in the Investments since the
date of such report or changes in the market value of the Investments.
(c) That such Target Fund and FAM Trust shall have furnished to Bond
Fund a certificate signed by each Target Fund's and, if applicable, FAM
Trust's President (or any Vice President) and its Treasurer, dated the
Closing Date, certifying that as of the Valuation Time and as of the
Closing Date all representations and warranties of such Target Fund and,
if applicable, FAM Trust made in this Agreement are true and correct in
all material respects with the same effect as if made at and as of such
dates and such Target Fund and, if applicable, FAM Trust has complied
with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied at or prior to each of such dates.
I-27
(d) That Global Bond and Corporate Fund, as applicable, shall have
delivered to Bond Fund a letter from [o], dated the Closing Date, stating
that such firm has performed a limited review of the Federal, state and
local income tax returns of Global Bond and Corporate Fund, as
applicable, for the period ended December 31, 2001 (which returns
originally were prepared and filed by the applicable Fund), and that
based on such limited review, nothing came to their attention which
caused them to believe that such returns did not properly reflect, in all
material respects, the Federal, state and local income taxes of the
applicable Fund for the period covered thereby; and that for the period
from January 1, 2002, to and including the Closing Date and for any
taxable year of the applicable Fund ending upon such Fund's liquidation,
such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that either
such amount has been paid or reserves have been established for payment
of such taxes, this review to be based on unaudited financial data; and
that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside
for payment of such taxes were not adequate in all material respects for
the satisfaction of Federal, state and local taxes for the period from
January 1, 2002, to and including the Closing Date and for any taxable
year of such Funds ending upon such Fund's liquidation or that either
Fund would not continue to qualify as a RIC for Federal income tax
purposes for the tax years in question.
(e) That Mercury Total Return Bond and ML Total Return Bond, as
applicable, shall have delivered to Bond Fund a letter from [o], dated
the Closing Date, stating that such firm has performed a limited review
of the Federal, state and local income tax returns of Mercury Total
Return Bond and ML Total Return Bond, as applicable, for the period ended
June 30, 2002 (which returns originally were prepared and filed by the
applicable Trust or Fund), and that based on such limited review, nothing
came to their attention which caused them to believe that such returns
did not properly reflect, in all material respects, the Federal, state
and local income taxes of the applicable Fund for the period covered
thereby; and that for the period from July 1, 2002, to and including the
Closing Date and for any taxable year of Mercury Total Return Bond and ML
Total Return Bond ending upon the liquidation of such Fund, such firm has
performed a limited review to ascertain the amount of applicable Federal,
state and local taxes, and has determined that either such amount has
been paid or reserves have been established for payment of such taxes,
this review to be based on unaudited financial data; and that based on
such limited review, nothing has come to their attention which caused
them to believe that the taxes paid or reserves set aside for payment of
such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from July
1, 2002, to and including the Closing Date and for any taxable year of
such Fund ending upon such Fund's liquidation or that either Fund would
not continue to qualify as a RIC for Federal income tax purposes for the
tax years in question.
(f) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(g) That Bond Fund shall have received an opinion of Sidley Austin
Brown & Wood LLP, as special Maryland counsel to MLIM Fund and Corporate
Fund, in form and substance satisfactory to Bond Fund and dated as of the
Closing Date, with respect to matters specified in Section 12(e) of this
Agreement.
(h) That Bond Fund shall have received the opinions of Sidley Austin
Brown & Wood LLP, as counsel to Global Bond, and Clifford Chance US LLP,
as counsel to Mercury Trust, MLIM Fund, FAM Trust and Corporate Fund, in
form and substance satisfactory to Bond Fund and dated the Closing Date,
with respect to matters specified in Section 12(f) of this Agreement.
(i) That Bond Fund shall have received letters from Sidley Austin
Brown & Wood LLP, as counsel to Global Bond, and Clifford Chance US LLP,
as counsel to Mercury Trust, MLIM Fund, FAM Trust and Corporate Fund, in
form and substance satisfactory to Bond Fund and dated the Closing Date,
with respect to matters specified in Section 12(g) of this Agreement
(j) That, if applicable, Bond Fund shall have received an opinion of
Bingham McCutchen LLP, as special Massachusetts counsel to Global Bond
and Mercury Trust, in form satisfactory to Bond Fund and dated the
Closing Date, to the effect that (i) each of Global Bond and Mercury
Trust is a trust with transferable shares of beneficial interest, validly
existing in conformity
I-28
with the laws of the Commonwealth of Massachusetts and duly authorized to
transact business in the Commonwealth of Massachusetts; (ii) this
Agreement, to the extent Massachusetts law applies, has been duly
authorized and executed by each of Global Bond and Mercury Trust; (iii)
to the extent Massachusetts law applies, the execution of this Agreement
and the consummation of the transactions contemplated hereby have been
duly authorized by each of Global Bond and Mercury Trust; (iv) the
execution and delivery of this Agreement by each of Global Bond and
Mercury Trust and the consummation of the transactions contemplated
hereby in accordance with the terms of this Agreement do not violate the
applicable Declaration of Trust, as amended, or by-laws of Global Bond
and Mercury Trust, as amended, or, to the best of such counsel's
knowledge, Massachusetts law; (v) to the best of such counsel's
knowledge, no consent, approval, authorization or order of any
Massachusetts state court or governmental authority is required under
Massachusetts law for the consummation by each of Global Bond and Mercury
Trust of the Reorganization in accordance with the terms of this
Agreement, except (a) a filing with the Secretary of the Commonwealth of
Massachusetts to terminate Mercury Total Return Bond as a series of
Mercury Trust, (b) a filing with the Secretary of the Commonwealth of
Massachusetts to terminate Global Bond as a Massachusetts business trust,
and (c) such as may be required under Massachusetts state securities laws
about which such counsel need not express an opinion. Such opinion is
solely for the benefit of Bond Fund and its Directors and officers. In
giving the opinion set forth above, Bingham McCutchen LLP may state that
it is relying on certificates of officers of FAM, MLIM, FDS and of Global
Bond and Mercury Trust with regard to matters of fact and certain
certificates and written statements of government officials with respect
to the good standing of each of Global Bond and Mercury Trust.
(k) That, if applicable, Bond Fund shall have received an opinion of
Richards, Layton & Finger, P.A., as special Delaware counsel to FAM
Trust, in form and substance satisfactory to Bond Fund and dated the
Closing Date, to the effect that (i) FAM Trust is a statutory trust duly
formed, validly existing and in good standing in conformity with the laws
of the State of Delaware; (ii) this Agreement has been duly authorized,
executed and delivered by FAM Trust; (iii) the execution and delivery of
this Agreement does not, and the consummation of the Reorganization will
not, violate any material provisions of Delaware law or the Declaration
of Trust, as amended and restated, or the by-laws, as amended; (iv) FAM
Trust has the power to sell, assign, transfer and deliver the assets
transferred by it hereunder; (v) to the best of such counsel's knowledge,
no consent, approval, authorization or order of any Delaware state court
or governmental authority is required for the consummation by FAM Trust
of the Reorganization, except such as have been obtained from the Board
of Trustees of FAM Trust and such as may be required under Delaware state
securities laws; (vi) all necessary actions required to be taken by FAM
Trust to authorize this Agreement and to effect the Reorganization have
been duly authorized by all necessary actions on the part of FAM Trust,
and (vii) such opinion is solely for the benefit of Bond Fund and its
Directors and officers. In giving the opinion set forth above, Richards,
Layton & Finger, P.A. may state that it is relying on certificates of the
officers of FAM Trust with regard to matters of fact and certain
certificates and written statements of governmental officials with
respect to the good standing of FAM Trust.
(l) That Bond Fund shall have received an opinion of Sidley Austin
Brown & Wood LLP, as tax counsel to each Target Fund, with respect to the
matters specified in Section 12(h) of this Agreement.
(m) That Bond Fund, as applicable, shall have received from [o] a
letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior
to the Closing Date, in form and substance satisfactory to Bond Fund, to
the effect that (i) they are independent public accountants with respect
to each of Global Bond and Corporate Fund within the meaning of the 1933
Act and the applicable published rules and regulations thereunder; (ii)
in their opinion, the financial statements and supplementary information
of Global Bond and Corporate Fund, as applicable, included or
incorporated by reference in the N-14 Registration Statement and reported
on by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed
upon by Global Bond and Corporate Fund, as applicable, and Bond Fund and
described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited interim financial statements and unaudited supplementary
information of the applicable Fund included in the N-14 Registration
Statement, and inquiries of certain officials of the applicable Fund
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act and
I-29
the published rules and regulations thereunder, (b) such unaudited
financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements,
or (c) such unaudited supplementary information is not fairly stated in
all material respects in relation to the unaudited financial statements
taken as a whole; and (iv) on the basis of limited procedures agreed upon
by Bond Fund and the applicable Fund and described in such letter (but
not an examination in accordance with generally accepted auditing
standards), the information relating to the applicable Fund appearing in
the N-14 Registration Statement, which information is expressed in
dollars (or percentages derived from such dollars) (with the exception of
performance comparisons, if any), if any, has been obtained from the
accounting records of the applicable Fund or from schedules prepared by
officials of the applicable Fund having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(n) That Bond Fund, as applicable, shall have received from [o] a
letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior
to the Closing Date, in form and substance satisfactory to Bond Fund, to
the effect that (i) they are independent public accountants with respect
to Mercury Total Return Bond and ML Total Return Bond, as applicable,
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements
and supplementary information of Mercury Total Return Bond and ML Total
Return Bond, as applicable, included or incorporated by reference in the
N-14 Registration Statement and reported on by them comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by Mercury Total Return Bond and
ML Total Return Bond and Bond Fund, as applicable, and described in such
letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of the
applicable Fund included in the N-14 Registration Statement, and
inquiries of certain officials of the applicable Fund responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that (a) such unaudited financial statements and
related unaudited supplementary information do not comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity
with generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements,
or (c) such unaudited supplementary information is not fairly stated in
all material respects in relation to the unaudited financial statements
taken as a whole; and (iv) on the basis of limited procedures agreed upon
by Bond Fund and Mercury Total Return Bond and ML Total Return Bond, as
applicable, and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the information
relating to the applicable Fund appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages
derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting
records of the applicable Fund or from schedules prepared by officials of
the applicable Fund having responsibility for financial and reporting
matters and such information is in agreement with such records, schedules
or computations made therefrom.
(o) That the assets to be transferred to Bond Fund shall not include
any assets or liabilities that Bond Fund, by reason of charter
limitations or otherwise, may not properly acquire or assume.
(p) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of each Target Fund or FAM
Trust, be contemplated by the Commission.
(q) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of each
Target Fund or would prohibit the Reorganization.
I-30
(r) That all proceedings taken by each Target Fund and FAM Trust in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Bond Fund.
(s) That prior to the Closing Date, each Target Fund shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to such Target Fund's
shareholders all of the investment company taxable income of each Target
Fund to and including the Closing Date, if any (computed without regard
to any deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Closing Date.
18. Termination, Postponement, Amendment and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and a Target Fund Acquisition
and/or the Reorganization abandoned at any time (whether before or after
adoption thereof by the shareholders of each Target Fund) prior to the
Closing Date, or the Closing Date may be postponed, (i) by mutual consent
of the Boards of Directors of Bond Fund, MLIM Fund and Corporate Fund and
the Boards of Trustees of Global Bond, Mercury Trust and FAM Trust; (ii)
as to Global Bond, by the Board of Trustees of Global Bond if any
condition of Global Bond's obligations set forth in Section 12 of this
Agreement has not been fulfilled or waived by such Board; (iii) as to
Mercury Trust, by the Board of Trustees of Mercury Trust if any condition
of Mercury Trust's obligations set forth in Section 13 of this Agreement
has not been fulfilled or waived by such Board; (iv) as to MLIM Fund, by
the Board of Directors of MLIM Fund if any condition of MLIM Fund's
obligations set forth in Section 14 of this Agreement has not been
fulfilled or waived by such Board; (v) as to FAM Trust, by the Board of
Trustees of FAM Trust if any condition of FAM Trust's obligations set
forth in Section 15 of this Agreement has not been fulfilled or waived by
such Board; (vi) as to Corporate Fund, by the Board of Directors of
Corporate Fund if any condition of Corporate Fund's obligations set forth
in Section 16 of this Agreement has not been fulfilled or waived by such
Board; or (vii) as to Bond Fund, by the Board of Directors of Bond Fund
if any condition of Bond Fund's obligations with respect to such Target
Fund or Funds set forth in Section 17 of this Agreement has not been
fulfilled or waived by such Board.
(b) If the Reorganization contemplated by this Agreement has not
been consummated by September 30, 2003, this Agreement with respect to
the Reorganization of such Target Fund or Funds automatically shall
terminate on that date, unless a later date is mutually agreed to by the
Board of Directors of Bond Fund and the Board of Directors/Trustees of
such Target Fund or Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect,
and there shall not be any liability on the part of Bond Fund or such
Target Fund or Funds or persons who are their directors, trustees,
officers, agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Boards of Directors of
Bond Fund, MLIM Fund and Corporate Fund and the Boards of Trustees of
Global Bond, Mercury Trust and FAM Trust (whichever is entitled to the
benefit thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a material adverse
effect on the benefits intended under this Agreement to the respective
shareholders on behalf of which such action is taken. In addition, the
Boards of Directors of Bond Fund, MLIM Fund and Corporate Fund and the
Boards of Trustees of Mercury Trust and FAM Trust have delegated to FAM
and the Board of Trustees of Global Bond has delegated to MLIM the
ability to make non-material changes to the transaction if MLIM or FAM,
as the case may be, deems it to be in the best interests of the affected
Fund to do so.
(e) The respective representations and warranties contained in
Sections 1, 2, 3, 4, 5 and 6 of this Agreement shall expire with, and be
terminated by, the consummation of the Reorganization, and neither Bond
Fund, Global Bond, Mercury Trust, MLIM Fund, FAM Trust and Corporate Fund
nor any of their officers, directors or trustees, agents or shareholders
shall have any liability with respect to such representations or
warranties after the Closing Date. This provision shall not protect any
officer, director,
I-31
agent or shareholder of Bond Fund, Global Bond, Mercury Trust, MLIM Fund,
FAM Trust and Corporate Fund against any liability to the entity for
which that officer, director or trustee, agent or stockholder so acts or
to its shareholders, to which that officer, director or trustee, agent or
stockholder otherwise would be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties in the
conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall impose any
terms or conditions that are determined by action of the Boards of
Directors of Bond Fund, MLIM Fund and Corporate Fund and the Boards of
Trustees of Global Bond, Mercury Trust and FAM Trust to be acceptable,
such terms and conditions shall be binding as if a part of this Agreement
without further vote or approval of the shareholders of each Target Fund
unless such terms and conditions shall result in a change in the method
of computing the number of shares of Core Bond Common Stock to be issued
to each Target Fund in which event, unless such terms and conditions
shall have been included in the proxy solicitation materials furnished to
the shareholders of each Target Fund prior to the meeting at which the
Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless each Target Fund promptly shall
call a special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
(g) Except as set forth in (d) above, prior to shareholder approval
of the applicable Target Fund Acquisition, this Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
covenants hereof may be waived, only by a written instrument executed by
the applicable parties or, in the case of a waiver, by the party waiving
compliance.
19. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with
the issuance of any shares to any person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), Bond Fund will cause to be
affixed upon the certificate(s) issued to such person (if any) a legend
as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT TO MERRILL LYNCH BOND FUND, INC. (OR ITS
STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (II) IN THE OPINION
OF COUNSEL REASONABLY SATISFACTORY TO MERRILL LYNCH BOND FUND,
INC., SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Bond
Fund's transfer agent with respect to such shares. Each Target Fund will
provide Bond Fund on the Closing Date with the name of any Target Fund
shareholder who is to the knowledge of such Target Fund an affiliate of
such Target Fund on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each
of the parties, notwithstanding any investigation made by them or on
their behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be made by hand
delivery, prepaid certified mail or overnight service, addressed to Bond
Fund, Global Bond, Mercury Trust, MLIM Fund, FAM Trust or Corporate Fund,
in each case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
Attn: Terry K. Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization,
may not be changed except by a letter of agreement signed by each party
and shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in
said state.
(e) Copies of the Articles of Incorporation, as amended and
supplemented, of Bond Fund, Corporate Fund and MLIM Fund are each on file
with the SDAT, and notice is hereby given that these
I-32
instruments are executed on behalf of the Directors of each of Bond Fund,
Corporate Fund and MLIM Fund, respectively.
(f) Copies of the Declarations of Trust, as amended and
supplemented, of Global Bond and Mercury Trust are on file with the
Massachusetts Secretary of State, and notice is hereby given that these
instruments are executed on behalf of the trustees of each of Global Bond
and Mercury Trust, respectively. Bond Fund acknowledges that the
obligations arising out of these instruments are not binding upon Global
Bond's and Mercury Trust's trustees, officers, employees, agent or
shareholders individually, but are binding solely upon the assets of and
property of Global Bond and Mercury Trust, respectively. Bond Fund
further acknowledges that the assets and liabilities of each series of
Mercury Trust are separate and distinct and that the obligations of or
arising out of Mercury Trust's Declaration of Trust, as amended and
restated, are binding solely upon the assets or property of Mercury Total
Return Bond, on whose behalf Mercury Trust has executed this Agreement.
(g) Copies of the Certificate of Trust of FAM Trust are on file with
the Secretary of State of the State of Delaware, and notice is hereby
given that this instrument is executed on behalf of the trustees of FAM
Trust. No trustee, officer, employee or agent of FAM Trust when acting in
such capacity shall be subject to any personal liability whatsoever, in
his or her individual capacity, to any person in connection with the
affairs of FAM Trust; and all such persons shall look solely to FAM
Trust's property for satisfaction of claims of any nature against a
trustee, officer, employee or agent of FAM Trust in connection with the
affairs of FAM Trust.
I-33
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH INVESTMENT MANAGERS
FUNDS, INC.
on behalf of
MERRILL LYNCH TOTAL RETURN BOND FUND
By:
------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(PHILLIP S. GILLESPIE, SECRETARY)
MERCURY FUNDS II
on behalf of
MERCURY TOTAL RETURN BOND FUND
By:
-------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(PHILLIP S. GILLESPIE, SECRETARY)
FUND ASSET MANAGEMENT MASTER TRUST
on behalf of
TOTAL RETURN BOND MASTER PORTFOLIO
By:
-------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(PHILLIP S. GILLESPIE, SECRETARY)
I-34
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT
By:
------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(DAVID CLAYTON, SECRETARY)
THE CORPORATE FUND ACCUMULATION
PROGRAM, INC.
By:
------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(DAVID CLAYTON, SECRETARY)
MERRILL LYNCH BOND FUND, INC.
By:
------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
- -------------------------------------
(PHILLIP S. GILLESPIE, SECRETARY)
I-35
EXHIBIT II
DESCRIPTION OF BOND RATINGS
Ratings of Bonds
Description of Bond Ratings of Moody's:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its rating category.
Description of Bond Ratings of Standard & Poor's:
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
II-1
CCC indicates the lowest degree of speculation and CC the highest degree of
CC speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is being
paid.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Bond Ratings of Fitch Ratings ("Fitch")
AAA Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F1+.
A Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to have
an adverse impact on these bonds and, therefore, impair timely payment.
The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics, which, if not
remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest or
principal.
DDD Bonds rated DDD, DD and D are in actual default of interest and/or
DD principal payments. Such bonds are extremely speculative and should be
D valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category covering 12-36 months.
II-2
EXHIBIT III
SECURITY OWNERSHIP
To the knowledge of Mercury Trust, the following persons or entities
owned beneficially or of record 5% or more of any class of Mercury Total
Return Bond's outstanding shares as of the Record Date.
Mercury Total Return Bond
Percentage of Class Owned** Owned
---------------------------------------------------- ---------------------------
Shareholder Name and Address* Class I Class B Class C Class A Beneficially Of Record
---------- ---------- ---------- ---------- -------------- -----------
- ----------
*Unless otherwise indicated, the address for each shareholder listed above is:
c/o Mercury Total Return Bond Fund, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
** Following the Reorganization, no person will own beneficially or of record
5% or more of any class of the Combined Fund.
To the knowledge of MLIM Fund, the following persons or entities owned
beneficially or of record 5% or more of any class of ML Total Return Bond's
shares as of the Record Date:
ML Total Return Bond
Percentage of Class Owned** Owned
---------------------------------------------------- ---------------------------
Shareholder Name and Address* Class A Class B Class C Class D Beneficially Of Record
---------- ---------- ---------- ---------- -------------- -----------
- ----------
*Unless otherwise indicated, the address for each shareholder listed above is:
c/o Merrill Lynch Total Return Bond Fund, 800 Scudders Mill Road, Plainsboro,
New Jersey 08536.
** Following the Reorganization, no person will own beneficially or of record
5% or more of any class of the Combined Fund.
To the knowledge of Global Bond, the following persons or entities owned
beneficially or of record 5% or more of any class of Global Bond's shares as
of the Record Date:
Global Bond
Percentage of Class Owned** Owned
---------------------------------------------------- ---------------------------
Shareholder Name and Address* Class A Class B Class C Class D Beneficially Of Record
---------- ---------- ---------- ---------- -------------- -----------
III-1
- ---------------------
- ----------
*Unless otherwise indicated, the address for each shareholder listed above is:
c/o Global Bond Fund for Investment and Retirement, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. ** Following the Reorganization, no person will
own beneficially or of record 5% or more of any class of the Combined Fund.
To the knowledge of Corporate Fund, the following persons or entities
owned beneficially or of record 5% or more of Corporate Fund's shares as of
the Record Date.
Corporate Fund
Percentage Owned** Owned
--------------------------------------------- -----------------------------
Shareholder Name and Address* Beneficially Of Record
--------------- -------------
- ----------
*Unless otherwise indicated, the address for each shareholder listed above is:
c/o The Corporate Fund Accumulation Program, Inc., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
** Following the Reorganization, no person will own beneficially or of record
5% or more of any class of the Combined Fund.
To the knowledge of Bond Fund, the following persons or entities owned
beneficially or of record 5% or more of any class of Core Bond's shares as of
the Record Date:
Core Bond
Percentage of Class Owned** Owned
---------------------------------------------------- ----------------------------
Shareholder Name and Address* Class A Class B Class C Class D Beneficially Of Record
------------ ----------- ----------- ---------- -------------- ------------
- ----------
*Unless otherwise indicated, the address for each shareholder listed above is:
c/o Merrill Lynch Bond Fund, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
** Following the Reorganization, no person will own beneficially or of record
5% or more of any class of the Combined Fund.
III-2
The information in this statement of additional information is not complete and
may be changed. We may use this statement of additional information to sell
securities until the registration statement containing this statement of
additional information, which has been filed with the Securities and Exchange
Commission, is effective. This statement of additional information is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 22, 2002
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT,
MERCURY TOTAL RETURN BOND FUND, a series of
MERCURY FUNDS II,
MERRILL LYNCH TOTAL RETURN BOND FUND, a series of
MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.
THE CORPORATE FUND ACCUMULATION PROGRAM, INC.
CORE BOND PORTFOLIO, a series of MERRILL LYNCH BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Joint Proxy Statement and Prospectus of
Merrill Lynch Global Bond Fund for Investment and Retirement ("Global Bond"),
Mercury Total Return Bond Fund ("Mercury Total Return Bond"), a series of
Mercury Funds II ("Mercury Trust"), Merrill Lynch Total Return Bond Fund ("ML
Total Return Bond"), a series of Merrill Lynch Investment Managers Funds, Inc.
("MLIM Fund"), The Corporate Fund Accumulation Program, Inc. ("Corporate
Fund") and Core Bond Portfolio ("Core Bond"), a series of Merrill Lynch Bond
Fund, Inc. ("Bond Fund"), dated [?], 2002 (the "Proxy Statement and
Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling Bond Fund
at 1-800-______-_______, ext. ____, or by writing to Bond Fund at the above
address. This Statement of Additional Information has been incorporated by
reference into the Proxy Statement and Prospectus. Global Bond, Mercury Total
Return Bond, ML Total Return Bond and Corporate Fund are each referred to
herein as a "Target Fund" and collectively as the "Target Funds," as the
context requires.
Further information about Core Bond is contained in the Statement of
Additional Information of Bond Fund, dated January 24, 2002 (the "Bond Fund
Statement"), which is incorporated by reference into and accompanies this
Statement of Additional Information.
The Commission maintains a web site (http://www.sec.gov) that contains
the prospectus relating to each Target Fund, the statement of additional
information relating to each Target Fund, the prospectus of Bond Fund, the
Bond Fund Statement, other material incorporated by reference and other
information regarding Bond Fund and each Target Fund.
The date of this Statement of Additional Information is [o], 2002
SAI-1
TABLE OF CONTENTS
General Information......................................................SAI-2
Financial Statements.....................................................SAI-2
GENERAL INFORMATION
The shareholders of each Target Fund are being asked to approve an
Agreement and Plan of Reorganization whereby Total Return Master will transfer
all of its assets and liabilities on a pro rata basis to Mercury Total Return
Bond and ML Total Return Bond in return for all of their beneficial interests
in Total Return Master. Next, Global Bond, Mercury Total Return Bond, ML Total
Return Bond and Corporate Fund will transfer all of their assets and all of
their liabilities to Core Bond in return solely for an equal aggregate value
of newly issued shares of Core Bond to be distributed to the shareholders of
Global Bond, Mercury Total Return Bond, ML Total Return Bond and Corporate
Fund. Global Bond and Corporate Fund will thereafter dissolve as a matter of
state law and deregister as investment companies and Mercury Total Return
Bond, ML Total Return Bond and Total Return Master will thereafter be
terminated as series of Mercury Trust, MLIM Fund and FAM Trust, respectively.
Each acquisition of assets and assumption of liabilities of a Target Fund by
Core Bond is individually referred to herein as a "Target Fund Acquisition,"
and the Target Fund Acquisitions are collectively referred to herein as the
"Reorganization." Bond Fund is an open-end fund that is organized as a
Maryland corporation. A Special Meeting of the Shareholders of each Target
Fund will be held at the offices of Fund Asset Management, L.P. ("FAM") and
Merrill Lynch Investment Managers, L.P. ("MLIM"), 800 Scudders Mill Road,
Plainsboro, New Jersey, on January 17, 2003, at the following times:
Fund Meeting Time
---- ------------
Global Bond [o] a.m. Eastern time
Mercury Total Return Bond [o] a.m. Eastern time
ML Total Return Bond [o] a.m. Eastern time
Corporate Fund [o] a.m. Eastern time
For detailed information about each Target Fund Acquisition and the
Reorganization, shareholders of each Target Fund should refer to the Proxy
Statement and Prospectus. For further information about Core Bond,
shareholders should refer to the Bond Fund Statement, which accompanies this
Statement of Additional Information and is incorporated by reference herein.
FINANCIAL STATEMENTS
In accordance with Part B, Item 14(a) of Form N-14, pro forma financial
statements reflecting consummation of a Target Fund Acquisition have not been
prepared since, as of September 30, 2002, the net asset value of no Target
Fund exceeded 10% of the net asset value of Core Bond.
Core Bond
Audited financial statements and accompanying notes for the fiscal year
ended September 30, 2002 and the independent auditors' report thereon, dated
[o], 2002, of Core Bond are incorporated herein by reference from Bond Fund's
Annual Report to Stockholders, which accompanies this Statement of Additional
Information.
Global Bond
Audited financial statements and accompanying notes for the fiscal year
ended December 31, 2001 and the independent auditors' report thereon, dated
[o], 2002, of Global Bond are incorporated herein by reference from Global
Bond's Annual Report to Shareholders, which accompanies this Statement of
Additional Information if you are a shareholder of Global Bond. Unaudited
financial statements and accompanying notes for the six months ended June 30,
2002 are incorporated herein by reference from Global Bond's Semi-Annual
Report to Shareholders, which accompanies this Statement of Additional
Information if you are a shareholder of Global Bond.
SAI-2
Mercury Total Return Bond
Audited financial statements and accompanying notes for the fiscal year
ended June 30, 2002 and the independent auditors' report thereon, dated [?],
2002, of Mercury Total Return Bond are incorporated herein by reference from
Mercury Trust's Annual Report to Shareholders, which accompanies this
Statement of Additional Information if you are a shareholder of Mercury Total
Return Bond.
ML Total Return Bond
Audited financial statements and accompanying notes for the fiscal year
ended June 30, 2002 and the independent auditors' report thereon, dated [?],
2002, of ML Total Return Bond are incorporated herein by reference from MLIM
Fund's Annual Report to Shareholders, which accompanies this Statement of
Additional Information if you are a shareholder of ML Total Return Bond.
Corporate Fund
Audited financial statements and accompanying notes for the fiscal year
ended December 31, 2001 and the independent auditors' report thereon, dated
[?], 2002, of Corporate Fund are incorporated herein by reference from
Corporate Fund's Annual Report to Shareholders, which accompanies this
Statement of Additional Information if you are a shareholder of Corporate
Fund. Unaudited financial statements and accompanying notes for the six months
ended June 30, 2002 are incorporated herein by reference from Corporate Fund's
Semi-Annual Report to Shareholders, which accompanies this Statement of
Additional Information if you are a shareholder of Corporate Fund.
SAI-3
PART C
OTHER INFORMATION
Item 15. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreement.
Insofar as the conditional advancing of indemnification moneys for
actions based on the Investment Company Act of 1940, as amended (the
"Investment Company Act"), may be concerned, Article VI of the Registrant's
By-Laws provides that such payments will be made only on the following
conditions: (i) advances may be made only on receipt of a written affirmation
of such person's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay any such
advance if it is ultimately determined that the standard of conduct has not
been met; and (ii) (a) such promise must be secured by a security for the
undertaking in form and amount acceptable to the Registrant, (b) the
Registrant is insured against losses arising by reason of the advance, or (c)
a majority of a quorum of the Registrant's disinterested non-party Directors,
or an independent legal counsel in a written opinion, shall determine, based
upon a review of readily available facts, that at the time the advance is
proposed to be made, there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.
In Section 9 of the Distribution Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify FAM Distributors, Inc
(the "Distributor") and each person, if any, who controls the Distributor
within the meaning o the Securities Act of 1933, as amended (the "Securities
Act"), against certain types of civil liabilities arising in connection with
the Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding)
is asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 16. Exhibits.
1(a) -- Articles of Incorporation (incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A (File No. 2-62329)) ("Registration Statement").
1(b) -- Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement).
1(c) -- Articles Supplementary reclassifying shares of Intermediate Term Portfolio Series Common Stock (incorporated by
reference to Exhibit 1(c) to Post-Effective Amendment No. 16 to Registrant's Registration Statement).
1(d) -- Articles of Amendment changing name to Merrill Lynch Bond Fund, Inc. (incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 27 to Registrant's Registration Statement).
1(e) -- Articles of Amendment to Articles Supplementary renaming Class A Common Stock, Class B Common Stock, Class C
Common Stock and Class D Common Stock of the High Quality Portfolio to Core Bond Portfolio.
2 -- By-Laws (incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 21 to Registrant's Registration
Statement).
C-1
3(a) -- Specimen certificates for Class A shares of High Quality Portfolio Series and High Income Portfolio Series Common
Stock of Registrant (incorporated by reference to Exhibit 4(a) filed with Post-Effective Amendment No. 13 to
Registrant's Registration Statement).
3(b) -- Specimen certificates for Class B shares of High Quality Portfolio Series and High Income Portfolio Series Common
Stock of Registrant (incorporated by reference to Exhibit 4(b) filed with Post-Effective Amendment No. 13 to
Registrant's Registration Statement).
4(a) -- Form of Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. (incorporated by reference
to Exhibit 5 filed with Post-Effective Amendment No. 5 to Registrant's Registration Statement).
4(b) -- Form of Investment Sub-Advisory Agreement between Fund Asset Management, L.P. and Merrill Lynch Asset Management
U.K. Limited (incorporated by reference to Exhibit 5(b) filed with Post- Effective Amendment No. 23 to Registrant's
Registration Statement).
5 -- Form of Unified Distribution Agreement between Registrant and FAM Distributors, Inc. (the "Distributor")
(incorporated by reference to Exhibit 5 to Post-Effective Amendment No. 27 to Registrant's Registration Statement).
6 -- None
7 -- Form of Custodian Agreement between Registrant and State Street Bank and Trust Company (incorporated by reference
to Exhibit A.8 filed with Amendment No. 2 to Registrant's Registration Statement on Form S-5) ("Post-Effective
Amendment No. 2").
8(a) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between Registrant
and Financial Data Services, Inc. (incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 12 to
Registrant's Registration Statement).
8(b) -- Form of Agreement relating to the use of the "Merrill Lynch" name (incorporated by reference to Exhibit A.9(c)
filed with Amendment No. 2).
8(c) -- Credit Agreement between the Registrant and a syndicate of banks (incorporated by reference to Exhibit 8(b) to the
Registration Statement on Form N-1A of Master Premium Growth Trust (File No. 811-09733), filed on December 21,
1999).
8(d) -- Form of Administrative Services Agreement between the Registrant and State Street Bank and Trust Company
(incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No. 1 to the Registration Statement on Form
N-1A of Merrill Lynch Focus Twenty Fund, Inc. (File No. 333-89775) filed on March 20, 2001
9 -- Opinion of Rogers & Wells (incorporated by reference to Exhibit 10 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement).
10 -- Investment Letter--High Income Portfolio--Class C and Class D shares (incorporated by reference to Exhibit 13(a)
filed with Post-Effective Amendment No. 20 to Registrant's Registration Statement).
11 -- Opinion of Sidley Austin Brown & Wood LLP.*
12 -- Tax Opinion of Sidley Austin Brown & Wood LLP.*
13 -- Not applicable.
14(a) -- Consent of [o], independent auditors for the Registrant.*
14(b) -- Consent of [o], independent auditors for Merrill Lynch Global Bond Fund for Investment and Retirement.*
14(c) -- Consent of [o], independent auditors for The Corporate Fund Accumulation Program, Inc.*
14(d) -- Consent of [o], independent auditors for Mercury Total Return Bond Fund of Mercury Funds II.*
14(e) -- Consent of [o], independent auditors for Merrill Lynch Total Return Bond Fund of Merrill Lynch Investment Managers
Funds, Inc.*
17(a) -- Prospectus, dated January 24, 2002, of the Registrant.**
17(b) -- Statement of Additional Information, dated January 24, 2002, of the Registrant.**
17(c) -- Prospectus, dated April 19, 2002, of Merrill Lynch Global Bond Fund for Investment and Retirement.**
17(d) -- Prospectus, dated April 29, 2002, of The Corporate Fund Accumulation Program, Inc.**
17(e) -- Prospectus, dated October [o], 2002, of Mercury Total Return Bond Fund of Mercury Funds II.*
17(f) -- Prospectus, dated October [o], 2002, of Merrill Lynch Total Return Bond Fund of Merrill Lynch Investment Mangers
Funds, Inc.*
17(g) -- Annual Report to Shareholders of the Registrant, as of September 30, 2002.*
C-2
17(h) -- Annual Report to Shareholders of Merrill Lynch Global Bond Fund for Investment and Retirement, as of December 31,
2001.**
17(i) -- Semi-Annual Report to Shareholders of Merrill Lynch Global Bond Fund for Investment and Retirement, as of June 30,
2002.**
17(j) -- Annual Report to Shareholders of The Corporate Fund Accumulation Program, Inc., as of December 31, 2001.**
17(k) -- Semi-Annual Report to Shareholders of The Corporate Fund Accumulation Program, Inc., as of June 30, 2002.**
17(l) -- Annual Report to Shareholders of Mercury Total Return Bond Fund of Mercury Funds II, as of June 30, 2002.**
17(m) -- Annual Report to Shareholders of Merrill Lynch Total Return Bond Fund of Merrill Lynch Investment Managers Funds,
Inc., as of June 30, 2002.**
17(n) -- Forms of Proxy.**
- --------------
* To be filed by amendment.
** Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is party of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, a
copy of an opinion of counsel as to certain tax matters within a reasonable
time after receipt of such opinion.
C-3
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 22nd day of October, 2002.
MERRILL LYNCH BOND FUND, INC.
(Registrant)
By: /s/ Terry K. Glenn
------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke, and Phillip S. Gillespie, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Terry K. Glenn President (Principal Executive Officer) October 22, 2002
- ---------------------------------- and Director
(Terry K. Glenn)
/s/ Donald C. Burke Vice President and Treasurer (Principal October 22, 2002
- ---------------------------------- Financial and Accounting Officer)
(Donald C. Burke)
/s/ Ronald W. Forbes Director October 22, 2002
- ----------------------------------
(Ronald W. Forbes)
/s/ Cynthia A. Montgomery Director October 22, 2002
- ----------------------------------
(Cynthia A. Montgomery)
/s/ Charles C. Reilly Director October 22, 2002
- ----------------------------------
(Charles C. Reilly)
/s/ Kevin A. Ryan Director October 22, 2002
- ----------------------------------
(Kevin A. Ryan)
/s/ Roscoe S. Suddarth Director October 22, 2002
- ----------------------------------
(Roscoe S. Suddarth)
/s/ Richard R. West Director October 22, 2002
- ----------------------------------
(Richard R. West)
/s/ Edward D. Zinbarg Director October 22, 2002
- ----------------------------------
(Edward D. Zinbarg)
C-4
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
17(a) -- Prospectus, dated January 24, 2002, of the Registrant.
17(b) -- Statement of Additional Information, dated January 24, 2002, of the Registrant.
17(c) -- Prospectus, dated April 19, 2002, of Merrill Lynch Global Bond Fund for Investment and Retirement.
17(d) -- Prospectus, dated April 29, 2002, of The Corporate Fund Accumulation Program, Inc.
17(h) -- Annual Report to Shareholders of Merrill Lynch Global Bond Fund for Investment and Retirement, as of December 31,
2001.
17(i) -- Semi-Annual Report to Shareholders of Merrill Lynch Global Bond Fund for Investment and Retirement, as of June 30,
2002.
17(j) -- Annual Report to Shareholders of The Corporate Fund Accumulation Program, Inc., as of December 31, 2001.
17(k) -- Semi-Annual Report to Shareholders of The Corporate Fund Accumulation Program, Inc., as of June 30, 2002.
17(l) -- Annual Report to Shareholders of Mercury Total Return Bond Fund of Mercury Funds II, as of June 30, 2002.
17(m) -- Annual Report to Shareholders of Merrill Lynch Total Return Bond Fund of Merrill Lynch Investment Managers Funds,
Inc., as of June 30, 2002.
17(n) -- Forms of Proxy.