STATEMENT OF ADDITIONAL INFORMATION
Merrill
Lynch Mid Cap Value Fund
P.O. Box
9011, Princeton, New Jersey 08543-9011
Ÿ
Phone No. (609) 282-2800
The Merrill Lynch Mid
Cap Value Fund (the “Fund”) is a series of The Asset
Program, Inc. (the “Program”), a professionally managed
open-end management investment company organized as a Maryland
corporation. The Fund seeks capital appreciation and,
secondarily, income by investing in a diversified portfolio of
securities, primarily equities, that the management of the Fund
believes are undervalued and therefore represent investment
value. There can be no assurance that the investment objective of
the Fund will be realized. For more information on the Fund
’s investment objective and policies, see “Investment
Objective and Policies.”
Pursuant to the Merrill
Lynch Select Pricing
SM
System,
the Fund offers four classes of shares, each with a different
combination of sales charges, ongoing fees and other features.
The Merrill Lynch Select Pricing
SM
System
permits an investor to choose the method of purchasing shares
that the investor believes is most beneficial given the amount of
the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. See “Purchase of
Shares.”
This Statement of
Additional Information is not a prospectus and should be read in
conjunction with the Prospectus of the Fund, dated April 3, 2000
(the “Prospectus”), which has been filed with the
Securities and Exchange Commission (the “Commission”)
and can be obtained, without charge, by calling 1-800-MER-FUND or
your Merrill Lynch Financial Consultant, or by writing to the
address listed above. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement
of Additional Information is incorporated by reference into the
Prospectus. The Fund’s audited financial statements are
incorporated in this Statement of Additional Information by
reference to the Program’s 1999 annual report to
shareholders. You may request a copy of the annual report or the
Prospectus at no charge by calling 1-800-456-4587 ext. 789
between 8:00 a.m. and 8:00 p.m. on any business day.
Merrill
Lynch Asset Management — Investment
Adviser
Merrill
Lynch Funds Distributor —
Distributor
The date
of this Statement of Additional Information is April 3,
2000.
TABLE
OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES
The Merrill Lynch Mid
Cap Value Fund (“the Fund”) seeks capital appreciation
and, secondarily, income by investing in securities, primarily in
equity securities that Merrill Lynch Asset Management, L.P. (
“MLAM” or the “Investment Adviser”) believes
are undervalued and therefore represent an investment value. The
investment objective of the Fund is a fundamental policy of the
Fund and may not be changed without the approval of a majority of
the Fund’s outstanding voting securities. The Fund invests
primarily in equity securities of companies that typically have
total market capitalizations at the time of purchase in the same
range as companies in the Standard & Poor’s Composite
400 Index (“S&P 400 Index”). The Fund seeks special
opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or
seem capable of recovering from temporarily out-of-favor
considerations. Particular emphasis is placed on securities which
provide an above-average dividend return and sell at a
below-average price-earnings ratio. There can be no assurance
that the objectives of the Fund will be achieved.
Investment emphasis is
on equities, primarily common stock and, to a lesser extent,
securities convertible into common stocks. The Fund also may
invest in preferred stocks and non-convertible debt securities.
The Fund may invest up to 30% of its total assets, taken at
market value at the time of acquisition, in the securities of
foreign issuers. Reference is made to “How the Fund Invests
” and “Investment Risks” in the Prospectus. The
Fund is classified as a diversified fund under the Investment
Company Act of 1940, as amended (the “Investment Company Act
”).
Under normal
circumstances, the Fund will invest primarily (at least 65% of
the Fund’s total assets) in equity securities of companies
that typically have total capitalizations at the time of purchase
in the same range as companies in the S&P 400 Index. In
purchasing equity securities for the Fund, the Investment Adviser
will seek to identify the securities of companies and industry
sectors which are expected to provide high total return relative
to alternative equity investments. The Fund generally will seek
to invest in securities the Investment Adviser believes to be
undervalued. Undervalued issues include securities selling at a
discount from the price-to-book value ratios and price-earnings
ratios computed with respect to the relevant stock market
averages. The Fund also may consider as undervalued securities
selling at a discount from their historic price-to-book value or
price-earnings ratios, even though these ratios may be above the
ratios for the stock market averages. Securities offering
dividend yields higher than the yields for the relevant stock
market averages or higher than such securities’ historic
yields may also be considered to be undervalued. The Fund may
also invest in the securities of small and emerging growth
companies when such companies are expected to provide a higher
total return than other equity investments. Such companies are
characterized by rapid historical growth rates, above-average
returns on equity or special investment value in terms of their
products or services, research capabilities or other unique
attributes. The Investment Adviser will seek to identify small
and emerging growth companies that possess superior management,
marketing ability, research and product development skills and
sound balance sheets.
Investment in the
securities of small and emerging growth companies involves
greater risk than investment in larger, more established
companies. Such risks include the fact that securities of small
or emerging growth companies may be subject to more abrupt or
erratic market movements than larger, more established companies
or the market average in general. Also, these companies may have
limited product lines, markets or financial resources, or they
may be dependent on a limited management group.
There may be periods
when market and economic conditions exist that favor certain
types of tangible assets as compared to other types of
investments.
The Fund may invest up
to 30% of its total assets in the securities of foreign issuers.
Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically
involved in domestic investment, including fluctuations in
foreign exchange rates, future foreign political and economic
developments, and the possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions
applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates may
affect the value of investments in the portfolio and the
unrealized appreciation or depreciation of investments insofar as
U.S. investors are concerned. Changes in foreign currency
exchange rates may affect the value of investments in the
portfolio and the unrealized
appreciation or depreciation of investments insofar as U.S.
investors are concerned. Changes in foreign currency exchange
rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund’s assets denominated in those currencies
and the corresponding Fund’s yields on such assets. Foreign
currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are, in
turn, affected by the international balance of payments and other
economic and financial conditions, government intervention,
speculation, and other factors. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national products,
rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
With respect to certain
foreign countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or
diplomatic developments which could affect investment in those
countries. There may be less publicly available information about
a foreign financial instrument than about a U.S. instrument, and
foreign entities may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to
those to which U.S. entities are subject. Foreign financial
markets, while growing in volume, generally have substantially
less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Foreign markets also
have different clearance and settlement procedures and in certain
markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. Delays in settlement
could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of securities in the Fund due
to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the Fund’s portfolio
securities or, if the Fund has entered into a contract to sell
the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign
securities generally are higher than costs associated with
transactions in U.S. securities. There is generally less
government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in
the United States.
The operating expense
ratios of the Fund can be expected to be higher than those of an
investment company investing exclusively in U.S. securities
because the expenses of the Fund, such as custodial costs, may be
higher.
Dividends and interest
received by the Fund, may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between
certain countries and the United States may reduce or eliminate
such taxes.
European Economic and
Monetary Union.
For a number of years,
certain European countries have been seeking economic unification
that would, among other things, reduce barriers between
countries, increase competition among companies, reduce
government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries.
The Treaty on European Union (the “Maastricht Treaty”)
set out a framework for the European Economic and Monetary Union (
“EMU”) among the countries that comprise the European
Union (“EU”). EMU established a single common European
currency (the “euro”) that was introduced on January 1,
1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. EMU took effect for the
initial EMU participants on January 1, 1999. Certain securities
issued in participating EU countries (beginning with government
and corporate bonds) were redenominated in the euro, and are
listed, traded, and make dividend and other payments only in
euros.
No assurance can be
given that EMU will take effect, that the changes planned for the
EU can be successfully implemented, or that these changes will
result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be
completed but then partially or completely unwound. Because any
participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could
choose to abandon EMU, which could diminish its credibility and
influence. Any of these occurrences could have adverse effects on
the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of
participants’ national currencies and a significant increase
in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European
markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity,
and/or reversion of the attempts to lower government debt and
inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities redenominated
in euros are transferred back into that country’s national
currency, particularly if the withdrawing country is a major
economic power. Such developments could have an adverse impact on
the Fund’s investments in Europe generally or in specific
countries participating in EMU. Gains or losses from euro
conversion may be taxable to Fund shareholders under foreign or,
in certain limited circumstances, U.S. tax laws.
International Investing in Countries with Smaller Capital
Markets
The risks associated
with investments in foreign securities discussed above are often
heightened for investments in small capital markets.
There may be less
publicly available information about an issuer in a smaller
capital market than would be available about a U.S. company, and
it may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which
U.S. companies are subject. As a result, traditional investment
measurements, such as price-earnings ratios, as used in the
United States, may not be applicable in certain capital
markets.
Smaller capital
markets, while often growing in trading volume, typically have
substantially less volume than U.S. markets, and securities in
many smaller capital markets are less liquid and their prices may
be more volatile than securities of comparable U.S. companies.
Brokerage commissions, custodial services, and other costs
relating to investment in smaller capital markets are generally
more expensive than in the United States. Such markets have
different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. Further, satisfactory
custodial services for investment securities may not be available
in some countries having smaller capital markets, which may
result in the Fund’s incurring additional costs and delays
in transporting and custodying such securities outside such
countries. Delays in settlement problems could result in
temporary periods when Fund assets are uninvested and no return
is earned thereon. The inability of the Fund to make intended
security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into
a contract to sell the security, could result in possible
liability to the purchaser. There is generally less government
supervision and regulation of exchanges, brokers and issuers in
countries having smaller capital markets than there are in the
United States.
As a result, Fund
management may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including Fund
management, have had no or limited prior experience.
Investments in Securities Denominated in Foreign
Currencies
The Fund may invest in
securities denominated in currencies other than the U.S. dollar.
In selecting securities denominated in foreign currencies, the
Investment Adviser will consider, among other factors, the effect
of movement in currency exchange rates on the U.S. dollar value
of such securities. An increase in the value of a currency will
increase the total return to the Fund of securities denominated
in such currency. Conversely, a decline in the value of the
currency will reduce the total return. The Investment Adviser may
seek to hedge all or a portion of the Fund’s foreign
securities through the use of forward foreign currency contracts,
currency options, futures contracts and options thereon or
derivative securities. See “Indexed and Inverse Securities
” and “Options and Futures Transactions”
below.
For temporary or
defensive purposes or in anticipation of redemptions, the Fund is
authorized to invest up to 100% of its assets in money market
instruments (short term, high quality debt instruments),
including obligations
of or guaranteed by the U.S. Government or its instrumentalities or
agencies, certificates of deposit, bankers’ acceptances and
other bank obligations, commercial paper rated in the highest
category by a nationally recognized rating agency or other fixed
income securities deemed by the Investment Adviser to be
consistent with the objectives of the Fund, or the Fund may hold
its assets in cash.
The Fund is authorized
to invest in fixed income securities. To the extent the Fund
invests in fixed income securities, the net asset value of its
shares will be affected by changes in the general level of
interest rates. Typically, when interest rates decline, the value
of a portfolio of fixed income securities can be expected to
rise. Conversely, when interest rates rise typically the value of
a portfolio of fixed income securities can be expected to
decline.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments
The Fund may purchase
or sell securities that it is entitled to receive on a when
issued basis. The Fund may also purchase or sell securities on a
delayed delivery basis. The Fund may also purchase or sell
securities through a forward commitment. These transactions
involve the purchase or sale of securities by the Fund at an
established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of
entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in
connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase
commitments.
There can be no
assurance that a security purchased on a when issued basis will
be issued or that a security purchased or sold through a forward
commitment will be delivered. The value of securities in these
transactions on the delivery date may be more or less than the
Fund’s purchase price. The Fund may bear the risk of a
decline in the value of the security in these transactions and
may not benefit from an appreciation in the value of the security
during the commitment period.
Standby Commitment Agreements
The Fund may enter into
standby commitment agreements. These agreements commit the Fund,
for a stated period of time, to purchase a stated amount of
securities which may be issued and sold to that Fund at the
option of the issuer. The price of the security is fixed at the
time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued. The Fund will
enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered
advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will
limit its investment in such commitments so that the aggregate
purchase price of securities subject to such commitments,
together with the value of portfolio securities subject to legal
restrictions on resale that affect their marketability, will not
exceed 15% of its net assets taken at the time of the commitment.
The Fund segregates liquid assets in an aggregate amount equal to
the purchase price of the securities underlying the
commitment.
There can be no
assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since
the issuance of the security underlying the commitment is at the
option of the issuer, the Fund may bear the risk of a decline in
the value of such security and may not benefit from an
appreciation in the value of the security during the commitment
period.
The purchase of a
security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value
of the security thereafter will be reflected in the calculation
of the Fund’s net asset value. The cost basis of the
security will be
adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby
commitment.
Repurchase Agreements and Purchase and Sale
Contracts
.
The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale
contracts. Repurchase agreements and purchase and sale contracts
may be entered into only with financial institutions which have
capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into
the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market
fluctuations during such period, although such return may be
affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligation; whereas,
in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In
the case of a repurchase agreement, as a purchaser, the Fund will
require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any
time during the term of the repurchase agreement; the Fund does
not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the
seller under a repurchase agreement constructed to be a
collateralized loan, the underlying securities are not owned by
the Fund but only constitute collateral for the seller’s
obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in
connection with disposition of the collateral.
A purchase and sale
contract differs from a repurchase agreement in that the contract
arrangements stipulate that securities are owned by the Fund. In
the event of a default under such a repurchase agreement or under
a purchase and sale contract, instead of the contractual fixed
rate, the rate of return to the Fund would be dependent upon
intervening fluctuations of the market values of such securities
and the accrued interest on the securities. In such event, the
Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not
invest in repurchase agreements or purchase and sale contracts
maturing in more than seven days if such investments, together
with the Fund’s other illiquid investments, would exceed 15%
of the Fund’s total assets.
The Fund may use
instruments referred to as Derivatives. Derivatives allow the
Fund to increase or decrease the level of risk to which the Fund
is exposed more quickly and efficiently than transactions in
other types of instruments.
The Fund may use the
following types of derivative instruments and trading
strategies:
Hedging.
The Fund may use Derivatives for hedging
purposes. Hedging is a strategy in which a Derivative is used to
offset the risk that other Fund holdings may decrease in value.
Losses on the other investment may be substantially reduced by
gains on a Derivative that reacts in an opposite manner to market
movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than
anticipated by the fund investing in the Derivative or if the
cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the
Derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings
being hedged may not be reduced. The Fund is not required to use
hedging and may choose not to do so.
Indexed
and Inverse Floating Rate Securities
The Fund may invest in
securities the potential return of which is based on an index. As
an illustration, the Fund may invest in a debt security that pays
interest based on the current value of an interest rate index,
such as the prime rate. The Fund may also invest in a debt
security which returns principal at maturity based on the level
of a securities index or a basket of securities, or based on the
relative changes of two indices. In addition, the Fund may invest
in securities the potential return of which is based inversely on
the change in an index (that is, a
security the value of which will move in the opposite direction of
changes to an index). For example, the Fund may invest in
securities that pay a higher rate of interest when a particular
index decreases and pay a lower rate of interest (or do not fully
return principal) when the value of the index increases. If the
Fund invests in such securities, it may be subject to reduced or
eliminated interest payments or loss of principal in the event of
an adverse movement in the relevant index or indices. Indexed and
inverse securities involve credit risk, and certain indexed and
inverse securities may involve leverage risk, liquidity risk, and
currency risk. The Fund may invest in indexed and inverse
securities for hedging purposes, to increase return or to vary
the degree of portfolio leverage relatively efficiently under
different market conditions. When used for hedging purposes,
indexed and inverse securities involve correlation risk. Indexed
and inverse securities are currently issued by a number of U.S.
governmental agencies such as FHLMC and FNMA, as well as a number
of other financial institutions. To the extent the Fund invests
in such instruments, under current market conditions, it most
likely will purchase indexed and inverse securities issued by the
above-mentioned U.S. governmental agencies.
Options
and Futures Transactions
The Fund may engage in
various portfolio strategies to seek to increase its return
through the use of listed or over-the-counter (“OTC”)
options on its portfolio securities and to hedge its portfolio
against adverse movements in the markets in which it invests. The
Fund is authorized to write (
i.e.
, sell) covered put and
call options on its portfolio securities or securities in which
it anticipates investing and purchase put and call options on
securities. In addition, the Fund may engage in transactions in
stock index options, stock index futures and related options on
such futures and may deal in forward foreign exchange
transactions and foreign currency options and futures and related
options on such futures. Each of these portfolio strategies is
described in more detail below. Although certain risks are
involved in options and futures transactions, the Investment
Adviser believes that, because the Fund will (i) write only
covered options on portfolio securities or securities in which
they anticipate investing and (ii) engage in other options and
futures transactions only for hedging purposes, the options and
portfolio strategies of the Fund will not subject it to the risks
frequently associated with the speculative use of options and
futures transactions. While the Fund’s use of hedging
strategies is intended to reduce the volatility of the net asset
value of its shares, its net asset value will fluctuate. There
can be no assurance that the Fund’s hedging transactions
will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity or
debt markets, interest rates or currency exchange rates
occur.
Writing Covered
Options
. The Fund is authorized to
write (
i.e.
, sell) covered call options on the securities
in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium
gives another party a right to buy specified securities owned by
the Fund at a specified future date and price set at the time of
the contract. The principal reason for writing call options is to
attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while
the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition,
the Fund’s ability to sell the underlying security will be
limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction
cancels out the Fund’s position as the writer of an option
by means of an offsetting purchase of an identical option prior
to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the
underlying security declining. The Fund may not write covered
options on underlying securities exceeding 15% of its total
assets.
The Fund also may write
put options which give the holder of the option the right to sell
the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which
increases the Fund’s return. The Fund writes only covered
put options, which means that so long as the Fund is obligated as
the writer of the option it will, through its custodian, have
deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the
exercise price of the underlying securities. By writing a put,
the Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security
at the time of exercise for as long as the option is outstanding.
The Fund may engage in closing transactions in order to terminate
put options that it has written.
Purchasing
Options
. The Fund is authorized to
purchase put options to hedge against a decline in the market
value of its securities. By buying a put option, the Fund has a
right to sell the underlying security at the exercise
price, thus limiting the Fund’s risk of loss through a decline
in the market value of the security until the put option expires.
The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior
to its expiration, a put option may be sold in a closing sale
transaction, and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid
for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund’s position as the
purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has
purchased. In certain circumstances, the Fund may purchase call
options on securities held in its portfolio on which it has
written call options or on securities which it intends to
purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result
of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market
value of the Fund’s total assets.
Stock Index
Options
. The Fund is authorized to
engage in transactions in stock index options. The Fund may
purchase or write put and call options on stock indexes to hedge
against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indexes are
similar to options on securities, except that on exercise or
assignment, the parties to the contract pay or receive an amount
of cash equal to the difference between the closing value of the
index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a
broad market index,
e.g.
, the Standard & Poor’s
Composite 500 Index (“S&P 500 Index”), or on a
narrow index representing an industry or market segment,
e.g.
, the AMEX Oil & Gas Index.
Stock Index Futures
Contracts
. The Fund may purchase and
sell stock index futures contracts as a hedge against adverse
changes in the market value of portfolio securities, as described
below. Stock index futures contracts are herein referred to as
“futures contracts.”
A futures contract is
an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract
to sell a financial instrument for a set price on a future date.
The terms of a futures contract require either actual delivery of
the financial instrument underlying the contract or a cash
settlement based upon the difference in value of the index
between the time the contract was entered into and the time of
its settlement. The Fund may effect transactions in stock index
futures contracts in connection with the equity securities in
which it invests. Transactions by the Fund in futures contracts
are subject to limitations as described below under
“Restrictions on the Use of Futures Transactions.
”
The Fund may sell
futures contracts in anticipation of or during a market decline
to attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a
significant advance, it may purchase futures in order to gain
rapid market exposure. This technique generally will allow the
Fund to gain exposure to a market in a manner which is more
efficient than purchasing individual securities and may in part
or entirely offset increases in the cost of securities in such
market that the Fund ultimately purchases. As such purchases are
made, an equivalent amount of futures contracts will be
terminated by offsetting sales. The Program does not consider
purchases of futures contracts by the Fund to be a speculative
practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures
position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a put
option on a future, but under unusual circumstances (
e.g.
,
the Fund experiences a significant amount of redemptions), a long
futures position may be terminated without the corresponding
purchase of securities.
The Fund also has
authority to purchase and write call and put options on futures
contracts and stock indexes and in connection with its hedging
(including anticipatory hedging) activities. Generally, these
strategies are utilized under the same market and market sector
conditions (
i.e.
, conditions relating to specific types of
investments) in which the Fund enters into futures transactions.
The Fund may purchase put options or write call options on
futures contracts or stock indexes rather than selling the
underlying futures contract in anticipation of a decrease in the
market value of its securities. Similarly, the Fund may purchase
call options, or write put options on futures contracts or stock
indexes, as a substitute for the purchase of such futures
contract to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends
to purchase.
The Fund may engage in
options and futures transactions on U.S. and foreign exchanges
and in the over-the-counter markets (“OTC options”). In
general, exchange-traded contracts are third-party contracts
(
i.e.,
performance of the parties’ obligations is
guaranteed by an exchange or clearing corporation) with
standardized
strike prices and expiration dates. OTC options are two-party
contracts with prices and terms negotiated by the buyer and
seller. See “Restrictions on OTC Options” below for
information as to restrictions on the use of OTC
options.
Foreign Currency
Hedging
. The Fund is authorized to
deal in forward foreign exchange among currencies of the
different countries in which it will invest and multinational
currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. Foreign currency
hedging is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date
(up to one year) and price set at the time of the contract. The
Fund’s dealings in forward foreign exchange will be limited
to hedging involving either specific transactions or portfolio
positions.
Transaction hedging is
the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in
connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the
payment of dividends by the Fund. Position hedging is the sale of
forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The
Fund will not speculate in forward foreign exchange.
Hedging against a
decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates.
The Fund also is
authorized to purchase or sell listed or OTC foreign currency
options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-U.S. dollar denominated
securities owned by the Fund sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a yen
denominated security. In such circumstances, for example, the
Fund may purchase a foreign currency put option enabling it to
sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be
offset by an increase in the value of the put option. To offset,
in whole or in part, the cost of acquiring such a put option, the
Fund may also sell a call option which, if exercised, requires it
to sell a specified amount of yen for dollars at a specified
price by a future date (a technique called a “straddle
”). By selling such a call option in this illustration, the
Fund gives up the opportunity to profit without limit from
increases in the relative value of the yen to the dollar. The
Investment Adviser believes that “straddles” of the
type which may be utilized by the Fund constitute hedging
transactions and are consistent with the policies described
above.
Certain differences
exist between these foreign currency hedging instruments. Foreign
currency options provide the holder thereof the right to buy or
sell a currency at a fixed price on a future date. A futures
contract on a foreign currency is an agreement between two
parties to buy and sell a specified amount of a currency for a
set price on a future date. Futures contacts and options on
futures contracts are traded on boards of trade or futures
exchanges. The Fund will not speculate in foreign currency
options, futures or related options. Accordingly, the Fund will
not hedge a currency substantially in excess of the market value
of securities which it has committed or anticipates to purchase
which are denominated in such currency and, in the case of
securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. The
fund is limited regarding potential net liabilities from foreign
currency options, futures or related options to no more than 20%
of its total assets.
Restrictions on the
Use of Futures Transactions
.
Regulations of the Commodity Futures Trading Commission
(the “CFTC”) applicable to the Fund provide that the
futures trading activities described herein will not result in
the Fund being deemed a “commodity pool” as defined
under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for
bona fide
hedging purposes and (ii) for non-hedging purposes, if the
aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of the
liquidation value of the
Fund’s holdings, after taking into account unrealized profits
and unrealized losses on any such contracts and options. Margin
deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When the Fund purchases
a futures contract, or writes a put option or purchases a call
option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account in the name of the Fund with
the Fund’s custodian so that the amount so segregated, plus
the amount of initial and variation margin held in the account of
its broker, equals the market value of the futures contract,
thereby ensuring that the use of such futures contract is
unleveraged.
Restrictions on OTC
Options
. The Fund may engage in OTC
options, including OTC stock index options, OTC foreign currency
options and options on foreign currency futures, only with such
banks or dealers which have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of
at least $50 million.
The staff of the SEC
has taken the position that purchased OTC options and the assets
used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently
outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently
outstanding which were sold by the Fund and margin deposits on
the Fund’s existing OTC options on futures contracts exceed
15% (10% to the extent required by certain state laws) of the
total assets of the Fund taken at market value, together with all
other assets of the Fund which are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the
Fund to a primary U.S. Government securities dealer recognized by
the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option
is “in-the-money” (
i.e.
, current market value of
the underlying security minus the option’s strike price).
The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the
premium received for the option, plus the amount by which the
option is “in-the-money”. This policy as to OTC options
is not a fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of its shareholders.
However, the Fund will not change or modify this policy prior to
the change or modification by the SEC staff of its
position.
Risk Factors in
Options and Futures Transactions
.
Utilization of options and futures transactions to hedge
the Fund involves the risk of imperfect correlation in movements
in the price of options and futures and movements in the price of
the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than
the price of the hedged securities or currencies, the Fund will
experience a gain or loss which will not be completely offset by
movements in the price of the subject of the hedge. The
successful use of options and futures also depends on the
Investment Adviser’s ability to correctly predict price
movements in the market involved in a particular options or
futures transactions. To compensate for imperfect correlations,
the Fund may purchase or sell index options or futures contracts
in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than
the volatility of the stock index options or futures contracts.
Conversely, the Fund may purchase or sell fewer stock index
options or futures contracts if the volatility of the price of
the hedged securities is historically less than that of the stock
index options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of
the stock index option or futures contract
approaches.
The Fund intends to
enter into options and futures transactions, on an exchange or in
the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of
over-the-counter transactions, the Investment Adviser believes
the Fund can receive in each business day at least two
independent bids or offers. However, there can be no assurance
that a liquid secondary market will exist at any specific time.
Thus, it may be possible to close an options or futures position.
The inability to close options and futures positions also could
have an adverse impact on the Fund’s ability to hedge
effectively its portfolio. There is also a risk of loss by the
Fund of margin deposits or collateral in the event of bankruptcy
of a broker with whom the Fund has an open position in an option,
a futures contract or a related option.
The exchanges on which
the Fund intends to conduct options transactions have generally
established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether
or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of
whether such options are written on the same or different
exchanges or are held or written on one or more accounts or
through one or more brokers). “Trading limits” are
imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser does
not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund
’s holdings.
All options referred to
herein and in the Fund’s Prospectus are options issued by
the Options Clearing Corporation which are currently traded on
the Chicago Board Options Exchange, American Stock Exchange,
Philadelphia Stock Exchange, Pacific Stock Exchange or New York
Stock Exchange (“NYSE”). An option gives the purchaser
of the option the right to buy, and obligates the writer (seller)
to sell the underlying security at the exercise price during the
option period. The option period normally ranges from three to
nine months from the date the option is written. For writing an
option, the Program receives a premium, which is the price of
such option on the exchange on which it is traded. The exercise
price of the option may be below, equal to, or above the current
market value of the underlying security at the time the option is
written.
The writer may
terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is
effected by purchasing on an exchange an option of the same
series (
i.e.
, same underlying security, exercise price and
expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing
purchase transaction ordinarily will be effected to realize a
profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of the underlying
security or to permit the writing of a new call option containing
different terms on such underlying security. The cost of such a
liquidation purchase plus transaction costs may be greater than
the premium received upon the original option, in which event the
Fund will have incurred a loss in the transaction. An option may
be closed out only on an exchange which provides a secondary
market for an option of the same series and there is no assurance
that a liquid secondary market on an exchange will exist for any
particular option. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the
underlying security until the option expires or the underlying
security is delivered upon exercise, with the result that the
writer will be subject to the risk of market decline in the
underlying security during such period. The Fund will write an
option on a particular security only if management believes that
a liquid secondary market will exist on an exchange for options
of the same series which will permit the Fund to make a closing
purchase transaction in order to close out its
position.
Convertible securities
entitle the holder to receive interest payments paid on corporate
debt securities or the dividend preference on a preferred stock
until such time as the convertible security matures or is
redeemed or until the holder elects to exercise the conversion
privilege. Synthetic convertible securities may be either (i) a
debt security or preferred stock that may be convertible only
under certain contingent circumstances or that may pay the holder
a cash amount based on the value of shares of underlying common
stock partly or wholly in lieu of a conversion right (a
“Cash-Settled Convertible”), (ii) a combination of
separate securities chosen by the Investment Adviser in order to
create the economic characteristics of a convertible security,
i.e., a fixed income security paired with a security with equity
conversion features, such as an option or warrant (a
“Manufactured Convertible”) or (iii) a synthetic
security manufactured by another party.
The characteristics of
convertible securities make them appropriate investments for an
investment company seeking a high total return from capital
appreciation and investment income. These characteristics include
the potential for capital appreciation as the value of the
underlying common stock increases, the relatively high yield
received from dividend or interest payments as compared to common
stock dividends and decreased risks of decline in value relative
to the underlying common stock due to their fixed-income nature.
As a result of the conversion feature, however, the interest rate
or dividend preference on a convertible security is generally
less than would be the case if the securities were issued in
nonconvertible form.
In analyzing
convertible securities, the Investment Adviser will consider both
the yield on the convertible security relative to its credit
quality and the potential capital appreciation that is offered by
the underlying common stock, among other things.
Convertible securities
are issued and traded in a number of securities markets. For the
past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have
included major corporations domiciled in the United States,
Japan, France, Switzerland, Canada and the United Kingdom. Even
in cases where a substantial portion of the convertible
securities held by the Fund are denominated in United States
dollars, the underlying equity securities may be quoted in the
currency of the country where the issuer is domiciled. With
respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the
conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which
the debt security is denominated and the currency in which the
share price is quoted will affect the value of the convertible
security. As described below, the Fund is authorized to enter
into foreign currency hedging transactions in which it may seek
to reduce the effect of such fluctuations.
Apart from currency
considerations, the value of convertible securities is influenced
by both the yield of nonconvertible securities of comparable
issuers and by the value of the underlying common stock. The
value of a convertible security viewed without regard to its
conversion feature (
i.e.
, strictly on the basis of its
yield) is sometimes referred to as its “investment value.
” To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However, at
the same time, the value of the convertible security will be
influenced by its “conversion value,” which is the
market value of the underlying common stock that would be
obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common
stock. If, because of a low price of the common stock the
conversion value is substantially below the investment value of
the convertible security, the price of the convertible security
is governed principally by its investment value.
To the extent the
conversion value of a convertible security increases to a point
that approximates or exceeds its investment value, the price of
the convertible security will be influenced principally by its
conversion value. A convertible security will sell at a premium
over the conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a
fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value
to affect their market value more than the securities’
investment value.
Holders of convertible
securities generally have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be
subject to redemption at the option of the issuer at a price
established in the charter provision, indenture or other
governing instrument pursuant to which the convertible security
was issued. If a convertible security held by the Fund is called
for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third
party. Certain convertible debt securities may provide a put
option to the holder which entitles the holder to cause the
security to be redeemed by the issuer at a premium over the
stated principal amount of the debt security under certain
circumstances.
As indicated above,
synthetic convertible securities may include either Cash-Settled
Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and
have the economic characteristics of traditional convertible
securities but may not actually permit conversion into the
underlying equity securities in all circumstances. As an example,
a private company may issue a Cash-Settled Convertible that is
convertible into common stock only if the company successfully
completes a public offering of its common stock prior to maturity
and otherwise pays a cash amount to reflect any equity
appreciation. Manufactured Convertibles are created by the
Investment Adviser by combining separate securities that possess
one of the two principal characteristics of a convertible
security,
i.e.
, fixed income (“fixed income component
”) or a right to acquire equity securities (
“convertibility component”). The fixed income component
is achieved by investing in nonconvertible fixed income
securities, such as nonconvertible bonds, preferred stocks and
money market instruments. The convertibility component is
achieved by investing in call options, warrants, or other
securities with equity conversion features (“equity features
”) granting the holder the right to purchase a specified
quantity of the underlying stocks within a specified period of
time at a specified price or, in the case of a stock index
option, the right to receive a cash payment based on the value of
the underlying stock index.
The Fund may invest in
warrants, which are securities permitting, but not obligating,
the warrant holder to subscribe for other securities. Buying a
warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no right to dividends or votes on
the underlying stock. A warrant does not carry any right to
assets of the issuer, and for this reason investment in warrants
may be more speculative than other equity-based
investments.
The Fund may lend
securities with a value not exceeding 33
1
/
3
% of its
total assets. In return, the Fund receives collateral in an
amount equal to at least 100% of the current market value of the
loaned securities in cash or securities issued or guaranteed by
the U.S. Government. This limitation is a fundamental policy and
it may not be changed without the approval of the holders of a
majority of the Fund’s outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the
“Investment Company Act”). The Fund receives securities
as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by
the Fund for the loaned securities, which increases the Fund
’s yield. The Fund may receive a flat fee for its loans. The
loans 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, administrative
and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the
Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed
securities.
Illiquid or Restricted Securities
The Fund may invest up
to 15% of its net assets in securities that lack an established
secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily
of the security and the price to be obtained upon disposition of
the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at
a discount from comparable, more liquid investments. Investment
of the Fund’s assets in illiquid securities may restrict the
ability of the Fund to dispose of its investments in a timely
fashion and for a fair price as well as its ability to take
advantage of market opportunities. The risks associated with
illiquidity will be particularly acute where the Fund’s
operations require cash, such as when the Fund redeems shares or
pays dividends, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the
sale of illiquid investments.
The Fund may invest in
securities that are not registered (“restricted securities
”). Restricted securities may be sold in private placement
transactions between issuers and their purchasers and may be
neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities may not be
freely transferable under the laws of the applicable jurisdiction
or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly
traded securities. To the extent that privately placed securities
may be resold in privately negotiated transactions, the prices
realized from the sales, due to illiquidity, could be less than
those originally paid by the Fund or less than their fair market
value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their
securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under
the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of
registration. Certain of the Fund’s investments in private
placements may consist of direct investments and may include
investments in smaller, less seasoned issuers, which may involve
greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a
limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund’s ability to conduct
portfolio transactions in such securities.
The Fund may purchase
restricted securities that can be offered and sold to
“qualified institutional buyers” under Rule 144A under
the Securities Act of 1933, as amended (the “Securities Act
”). The Directors have determined to treat as liquid Rule
144A securities that are either freely tradeable in their primary
markets offshore or have been determined to be liquid in
accordance with the policies and procedures adopted by the
Directors. The Directors have adopted guidelines and delegated to
the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Directors,
however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to
predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will continue to
develop, the Directors will carefully monitor the Fund’s
investments in these securities. This investment practice could
have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for
a time uninterested in purchasing these securities.
The Fund may borrow up
to 33
1
/
3
% of its
total assets, taken at market value, but only from banks as a
temporary measure for extraordinary or emergency purposes,
including to meet redemptions (so as not to force the Fund to
liquidate securities at a disadvantageous time) or to settle
securities transactions. The Fund will not purchase securities at
any time when borrowings exceed 5% of its total assets, except
(a) to honor prior commitments or (b) to exercise subscription
rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect
of leveraging the Fund. Such leveraging increases the Program
’s exposure to capital risk, and borrowed funds are subject
to interest costs that will reduce net income.
The use of leverage by
the Fund creates an opportunity for greater total return, but, at
the same time, creates special risks. For example, leveraging may
exaggerate changes in the net asset value of the Fund’s
shares and in the yield on the Fund. Although the principal of
such borrowings will be fixed, the Fund’s assets may change
in value during the time the borrowings are outstanding.
Borrowings will create interest expenses for the Fund which can
exceed the income from the assets purchased with the borrowings.
To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the
Fund will have to pay on the borrowings, the Fund’s return
will be greater than if leverage had not been used. Conversely,
if the income or capital appreciation from the securities
purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to the Fund will be less than if
leverage had not been used, and therefore the amount available
for distribution to shareholders as dividends will be reduced. In
the latter case, the Investment Adviser in its best judgment
nevertheless may determine to maintain the Fund’s leveraged
position if it expects that the benefits to the Fund’s
shareholders of maintaining the leveraged position will outweigh
the current reduced return.
Certain types of
borrowings by the Fund may result in the Fund being subject to
covenants in credit agreements relating to asset coverage,
portfolio composition requirements and other matters. It is not
anticipated that observance of such covenants would impede the
Investment Adviser from managing the Fund in accordance with the
Fund’s investment objectives and policies. However, a breach
of any such covenants not cured within the specified cure period
may result in acceleration of outstanding indebtedness and
require the Fund to dispose of portfolio investments at a time
when it may be disadvantageous to do so.
The Fund at times may
borrow from affiliates of the Investment Adviser, provided that
the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the
marketplace.
The Fund has adopted
the following restrictions and policies relating to the
investment of the Fund’s assets and its activities. The
fundamental restrictions set forth below may not be changed
without the approval of the holders of a majority of the Fund
’s outstanding voting securities (which for this purpose and
under the Investment Company Act means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares). Unless otherwise provided, all references to
the Fund’s assets below are in terms of current market
value. The Fund may not:
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1. Make
any investment inconsistent with the Fund’s classification
as a diversified company under the Investment Company
Act.
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2. Invest
more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its
agencies and instrumentalities).
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3. Make
investments for the purpose of exercising control or
management.
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4.
Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or
interests therein.
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5. Make
loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through
instruments, certificates of deposit, bankers’
acceptances, repurchase agreements, purchase and sale contracts
or any similar instruments shall not be deemed to be the making
of a loan, and except further that the Fund may lend its
portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law
and the guidelines set forth in the Program’s Prospectus
and Statement of Additional Information, as they may be amended
from time to time.
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6. Issue
senior securities to the extent such issuance would violate
applicable law.
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7. Borrow
money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to
33
1
/
3
% of its
total assets (including the amount borrowed), (ii) the Fund may
borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as
may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities
on margin to the extent permitted by applicable law. The Fund
may not pledge its assets other than to secure such borrowings
or, to the extent permitted by the Fund’s investment
policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales,
when issued and forward commitment transactions and similar
investment strategies.
|
|
|
8.
Underwrite securities of other issuers except insofar as
the Fund technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
|
|
|
9.
Purchase or sell commodities or contracts on commodities,
except to the extent that the Fund may do so in accordance with
applicable law and the Fund’s Prospectus and this
Statement of Additional Information, as they may be amended
from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
|
In addition, the Fund
has adopted non-fundamental restrictions that may be changed by
the Board of Directors of the Program without shareholder
approval, provided the Fund may not:
|
|
a.
Purchase securities of other investment companies, except
to the extent such purchases are permitted by applicable law.
As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or
registered unit investment trust, in reliance on Section
12(d)(1)(F) or (G) (the “fund of funds” provisions)
of the Investment Company Act, at any time its shares are owned
by another investment company that is part of the same group of
investment companies as the Program.
|
|
|
b. Make
short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
|
|
|
c. Invest
in securities that cannot be readily resold because of legal or
contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time
of acquisition
more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities that
mature within seven days or securities that the Board of
Directors of the Program have otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (which are restricted
securities that can be resold to qualified institutional
buyers, but not to the general public) and determined to be
liquid by the Board of Directors of the Program are not subject
to the limitations set forth in this investment
restriction.
|
|
|
d.
Notwithstanding fundamental investment restriction (7)
above, borrow amounts in excess of 10% of its total assets,
taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes such as
redemption of Fund shares. The Fund will not purchase
securities while borrowings exceed 5% (taken at market value)
of its total assets.
|
Portfolio securities of
the Fund generally may not be purchased from, sold or loaned to
the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless
pursuant to rule or exemptive order under the Investment Company
Act.
The staff of the
Commission has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options if, as
a result of such transaction, the sum of the market value of OTC
options currently outstanding that are held by the Fund, the
market value of the underlying securities covered by OTC call
options currently outstanding that were sold by the Fund and
margin deposits on the Fund’s existing OTC options on
futures contracts exceeds 15% of the net assets of the Fund taken
at market value, together with all other Fund assets that are
illiquid or are not otherwise readily marketable. However, if the
OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined
price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less
the amount by which the option is “in-the-money”
(
i.e.
, current market value of the underlying securities
minus the option’s strike price). The repurchase price with
the primary dealers is typically a formula price that is
generally based on a multiple of the premium received for the
option plus the amount by which the option is “in-the-money.
” This policy as to OTC options is not a fundamental policy
of the Fund and may be amended by the Directors without the
approval of the shareholders. However, the Directors will not
change or modify this policy prior to the change or modification
by the Commission staff of its position.
Because of the
affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“Merrill Lynch”) with the Investment
Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch or its affiliates except for
brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act.
See “Portfolio Transactions and Brokerage.” Without
such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
The rate of portfolio
turnover is not a limiting factor and, given the Fund’s
investment policies, it is anticipated that there may be periods
when high portfolio turnover will exist. The use of covered call
options at times when the underlying securities are appreciating
in value may result in higher portfolio turnover. High portfolio
turnover may have certain tax consequences, such as increased
capital gain dividends. The Fund pays brokerage commissions in
connection with writing call options and effecting closing
purchase transactions, as well as in connection with purchases
and sales of portfolio securities. The portfolio turnover rate
for the Fund is calculated by dividing the lesser of the Fund
’s annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities with
maturities at the time of acquisition of one year or less) by the
monthly average value of the securities in the portfolio during
the year.
MANAGEMENT OF THE PROGRAM
The Directors of the
Program consist of seven individuals, five of whom are not
“interested persons” of the Program as defined in the
Investment Company Act. The Directors are responsible for the
overall supervision of the operations of the Program and perform
the various duties imposed on the directors of investment
companies by the Investment Company Act.
Information about the
Directors, executive officers and portfolio managers of the
Program, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless
otherwise noted, the address of each executive officer, Director
and portfolio manager is P.O. Box 9011, Princeton, New Jersey
08543-9011.
T
ERRY
K. G
LENN
(59)—
President and Director
(1)(2)—Executive Vice
President of the Investment Adviser and Fund Asset Management,
L.P. (“FAM”) (which terms as used herein include their
corporate predecessors) since 1983; Executive Vice President and
Director of Princeton Services, Inc. (“Princeton Services
”) since 1993; President of Princeton Funds Distributor,
Inc. (“PFD”) since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since
1988.
J
OE
G
RILLS
(64)—
Director
(2)(3)—P.O. Box 98, Rapidan, Virginia
22733. Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute (“CIEBA”)
since 1986; Member of CIEBA’s Executive Committee since 1988
and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated (“IBM”)
and Chief Investment Officer of IBM Retirement Funds from 1986
until 1993; Member of the Investment Advisory Committees of the
State of New York Common Retirement Fund and the Howard Hughes
Medical Institute since 1997; Director, Duke Management Company
since 1992 and elected Vice Chairman in May 1998; Director,
LaSalle Street Fund since 1995; Director, Hotchkis and Wiley
Mutual Funds since 1996; Director, Kimco Realty Corporation since
1997; Member of the Investment Advisory Committee of the Virginia
Retirement System since 1998; Director, Montpelier Foundation
since December 1998.
W
ALTER
M
INTZ
(70)—
Director
(2)(3)—1114 Avenue of the Americas,
New York, New York 10036. Special Limited Partner of Cumberland
Associates (investment partnership) since 1982.
R
OBERT
S. S
ALOMON
, J
R
. (63)—
Director
(2)(3)—106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management
(investment adviser) since 1994; Trustee, The Common Fund since
1980; Chairman and CEO of Salomon Brothers Asset Management from
1992 until 1995; Chairman of Salomon Brothers equity mutual funds
from 1992 until 1995; Monthly columnist with
Forbes
magazine since 1992; Director of Stock Research and U.S. Equity
Strategist at Salomon Brothers from 1975 until 1991.
M
ELVIN
R. S
EIDEN
(69)—
Director
(2)(3)—780 Third Avenue, Suite 2502,
New York, New York 10017. Director of Silbanc Properties, Ltd.
(real estate, investment and consulting) since 1987; Chairman and
President of Seiden & de Cuevas, Inc (private investment
firm) from 1964 to 1987.
S
TEPHEN
B. S
WENSRUD
(66)—
Director
(2)(3)—24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors
(investment adviser) since 1996; Principal, Fernwood Associates
(financial consultant) since 1975; Chairman of RPP Corporation
(manufacturing) since 1978; Director of International Mobile
Communications, Inc. (telecommunications) since 1998.
A
RTHUR
Z
EIKEL
(67)—
Director
(1)(2)—300 Woodland Avenue,
Westfield, New Jersey 07090. Chairman of the Investment Adviser
and MLAM from 1997 to 1999 and President thereof from 1977 to
1997; Chairman of Princeton Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. (
“ML & Co.”) from 1990 to 1999.
J
OSEPH
T. M
ONAGLE
, J
R
. (49)—
Senior Vice President
(1)(2)—Senior Vice
President of the Investment Adviser and MLAM since 1990;
Department Head of the Global Fixed Income Division of the
Investment Adviser and MLAM since 1997; Senior Vice President of
Princeton Services since 1993.
L
AWRENCE
R. F
ULLER
(58)—
Senior Vice President and Portfolio Manager
(1)(2)
—First Vice President of the Investment Adviser since 1997
and Vice President of the Investment Adviser from 1992 to
1997.
R. E
LISE
B
AUM
(39)—
Senior Vice President and Portfolio Manager
(1)(2)
—First Vice President of the Investment Adviser since 1999;
Director of the Investment Adviser from 1997 to 1999; Vice
President of the Investment Adviser from 1995 to
1997.
R
OBERT
C. D
OLL
, J
R
. (45)—
Senior Vice President
(1)(2)—Senior Vice
President of the Investment Adviser and MLAM since 1999; Senior
Vice President of Princeton Services since 1999; Chief Investment
Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999.
T
HOMAS
R. R
OBINSON
(54)—
Senior Vice President
(1)(2)—First Vice
President of the Investment Adviser since 1997; Vice President of
the Investment Adviser from 1995 to 1997; Senior Portfolio
Manager of the Investment Adviser since November 1995; Manager of
International Equity Strategy of ML & Co.’s Global
Securities Research and Economics Group from 1989 to
1995.
C
HRISTOPHER
G. A
YOUB
(41)—
Senior Vice President
(1)(2)—First Vice
President of the Investment Adviser since 1998; Vice President of
the Investment Adviser from 1985 to 1997; Assistant Vice
President of the Investment Adviser from 1984 to 1985 and
employee since 1982.
G
REGORY
M
ARK
M
AUNZ
(45)—
Senior Vice President
(1)(2)—First Vice
President of the Investment Adviser since 1997; Vice President of
the Investment Adviser from 1985 to 1997 and Portfolio Manager
since 1984.
D
ONALD
C. B
URKE
(39)—
Vice President and Treasurer
(1)(2)—Senior
Vice President and Treasurer of the Investment Adviser and FAM
since 1999; Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since 1999; First Vice
President of The Investment Adviser from 1997 to 1999; Vice
President of The Investment Adviser from 1990 to 1997; Director
of Taxation of The Investment Adviser since 1990.
|
(1)
|
Interested person, as defined in the Investment Company
Act, of the Program.
|
|
(2)
|
Such
Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or one
of its affiliates, acts as investment adviser or
manager.
|
|
(3)
|
Member
of the Program’s Audit and Nominating Committee, which is
responsible for the selection of the independent auditors and
the selection and nomination of non-interested
Directors.
|
As of March 1, 2000,
the officers and Directors of the Program as a group (15 persons)
owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co. and owned an aggregate of less than
1% of the outstanding shares of the Program.
Compensation of Directors
The Program pays each
non-interested Director, for service to the Program, a fee of
$1,500 per year plus $250 per in-person meeting attended,
together with such individual’s actual out-of-pocket
expenses relating to attendance at meetings. The Program also
compensates members of the Audit and Nominating Committee, which
consists of all of the non-affiliated Directors at the rate of
$1,500 annually for service to the Program plus $250 per
committee meeting attended.
The following table
sets forth the compensation earned by the non-interested
Directors for the fiscal year ended January 31, 2000 and the
aggregate compensation paid to them from all investment companies
advised by the Investment Adviser or its affiliates (
“MLAM/FAM-Advised Funds”) for the calendar year ended
December 31, 1999.
Name
|
|
Position with
Program
|
|
Compensation
from Program
|
|
Pension or
Retirement Benefits
Accrued as Part of
Program Expense
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Aggregate
Compensation from
Program and Other
MLAM/FAM-Advised
Funds(1)
|
|
Joe
Grills
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$245,250
|
|
Walter
Mintz
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Robert
S. Salomon, Jr.
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Melvin
R. Seiden
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Stephen
B. Swensrud
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$232,250
|
|
(1)
|
The
Directors serve on the boards of MLAM/FAM-Advised Funds as
follows: Joe Grills (31 registered investment companies
consisting of 46 portfolios), Walter Mintz (21 registered
investment companies consisting of 43 portfolios), Robert S.
Salomon, Jr. (21 registered investment companies consisting of
43 portfolios), Melvin R. Seiden (21 registered investment
companies consisting of 43 portfolios), Stephen B. Swensrud (30
registered investment companies consisting of 67
portfolios).
|
The Directors of the
Program may be eligible for reduced sales charges on purchases of
Class A shares. See “Reduced Initial Sales Charges
—Purchase Privileges of Certain Persons.”
Management and Advisory Arrangements
Investment Advisory
Services
. The Investment Adviser
provides the Program with investment advisory and management
services. Subject to the supervision of the Board of Directors,
the Investment Adviser is responsible for the actual management
of the Program’s portfolio and constantly reviews the Program
’s holdings in light of its own research analysis and that
from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with
the Investment Adviser. The Investment Adviser performs certain
of the other administrative services and provides all the office
space, facilities, equipment and necessary personnel for
management of the Program.
Investment Advisory
Fee
. As compensation for its services
to the Fund, the Investment Adviser will receive a monthly fee
based on the average daily value of that Fund’s net assets
at the annual rate of 0.65%.
The table below sets
forth for the periods indicated the total advisory fee paid by
the Fund to the Investment Adviser:
Fiscal Year Ended January 31,
|
|
Investment
Advisory Fee
|
|
2000
|
|
$691,824
|
|
1999
|
|
$606,626
|
|
1998
|
|
$428,666
|
The Investment Adviser
has entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited (“MLAM U.K.”) pursuant to
which MLAM U.K. provides investment advisory services to the
Investment Adviser with respect to the Fund. For the fiscal years
ended January 31, 2000, 1999 and 1998, the Investment Adviser
paid no fees to MLAM U.K. pursuant to this agreement.
Payment of Program
Expenses.
The Investment Advisory
Agreement obligates the Investment Adviser to provide investment
advisory services and to pay all compensation of and furnish
office space for officers and employees of the Program connected
with investment and economic research, trading and investment
management of the Program, as well as the fees of all Directors
of the Program who are affiliated persons of ML & Co. or any
of its affiliates. The Program pays all other expenses incurred
in the operation of the Program, including among other things:
taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports,
prospectuses and statements of additional information, except to
the extent paid by Merrill Lynch Funds Distributor, a division of
PFD (the “Distributor”); charges of the custodian and
the transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal and state
securities laws; fees and expenses of unaffiliated Directors;
accounting and pricing costs (including the daily calculations of
net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and
other expenses properly payable by the Program. Accounting
services are provided for the Program by the Investment Adviser
and the Program reimburses the Investment Adviser for its costs
in connection with such services. The Distributor will pay
certain promotional expenses of the Fund incurred in connection
with the offering of shares of the Fund. Certain expenses will be
financed by the Fund pursuant to distribution plans in compliance
with Rule 12b-1 under the Investment Company Act. See
“Purchase of Shares—Distribution Plans.
”
Organization of the
Investment Adviser
. MLAM is a limited
partnership, the partners of which are ML & Co., a financial
services holding company and the parent of Merrill Lynch, and
Princeton Services. ML & Co. and Princeton Services are
“controlling persons” of the Investment Adviser as
defined under the Investment Company Act because of their
ownership of its voting securities and their power to exercise a
controlling influence over its management or
policies.
The following entities
may be considered “controlling persons” of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.’s parent), a subsidiary
of Merrill Lynch International Holdings, Inc., a subsidiary of
Merrill Lynch International, Inc., a subsidiary of ML &
Co.
Duration and
Termination
. Unless earlier terminated
as described below, the Investment Advisory Agreement and
Sub-Advisory Agreement will continue in effect for two years from
its effective date. Thereafter, it will remain in effect from
year to year if approved annually (a) by the Board of Directors
of the Program or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days’
written notice at the option of either party thereto or by the
vote of the shareholders of the Fund.
Transfer Agency
Services
. Financial Data Services,
Inc. (the “Transfer Agent”), a subsidiary of ML &
Co., acts as the Fund’s Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the “Transfer Agency Agreement
”). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D account and
$14.00 per Class B or Class C account and is entitled to
reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts that close during the calendar
year. Application of this fee will commence the month following
the month the account is closed. At the end of the calendar year,
no further fee will be due. For purposes of the Transfer Agency
Agreement, the term “account” includes a shareholder
account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML &
Co.
Distribution
Expenses
. The Fund has entered into
separate distribution agreements with the Distributor in
connection with the continuous offering of each class of shares
of the Fund (the “Distribution Agreements”). The
Distribution Agreements obligate the Distributor to pay certain
expenses in connection with the offering of each class of shares
of the Fund. After the prospectuses, statements of additional
information and periodic reports have been prepared, set in type
and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for
other supplementary sales literature and advertising costs. The
Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Investment
Advisory Agreement described above.
The Board of Directors
of the Program each have adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that covers the Fund and the
Fund’s Investment Adviser and Distributor (the “Code of
Ethics”). The Code of Ethics significantly restricts the
personal investing activities of all employees of the Investment
Adviser and Distributor and, as described below, imposes
additional, more onerous, restrictions on fund investment
personnel.
The Code of Ethics
requires that all employees of the Investment Adviser and
Distributor pre-clear any personal securities investment (with
limited exceptions, such as mutual funds, high-quality short-term
securities and direct obligations of the U.S. government). The
pre-clearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser and
Distributor include a ban on acquiring any securities in a
“hot” initial public offering and a prohibition from
profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any
fund advised by the Investment Adviser. Furthermore, the Code of
Ethics provides for trading “blackout periods” that
prohibit trading by investment personnel of the Program within
seven calendar days before or after trading by the Fund in the
same or equivalent security.
Reference is made to
“How to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus for certain information as to the purchase of Fund
shares.
The Fund issues four
classes of shares under the Merrill Lynch Select Pricing
SM
System:
shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives and shares of Class B and Class
C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of
the Fund represents an identical interest in the investment
portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing
account maintenance fees (also known as service fees) and Class B
and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The
contingent deferred sales charges (“CDSCs”),
distribution fees and account maintenance fees that are imposed
on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class D shares, are imposed directly
against those classes and not against all assets of the Fund and,
accordingly, such charges do not affect the net asset value of
any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of
shares are calculated in the same manner at the same time and
differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that
class. Class B, Class C and Class D shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which the account
maintenance and/or distribution fees are paid (except that Class
B shareholders may vote upon any material changes to expenses
charged under the distribution plan for Class D shares). Each
class has different exchange privileges. See “Shareholder
Services—Exchange Privilege.”
Investors should
understand that the purpose and function of the initial sales
charges with respect to the Class A and Class D shares are the
same as those of the CDSCs and distribution fees with respect to
the Class B and Class C shares in that the sales charges and
distribution fees applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for
selling different classes of shares.
The Merrill Lynch
Select Pricing
SM
System is
used by more than 50 registered investment companies advised by
MLAM or FAM. Funds advised by MLAM or FAM that utilize the
Merrill Lynch Select Pricing
SM
System
are referred to herein as “Select Pricing Funds.
”
The Fund offers its
shares at a public offering price equal to the next determined
net asset value per share plus any sales charge applicable to the
class of shares selected by the investor. The applicable offering
price for purchase orders is based upon the net asset value of
the Fund next determined after receipt of the purchase order by
the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the NYSE (generally
4:00 p.m. Eastern time) which includes orders received after the
determination of net asset value on the previous day, the
applicable offering price will be based on the net asset value on
the day the order is placed with the Distributor, provided that
the orders are received by the Distributor prior to 30 minutes
after the close of business on the NYSE on that day. If the
purchase orders are not received prior to 30 minutes after the
close of business on the NYSE on that day, such orders shall be
deemed received on the next business day. Dealers have the
responsibility of submitting purchase orders to the Fund not
later than 30 minutes after the close of business on the NYSE in
order to purchase shares at that day’s offering
price.
The Fund or the
Distributor may suspend the continuous offering of the Fund
’s shares of any class at any time in response to conditions
in the securities markets or otherwise and may thereafter resume
such offering from time to time. Any order may be rejected by the
Fund or the Distributor. Neither the Distributor nor the dealers
are permitted to withhold placing orders to benefit themselves by
a price change. Certain securities dealers may charge a
processing fee to confirm a sale of shares to such customers. For
example, the fee currently charged by Merrill Lynch is $5.35.
Purchases made directly through the Transfer Agent are not
subject to the processing fee.
Initial Sales Charge Alternatives—Class A and Class D
Shares
Investors who prefer an
initial sales charge alternative may elect to purchase Class D
shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance fee
imposed on Class D shares.
Investors qualifying
for significantly reduced initial sales charges may find the
initial sales charge alternative particularly attractive because
similar sales charge reductions are not available with respect to
the deferred sales charges imposed in connection with purchases
of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge
and, in the case of Class D shares, the account maintenance fee.
Although some investors who previously purchased Class A shares
may no longer be eligible to purchase Class A shares of other
Select Pricing Funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will
count toward a right of accumulation which may qualify the
investor for reduced initial sales charge on new initial sales
charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge
shares. The ongoing Class D account maintenance fees will cause
Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A
shares.
The term “purchase,
” as used in the Prospectus and this Statement of Additional
Information in connection with an investment in Class A and Class
D shares of the Fund, refers to a single purchase by an
individual or to concurrent purchases, which in the aggregate are
at least equal to the prescribed amounts, by an individual, his
or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to
single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account
although more than one beneficiary is involved. The term
“purchase” also includes purchases by any “company,
” as that term is defined in the Investment Company Act, but
does not include purchases by any such company that has not been
in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however,
that it shall not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser.
Eligible Class A Investors
Class A shares are
offered to a limited group of investors and also will be issued
upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares in a shareholder
account,
are
entitled to purchase additional Class A shares of the Fund in
that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A
shares at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets
advised by MLAM/FAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance
reserve fund programs and U.S. branches of foreign banking
institutions provided that the program has $3 million or more
initially invested in Select Pricing Funds. Also eligible to
purchase Class A shares at net asset value are participants in
certain investment programs including TMA
SM
Managed
Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and certain
purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML
& Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM/FAM-advised investment
companies. Certain persons who acquired shares of certain
MLAM/FAM-advised closed-end funds in their initial offerings who
wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions are
met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, if certain conditions are met, to shareholders of Merrill
Lynch Municipal Strategy
Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc.
who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other Select
Pricing Funds.
The following table
sets forth information regarding Class A and Class D sales charge
information.
Class A
and Class D Sales Charge Information
Class A
Shares
For
the
fiscal year
ended
January 31,
|
|
Gross
Sales
Charges
Collected
|
|
Sales
Charges
Retained by
Distributor
|
|
Sales
Charges
Paid to
Merrill Lynch
|
|
CDSCs
Received on
Redemption of
Load-Waived Shares
|
|
2000
|
|
$282
|
|
$13
|
|
$269
|
|
$0
|
|
1999
|
|
$326
|
|
$16
|
|
$310
|
|
$0
|
|
1998
|
|
$368
|
|
$18
|
|
$350
|
|
$0
|
Class D
Shares
For
the
fiscal year
ended
January 31,
|
|
Gross
Sales
Charges
Collected
|
|
Sales
Charges
Retained by
Distributor
|
|
Sales
Charges
Paid to
Merrill Lynch
|
|
CDSCs
Received on
Redemption of
Load-Waived Shares
|
|
2000
|
|
$23,567
|
|
$1,195
|
|
$22,372
|
|
$0
|
|
1999
|
|
$41,048
|
|
$2,085
|
|
$38,963
|
|
$0
|
|
1998
|
|
$35,731
|
|
$1,745
|
|
$33,986
|
|
$0
|
The Distributor may
reallow discounts to selected dealers and retain the balance over
such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling
Class A and Class D shares of the Fund will receive a concession
equal to most of the sales charge, they may be deemed to be
underwriters under the Securities Act.
Reduced Initial Sales Charges
Reductions in or
exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that
will be needed to obtain such investments.
Reinvested
Dividends
. No initial sales charges
are imposed upon Class A and Class D shares issued as a result of
the automatic reinvestment of dividends.
Right of
Accumulation
. Reduced sales charges
are applicable through a right of accumulation under which
eligible investors are permitted to purchase shares of the Fund
subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser’s combined holdings of all classes of shares of
the Fund and of any other Select Pricing Funds. For any such
right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or the
purchaser’s securities dealer, with sufficient information
to permit confirmation of qualification. Acceptance of the
purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares
held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of
accumulation.
Letter of Intent
.
Reduced sales charges are applicable to
purchases aggregating $25,000 or more of Class A or Class D
shares of the Fund or any other Merrill Lynch mutual funds made
within a 13-month period starting with the first purchase
pursuant to the Letter of Intent. The Letter of Intent is
available only to investors whose accounts are established and
maintained at the Fund’s Transfer Agent. The Letter of
Intent is not available to employee benefit plans for which
affiliates of the Investment Adviser provide plan participant
record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower
sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intent may
be included under a subsequent Letter of Intent executed within
90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and other Select Pricing
Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under
the Letter of Intent, may be included as a credit toward the
completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intent (minimum of
$25,000), the investor will be notified and must pay, within 20
days of the execution of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class A or Class B shares
equal to at least 5.0% of the intended amount will be held in
escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.0% of the dollar
amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be
entitled on that purchase and subsequent purchases to that
further reduced percentage sales charge but there will be no
retroactive reduction of the sales charge on any previous
purchase.
The value of any shares
redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter. An
exchange from the Summit Cash Reserves Fund into the Fund that
creates a sales charge will count toward completing a new or
existing Letter of Intent from the Fund.
TMA
SM
Managed Trusts
. Class A shares are
offered at net asset value to TMA
SM
Managed
Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access
SM
Accounts.
Provided applicable
threshold requirements are met, either Class A or Class D shares
are offered at net asset value to Employee Access
SM
Accounts
available through authorized employers. The initial minimum
investment for such accounts is $500, except that the initial
minimum investment for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Employer-Sponsored
Retirement or Savings Plans and Certain Other Arrangements.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase Class A
or Class D shares at net asset value, based on the number of
employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the
plan. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other
arrangements is available toll-free from Merrill Lynch Business
Financial Services at 1-800-237-7777.
Purchase Privileges
of Certain Persons
. Directors of the
Program, members of the Boards of other MLAM/FAM-advised
investment companies, ML & Co. and its subsidiaries (the term
“subsidiaries,” when used herein with respect to ML
& Co., includes the Investment Adviser, MLAM and certain
other entities directly or indirectly wholly owned and controlled
by ML & Co.) and their directors and employees and any trust,
pension, profit-sharing or other benefit plan for such persons,
may purchase Class A shares of the Fund at net asset value. The
Fund realizes economies of scale and reduction of sales-related
expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors or trustees wishing to purchase
shares of the Fund must satisfy the Fund’s suitability
standards.
Class D shares of the
Fund are offered at net asset value, without a sales charge, to
an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor,
if the following conditions are satisfied: first, the investor
must advise Merrill Lynch that it will purchase Class D shares of
the Fund with proceeds from a redemption of shares of a mutual
fund that was sponsored by the Financial Consultant’s
previous firm and was subject to a sales charge either at the
time of purchase or on a deferred basis; and second, the investor
must establish that such redemption had been made within 60 days
prior to the investment in the Fund and the proceeds from the
redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the
Fund are also offered at net asset value, without a sales charge,
to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund
sponsored by a non-Merrill Lynch company for which Merrill Lynch
has served as a selected dealer and where Merrill Lynch has
either received or given notice that such arrangement will be
terminated (“notice”) if the following conditions are
satisfied: first, the investor must purchase Class D shares of
the Fund with proceeds from a redemption of shares of such other
mutual fund and the shares of such other fund were subject to a
sales charge either at the time of purchase or on a deferred
basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the
Fund are offered at net asset value, without a sales charge, to
an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for
which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: first, the investor must
advise Merrill Lynch that it will purchase Class D shares of the
Fund with proceeds from the redemption of shares of such other
mutual fund and that such shares have been outstanding for a
period of no less than six months; and, second, such purchase of
Class D shares must be made within 60 days after the redemption
and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.
Closed-End Fund
Investment Option
. Class A shares of
the Fund and certain other Select Pricing Funds (“Eligible
Class A Shares”) are offered at net asset value to
shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing
SM
System
commenced operations) and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A
shares, if the conditions set forth below are satisfied.
Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered
Class A shares (if eligible to buy Class A shares) or Class D
shares of the Fund and other Select Pricing Funds (“Eligible
Class D Shares”), if the following conditions are met.
First, the sale of closed-end fund shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Eligible Class D Shares.
Second, the closed-end fund shares must either have been acquired
in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain
MLAM/FAM-advised continuously offered closed-end funds may
reinvest at net asset value the net proceeds from a sale of
certain shares of common stock of such funds in shares of the
Fund. Upon exercise of this investment option, shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class
A shares of the Fund and shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that
shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this
option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other
requirements pertaining to the reinvestment privilege are met. In
order to exercise this investment option, a shareholder of one of
the above-referenced continuously offered closed-end funds (an
“eligible fund”) must sell his or her shares of common
stock of the eligible fund (the “eligible shares”) back
to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the
designated class of shares of the Fund. This investment option is
available only with respect to eligible shares as to which no
Early Withdrawal charge or CDSC (each as defined in the eligible
fund’s prospectus) is applicable. Purchase orders from
eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of
the designated class of the Fund on such day.
Acquisition of
Certain Investment Companies
. Class D
shares may be offered at net asset value in connection with the
acquisition of the assets of or merger or consolidation with a
personal holding company or a public or private investment
company.
Deferred Sales Charge—Class B and Class C
Shares
Investors choosing the
deferred sales charge alternatives should consider Class B shares
if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of
time they intend to hold their assets in Select Pricing
Funds.
Because no initial
sales charges are deducted at the time of the purchase, Class B
and Class C shares provide the benefit of putting all of the
investor’s dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for the reduction in
initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted
into Class D shares of the Fund after a conversion period of
approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
The public offering
price of Class B and Class C shares for investors choosing the
deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at
the time of purchase. See “Pricing of Shares
—Determination of Net Asset Value” below.
Contingent Deferred
Sales Charges—Class B Shares
.
Class B shares that are redeemed within four years of
purchase may be subject to a CDSC at the rates set forth below
charged as a percentage of the dollar amount subject thereto. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares
derived from reinvestment of dividends. It will be assumed that
the redemption is first of shares held for over four years or
shares acquired pursuant to reinvestment of dividends and then of
shares held longest during the four-year period. A transfer of
shares from a shareholder’s account to another account will
be assumed to be made in the same order as a
redemption.
The following table
sets forth the Class B CDSC:
Year
Since Purchase Payment Made
|
|
CDSC
as a Percentage
of Dollar Amount
Subject to Charge
|
|
0-1
|
|
4.0%
|
|
1-2
|
|
3.0%
|
|
2-3
|
|
2.0%
|
|
3-4
|
|
1.0%
|
|
4 and
thereafter
|
|
None
|
To provide an example,
assume an investor purchased 100 shares at $10 per share (at a
cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor
has acquired 10 additional shares upon dividend reinvestment. If
at such time the investor makes his or her first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to a
CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 2.0% (the applicable rate in the
third year after purchase).
The Class B CDSC may be
waived on redemptions of shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account
(“IRA”) or other retirement plan or following the death
or disability (as defined in the Internal Revenue Code of 1986,
as amended) of a shareholder (including one who owns the Class B
shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial
determination of disability, or if later, reasonably promptly
following completion of probate. The Class B CDSC may be waived
on redemptions of shares by certain eligible 401(a) and eligible
401(k) plans. The CDSC may also be waived for any Class B shares
that are purchased by eligible 401(k) or eligible 401(a) plans
that are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC may also be waived for any Class B
shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by
the MLAM Private Portfolio Group and held in such account at the
time of redemption. The Class B CDSC may be waived or its terms
may be modified in connection with certain fee-based programs.
The Class B CDSC may also be waived in connection with
involuntary termination of an account in which Fund shares are
held or for redemptions through the Merrill Lynch Systematic
Redemption Plan. See “Shareholder Services—Fee-Based
Programs” and “Systematic Withdrawal Plan.
”
Employer-Sponsored
Retirement or Savings Plans and Certain Other Arrangements.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase Class B
shares with a waiver of the CDSC upon redemption, based on the
number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the
plan in specified investments and/or the services provided by
Merrill Lynch to the plan. Such Class B shares will convert into
Class D shares approximately ten years after the plan purchases
the first share of any Select Pricing Fund. Minimum purchase
requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement
or savings plans and certain other arrangements is available
toll-free from Merrill Lynch Business Financial Services at
1-800-237-7777.
Conversion of Class
B Shares to Class D Shares
. After
approximately eight years (the “Conversion Period”),
Class B shares will be converted automatically into Class D
shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of the average daily net assets
but are not subject to the distribution fee that is borne by
Class B shares. Automatic conversion of Class B shares into Class
D shares will occur at least once each month (on the
“Conversion Date”) on the basis of the relative net
asset value of the shares of the two classes on the Conversion
Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes.
In addition, shares
purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class D shares. The Conversion
Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such
dividend reinvestment shares were outstanding. If at the
Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than
$50 worth of Class B shares being left in the account, all of the
Class B shares of the Fund held in the account on the Conversion
Date will be converted to Class D shares of the Fund.
In general, Class B
shares of equity Select Pricing Funds will convert approximately
eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert
approximately ten years after initial purchase. If, during the
Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year
Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will
apply and the holding period for the shares exchanged will be
tacked on to the holding period for the shares acquired. The
Conversion Period also may be modified for investors that
participate in certain fee-based programs. See “Shareholder
Services —Fee-Based Programs.”
Class B shareholders of
the Fund exercising the exchange privilege described under
“Shareholder Services—Exchange Privilege” will
continue to be subject to the Fund’s CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B
shares acquired as a result of the exchange.
Share certificates for
Class B shares of the Fund to be converted must be delivered to
the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are
not received by the Transfer Agent at least one week prior to the
Conversion Date, the related Class B shares will convert to Class
D shares on the next scheduled Conversion Date after such
certificates are delivered.
Contingent Deferred
Sales Charges—Class C Shares
.
Class C shares that are redeemed within one year of
purchase may be subject to a 1.0% CDSC charged as a percentage of
the dollar amount subject thereto. In determining whether a Class
C CDSC is applicable to a redemption, the calculation will be
determined in the manner that results in the lowest possible rate
being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on
shares derived from reinvestment of dividends. It will be assumed
that the redemption is first of shares held for over one year or
shares acquired pursuant to reinvestment of dividends and then of
shares held longest during the one-year period. The charge will
not be applied to dollar amounts representing an increase in net
asset value since the time of purchase. A transfer of shares from
a shareholder’s account to another account will be assumed
to be made in the same order as a redemption. The Class C CDSC
may be reduced or waived in connection with involuntary
termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
See “Shareholder Services—Systematic Withdrawal Plan.
”
Class
B and Class C Sales Charge Information
Class B
Shares*
For
the
fiscal year
ended
January 31,
|
|
CDSCs
Received
by Distributor
|
|
CDSCs
Paid to
Merrill Lynch
|
|
2000
|
|
$164,734
|
|
$164,734
|
|
1999
|
|
$
94,426
|
|
$
94,426
|
|
1998
|
|
$
82,799
|
|
$
82,799
|
* Additional Class B CDSCs payable to the Distributor with
respect to the fiscal years ended January 31, 1998, 1999 and 2000
may have been waived or converted to a contingent obligation in
connection with a shareholder’s participation in certain
fee-based programs.
Class C
Shares
For
the
fiscal year
ended
January 31,
|
|
CDSCs
Received
by Distributor
|
|
CDSCs
Paid to
Merrill Lynch
|
|
2000
|
|
$
13,744
|
|
$
13,744
|
|
1999
|
|
$
8,822
|
|
$
8,822
|
|
1998
|
|
$
5,816
|
|
$
5,816
|
Class B and Class C
Sales Charge Information
. Merrill
Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor
to defray the expenses of dealers (including Merrill Lynch)
related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such
as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealer’s own
funds. The combination of the CDSC and the ongoing distribution
fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time
of purchase. See “Distribution Plans” below. Imposition
of the CDSC and the distribution fee on Class B and Class C
shares is limited by the National Association of Securities
Dealers, Inc. (the “NASD”) asset-based sales charge
rule. See “Limitations on the Payment of Deferred Sales
Charges” below.
Reference is made to
“Fees and Expenses” in the Prospectus for certain
information with respect to the separate distribution plans for
Class B, Class C and Class D shares of the Fund pursuant to Rule
12b-1 under the Investment Company Act (each a “Distribution
Plan”) with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with
respect to such classes.
The Distribution Plan
for each of the Class B, Class C and Class D shares provides that
the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid
monthly, at the annual rate of 0.25% of the average daily net
assets of the Fund attributable to shares of the relevant class
in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account
maintenance activities with respect to Class B, Class C and Class
D shares. Each of those classes has exclusive voting rights with
respect to the Distribution Plan adopted with respect to such
class pursuant to which account maintenance and/or distribution
fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D
Distribution Plan).
The Distribution Plan
for each of the Class B and Class C shares provides that the Fund
also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at
the annual rate of 0.75% of the average daily net assets of the
Fund attributable to the shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder
and distribution services and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants
for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its
financial consultants in connection with the sale of the Class B
and Class C shares. In this regard, the purpose and function of
the ongoing distribution fees and the CDSC are the same as those
of the initial sales charge with respect to the Class A and Class
D shares of the Fund in that the ongoing distribution fees and
deferred sales charges provide for the financing of the
distribution of the Fund’s Class B and Class C
shares.
The Fund’s
Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each
Distribution Plan, the Directors must consider all factors they
deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and the related class of
shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection
and nomination of non-interested Directors shall be committed to
the discretion of the non-interested Directors then in office. In
approving each Distribution Plan in accordance with Rule 12b-1,
the non-interested Directors concluded that there is reasonable
likelihood that each Distribution Plan will benefit the Fund and
its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a
majority of the non-interested Directors or by the vote of the
holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without
the approval of the related class of shareholders and all
material amendments are required to be approved by the vote of
Directors, including a majority of the non-interested Directors
who have no direct or indirect financial interest in the
Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve
copies of the Distribution Plan and any report made pursuant to
such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in
an easily accessible place.
Among other things,
each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees
paid to the Distributor. Payments under the Distribution Plans
are based on a percentage of average daily net assets
attributable to the shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related
expenses of the related class. Information with respect to the
distribution-related revenues and expenses is presented to the
Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C
Distribution Plans. This information is presented annually as of
December 31 of each year, on a “fully allocated accrual
” basis and quarterly on a “direct expense and
revenue/cash” basis. On the fully allocated accrual basis,
revenues consist of the account maintenance fees, the
distribution fees, the CDSCs and certain other related revenues,
and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction
processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account
maintenance fees, the distribution fees and CDSCs and the
expenses consist of financial consultant
compensation.
As of December 31,
1999, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations
of Class B shares of the Fund exceeded fully allocated accrual
revenues by approximately $1,262,000 (1.99% of Class B net assets
at that date). As of January 31, 2000, direct cash revenues for
the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $1,465,714 (2.45% of Class B net
assets at that date). As of December 31, 1999, the fully
allocated
accrual
expenses of the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded
the fully allocated accrual revenues by approximately $1,050,000
(3.06% of Class C net assets at that date). As of January 31,
2000, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by
$713,562 (2.19% of Class C net assets at that date).
For the fiscal year
ended January 31, 2000, the Fund paid the Distributor $653,173
pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of
approximately $65.0 million), all of which was paid to Merrill
Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. For
the fiscal year ended January 31, 2000, the Fund
paid the Distributor $342,337 pursuant to the Class C Distribution
Plan (based on average daily net assets subject to such Class C
Distribution Plan of approximately $34.0 million), all of which
was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with
Class C shares. For the fiscal year ended January 31, 2000, the
Fund paid the Distributor $16,440 pursuant to the Class D
Distribution Plan (based on average daily net assets subject to
such Class D Distribution Plan of approximately $6.5 million),
all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D
shares.
Limitations on the Payment of Deferred Sales
Charges
The maximum sales
charge rule in the Conduct Rules of the NASD imposes a limitation
on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum
sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid
balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount
payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest
charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the “voluntary maximum”) in
connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs
will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstance payment in excess of
the amount payable under the NASD formula will not be
made.
The following table
sets forth comparative information as of January 31, 2000 with
respect to the Class B and Class C shares indicating the maximum
allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the
Distributor’s voluntary maximum for the periods
indicated.
|
|
|
Data
Calculated as of January 31, 2000
|
|
|
|
(In
thousands)
|
|
|
|
Eligible
Gross
Sales(1)
|
|
Allowable
Aggregate
Sales
Charges(2)
|
|
Allowable
Interest
on
Unpaid
Balance(3)
|
|
Maximum
Amount
Payable
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current
Net Asset
Level(5)
|
Class
B Shares, for the period
February 1, 1995 (commencement of
operations) to January 31,
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
NASD Rule as Adopted
|
|
68,513
|
|
4,280
|
|
806
|
|
5,086
|
|
2,000
|
|
3,086
|
|
448
|
|
Under
Distributor’s Voluntary Waiver
|
|
68,513
|
|
4,282
|
|
343
|
|
4,625
|
|
2,000
|
|
2,625
|
|
448
|
Class
C Shares, for the period
February 1, 1995 (commencement of
operations) to January 31,
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
NASD Rule as Adopted
|
|
44,029
|
|
2,751
|
|
545
|
|
3,296
|
|
771
|
|
2,525
|
|
244
|
|
(1)
|
Purchase
price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend
reinvestment and the exchange privilege.
|
|
(2)
|
Includes
amounts attributable to exchanges from Summit Cash Reserves
Fund (“Summit”) which are not reflected in Eligible
Gross Sales. Shares of Summit can only be purchased by exchange
from another fund (the “redeemed fund”). Upon such an
exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable
sales charge payment with respect to Summit. Upon an exchange
out of Summit, the remaining balance of this amount is deducted
from the maximum allowable sales charge payment to Summit and
added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
|
|
(3)
|
Interest
is computed on a monthly basis based upon the prime rate, as
reported in
The Wall Street Journal,
plus 1.0%, as
permitted under the NASD Rule.
|
|
(4)
|
Consists
of CDSC payments, distribution fee payments and accruals. See
“Fees and Expenses” in the Prospectus. Of the
distribution fee payments made with respect to Class B shares
prior to July 6, 1993 under the distribution plan in effect at
that time, at a 1.0% rate, 0.75% of average daily net assets
has been treated as a distribution fee and 0.25% of average
daily net assets has been deemed to have been a service fee and
not subject to the NASD maximum sales charge rule. See
“What are the Program’s fees and expenses?” in
the Prospectus. This figure may include CDSCs that were
deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A
shares in conjunction with the shareholder’s participation
in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch
MFA
SM
)
Program (the “MFA Program”). The CDSC is booked as a
contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
|
|
(5)
|
Provided
to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is
amortizing the unpaid balance. No assurance can be given that
payments of the distribution fee will reach either the
voluntary maximum (with respect to Class B shares) or the NASD
maximum (with respect to Class B and Class C
shares).
|
Reference is made to
“How to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus for certain information as to the redemption and
purchase of Fund shares.
The Fund is required to
redeem for cash all shares of the Fund upon receipt of a written
request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC that may be
applicable, there will be no charge for redemption if the
redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of
redemption.
The right to redeem
shares or to receive payment with respect to any such redemption
may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by
the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during
which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination
of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.
The value of shares of
the Fund at the time of redemption may be more or less than the
shareholder’s cost, depending in part on the market value of
the securities held by the Fund at such time.
The Fund has entered
into a joint committed line of credit with other investment
companies advised by the Investment Adviser and its affiliates
and a syndicate of banks that is intended to provide the Fund
with a temporary source of cash to be used to meet redemption
requests from Fund shareholders in extraordinary or emergency
circumstances.
A shareholder wishing
to redeem shares held with the Transfer Agent may do so without
charge by tendering the shares directly to the Fund’s
Transfer Agent, Financial Data Services, Inc., P.O. Box 45289,
Jacksonville, Florida 32232-5289. Proper notice of redemption in
the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption.
Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the
shares to be redeemed. Redemption requests should not be sent to
the Program or the Fund. A redemption request in either event
requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s)
on the Transfer Agent’s register. The signature(s) on the
redemption request may require a guarantee by an “eligible
guarantor institution” as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934 (the “Exchange Act”),
the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures are
not sufficient. In general, signature guarantees are waived on
redemptions of less than $50,000 as long as the following
requirements are met: (i) all requests require the signature(s)
of all persons in whose name(s) shares are recorded on the
Transfer Agent’s register; (ii) all checks must be mailed to
the stencil address of record on the Transfer Agent’s
register and (iii) the stencil address must not have changed
within 30 days. Certain rules may apply regarding certain account
types such as but not limited to UGMA/UTMA accounts, Joint
Tenancies With Rights of Survivorship, contra broker transactions
and institutional accounts. In certain instances, the Transfer
Agent may require additional documents such as, but not limited
to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate
authority.
A shareholder may also
redeem shares held with the Transfer Agent by telephone request.
To request a redemption from your account, call the Transfer
Agent at 1-800-MER-FUND. The request must be made by the
shareholder of record and be for an amount less than $50,000.
Before telephone requests will be honored, signature approval
from all shareholders of record on the account must be obtained.
The shares being redeemed must have been held for at least 15
days. Telephone redemption requests will not be honored in the
following situations: the
accountholder is deceased, the proceeds are to be sent to someone
other than the shareholder of record, funds are to be wired to
the client’s bank account, a systematic withdrawal plan is
in effect, the request is by an individual other than the
accountholder of record, the account is held by joint tenants who
are divorced, the address on the account has changed within the
last 30 days or share certificates have been issued on the
account.
Since the account
feature involves a risk of loss from unauthorized or fraudulent
transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be
refused if the caller is unable to provide: the account number,
the name and address registered on the account and the social
security number registered on the account. The Fund or the
Transfer Agent may temporarily suspend telephone transactions at
any time.
For shareholders
redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of
redemption. At various times the Fund may be requested to redeem
shares for which it has not yet received good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank). The Fund may delay or cause to be delayed the mailing
of a redemption check until such time as good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of such Fund
shares, which will usually not exceed 10 days. In the event that
a shareholder account held directly with the Transfer Agent
contains a fractional share balance, such fractional share
balance will be automatically redeemed by the Fund.
The Fund also will
repurchase its shares through a shareholder’s listed
securities dealer. The Fund normally will accept orders to
repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after the order is
placed. Shares will be priced at the net asset value calculated
on the day the request is received, provided that the request for
repurchase is submitted to the dealer prior to the regular close
of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on
the NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30
minutes after the close of business on the NYSE in order to
obtain that day’s closing price.
The foregoing
repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected
dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice
of repurchase to the Fund. Merrill Lynch may charge its customers
a processing fee (presently, $5.35) to confirm a repurchase of
shares to such customers. Repurchases made directly through the
Transfer Agent, on accounts held at the Transfer Agent, are not
subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is
rejected by the Fund, however, may redeem shares as set forth
above.
Reinstatement Privilege—Class A and Class D
Shares
Shareholders of the
Fund who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or
Class D shares, as the case may be, of the Fund at net asset
value without a sales charge up to the dollar amount redeemed.
The reinstatement privilege may be exercised by sending a notice
of exercise along with a check for the amount to be reinstated to
the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised
through the investor’s Merrill Lynch Financial Consultant
within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next
determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds.
Determination of Net Asset Value
Reference is made to
“How Shares Are Priced” in the Prospectus.
The net asset value of
the shares of all classes of the Fund is determined once daily
Monday through Friday after 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.
Any assets or liabilities expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day
of valuation. The NYSE is not open for trading on New Year’s
Day, Martin Luther King, Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Net asset value is
computed by dividing the value of the securities held by the Fund
plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares of the Fund
outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Investment Adviser and the
Distributor, are accrued daily.
The per share net asset
value of Class B, Class C and Class D shares generally will be
lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares, and the daily expense
accruals of the account maintenance fees applicable with respect
to Class D shares. Moreover, the per share net asset value of the
Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer
agency fees applicable with respect to Class B and Class C shares
of the Fund. It is expected, however, that the per share net
asset value of the four classes of the Fund will tend to converge
(although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the
expense accrual differentials between the classes.
Portfolio securities
that are traded on stock exchanges are valued at the last sale
price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for
short positions. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors of
the Program as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid
price in the OTC market prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at
the last available ask price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the
broadest and most representative market. When the Fund writes an
option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the
current market value of the option written, based on the last
sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last ask price. Options
purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are
stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board
of Directors of the Program. Such valuations and procedures will
be reviewed periodically by the Board of Directors of the
Program.
The Fund values debt
securities on the basis of valuations provided by dealers or by a
pricing service which uses information with respect to
transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships
between securities and yield to maturity. Portfolio securities
(other than short-term obligations but including listed issues)
may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal,
institutional-size trading units of such securities using market
information, transactions for comparable securities and various
relationships between securities which are generally recognized
by institutional traders. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless this
method no longer produces fair valuations.
Generally, trading in
non-U.S. securities, as well as U.S. Government securities and
money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The
values of such securities used in computing the net asset value
of the Fund’s shares are determined as of such times.
Foreign currency exchange rates also are generally determined
prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates
may occur between the times at which they are determined and the
close of business on the NYSE that may not be reflected in the
computation of the Fund’s net asset value.
Option Accounting
Principles
. When the Fund sells an option, an amount equal to
the premium received by the Fund is included in that Fund’s
Statement of Assets and Liabilities as a deferred credit. The
amount of such liability subsequently will be marked-to-market to
reflect the current market value of the option written. If
current market value exceeds the premium received there is an
unrealized loss; conversely, if the premium exceeds current
market value there is an unrealized gain. The current market
value of a traded option is the last sale price or, in the
absence of a sale, the last offering price. If an option expires
on its stipulated expiration date or if the Fund enters into a
closing purchasing transaction, the affected Fund will realize a
gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was sold) without
regard to any unrealized gain or loss on the underlying security,
and the liability related to such option will be extinguished. If
an option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security and the proceeds of sales are
increased by the premium originally received.
Each investor in the
Fund may add to or reduce its investment in the Fund on each day
the NYSE is open for trading. The value of each investor’s
interest in the Fund will be determined after the close of
business on the NYSE by multiplying the net asset value of the
Fund by the percentage, effective for that day, that represents
that investor’s share of the aggregate interests in the
Fund. The close of business on the NYSE is generally 4:00 p.m.,
Eastern time. Any additions or withdrawals to be effected on that
day will then be effected. The investor’s percentage of the
aggregate beneficial interests in the Fund will then be
recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor’s
investment in the Fund as of the time of determination on such
day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor’s investment
in the Fund effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Fund as of such
time on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate
investments in the Fund by all investors in the Fund. The
percentage so determined will then be applied to determine the
value of the investor’s interest in the Fund after the close
of business of the NYSE on the next determination of net asset
value of the Fund.
Computation of Offering Price Per Share
An illustration of the
computation of the offering price for Class A, Class B, Class C
and Class D shares of the Fund based on the value of the Fund
’s net assets and number of shares outstanding on January
31, 2000 is set forth below.
|
|
|
Class
A
|
|
Class
B
|
|
Class
C
|
|
Class
D
|
|
Net
Assets
|
|
$369,264
|
|
$59,736,084
|
|
$32,542,644
|
|
$5,913,078
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares Outstanding
|
|
26,141
|
|
4,355,234
|
|
2,374,973
|
|
420,946
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value Per Share (net assets divided by number
of shares outstanding)
|
|
$
14.13
|
|
$
13.72
|
|
$
13.70
|
|
$
14.05
|
|
|
Sales
Charge (Class A and Class D shares: 5.25% of
offering price; 5.54% of net asset
value) *
|
|
.78
|
|
**
|
|
**
|
|
.78
|
|
|
|
|
|
|
|
|
|
|
|
Offering
Price
|
|
$
14.91
|
|
$
13.72
|
|
$
13.70
|
|
$
14.83
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Rounded
to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
|
|
**
|
Class B
and Class C shares are not subject to an initial sales charge
but may be subject to a CDSC on redemption of shares. See
“Purchase of Shares—Deferred Sales Charge Alternatives
—Class B and Class C Shares” herein.
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies
established by the Directors of the Program, the Investment
Adviser is primarily responsible for the execution of the Fund
’s portfolio transactions and the allocation of brokerage.
The Fund has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities
and does not use any particular broker or dealer. In executing
transactions with brokers and dealers, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm and the firm
’s risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive
commission rates, the Fund does not necessarily pay the lowest
spread or commission available. In addition, consistent with the
Conduct Rules of the NASD and policies established by the
Directors of the Program, the Investment Adviser may consider
sales of Fund shares as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund; however,
whether or not a particular broker or dealer sells shares of the
Fund neither qualifies nor disqualifies such broker or dealer to
execute transactions for the Fund.
Subject to obtaining
the best net results, brokers who provide supplemental investment
research to the Investment Adviser may receive orders for
transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or
prospects of a company, industry or economic sector. Information
so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under
the Investment Advisory Agreements, and the expenses of the
Investment Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. If in the judgment
of the Investment Adviser, the Fund will benefit from
supplemental research services, the Investment Adviser is
authorized to pay brokerage commissions to a broker furnishing
such services that are in excess of commission that another
broker may have charged for effecting the same transactions.
Certain supplemental research services may primarily benefit one
or more other investment companies or other accounts for which
the Investment Adviser exercises investment discretion.
Conversely, the Fund may be the primary beneficiary of the
supplemental research services received as a result of portfolio
transactions effected for such other accounts or investment
companies.
The Fund anticipates
that its brokerage transactions involving securities of issuers
domiciled in countries other than the United States generally
will be conducted primarily on the principal stock exchanges of
such countries. Brokerage commissions and other transaction costs
on foreign stock exchange transactions generally are higher than
in the United States, although the Fund will endeavor to achieve
the best net results in effecting its portfolio transactions.
There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United
States.
Foreign equity
securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity
securities. ADRs, EDRs and GDRs may be listed on stock exchanges,
or traded in over-the-counter markets in the United States or
Europe, as the case may be. ADRs, like other securities traded in
the United States, will be subject to negotiated commission
rates. The Fund’s ability and decisions to purchase or sell
portfolio securities of foreign issuers may be affected by laws
or regulations relating to the convertibility and repatriation of
assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Program intends to manage the Fund so
as to give reasonable assurance that it will be able to obtain
U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, it is not believed that
these considerations will have significant effect on the Program
’s portfolio strategies.
The Fund may invest in
certain securities traded in the OTC market and intends to deal
directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment
Company Act, persons affiliated with the Program and persons who
are affiliated with such affiliated persons are prohibited from
dealing with the Program as principal in the purchase and sale of
securities unless a permissive order allowing such transactions
is obtained from the Commission. Since transactions in the OTC
market usually involve transactions with the dealers acting as
principal
for their own accounts, the program will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, an affiliated person
of the Program may serve as its broker in OTC transactions
conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities
during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the
Program that either comply with rules adopted by the Commission
or with interpretations of the Commission staff. See
“Investment Objective and Policies—Investment
Restrictions.”
Section 11(a) of the
Exchange Act generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least
annually furnishes the account with a statement setting forth the
aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission
has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill
Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it
is a member, appropriate consents have been obtained from the
Fund and annual statements as to aggregate compensation will be
provided to the Fund. Securities may be held by, or be
appropriate investments for, the Fund as well as other funds or
investment advisory clients of the Investment Adviser or its
affiliates.
The Directors of the
Program have considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting
portfolio transactions through affiliated entities. For example,
brokerage commissions received by affiliated brokers could be
offset against the advisory fee paid by the Fund to the
Investment Adviser. After considering all factors deemed
relevant, the Directors made a determination not to seek such
recapture. The Board will reconsider this matter from time to
time.
Information about the
brokerage commissions paid by the Fund, including commissions
paid to Merrill Lynch, is set forth in the following
table:
Fiscal Year Ended
January 31,
|
|
Aggregate Brokerage
Commissions Paid
|
|
Commissions Paid
to Merrill Lynch
|
|
2000
|
|
$193,078
|
|
$9,432
|
|
1999
|
|
$101,851
|
|
$4,822
|
|
1998
|
|
$153,414
|
|
$1,230
|
For the fiscal year
ended January 31, 2000, the brokerage commissions paid to Merrill
Lynch represented 4.89% of the aggregate brokerage commissions
paid and involved 5.71% of the Fund’s dollar amount of
transactions involving payment of brokerage
commissions.
Because of different
objectives or other factors, a particular security may be bought
for one or more clients of the Investment Adviser or its
affiliates when one or more clients of the Investment Adviser or
its affiliates are selling the same security. If purchases or
sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate act as investment
adviser, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or its affiliates
during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may
be an adverse effect on price.
The Fund offers a
number of shareholder services described below that are designed
to facilitate investment in its shares. Full details as to each
such service and copies of the various plans or how to change
options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from
the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
Each shareholder whose
account is maintained at the Transfer Agent has an Investment
Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the
reinvestment of dividends. The statements also will show any
other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each
purchase or sale transaction other than automatic investment
purchases and the reinvestment of dividends. A shareholder with
an account held at the Transfer Agent may make additions to his
or her Investment Account at any time by mailing a check directly
to the Transfer Agent. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder’s name may be opened automatically
at the Transfer Agent.
Share certificates are
issued only for full shares and only upon the specific request of
a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in
an Investment Account may be requested by a shareholder directly
from the Transfer Agent.
Shareholders may
transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer
agreement with Merrill Lynch. Certain shareholder services may
not be available for the transferred shares. After the transfer,
the shareholder may purchase additional shares of funds owned
before the transfer and all future trading of these assets must
be coordinated by the new firm. If a shareholder wishes to
transfer his or her shares to a securities dealer that has not
entered into a selected dealer agreement with Merrill Lynch, the
shareholder must either (i) redeem his or her shares, paying any
applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder
also may request the new securities dealer to maintain the shares
in an account at the Transfer Agent registered in the name of the
securities dealer for the benefit of the shareholder whether the
securities dealer has entered into a selected dealer agreement or
not.
Shareholders
considering transferring a tax-deferred retirement account such
as an individual retirement account, from Merrill Lynch to
another securities dealer should be aware that, if the firm to
which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at a
selected dealer for those shares.
U.S. shareholders of
each class of shares of the Fund have an exchange privilege with
certain other Select Pricing Funds and Summit Cash Reserves Fund (
“Summit”), a series of Financial Institutions Series
Trust, which is a Merrill Lynch-sponsored money market fund
specifically designated as available for exchange by holders of
Class A, Class B, Class C and Class D shares Select Pricing
Funds. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege, and any shares
used in an exchange must have been held by the shareholder for at
least 15 days. Before effecting an exchange, shareholders should
obtain a currently effective prospectus of the fund into which
the exchange is to be made. Exercise of the exchange privilege is
treated as a sale of the exchanged shares and a purchase of the
acquired shares for Federal income tax purposes.
Exchanges of Class A
and Class D Shares
. Class A
shareholders may exchange Class A shares of the Fund for Class A
shares of a second Select Pricing Fund if the shareholder holds
any Class A shares of the second fund in the account in which the
exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares
of a
second Select Pricing Fund, but does not hold Class A shares of the
second fund in his or her account at the time of exchange and is
not otherwise eligible to acquire Class A shares of the second
fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at
any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class D shares are exchangeable with
shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or
Class D shares outstanding (“outstanding Class A or Class D
shares”) for Class A or Class D shares of another Select
Pricing Fund, or for Class A shares of Summit (“new Class A
or Class D shares”) are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D
shares and the sales charge payable at the time of the exchange
on the new Class A or Class D shares. With respect to outstanding
Class A or Class D shares as to which previous exchanges have
taken place, the “sales charge previously paid” shall
include the aggregate of the sales charges paid with respect to
such Class A or Class D shares in the initial purchase and any
subsequent exchange. Class A or Class D shares issued pursuant to
dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the
exchange privilege, Class A and Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a
sales charge equal to the sales charge previously paid on the
Class A or Class D shares on which the dividend was paid. Based
on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares,
respectively, of the other funds with a reduced sales charge or
without a sales charge.
Exchanges of Class B
and Class C Shares
. Certain Select
Pricing Funds with Class B and Class C shares outstanding (
“outstanding Class B or Class C shares”) offer to
exchange their Class B or Class C shares for Class B or Class C
shares, respectively, of certain other Select Pricing Funds or
for Class B shares of Summit (“new Class B or Class C shares
”) on the basis of relative net asset value per Class B or
Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund’s CDSC schedule if such
schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund’s CDSC
schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund from which the
exchange was made. For purposes of computing the CDSC that may be
payable on a disposition of the new Class B or Class C shares,
the holding period for the outstanding Class B shares is
“tacked” to the holding period of the new Class B or
Class C shares. For example, an investor may exchange Class B
shares of the Fund for those of Merrill Lynch Special Value Fund,
Inc. (“Special Value Fund”) after having held the Fund
’s Class B shares for two-and-a-half years. The 2% CDSC that
generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive
cash.
There will be no CDSC
due on this redemption since by “tacking” the
two-and-a-half year holding period of the Fund Class B shares to
the three year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held Special Value
Fund Class B shares for more than five years.
Exchanges for Shares of
a Money Market Fund
. Class A and Class
D shares are exchangeable for Class A shares of Summit and Class
B and Class C shares are exchangeable for Class B shares of
Summit. Class A shares of Summit have an exchange privilege back
into Class A or Class D shares of Select Pricing Funds; Class B
shares of Summit have an exchange privilege back into Class B or
Class C shares of Select Pricing Funds and, in the event of such
an exchange, the period of time that Class B shares of Summit are
held will count toward satisfaction of the holding period
requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B
shares. Class B shares of Summit will be subject to a
distribution fee at an annual rate of 0.75% of average daily net
assets of such Class B shares. Please see your Merrill Lynch
Financial Consultant for further information.
Prior to October 12,
1998, exchanges from the Fund and other Select Pricing Funds into
a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit.
Shareholders who exchanged Select Pricing Funds shares for such
other money market funds and subsequently wish to exchange those
money market fund shares for shares of the Fund will be subject
to the CDSC schedule applicable to such Fund shares, if any. The
holding period for those money market fund shares will not count
toward satisfaction of the holding period requirement for
reduction of the CDSC imposed on such shares, if any, and, with
respect to Class B shares, toward satisfaction of the Conversion
Period. However, the holding period for Class B or Class C shares
of the Fund received in exchange for such money market fund
shares will be aggregated with the holding period for the fund
shares originally exchanged for such money market fund shares for
purposes of reducing the CDSC or satisfying the Conversion
Period.
Exchanges by
Participants in the MFA Program.
The
exchange privilege is modified with respect to certain retirement
plans which participate in the MFA Program. Such retirement plans
may exchange Class B, Class C or Class D shares that have been
held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the
commencement of participation in the MFA Program,
i.e
., no
CDSC will apply. The one year holding period does not apply to
shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares
will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon
redemption of Class B or Class C shares so reacquired, or the
Conversion Period for Class B shares so reacquired, the holding
period for the Class A shares will be “tacked” to the
holding period for the Class B or Class C shares originally held.
The Fund’s exchange privilege is also modified with respect
to purchases of Class A and Class D shares by non-retirement plan
investors under the MFA Program. First, the initial allocation of
assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a
Select Pricing Fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values
of the shares being exchanged. Therefore, there will not be a
charge for any difference between the sales charge previously
paid on the shares of the other Select Pricing Fund and the sales
charge payable on the shares of the Fund being acquired in the
exchange under the MFA Program.
Exercise of the
Exchange Privilege
. To exercise the
exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of
the exchange. Shareholders of the Fund, and shareholders of the
other Select Pricing Funds described above with shares for which
certificates have not been issued, may exercise the exchange
privilege by wire through their securities dealers. The Fund
reserves the right to require a properly completed Exchange
Application.
Telephone exchange
requests are also available in accounts held with the Transfer
Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-800-MER-FUND. The request
must be from the shareholder of record. Before telephone requests
will be honored, signature approval from all shareholders of
record must be obtained. The shares being exchanged must have
been held for at least 15 days. Telephone requests for an
exchange will not be honored in the following situations: the
accountholder is deceased, the request is by an individual other
than the accountholder of record, the account is held by joint
tenants who are divorced or the address on the account has
changed within the last 30 days. Telephone exchanges may be
refused if the caller is unable to provide: the account number,
the name and address registered on the account and the social
security number registered on the account. The Fund or the
Transfer Agent may temporarily suspend telephone transactions at
any time.
This exchange privilege
may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain
funds may suspend the continuous offering of their shares to the
general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally
may be made. It is contemplated that the exchange privilege may
be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Certain Merrill Lynch
fee-based programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a
“Program”), may permit the purchase of Class A shares
at net asset value. Under
specified circumstances, participants in certain Programs may
deposit other classes of shares, which will be exchanged for
Class A shares. Initial or deferred sales charges otherwise due
in connection with such exchanges may be waived or modified, as
may the Conversion Period applicable to the deposited shares.
Termination of participation in certain Programs may result in
the redemption of shares held therein or the automatic exchange
thereof to another class at net asset value. In addition, upon
termination of participation in a Program, shares that have been
held for less than specified periods within such Program may be
subject to a fee based on the current value of such shares. These
Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described
above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or
deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program
fees. Additional information regarding a specific Program
(including charges and limitations on transferability applicable
to shares that may be held in such Program) is available in the
Program’s client agreement and from the Transfer Agent at
1-800-MER-FUND (1-800-637-3863).
Retirement and Educational Savings Plans
Individual retirement
accounts and other retirement and education savings plans are
available from Merrill Lynch. Under these plans, investments may
be made in the Fund and certain of the other mutual funds
sponsored by Merrill Lynch as well as in other securities.
Merrill Lynch may charge an initial establishment fee and an
annual fee for each account. Information with respect to these
plans is available on request from Merrill Lynch.
Dividends received in
each of the plans referred to above are exempt from Federal
taxation until distributed from the plans. Different tax rules
apply to Roth IRA plans and education savings plans. Investors
considering participation in any retirement or education savings
plan should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make
additions to an Investment Account at any time by purchasing
Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public
offering price. These purchases may be made either through the
shareholder’s securities dealer or by mail directly to the
Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known
as the Fund’s Automatic Investment Plan. The Fund would be
authorized, on a regular basis, to provide systematic additions
to the Investment Account of such shareholder through charges of
$50 or more to the regular bank account of the shareholder by
either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA® or CBA®
account may arrange to have periodic investments made in the Fund
in amounts of $100 ($1 for retirement accounts) or more through
the CMA® or CBA® Automated Investment
Program.
Automatic Dividend Reinvestment Plan
Unless specific
instructions are given as to the method of payment, dividends
will be automatically reinvested, without sales charge, in
additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund
as determined after the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at
any time, by written notification to Merrill Lynch if their
account is maintained with Merrill Lynch, or by written
notification or by telephone (1-800-MER-FUND) to the Transfer
Agent, if their account is maintained with the Transfer Agent,
elect to have subsequent dividends of ordinary income and/or
capital gains paid in cash, rather than reinvested in shares of
the Fund (provided that, in the event that a payment on an
account maintained at the Transfer Agent would amount to $10.00
or less, a shareholder will not receive such payment in cash and
such payment will automatically be reinvested in additional
shares). Commencing ten days after the receipt by the Transfer
Agent of such notice, those instructions will be effected. The
Fund is not
responsible for any failure of delivery to the shareholder’s
address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also
be directly deposited to the shareholder’s bank
account.
Systematic Withdrawal Plan
A shareholder may elect
to receive systematic withdrawals from his or her Investment
Account by check or through automatic payment by direct deposit
to his or her bank account on either a monthly or quarterly basis
as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value,
based on cost or the current offering price, of $5,000 or more,
and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each
withdrawal payment, sufficient shares are redeemed from those on
deposit in the shareholder’s account to provide the
withdrawal payment specified by the shareholder. The shareholder
may specify the dollar amount and class of shares to be redeemed.
Redemptions will be made at net asset value as determined after
the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date,
the shares will be redeemed at the net asset value determined
after the close of business on the following business day. The
check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made on the next business
day following redemption. When a shareholder is making systematic
withdrawals, dividends on all shares in the Investment Account
are reinvested automatically in Fund shares. A shareholder’s
Systematic Withdrawal Plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
With respect to
redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or
Class C shares that can be redeemed from an account annually
shall not exceed 10% of the value of shares of such class in that
account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived.
Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are
otherwise redeemed. See “Purchase of Shares—Deferred
Sales Charge Alternatives—Class B and Class C Shares.”
Where the systematic withdrawal plan is applied to Class B
shares, upon conversion of the last Class B shares in an account
to Class D shares, a shareholder must make a new election to join
the systematic withdrawal program with respect to the Class D
shares. See “Purchase of Shares—Deferred Sales Charge
Alternatives—Conversion of Class B Shares to Class D Shares.
” If an investor wishes to change the amount being withdrawn
in a systematic withdrawal plan, the investor should contact his
or her Merrill Lynch Financial Consultant.
Withdrawal payments
should not be considered as dividends. Each withdrawal is a
taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder’s original investment
may be reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The
Fund will not knowingly accept purchase orders for shares of the
Fund from investors who maintain a systematic withdrawal plan
unless such purchase is equal to at least one year’s
scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which
the shareholder has elected to make systematic
withdrawals.
Alternatively, a
shareholder whose shares are held within a CMA® or CBA®
Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA
® or CBA® Systematic Redemption Program. The minimum
fixed dollar amount redeemable is $50. The proceeds of systematic
redemptions will be posted to the shareholder’s account
three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or
fourth Monday of each month, in the case of monthly redemptions,
or of every other month, in the case of bimonthly redemptions.
For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and
may designate whether the redemption is to be made on the first,
second, third or fourth Monday of the month. If the Monday
selected is not a business day, the redemption will be processed
at net asset value on the next business day. The CMA® or CBA
®
Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automated
Investment Program. For more information on the CMA® or CBA
® Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
The Fund intends to
distribute substantially all of its net investment income, if
any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be
distributed to the Fund’s shareholders at least annually.
From time to time, the Fund may declare a special distribution at
or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary
income and capital gains be distributed during the year. If in
any fiscal year, the Fund have net income from certain foreign
currency transactions, such income will be distributed at least
annually.
See “Shareholder
Services—Automatic Dividend Reinvestment Plan” for
information concerning the manner in which dividends may be
reinvested automatically in shares of the Fund. A shareholder
whose account is maintained at the Transfer Agent or whose
account is maintained through his or her selected dealer may
elect in writing to receive any such dividends in cash. Dividends
are taxable to shareholders, as discussed below, whether they are
reinvested in shares of the Fund or received in cash. The per
share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class D shares as a result
of the account maintenance, distribution and higher transfer
agency fees applicable with respect to the Class B and Class C
shares; similarly, the per share dividends on Class D shares will
be lower than the per share dividends on Class A shares as a
result of the account maintenance fees applicable with respect to
the Class D shares. See “Pricing of Shares
—Determination of Net Asset Value.”
The Fund intends to
continue to qualify for the special tax treatment afforded
regulated investment companies (“RICs”) under the
Internal Revenue Code of 1986, as amended (the “Code”).
As long as the Fund so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains
that it distributes to Class A, Class B, Class C and Class D
shareholders (together, the “shareholders”). The Fund
intends to distribute substantially all of such
income.
The Code requires a RIC
to pay a nondeductible 4% excise tax to the extent the RIC does
not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general on a October 31 year end,
plus certain undistributed amounts from previous years. While the
Fund intends to distribute its income and capital gains in the
manner necessary to minimize imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund
’s taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund
will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Dividends paid by the
Fund from its ordinary income or from an excess of net short term
capital gains over net long term capital losses (together
referred to hereafter as “ordinary income dividends”)
are taxable to shareholders as ordinary income. Distributions
made from an excess of net long term capital gains over net short
term capital losses (including gains or losses from certain
transactions in warrants, futures and options) (“capital
gain dividends”) are taxable to shareholders as long term
capital gains, regardless of the length of time the shareholder
has owned Fund shares. Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long term
capital loss to the extent of any capital gain dividends received
by the shareholder. Distributions in excess of the Fund’s
earnings and profits will first reduce the adjusted tax basis of
a holder’s shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Certain
categories of capital gains are taxable at different rates.
Generally not later than 60 days after the close of its taxable
year, the Fund will provide its shareholders with a written
notice designating the amount of any capital gain dividends as
well as any amount of capital gain dividends in the different
categories of capital gain referred to above.
Dividends are taxable
to shareholders even though they are reinvested in additional
shares of the Fund. A portion of the Fund’s ordinary income
dividends may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements
are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A,
Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to Class A, Class B,
Class C and Class D shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe. If
the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend
will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which
such dividend was declared.
No gain or loss will be
recognized by Class B shareholders on the conversion of their
Class B shares into Class D shares. A shareholder’s basis in
the Class D shares acquired will be the same as such shareholder
’s basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding
period for the converted Class B shares.
If a shareholder
exercises an exchange privilege within 90 days of acquiring the
shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent
any sales charge paid on the exchanged shares reduces any sales
charge the shareholder would have owed upon the purchase of the
new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a
sale or exchange of shares of the Fund will be disallowed if such
shares are acquired (whether through the automatic reinvestment
of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Ordinary income
dividends paid to shareholders who are non-resident aliens or
foreign entities will be subject to a 30% U.S. withholding tax
under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or
a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax
advisers concerning the applicability of the United States
withholding tax.
Under certain
provisions of the Code, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain
dividends and redemption payments (“backup withholding
”). Generally, shareholders subject to backup withholding
will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund’s
knowledge, have furnished an incorrect number. When establishing
an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not
otherwise subject to backup withholding.
Dividends and interest
received by the Fund may give rise to withholding and other taxes
imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such
taxes.
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions
The Fund may write,
purchase or sell options, futures and forward foreign exchange
contracts. Options and futures contracts that are “Section
1256 contracts” will be “marked to market” for
Federal income tax purposes at the end of each taxable year,
i.e.,
each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable
year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures
contract for a non-U.S. currency for which the Fund elects to
have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts
held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its
investments.
A forward foreign
exchange contract that is a Section 1256 contract will be marked
to market, as described above. However, the character of gain or
loss from such a contract will generally be ordinary under Code
Section 988. In certain instances, the Fund may, nonetheless,
elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss
realized in connection with a forward foreign exchange contract
that is a Section 1256 contract will be characterized as 60%
long-term and 40% short-term capital gain or loss.
Code Section 1092,
which applies to certain “straddles,” may affect the
taxation of the Fund’s sales of securities and transactions
in options, futures and forward foreign exchange contracts. Under
Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in options, futures
and forward foreign exchange contracts.
Special Rules for Certain Foreign Currency
Transactions
In general, gains from
“foreign currencies” and from foreign currency options,
foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign
currencies will be qualifying income for purposes of determining
whether the Fund qualifies as a RIC. It is currently unclear,
however, who will be treated as the issuer of a foreign currency
instrument or how foreign currency options, futures or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988,
special rules are provided for certain transactions in a foreign
currency other than the taxpayer’s functional currency
(
i.e.,
unless certain special rules apply, currencies
other than the U.S. dollar). In general, foreign currency gains
or losses from certain debt instruments, from certain forward
contracts, from futures contracts that are not “regulated
futures contracts” and from unlisted options will be treated
as ordinary income or loss under Code Section 988. In certain
circumstances, the Fund may elect capital gain or loss treatment
for such transactions. Regulated futures contracts, as described
above, will be taxed under Code Section 1256 unless application
of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount
of the investment company taxable income of the Fund available to
be distributed to shareholders as ordinary income. Additionally,
if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able
to make any ordinary income dividend distributions, and all or a
portion of distributions made before the losses were realized but
in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each
shareholder’s Fund shares and resulting in a capital gain
for any shareholder who received a distribution greater than such
shareholder’s basis in Fund shares (assuming the shares were
held as a capital asset). These rules and the mark-to-market
rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk
of currency fluctuations with respect to its
investments.
The foregoing is a
general and abbreviated summary of the applicable provisions of
the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent
Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to
change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and
capital gain dividends may also be subject to state and local
taxes.
Certain states exempt
from state income taxation dividends paid by RICs that are
derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S.
Government obligations is exempt from state income
tax.
Shareholders are urged
to consult their tax advisers regarding specific questions as to
Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an
investment in the Fund.
From time to time the
Fund may include its average annual total return and other total
return data in advertisements or information furnished to present
or prospective shareholders. Total return is based on the Fund
’s historical performance and is not intended to indicate
future performance. Average annual total return is determined
separately for Class A, Class B, Class C and Class D shares in
accordance with a formula specified by the
Commission.
Average annual total
return quotations for the specified periods are computed by
finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value
of such investment at the end of each period. Average annual
total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in
the case of Class A and Class D shares and the CDSC that would be
applicable to a complete redemption of the investment at the end
of the specified period in the case of Class B and Class C shares
and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to
the event any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same
amount, except that account maintenance and distribution charges
and any incremental transfer agency costs relating to each class
of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of
the Fund.
The Fund also may quote
annual, average annual and annualized total return and aggregate
total return performance data, both as a percentage and a dollar
amount based on a hypothetical $1,000 investment, for various
periods other than those noted below. Such data will be computed
as described above, except that (1) as required by the periods of
the quotations, actual annual, annualized or aggregate data,
rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with
respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be
lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total
return data generally will be higher than average annual total
return data since the aggregate rates of return reflect
compounding over a longer period of time. The Fund’s total
return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified
period.
The Fund may provide
information designed to help investors understand how the Fund is
seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market,
political, or other conditions, descriptive information on
general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of the Fund’s
portfolio composition, investment philosophy, strategy or
investment techniques, comparisons of the Fund’s performance
or portfolio composition to that of other funds or types of
investments, indices relevant to the comparison being made, or to
a hypothetical or model portfolio. The Fund may also quote
various measures of volatility and benchmark correlation in
advertising and other materials, and may compare these measures
to those of other funds or types of investments.
Set forth below is
total return information for the Class A, Class B, Class C and
Class D shares of the Fund for the periods indicated.
|
|
|
Class
A Shares
|
|
Class
B Shares
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
One year
ended January 31,
2000
|
|
(2.81
|
)%
|
|
$
971.90
|
|
(2.49
|
)%
|
|
$
975.10
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
12.82
|
%
|
|
$1,827.40
|
|
12.82
|
%
|
|
$1,827.40
|
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
Year
Ended January 31,
|
|
2000
|
|
2.57
|
%
|
|
$1,025.70
|
|
1.45
|
%
|
|
$1,014.50
|
|
1999
|
|
8.51
|
%
|
|
$1,085.10
|
|
7.32
|
%
|
|
$1,073.20
|
|
1998
|
|
17.12
|
%
|
|
$1,171.20
|
|
15.91
|
%
|
|
$1,159.10
|
|
1997
|
|
23.20
|
%
|
|
$1,232.00
|
|
21.79
|
%
|
|
$1,217.90
|
Inception (February 1, 1995) to
year ended January 31,
1996
|
|
20.10
|
%
|
|
$1,201.00
|
|
18.89
|
%
|
|
$1,188.90
|
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
82.74
|
%
|
|
$1,827.40
|
|
82.74
|
%
|
|
$1,827.40
|
|
|
|
|
Class
C Shares
|
|
Class
D Shares
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
One year
ended January 31,
2000
|
|
0.39%
|
|
|
$1,003.90
|
|
(3.03%)
|
|
|
$
969.70
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
12.80%
|
|
|
$1,825.40
|
|
12.56%
|
|
|
$1,806.00
|
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
Year
Ended January 31,
|
|
2000
|
|
1.38%
|
|
|
$1,013.80
|
|
2.35%
|
|
|
$1,023.50
|
|
1999
|
|
7.23%
|
|
|
$1,072.30
|
|
8.19%
|
|
|
$1,081.90
|
|
1998
|
|
15.93%
|
|
|
$1,159.30
|
|
16.89%
|
|
|
$1,168.90
|
|
1997
|
|
21.82%
|
|
|
$1,218.20
|
|
22.82%
|
|
|
$1,228.20
|
Inception (February 1, 1995)
for year ended January 31,
1996
|
|
18.89%
|
|
|
$1,188.90
|
|
19.90%
|
|
|
$1,199.00
|
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
82.54%
|
|
|
$1,825.40
|
|
80.60%
|
|
|
$1,806.00
|
In order to reflect the
reduced sales charges in the case of Class A or Class D shares or
the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under
“Purchase of Shares” and “Redemption of Shares,
” respectively, the total return data quoted by the Fund in
advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into
account the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales
charges, a lower amount of expenses is deducted.
On occasion, the Fund
may compare its performance to various indices including the S
&P 500 Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. (“Morningstar”), CDA
Investment Technology, Inc.,
Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine and Fortune
Magazine.
When comparing its performance to a market index,
the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as
standard deviation and beta. In addition, from time to time the
Fund may include the Fund’s Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund
’s relative performance for any future period.
The Program was
incorporated under Maryland law on May 12, 1994. As of the date
of this Statement of Additional Information, the Program has an
authorized capital of 200,000,000 shares of Common Stock, par
value $0.10 per share, of which 43,750,000 has been designated to
the Fund as follows: 6,250,000 Class A shares, 25,000,000 Class B
shares, 6,250,000 Class C shares and 6,250,000 Class D shares.
The Board of Directors of the Program may classify and reclassify
the shares of the Fund into additional classes of Common Stock at
a future date.
Shareholders are
entitled to one vote for each share held and fractional votes for
fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. The Program
does not intend to hold meetings of shareholders in any year in
which the Investment Company Act does not require shareholders to
act on any of the following matters: (i) election of Directors;
(ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection
of independent auditors. Generally, under Maryland law, a meeting
of shareholders may be called for any purpose on the written
request of the holders of at least 10% of the outstanding shares
of the Program. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Redemption rights are discussed
elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by
the Program and in the net assets of the Program on liquidation
or dissolution after satisfaction of outstanding liabilities.
Stock certificates are issued by the Transfer Agent only on
specific request. Certificates for fractional shares are not
issued in any case.
Deloitte & Touche
LLP
, Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Program. The independent auditors are
responsible for auditing the annual financial statements of the
Program.
The Bank of New York,
100 Church Street, New York, New York 10286 (the “Custodian
”), acts as the Custodian of the Program’s assets.
Under its contract with the Program, the Custodian is authorized
to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Program to be held in its offices
outside the United States and with certain foreign banks and
securities depositories. The Custodian is responsible for
safeguarding and controlling the Program’s cash and
securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Program’s
investments.
Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, which is a wholly owned subsidiary of ML & Co.,
acts as the Fund’s Transfer Agent pursuant to a transfer
agency, dividend disbursing agency and shareholder servicing
agency agreement (the “Transfer Agency Agreement”). The
Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening, maintenance and servicing
of shareholder accounts.
Brown & Wood
LLP
, One
World Trade Center, New York, New York 10048-0557, is counsel for
the Program and the Fund.
The fiscal year of the
Fund ends on January 31 of each year. The Fund sends to its
shareholders at least semi-annually reports showing information
related to the Fund’s portfolio and other information. An
annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After
the end of each year, shareholders will receive Federal income
tax information regarding dividends.
Shareholder inquiries
may be addressed to the Fund at the address or telephone number
set forth on the cover page of this Statement of Additional
Information.
The Prospectus and this
Statement of Additional Information do not contain all the
information set forth in the Registration Statement and the
exhibits relating thereto, which the Fund has filed with the
Commission, Washington, D.C., under the Securities Act and the
Investment Company Act, to which reference is hereby
made.
Under a separate
agreement, ML & Co. has granted the Fund the right to use the
“Merrill Lynch” name and has reserved the right to
withdraw its consent to the use of such name by the Fund at any
time or to grant the use of such name to any other company, and
the Fund granted ML & Co. under certain conditions, the use
of any other name it might assume in the future, with respect to
any corporation organized by ML & Co.
To the knowledge of the
Fund, no persons or entities owned beneficially 5% or more of any
class of stock of the Fund as of March 1, 2000.
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[This page intentionally left blank]
CODE #18472-04-00
Mercury
Growth Opportunity Fund
PROSPECTUS
Ÿ
April 3, 2000
[ARTWORK]
This Prospectus
contains information you should know before investing, including
information about risks. please read it before you invest and
keep it for future reference.
The Securities and
Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Table of
Contents
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund
Facts
In an effort to
help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in
this prospectus in the sidebar.
Equity
Securities
—
securities
representing ownership of a corporation, including common stock,
or securities whose price is linked to the value of securities
that represent company ownership.
ABOUT THE MERCURY GROWTH OPPORTUNITY FUND
What is the Fund
’s investment objective?
The
investment objective of the Fund is to seek long term capital
growth.
What are the Fund
’s main investment strategies?
The Fund
invests primarily in
equity securities
of growth
companies. The Fund selects companies on the basis of their long
term potential for expanding their earnings, profitability and
size. The Fund also selects companies on the basis of their long
term potential for gaining increased market recognition for their
securities. The Fund does not select companies with the objective
of providing current income. The Fund may also invest in
securities issued by foreign entities and in securities
denominated in currencies other than the U.S. dollar.
What are the main
risks of investing in the Fund?
As with
any mutual fund, the value of the Fund’s investments
—and therefore the value of Fund shares—may fluctuate.
These changes may occur because particular stock markets in which
the Fund invests are rising or falling. At other times, there are
specific factors that may affect the value of a particular
investment. If the value of the Fund’s investments goes
down, you may lose money.
The Fund
may invest in foreign securities. Foreign investing involves
special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be
less liquid and harder to value than U.S. securities. These risks
are greater for investments in emerging markets.
The Fund
is a non-diversified fund, which means that it may invest more of
its assets in securities of a single issuer than if it were a
diversified fund. By concentrating in a smaller number of
issuers, the Fund’s risk is increased because developments
affecting an individual issuer have a greater impact on the Fund
’s performance.
Who should
invest?
The Fund
may be an appropriate investment for you if you:
|
|
Ÿ
|
Are
investing with long term goals, such as retirement or funding a
child’s education
|
|
|
Ÿ
|
Want a
professionally managed portfolio
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund
Facts
|
|
Ÿ
|
Are
willing to accept the risk that the value of your investment
may decline in order to seek long term capital
growth
|
|
|
Ÿ
|
Are not
looking for a significant amount of current income
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund
Facts
The bar
chart and table shown below provide an indication of the risks if
investing in the Fund. The bar chart shows changes in the Fund
’s performance for Class B shares for each complete calendar
year since the Fund’s inception. Sales charges are not
reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the
average annual total returns for each class of the Fund’s
shares for the periods shown with those of the Lipper Growth Fund
Index. How the Fund performed in the past is not necessarily an
indication of how the Fund will perform in the
future.
[BAR CHART]
1997 1998 1999
------ ------ ------
27.19% 32.05% 32.45%
During the
period shown in the bar chart, the highest return for a quarter
was in 26.74% (quarter ended December 31, 1998) and the lowest
return for a quarter was -13.29% (quarter ended September 30,
1998).
Average Annual
Total Returns (as of
the calendar year ended December 31, 1999)
|
|
Past
One Year
|
|
Since
Inception
|
|
|
Mercury Growth Opportunity Fund*†††
I
|
|
26.85%
|
|
25.73%
|
†
|
|
Lipper Growth Fund Index**
|
|
29.23%
|
|
23.33%†
†
|
|
|
|
Mercury Growth Opportunity Fund*†††
A
|
|
26.60%
|
|
25.49%
|
†
|
|
Lipper Growth Fund Index**
|
|
29.23%
|
|
23.33%†
†
|
|
|
|
Mercury Growth Opportunity Fund*
B
|
|
28.45%
|
|
26.01%
|
†
|
|
Lipper Growth Fund Index**
|
|
29.23%
|
|
23.33%†
†
|
|
|
|
Mercury Growth Opportunity Fund*
C
|
|
31.45%
|
|
26.09%
|
†
|
|
Lipper Growth Fund Index**
|
|
29.23%
|
|
23.33%†
†
|
|
|
*
|
Includes sales charges.
|
|
**
|
Lipper Growth Fund Index is an equally weighted
Index of the largest mutual funds which normally invest in
companies whose long-term earnings are expected to grow
significantly faster than the earnings of the stocks
represented in the major unmanaged stock indexes. Past
performance is not predictive of future
performance.
|
|
†
|
Inception date is February 2,
1996.
|
|
††
|
Since February 1, 1996.
|
|
†††
|
As of April 3, 2000, Class A shares were
redesignated Class I shares and Class D shares were
redesignated Class A shares.
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund
Facts
UNDERSTANDING
EXPENSES
Fund investors
pay various expenses, either directly or indirectly. Listed
below are some of the main types of expenses, which all mutual
funds may charge:
Expenses paid
directly by the shareholder:
Shareholder
Fees —
these fees
include sales charges which you may pay when you buy or sell
shares of the Fund.
Expenses paid
indirectly by the shareholder:
Annual Fund
Operating Expenses —
expenses
that cover the costs of operating the Fund.
Management Fee
—
a fee paid
to the Investment Adviser for managing the Fund.
Distribution
Fees —
fees used
to support the Fund’s marketing and distribution efforts,
such as compensating financial consultants, advertising and
promotion.
Service
(Account Maintenance) Fees —
fees used
to compensate securities dealers and other financial
intermediaries, for services to beneficial shareholders and/or
account maintenance activities.
The Fund
offers four different classes of shares. Although your money
will be invested the same way no matter which class of shares
you buy, there are differences among the fees and expenses
associated with each class. Not everyone is eligible to buy
every class. After determining which classes you are eligible to
buy, decide which class best suits your needs. Your financial
consultant can help you with this decision.
This
table shows the different fees and expenses that you may pay if
you buy and hold the different classes of shares of the Fund.
Future expenses may be greater or less than those indicated
below.
Shareholder
Fees (Fees paid directly from your
investment)(a):
|
|
Class
I*
|
|
Class
A*
|
|
Class
B(b)
|
|
Class
C
|
|
Maximum Sales
Charge (Load) imposed on purchases (as a
percentage of offering price)
|
|
5.25
|
%(c)
|
|
5.25
|
%(c)
|
|
None
|
|
|
None
|
|
|
Maximum
Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower)
|
|
None
|
(d)
|
|
None
|
(d)
|
|
4.00
|
%(c)
|
|
1.00
|
%(c)
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fee
|
|
0.65
|
%
|
|
0.65
|
%
|
|
0.65
|
%
|
|
0.65
|
%
|
|
|
Distribution and/or Service (12b-1)
Fees(e)
|
|
None
|
|
|
0.25
|
%
|
|
1.00
|
%
|
|
1.00
|
%
|
|
|
Other Expenses
(including transfer agency fees)(f)
|
|
0.71
|
%
|
|
0.72
|
%
|
|
0.80
|
%
|
|
0.83
|
%
|
|
|
Total Annual
Fund Operating Expenses
|
|
1.36
|
%
|
|
1.62
|
%
|
|
2.45
|
%
|
|
2.48
|
%
|
|
|
*
|
As of April 3, 2000, Class A shares were
redesignated Class I shares and Class D shares were
redesignated Class A shares.
|
|
(a)
|
Certain securities dealers or other financial
intermediaries may charge a fee to process a purchase or sale
of shares. See “How to Buy, Sell, Transfer and Exchange
Shares.”
|
|
(b)
|
Class B shares automatically convert to Class
A shares about eight years after you buy them and will no
longer be subject to distribution fees.
|
|
(c)
|
Some investors may qualify for reductions in
the sales charge (load).
|
|
(d)
|
You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one
year.
|
|
(e)
|
The Fund calls the “Service Fee” an
“Account Maintenance Fee.” Account Maintenance Fee
is the term used elsewhere in this Prospectus and in all other
Fund materials. If you hold Class B or C shares for a long
time, it may cost you more in distribution (12b-1) fees than
the maximum sales charge that you would have paid if you had
bought one of the other classes.
|
|
(f)
|
The Fund pays the Transfer Agent a fee for
each shareholder account and reimburses it for out-of-pocket
expenses. The fee ranges from $11.00 to $23.00 per account
(depending on the level of services required), but is set at
0.10% for certain accounts that participate in certain
fee-based programs. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close
during the calendar year. The fee begins the month following
the month the account is closed and ends at the end of the
calendar year. For the fiscal year ended January 31, 2000, the
fee paid by the Fund to the Transfer Agent was $797,869. The
Investment Adviser provides accounting services to the Fund at
its cost. For the fiscal year ended January 31, 2000, the Fund
reimbursed the Investment Adviser $113,160 for these
services.
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund
Facts
Example:
These
examples are intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual
funds.
These
examples assume that you invest $10,000 in the Fund for the time
periods indicated, that your investment has a 5% return each
year, that you pay the sales charges, if any, that apply to the
particular class and that the Fund’s operating expenses
remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may
be more or less than the 5% used in these examples. Although
your actual costs may be higher or lower, based on these
assumptions, your costs would be:
|
|
|
|
|
|
|
|
|
|
|
Expenses if you
did
redeem your
shares:
|
|
|
|
|
Class
I**
|
|
Class
A**
|
|
Class
B
|
|
Class
C
|
|
|
One
Year
|
|
$
656
|
|
$
681
|
|
$
648
|
|
|
$
351
|
|
|
Three
Years
|
|
$
933
|
|
$1,009
|
|
$1,064
|
|
|
$
773
|
|
|
Five
Years
|
|
$1,231
|
|
$1,360
|
|
$1,406
|
|
|
$1,321
|
|
|
Ten
Years
|
|
$2,074
|
|
$2,346
|
|
$2,601
|
*
|
|
$2,816
|
|
|
|
Expenses if you
did not
redeem your
shares:
|
|
|
|
|
Class
I**
|
|
Class
A**
|
|
Class
B
|
|
Class
C
|
|
|
One
Year
|
|
$
656
|
|
$
681
|
|
$
248
|
|
|
$
251
|
|
|
Three
Years
|
|
$
933
|
|
$1,009
|
|
$
764
|
|
|
$
773
|
|
|
Five
Years
|
|
$1,231
|
|
$1,360
|
|
$1,306
|
|
|
$1,321
|
|
|
Ten
Years
|
|
$2,074
|
|
$2,346
|
|
$2,601
|
*
|
|
$2,816
|
|
|
*
|
Assumes conversion to Class A shares
approximately eight years after purchase. See note (b) to the
Fees and Expenses table above.
|
|
**
|
As of April 3, 2000, Class A shares were
redesignated Class I shares and Class D shares were
redesignated Class A shares.
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] About
the Details
About the
Portfolio Manager —
Lawrence
R. Fuller is a Senior Vice President and the Portfolio Manager
of the Fund. Mr. Fuller was a Senior Vice President and Director
of Benefit Capital Management from 1984 to 1992. He was a Vice
President of the Investment Adviser from 1992 to 1997 and has
been a First Vice President since 1997.
About the
Investment Adviser —
The Fund
is managed by Fund Asset Management.
The Fund
’s investment objective is long term growth of capital. The
Fund will try to achieve its investment objective by investing
in a diversified portfolio primarily consisting of equity
securities of U.S. companies. Equity securities consist
of:
|
|
Ÿ
|
securities convertible into common stock
|
|
|
Ÿ
|
rights
to subscribe for common stock
|
The Fund
also can invest in non-convertible preferred stock and fixed
income securities of growth companies during temporary periods
if warranted by market or economic conditions. Normally, the
Fund will invest at least 65% of its total assets in equity
securities.
Fund
management emphasizes growth companies which possess
above-average growth rates in earnings, resulting from a variety
of factors including, but not limited to, above-average growth
rates in sales, profit margin improvement, proprietary or niche
products or services, leading market shares, and underlying
strong industry growth. Fund management believes that companies
which possess above-average earnings growth frequently provide
the prospect of above-average stock market returns, although
such companies tend to have higher relative stock market
valuation. The Fund may invest in companies of any size;
however, emphasis will be given to companies having medium to
large stock market capitalizations ($500 million or more). Fund
management may also select growth companies on the basis of
their long term potential for gaining increased market
recognition. The Fund does not select companies with the
objective of providing current income.
To
analyze a security, Fund management focuses on the long range
view of a company’s prospects including a fundamental
analysis of:
Fund
management’s fundamental analysis of a company does not
guarantee successful results. Additionally, full realization of
the market potential of aggressive growth companies takes time
and, for this reason, the Fund should be
considered a long term investment and not as a vehicle for seeking
short term profits.
Fund
management will select the percentages of the total portfolio
invested in equity, fixed income and other types of securities
based on its view of market or economic conditions. Fund
management may consider general economic and financial trends in
various industries, such as inflation, commodity prices,
interest movements, estimates of growth in industrial output and
profits, and government fiscal policies. Fund management will
seek to allocate the Fund’s investments among the various
types of securities in which the Fund may invest in a manner
that it believes will best capitalize on the economic and
financial trends that it perceives. There is no guarantee Fund
management will be able to correctly forecast economic or
financial trends or be able to select investments that will
benefit from the trends it perceives.
The Fund
may invest up to 20% of its total assets in equity securities of
foreign issuers. There are no limits on the geographical
allocations of these investments. Investments in American
Depository Receipts are not subject to the 20%
restriction.
The Fund
will normally invest a portion of its assets in short term debt
securities, such as commercial paper or Treasury bills. As a
temporary measure for defensive purposes, the Fund may invest
more heavily in these securities, without limitation. The Fund
may also increase its investment in these securities when Fund
management is unable to find enough attractive long term
investments, to reduce exposure to long term investments when
management believes it is advisable to do so on a temporary
basis, or to meet redemptions. Investments in short term debt
securities can be sold easily and have limited risk of loss but
earn only limited returns. Short term investments may, therefore
limit the potential for the Fund to achieve its investment
objective.
This
section contains a summary discussion of the general risks of
investing in the Fund. As with any fund, there can be no
guarantee that the Fund will meet its objective, or that the Fund
’s performance will be positive over any period of
time.
The
Fund’s principal risks include:
Market and
Selection Risk
Market
risk is the risk that the stock market in one or more countries
in which the Fund invests will go down in value, including the
possibility that one or more
markets will go down sharply and unpredictably. Selection risk is
the risk that the investments that Fund management selects will
underperform the stock markets or other funds with similar
investment objectives and investment strategies.
Concentration
Risk
The Fund
is a non-diversified portfolio. By concentrating in a smaller
number of investments, the Fund’s risk is increased because
each investment has a greater effect on the Fund’s
performance.
The
Fund also may be subject, to a lesser extent, to the following
general risks and to risks associated with investment strategies
discussed below:
Foreign Market
Risk
Since the
Fund may invest in foreign securities, it offers the potential
for more diversification than an investment only in the United
States. This is because stocks traded on foreign markets have
often (though not always) performed differently than stocks in
the United States. However, such investments involve special
risks not present in U.S. investments that can increase the
chances that the Fund will lose money. In particular, the Fund
is subject to the risk that because there are generally fewer
investors on foreign exchanges and a smaller number of shares
traded each day, it may make it difficult for the Fund 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.
Foreign Economy
Risk
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. Investments in foreign markets may also be
adversely affected by governmental actions such as the
imposition of capital controls, nationalization of companies or
industries, expropriation of assets or the imposition of
punitive taxes. In addition, the governments of certain
countries may prohibit or impose substantial restrictions on
foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security
prices, impair the Fund’s ability to purchase or sell
foreign securities or transfer the Fund’s assets or income
back into the United States, or otherwise adversely affect the
Fund’s operations. 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
some foreign countries may be less extensive than those
available to investors in the United States or other foreign
countries.
Currency
Risk
Securities in which the Fund invests may be denominated
or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates affect the value of the Fund
’s portfolio. Generally, when the U.S. dollar rises in
value against a foreign currency, a security denominated in that
currency loses value because the currency is worth fewer U.S.
dollars. Conversely, when the U.S. dollar decreases in valuer
against a foreign currency, a security denominated in that
currency gains value because the currency is worth more U.S.
dollars. The risk, generally known as “currency risk,”
means that a strong U.S. dollar will reduce returns for U.S.
investors while a weak U.S. dollar will increase those
returns.
Convertibles
Convertibles are generally debt securities or preferred
stocks that may be converted into common stock. Convertibles
typically pay current income as either interest (debt security
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 that of a regular
debt security; 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.
|
|
Ÿ
|
Conversion and
Call Risk
— For some convertibles, the issuer can choose when
to convert to common stock, or can “call” (redeem)
the convertible security. An issuer may convert or call a
convertible when it is disadvantageous for the Fund, causing
the Fund to lose an opportunity for gain. For other
convertibles, the Fund can choose when to convert the security
to common stock or to put (sell) the convertible back to the
issuer. Some convertibles may convert only under certain
circumstances and carry the additional risk that conversion
may never occur. Others may convert into a cash payment, which
is generally based on the underlying stock’s
value.
|
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] About
the Details
|
|
Ÿ
|
Synthetics
—
The Fund Manager may combine fixed income securities
(fixed income components) with a right to acquire equities
(convertibility component) to create synthetic convertible
securities. Synthetic convertible securities provide the
flexibility to create an investment that is not available in
the market directly. The separate components of synthetic
convertibles trade separately; each has its own trading market
and value. The value of the synthetic convertible is the sum
of the value of the fixed income and convertibility
components. A synthetic convertible gives the Fund Manager the
flexibility to create an investment that is not available in
the market. However, because its components trade separately,
often in different markets, the value of a synthetic
convertible may respond differently to market movements and
other events than a traditional convertible. The
convertibility component in a synthetic convertible may be a
warrant or option to purchase common stock at a set price
(exercise price), or an option on a stock index. If the value
of the underlying common stock or index falls below the
exercise price, the warrant or option may lose all
value.
|
Warrants
A warrant
gives the Fund the right to buy a quantity of stock. The warrant
specifies the amount of underlying stock, the purchase (or
“exercise”) price, and the date the warrant expires.
The Fund has no obligation to exercise the warrant and buy the
stock. A warrant has value only if the Fund can exercise it or
sell it before it expires. If the price of the underlying stock
does not rise above the exercise price before the warrant
expires, the warrant generally expires without any value and the
Fund loses any amount it paid for the warrant. Thus, investments
in warrants may involve substantially more risk than investments
in common stock. Warrants may trade in the same markets as their
underlying stock; however, the price of the warrant does not
necessarily move with the price of the underlying
stock.
Small Cap and
Emerging Growth Securities
Small cap
or emerging growth companies may have limited product lines or
markets. They may be less financially secure than larger, more
established companies. They may depend on a small number of key
personnel. If a product fails, or if management changes, or
there are other adverse developments, the Fund’s investment
in a small cap or emerging growth company may lose substantial
value.
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] About
the Details
The securities of small cap and emerging growth companies
generally trade in lower volumes and are subject to greater and
less predictable price changes than securities of larger, more
established companies. Investing in smaller and emerging growth
companies requires a long term view.
Depositary
Receipts
The Fund
may invest in securities of foreign issuers in the form of
Depositary Receipts. American Depositary Receipts are receipts
typically issued by an American bank or trust company that show
evidence of underlying securities issued by a foreign
corporation. European Depositary Receipts evidence a similar
ownership arrangement. The Fund may also invest in unsponsored
Depositary Receipts. The issuers of such unsponsored Depositary
Receipts are not obligated to disclose material information in
the United States, and therefore, there may be less information
available regarding such issuers.
Derivatives
The Fund
may use derivative instruments including futures, forwards,
options indexed securities and inverse securities. Derivatives
allow the Fund to increase or decrease its risk exposure more
quickly and efficiently than other types of
instruments.
Derivatives are volatile and involve significant risks,
including:
|
|
Ÿ
|
Credit
risk
—
the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be
unable to honor its financial obligation to the
Fund
|
|
|
Ÿ
|
Currency
risk
—
the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar
terms) of an investment
|
|
|
Ÿ
|
Leverage
risk
—
the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the
amount of investments) 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
|
|
|
Ÿ
|
Liquidity
Risk
—
the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or
at the price that the seller believes the security is
currently worth
|
The Fund
may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a
derivative to offset the
risk that other Fund holdings may decrease in value. While hedging
can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund
or if the cost of the derivative outweighs the benefit of the
hedge. Hedging also involves the risk that changes in the value
of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. There can be no
assurance that the Fund’s hedging strategy will reduce risk
or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may
choose not to do so.
Indexed and
Inverse Floater Securities
The Fund
may invest in debt securities the potential returns of which are
directly related to changes in an underlying index or interest
rate, known as indexed securities. The return on indexed
securities will rise when the underlying index or interest rate
rises and fall when the index or interest rate falls. The Fund
may also invest in securities whose return is inversely related
to changes in an index or interest rate. In general, inverse
securities change in value in a manner that is opposite to most
securities—that is, the return of inverse securities will
decrease. Investments in indexed and inverse securities may
subject the Fund to the risks of reduced or eliminated interest
payments and losses of principal. In addition, certain indexed
and inverse securities may increase or decrease in value at a
greater rate than the underlying index, which effectively
leverages the Fund’s investment. As a result, the market
value of such securities will generally be more volatile than
that of other securities.
Covered Call
Options
The Fund
can sell covered call options, which are options that give the
purchaser the right to require the Fund to sell a security owned
by the Fund to the purchaser at a specified price within a
limited time period. The Fund may also sell the purchaser a
right to require the Fund to make a payment based on the level
of an index that is closely correlated with some of the Fund
’s holdings. The Fund will receive a premium (an upfront
payment) for selling a covered call option, and if the option
expires unexercised because the price of the underlying security
has gone down the premium received by the Fund will partially
offset any losses on the underlying security. By writing a
covered call option, however, the Fund limits its ability to
sell the underlying security and gives up the opportunity to
profit from any increase in the value of the underlying security
beyond the sale price specified in the option.
MERCURY
GROWTH OPPORTUNITY FUND
[GRAPHIC] About
the Details
Short Term
Trading
The Fund
can buy and sell securities whenever it sees a market
opportunity, and therefore the Fund may engage in short term
trading. Short term trading may increase the Fund’s
expenses and have tax consequences.
Repurchase
Agreement Risk
The Fund
may enter into repurchase agreements. Under a repurchase
agreement, the seller agrees to repurchase a security at a
mutually agreed upon time and price. If the other party to a
repurchase agreement defaults on its obligation under the
agreement, the Fund may suffer delays and incur costs or even
lose money in exercising its rights under the
agreements.
When Issued
Securities, Delayed Delivery Securities and Forward
Commitments
When
issued and delayed delivery securities and forward commitments
involve the risk that the security the Fund buys will lose value
prior to its delivery. There also is the risk that the security
will not be issued or that the other party will not meet its
obligation. If this occurs, the Fund both loses the investment
opportunity for the assets it has set aside to pay for the
security and any gain in the security’s price.
Borrowing and
Leverage
The Fund
may borrow for temporary emergency purposes including to meet
redemptions. Borrowings may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund’s
portfolio. Borrowing will cost the Fund interest expense and
other fees. The cost of borrowing may reduce the Fund’s
return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward
commitments, options, warrants and reverse repurchase
agreements.
Illiquid
Securities
The Fund
may invest up to 15% of its net assets in illiquid securities
that it cannot easily resell within seven days at current value
or that have contractual or legal restrictions on resale. If the
Fund buys illiquid securities it may be unable to quickly resell
them or may be able to sell them only at a price below current
value.
Restricted
Securities
Restricted securities have contractual or legal
restrictions on their resale. They include private placement
securities that the Fund buys directly from the issuer.
Private placement and other restricted securities may not be
listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. The Fund may be
unable to sell them on short notice or may be able to sell them
only at a price below current value. The Fund may get only
limited information about the issuer, so it may be less able to
predict a loss. In addition, if Fund management receives
material adverse nonpublic information about the issuer, the
Fund will not be able to sell the security.
Rule 144A
Securities
Rule 144A
securities are restricted securities that can be resold to
qualified institutional buyers but not to the general public.
Rule 144A securities may have an active trading market, but
carry the risk that the active trading market may not
continue.
Securities
Lending
The Fund
may lend securities to financial institutions that provide
government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in
a timely manner or at all. As a result, the Fund may lose money
and there may be a delay in recovering the loaned securities.
The Fund could also lose money if it does not recover the
securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.
STATEMENT OF ADDITIONAL INFORMATION
Mercury Growth Opportunity Fund
P.O.
Box 9011, Princeton, New Jersey 08543-9011
Ÿ
Phone No. (888) 763-2260
The Mercury Growth
Opportunity Fund (the “Fund”) is a series of The Asset
Program, Inc. (the “Program”), a
professionally-managed open-end management investment company
organized as a Maryland corporation. The Fund seeks growth of
capital and, secondarily, income by investing in a portfolio of
equity securities placing principal emphasis on those securities
which management of the Fund believes to be undervalued. There
can be no assurance that the investment objective of the Fund
will be realized. For more information on the Fund’s
investment objective and policies, see “Investment
Objective and Policies.”
The Fund offers four
classes of shares, each with a different combination of sales
charges, ongoing fees and other features. These alternatives
permit an investor to choose the method of purchasing shares
that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold
the shares and other relevant circumstances. See “Purchase
of Shares.”
This Statement of
Additional Information is not a prospectus and should be read in
conjunction with the Prospectus of the Fund, dated April 3, 2000
(the “Prospectus”), which has been filed with the
Securities and Exchange Commission (the “Commission”)
and can be obtained, without charge, by calling the Fund at
1-888-763-2260 or your financial consultant, or by writing to
the address listed above. The Prospectus is incorporated by
reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund’s audited financial
statements are incorporated in this Statement of Additional
Information by reference to the Program’s 1999 annual
report to shareholders. You may request a copy of the annual
report or the Prospectus at no charge by calling 1-800-456-4587
ext. 789 between 8:00 a.m. and 8 p.m. on any business
day.
Fund
Asset Management — Investment
Adviser
Mercury Funds Distributor —
Distributor
The date
of this Statement of Additional Information is April 3,
2000.
TABLE
OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES
The Mercury Growth
Opportunity Fund seeks long term growth of capital. The Fund
will seek to achieve its investment objective by investing in a
portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in
earnings. The investment objective of the Fund set forth in the
first sentence of this paragraph is a fundamental policy of the
Fund that may not be changed without approval of a majority of
the Fund’s outstanding voting securities.
The Fund will give
particular emphasis to companies which possess above-average
growth rates in earnings, resulting from a variety of factors
including, but not limited to, above-average growth rates in
sales, profit margin improvement, proprietary or niche products
or services, leading market shares, and underlying strong
industry growth. Fund management believes that companies which
possess above-average earnings growth frequently provide the
prospect of above-average stock market returns, although such
companies tend to have higher relative stock market valuations.
Emphasis also will be given to companies having medium to large
stock market capitalizations ($500 million or more).
Investment emphasis
will be on equities, primarily common stocks and, to a lesser
extent, securities convertible into common stocks. The Fund also
may invest in nonconvertible preferred stocks and debt
securities during temporary periods as market or economic
conditions may warrant. Up to 5% of the Fund’s total assets
may be invested in debt securities rated below investment grade
(
i.e
., Ba or lower by Moody’s or BB or lower by
Standard & Poor’s or Fitch), or which possess, in the
judgment of the Investment Adviser, similar credit
characteristics. See “Debt Securities—Credit Quality.
”
The Fund may invest up
to 20% of its total assets in equity securities of foreign
issuers with the foregoing characteristics. Except as otherwise
set forth herein, there are no prescribed limits on the
geographical allocation of the Fund’s assets. (Purchases of
American Depositary Receipts (“ADRs”), however, will
not be subject to this restriction.) The Fund may invest in
securities of foreign issuers in the form of ADRs, European
Depositary Receipts (“EDRs”), Global Depositary
Receipts (“GDRs”) or other securities convertible into
securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts
typically used by an American bank or trust company which
evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs, which are issued
in registered form, are designed for use in European securities
markets. GDRs are tradable both in the United States and Europe
and are designed for use throughout the world.
The Fund is classified
as non-diversified within the meaning of the Investment Company
Act of 1940, as amended (the “Investment Company Act
”), which means that the Fund is not limited by such Act in
the proportion of its assets that it may invest in securities of
a single issuer. The Fund’s investments will be limited,
however, in order to qualify for the special tax treatment
afforded regulated investment companies under the Code. See
“Dividends and Taxes”. To qualify, the Fund will
comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Fund
’s total assets will be invested in the securities of a
single issuer and (ii) with respect to 50% of the market value
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. A fund which elects to be classified as “diversified
” under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its
total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the
Fund’s net asset value may fluctuate to a greater extent
than that of another diversified company as a result of changes
in the financial condition or in the market’s assessment of
the issuers, and the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a diversified
company.
For purposes of the
diversification requirements set forth above with respect to
regulated investment companies, and to the extent required by
the Commission, the Fund, as a non-fundamental policy, will
consider securities issued or guaranteed by the government of
any one foreign country as the obligations of a single
issuer.
The Fund will, except
during temporary periods as market or economic conditions may
warrant, maintain at least 65% of its total assets invested in
equity securities. In purchasing equity securities for the Fund,
the Investment Adviser will seek to identify the securities of
companies and industry sectors which are expected to provide
high total return relative to alternative equity investments.
The Fund generally will seek to invest in securities the
Investment Adviser believes to be undervalued. Undervalued
issues include securities selling at a discount from the
price-to-book value ratios and price-earnings ratios computed
with respect to the relevant stock market averages. The Fund
also may consider as undervalued securities selling at a
discount from their historic price-to-book value or
price-earnings ratios, even though these ratios may be above the
ratios for the stock market averages. Securities offering
dividend yields higher than the yields for the relevant stock
market averages or higher than such securities’ historic
yields may also be considered to be undervalued. The Fund may
also invest in the securities of small and emerging growth
companies when such companies are expected to provide a higher
total return than other equity investments. Such companies are
characterized by rapid historical growth rates, above-average
returns on equity or special investment value in terms of their
products or services, research capabilities or other unique
attributes. The Investment Adviser will seek to identify small
and emerging growth companies that possess superior management,
marketing ability, research and product development skills and
sound balance sheets.
Investment in the
securities of small and emerging growth companies involves
greater risk than investment in larger, more established
companies. Such risks include the fact that securities of small
or emerging growth companies may be subject to more abrupt or
erratic market movements that larger, more established companies
or the market average in general. Also, these companies may have
limited products lines, markets or financial resources, or they
may be dependent on a limited management group.
There may be periods
when market and economic conditions exist that favor certain
types of tangible assets as compared to other types of
investments.
The Fund may invest up
to 20% of its total assets in companies located in countries
other than the United States. As a result, the Fund’s
investments may include companies organized, traded or having
substantial operations outside the United States. This may
expose the Fund to risks associated with foreign investments.
Foreign investments involve certain risks not typically involved
in domestic investments, including fluctuations in foreign
exchange rates, future political and economic developments,
different legal systems and the existence or possible imposition
of exchange controls or other U.S. or non-U.S. governmental laws
or restrictions applicable to such investments. Securities
prices in different countries are subject to different economic,
financial and social factors. Because the Fund may invest in
securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates may
affect the value of securities in the portfolio and the
unrealized appreciation or depreciation of investments insofar
as U.S. investors are concerned. Foreign currency exchange rates
are determined by forces of supply and demand in the foreign
exchange markets. These forces are, in turn, affected by
international balance of payments and other economic and
financial conditions, government intervention, speculation and
other factors. With respect to certain countries, there may be
the possibility of expropriation of assets, confiscatory
taxation, high rates of inflation, political or social
instability or diplomatic developments that could affect
investment in those countries. In addition, certain investments
may be subject to non-U.S. withholding taxes.
European Economic
and Monetary Union
. A number of
European countries entered into the European Economic and
Monetary Union (“EMU”) in an effort to reduce trade
barriers between themselves and eliminate fluctuations in their
currencies. EMU established a single European currency (the
“euro”), which was introduced on January 1, 1999 and
is expected to replace the existing national currencies of all
initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were
redenominated in the euro and will trade and make dividend and
other payments only in euros. Like other investment companies
and business organizations, including the companies in which the
Fund invests, the Fund could be adversely affected if the
transition to the euro, or EMU as a whole, does not proceed as
planned or if a participating country withdraws from
EMU.
International Investing in Countries with Smaller Capital
Markets
The risks associated
with investments in foreign securities discussed above are often
heightened for investments in small capital markets.
There may be less
publicly available information about an issuer in a smaller
capital market than would be available about a U.S. company, and
it may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to
which U.S. companies are subject. As a result, traditional
investment measurements, such as price-earnings ratios, as used
in the United States, may not be applicable in certain capital
markets.
Smaller capital
markets, while often growing in trading volume, typically have
substantially less volume than U.S. markets, and securities in
many smaller capital markets are less liquid and their prices
may be more volatile than securities of comparable U.S.
companies. Brokerage commissions, custodial services, and other
costs relating to investment in smaller capital markets are
generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been
unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Further,
satisfactory custodial services for investment securities may
not be available in some countries having smaller capital
markets, which may result in the Fund’s incurring
additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement problems
could result in temporary periods when Fund assets are
uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security
or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
There is generally less government supervision and regulation of
exchanges, brokers and issuers in countries having smaller
capital markets than there are in the United States.
As a result, Fund
management may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including Fund
management, have had no or limited prior experience.
The Fund may invest up
to 5% of its total assets in debt securities. Debt securities,
such as bonds, involve credit risk. This is the risk that the
borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer’s
financial condition and on the terms of the bonds. This risk is
minimized to the extent the Fund limits its debt investments to
U.S. Government securities. All debt securities, however, are
subject to interest rate risk. This is the risk that the value
of the security may fall when interest rates rise. In general,
the market price of debt securities with longer maturities will
go up or down more in response to changes in interest rates than
the market price of shorter term securities.
Portfolio
Maturity
. The portion of the Fund
invested in debt securities is not limited as to the maturities
of its portfolio investments. The Investment Adviser may adjust
the average maturity of the Fund’s investments from time to
time, depending on its assessment of the relative yields
available on securities of different maturities and its
assessment of future interest rate patterns. Thus, at various
times the average maturity of the Fund may be relatively short
(from under one year to five years, for example) and at other
times may be relatively long (over 10 years, for
example).
Credit Quality
.
The Fund is authorized to invest up to
5% of its total assets in fixed income securities rated below Ba
by Moody’s or BB by Standard & Poor’s or Fitch or
in unrated securities which, in the Investment Adviser’s
judgment, possess similar credit characteristics (“high
yield bonds”). Investment in high yield bonds (which are
sometimes referred to as “junk” bonds) involves
substantial risk. Investments in high yield bonds will be made
only when, in the judgment of the Investment Adviser, such
securities provide attractive total return
potential, relative to the risk of such securities, as compared to
higher quality debt securities. Securities rated BB or lower by
Standard & Poor’s or Fitch or Ba or lower by Moody
’s are considered by those rating agencies to have varying
degrees of speculative characteristics. Consequently, although
high yield bonds can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations
and risk of loss of principal than lower yielding, higher rated
fixed income securities. The Fund will not invest in debt
securities in the lowest rating categories (CC or lower for
Standard & Poor’s or Fitch or Ca or lower for Moody
’s) unless the Investment Adviser believes that the
financial condition of the issuer or the protection afforded the
particular securities is stronger than would otherwise be
indicated by such low ratings. See Appendix—“Long Term
and Short Term Obligation Ratings” for additional
information regarding high yield bonds.
High yield bonds may
be issued by less creditworthy companies or by larger, highly
leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such
securities are particularly vulnerable to adverse changes in the
issuer’s industry and in general economic conditions. High
yield bonds frequently are junior obligations of their issuers,
so that in the event of the issuer’s bankruptcy, claims of
the holders of high yield bonds will be satisfied only after
satisfaction of the claims of senior security holders. While the
high yield bonds in which the portfolios may invest normally do
not include securities which, at the time of investment, are in
default or the issuers of which are in bankruptcy, there can be
no assurance that such events will not occur after the Fund
purchases a particular security, in which case the Fund may
experience losses and incur costs.
High yield bonds tend
to be more volatile than higher rated fixed income securities so
that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher rated fixed income
securities. Like higher rated fixed income securities, high
yield bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts.
However, there are fewer dealers in the high yield bond market
which may be less liquid than the market for higher rated fixed
income securities even under normal economic conditions. Also,
there may be significant disparities in the prices quoted for
high yield bonds by various dealers. Adverse economic conditions
or investor perceptions (whether or not based on economic
fundamentals) may impair the liquidity of this market and may
cause the prices the Fund receives for its high yield bonds to
be reduced, or the Fund may experience difficulty in liquidating
a portion of its portfolio. Under such conditions, judgment may
play a greater role in valuing certain of the Fund’s
securities than in the case of securities trading in a more
liquid market.
Investments in Securities Denominated in Foreign
Currencies
The Fund may invest in
securities denominated in currencies other than the U.S. dollar.
In selecting securities denominated in foreign currencies, the
Investment Adviser will consider, among other factors, the
effect of movement in currency exchange rates on the U.S. dollar
value of such securities. An increase in the value of a currency
will increase the total return to the Fund of securities
denominated in such currency. Conversely, a decline in the value
of the currency will reduce the total return. The Investment
Adviser may seek to hedge all or a portion of the Fund’s
foreign securities through the use of forward foreign currency
contracts, currency options, futures contracts and options
thereon or derivative securities. See “Indexed and Inverse
Floating Rate Securities,” and —“Options and
Futures Transactions” below.
The Fund is authorized
to invest in fixed income securities. To the extent the Fund
invests in fixed income securities, the net asset value of its
shares will be affected by changes in the general level of
interest rates. Typically, when interest rates decline, the
value of a portfolio of fixed income securities can be expected
to rise. Conversely, when interest rates rise typically the
value of a portfolio of fixed income securities can be expected
to decline.
For temporary or
defensive purposes or in anticipation of redemptions, the Fund
is authorized to invest up to 100% of its assets in money market
instruments (short term, high quality debt instruments),
including obligations
of or guaranteed by the U.S. Government or its instrumentalities
or agencies, certificates of deposit, bankers’ acceptances
and other bank obligations, commercial paper rated in the
highest category by a nationally recognized rating agency or
other fixed income securities deemed by the Investment Adviser
to be consistent with the objectives of the Fund, or the Fund
may hold its assets in cash. The obligations of commercial banks
may be issued by U.S. banks, foreign branches of U.S. banks (
“Eurodollar” obligations) or U.S. branches of foreign
banks (“Yankeedollar” obligations). Except during
extraordinary periods, the Fund would not expect that such
securities or cash held for redemptions would exceed 20% of its
total assets.
The Fund may borrow up
to 33
1
/
3
% of its
total assets, taken at market value, but only from banks as a
temporary measure for extraordinary or emergency purposes,
including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities at any time
when borrowings exceed 5% of its total assets, except (a) to
honor prior commitments or (b) to exercise subscription rights
when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect
of leveraging the Fund. Such leveraging increases the Fund
’s exposure to capital risk, and borrowed funds are subject
to interest costs that will reduce net income. The use of
leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund’s
portfolio. Although the principal of such borrowings will be
fixed, the Fund’s assets may change in value during the
time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund which can exceed the income from
the assets purchased with the borrowings. To the extent the
income or capital appreciation derived from securities purchased
with borrowed funds exceeds the interest the Fund will have to
pay on the borrowings, the Fund’s return will be greater
than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such
borrowed funds is not sufficient to cover the cost of borrowing,
the return to the Fund will be less than if leverage had not
been used, and therefore the amount available for distribution
to shareholders as dividends will be reduced. In the latter
case, the Investment Adviser in its best judgment nevertheless
may determine to maintain the Fund’s leveraged position if
it expects that the benefits to the Fund’s shareholders of
maintaining the leveraged position will outweigh the current
reduced return.
Certain types of
borrowings by the Fund may result in the Fund being subject to
covenants in credit agreements relating to asset coverage,
portfolio composition requirements and other matters. It is not
anticipated that observance of such covenants would impede the
Investment Adviser from managing the Fund’s portfolio in
accordance with the Fund’s investment objectives and
policies. However, a breach of any such covenants not cured
within the specified cure period may result in acceleration of
outstanding indebtedness and require the Fund to dispose of
portfolio investments at a time when it may be disadvantageous
to do so.
The Fund at times may
borrow from affiliates of the Investment Adviser, provided that
the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the
marketplace.
The Fund may use
instruments referred to as Derivatives. Derivatives allow the
Fund to increase or decrease the level of risk to which the Fund
is exposed more quickly and efficiently than transactions in
other types of instruments.
Hedging
.
The Fund may use Derivatives for hedging
purposes. Hedging is a strategy in which a Derivative is used to
offset the risk that other Fund holdings may decrease in value.
Losses on the other investment may be substantially reduced by
gains on a Derivative that reacts in an opposite manner to
market movements. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the
Derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the Derivative
will not match those of the holdings being hedged as expected by
the Fund, in which case any losses on the holdings being hedged
may not be reduced.
The Fund may use the
following types of derivative investments and trading
strategies:
Indexed and Inverse
Floating Rate Securities.
The Fund
may invest in securities the potential return of which is based
on an index. As an illustration, the Fund may invest in a debt
security that pays interest based on the current value of an
interest rate index, such as the prime rate. The Fund may also
invest in a debt security which returns principal at maturity
based on the level of a securities index or a basket of
securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return
of which is based inversely on the change in an index (that is,
a security the value of which will move in the opposite
direction of changes to an index). For example, the Fund may
invest in securities that pay a higher rate of interest when a
particular index decreases and pay a lower rate of interest (or
do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of
principal in the event of an adverse movement in the relevant
index or indices. Indexed and inverse securities involve credit
risk, and certain indexed and inverse securities may involve
leverage risk, liquidity risk, and currency risk. The Fund may
invest in indexed and inverse securities for hedging purposes,
to increase return or to vary the degree of portfolio leverage
relatively efficiently under different market conditions. When
used for hedging purposes, indexed and inverse securities
involve correlation risk. Indexed and inverse securities are
currently issued by a number of U.S. governmental agencies such
as FHLMC and FNMA, as well as a number of other financial
institutions. To the extent the Fund invests in such
instruments, under current market conditions, it most likely
will purchase indexed and inverse securities issued by the
above-mentioned U.S. governmental agencies.
Options and Futures
Transactions.
The Fund may engage in
various portfolio strategies to seek to increase its return
through the use of listed or over-the-counter (“OTC”)
options on its portfolio securities and to hedge its portfolio
against adverse movements in the markets in which it invests.
The Fund is authorized to write (
i.e.
, sell) covered put
and call options on its portfolio securities or securities in
which it anticipates investing and purchase put and call options
on securities. In addition, the Fund may engage in transactions
in stock index options, stock index futures and related options
on such futures and may deal in forward foreign exchange
transactions and foreign currency options and futures and
related options on such futures. Each of these portfolio
strategies is described in more detail below. Although certain
risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will (i)
write only covered options on portfolio securities or securities
in which they anticipate investing and (ii) engage in other
options and futures transactions only for hedging purposes, the
options and portfolio strategies of the Fund will not subject it
to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund’s use of
hedging strategies is intended to reduce the volatility of the
net asset value of its shares, its net asset value will
fluctuate. There can be no assurance that the Fund’s
hedging transactions will be effective. Furthermore, the Fund
will only engage in hedging activities from time to time and may
not necessarily be engaging in hedging activities when movements
in the equity or debt markets, interest rates or currency
exchange rates occur.
Writing Covered
Options
. The Fund is authorized to
write (
i.e.
, sell) covered call options on the securities
in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered
call option is an option where a Fund in return for a premium
gives another party a right to buy specified securities owned by
the Fund at a specified future date and price set at the time of
the contract. The principal reason for writing call options is
to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone.
By writing covered call options, a Fund gives up the
opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option
exercise price. In addition, the Fund’s ability to sell the
underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A
closing purchase transaction cancels out the Fund’s
position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial
hedge against the price of the underlying security declining.
The Fund may not write covered options on underlying securities
exceeding 15% of its total assets.
The Fund also may
write put options which give the holder of the option the right
to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a
put option which increases the Fund’s return. The Fund
writes only covered put options, which means that so long as the
Fund is obligated as the writer of the option it will, through
its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid
debt or equity securities denominated in U.S. dollars or
non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it
has written.
Purchasing
Options
. The Fund is authorized to
purchase put options to hedge against a decline in the market
value of its securities. By buying a put option, the Fund has a
right to sell the underlying security at the exercise price,
thus limiting the Fund’s risk of loss through a decline in
the market value of the security until the put option expires.
The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior
to its expiration, a put option may be sold in a closing sale
transaction, and profit or loss from the sale will depend on
whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A
closing sale transaction cancels out the Fund’s position as
the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has
purchased. In certain circumstances, the Fund may purchase call
options on securities held in its portfolio on which it has
written call options or on securities which it intends to
purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result
of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market
value of the Fund’s total assets.
Stock Index
Options
. The Fund is authorized to
engage in transactions in stock index options. The Fund may
purchase or write put and call options on stock indexes to hedge
against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indexes are
similar to options on securities, except that on exercise or
assignment, the parties to the contract pay or receive an amount
of cash equal to the difference between the closing value of the
index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a
broad market index,
e.g.
, the Standard & Poor’s
Composite 500 Index, or on a narrow index representing an
industry or market segment,
e.g.
, the AMEX Oil & Gas
Index.
Stock Index Futures
and Interest Futures Contracts
. The
Fund may purchase and sell stock index futures contracts and the
interest rate futures contracts, as a hedge against adverse
changes in the market value of portfolio securities, as
described below. Stock index futures contracts and interest rate
futures contracts are herein together referred to as
“futures contracts.”
A futures contract is
an agreement between two parties which obligates the purchaser
of the futures contract to buy and the seller of a futures
contract to sell a financial instrument for a set price on a
future date. The terms of a futures contract require either
actual delivery of the financial instrument underlying the
contract or, in the case of a stock index futures contract, a
cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time of
its settlement. The Fund may effect transactions in stock index
futures contracts in connection with the equity securities it
invests; the Fund may invest in interest rate futures contracts
in connection with the debt securities in which it invests.
Transactions by the Fund in futures contracts are subject to
limitations as described below under “Restrictions on the
Use of Futures Transactions.”
The Fund may sell
futures contracts in anticipation of or during a market decline
to attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a
significant advance, it may purchase futures in order to gain
rapid market exposure. This technique generally will allow the
Fund to gain exposure to a market in a manner which is more
efficient than purchasing individual securities and may in part
or entirely offset increases in the cost of securities in such
market that the Fund ultimately purchases. As such purchases are
made, an equivalent amount of futures contracts will be
terminated by offsetting sales. The Program does not consider
purchases of futures contracts by the Fund to be a speculative
practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures
position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a
put option on a future, but under unusual circumstances
(
e.g.
, the Fund experiences a significant amount of
redemptions), a long futures position may be terminated without
the corresponding purchase of securities.
The Fund also has
authority to purchase and write call and put options on futures
contracts and stock indexes and in connection with its hedging
(including anticipatory hedging) activities. Generally, these
strategies are utilized under the same market and market sector
conditions (
i.e.
, conditions relating to specific types
of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call
options on futures contracts or stock indexes rather than
selling the underlying futures contract in anticipation of a
decrease in the market value of its securities. Similarly, the
Fund may purchase call options, or write put options on futures
contracts or stock indexes, as a substitute for the purchase of
such futures contract to hedge against the increased cost
resulting from an increase in the market value of securities
which the Fund intends to purchase.
The Fund may engage in
options and futures transactions on U.S. and foreign exchanges
and in the over-the-counter markets (“OTC options”).
In general, exchange-traded contracts are third-party contracts
(
i.e.
, performance of the parties’ obligations is
guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options are
two-party contracts with prices and terms negotiated by the
buyer and seller. See “Restrictions on OTC Options”
below for information as to restrictions on the use of OTC
options.
Foreign Currency
Hedging
. The Fund is authorized to
deal in forward foreign exchange among currencies of the
different countries in which it will invest and multinational
currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. Foreign currency
hedging is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date
(up to one year) and price set at the time of the contract. The
Fund’s dealings in forward foreign exchange will be limited
to hedging involving either specific transactions or portfolio
positions.
Transaction hedging is
the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in
connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the
payment of dividends by the Fund. Position hedging is the sale
of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The
Fund will not speculate in forward foreign exchange.
Hedging against a
decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Portfolio to hedge against a devaluation that is
so generally anticipated that the Portfolio is not able to
contract to sell the currency at a price above the devaluation
level it anticipates.
The Fund also is
authorized to purchase or sell listed or OTC foreign currency
options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-U.S. dollar denominated
securities owned by the Fund sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a yen
denominated security. In such circumstances, for example, the
Fund may purchase a foreign currency put option enabling it to
sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be
offset by an increase in the value of the put option. To offset,
in whole or in part, the cost of acquiring such a put option,
the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a
“straddle”). By selling such a call option in this
illustration, the Fund gives up the opportunity to profit
without limit from increases in the relative value of the yen to
the dollar. The Investment Adviser believes that “straddles
” of the type which may be utilized by the Fund constitute
hedging transactions and are consistent with the policies
described above.
Certain differences
exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A
futures contract on a foreign currency is an agreement between
two parties to buy and sell a specified amount of a currency for
a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade or futures
exchanges. The Fund will not speculate in foreign currency
options, futures or related options. Accordingly, the
Fund will not hedge a currency substantially in excess of the
market value of securities which it has committed or anticipates
to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. The
Fund is limited regarding potential net liabilities from foreign
currency options, futures or related options to no more than 20%
of its total assets.
Restrictions on the
Use of Futures Transactions
.
Regulations of the Commodity Futures Trading Commission
(the “CFTC”) applicable to the Fund provide that the
futures trading activities described herein will not result in
the Fund being deemed a “commodity pool” as defined
under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for
bona fide
hedging purposes and (ii) for non-hedging purposes, if the
aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of
the liquidation value of the Fund’s holdings, after taking
into account unrealized profits and unrealized losses on any
such contracts and options. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract
market.
When the Fund
purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash
equivalents will be deposited in a segregated account in the
name of the Fund with the Fund’s custodian so that the
amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market
value of the futures contract, thereby ensuring that the use of
such futures contract is unleveraged.
Restrictions on OTC
Options
. The Fund may engage in OTC
options, including OTC stock index options, OTC foreign currency
options and options on foreign currency futures, only with such
banks or dealers which have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of
at least $50 million.
The staff of the
Commission has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of
such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market
value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin
deposits on the Fund’s existing OTC options on futures
contracts exceed 15% (10% to the extent required by certain
state laws) of the total assets of the Fund taken at market
value, together with all other assets of the Fund which are
illiquid or are not otherwise readily marketable. However, if
the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined
price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less
the amount by which the option is “in-the-money”)
(
i.e.
, current market value of the underlying security
minus the option’s strike price). The repurchase price with
the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the
option, plus the amount by which the option is
“in-the-money.” This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of its shareholders.
However, the Fund will not change or modify this policy prior to
the change or modification by the Commission staff of its
position.
Risk Factors in
Options and Futures Transactions
.
Utilization of options and futures transactions to hedge
the Fund involves the risk of imperfect correlation in movements
in the price of options and futures and movements in the price
of the securities or currencies which are the subject of the
hedge. If the price of the options or futures moves more or less
than the price of the hedged securities or currencies, the Fund
will experience a gain or loss which will not be completely
offset by movements in the price of the subject of the hedge.
The successful use of options and futures also depends on the
Investment Adviser’s ability to correctly predict price
movements in the market involved in a particular options or
futures transaction. To compensate for imperfect correlations,
the Fund may purchase or sell index options or futures contracts
in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than
the volatility of the stock index options or futures contracts.
Conversely, the Fund may purchase or sell fewer stock index
options or futures
contracts if the volatility of the price of the hedged securities
is historically less than that of the stock index options or
futures contracts. The risk of imperfect correlation generally
tends to diminish as the maturity date of the stock index option
or futures contract approaches.
The Fund intends to
enter into options and futures transactions, on an exchange or
in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the
case of over-the-counter transactions, the Investment Adviser
believes the Fund can receive in each business day at least two
independent bids or offers. However, there can be no assurance
that a liquid secondary market will exist at any specific time.
Thus, it may be possible to close an options or futures
position. The inability to close options and futures positions
also could have an adverse impact on the Fund’s ability to
hedge effectively its portfolio. There is also a risk of loss by
the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position
in an option, a futures contract or a related
option.
The exchanges on which
the Fund intends to conduct options transactions have generally
established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether
or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of
whether such options are written on the same or different
exchanges or are held or written on one or more accounts or
through one or more brokers). “Trading limits” are
imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser does
not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the
Portfolio’s holdings.
All options referred
to herein and in the Fund’s Prospectus are options issued
by the Options Clearing Corporation (the “Clearing
Corporation”) which are currently traded on the Chicago
Board Options Exchange, American Stock Exchange, Philadelphia
Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange (“NYSE”). An option gives the purchaser of
the option the right to buy, and obligates the writer (seller)
to sell the underlying security at the exercise price during the
option period. The option period normally ranges from three to
nine months from the date the option is written. For writing an
option, the Program receives a premium, which is the price of
such option on the exchange on which it is traded. The exercise
price of the option may be below, equal to, or above the current
market value of the underlying security at the time the option
is written.
The writer may
terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is
effected by purchasing on an exchange an option of the same
series (
i.e.
, same underlying security, exercise price
and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A
closing purchase transaction ordinarily will be effected to
realize a profit on an outstanding call option, to prevent an
underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new call
option containing different terms on such underlying security.
The cost of such a liquidation purchase plus transaction costs
may be greater than the premium received upon the original
option, in which event the Fund will have incurred a loss in the
transaction. An option may be closed out only on an exchange
which provides a secondary market for an option of the same
series and there is no assurance that a liquid secondary market
on an exchange will exist for any particular option. A covered
option writer unable to effect a closing purchase transaction
will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon
exercise, with the result that the writer will be subject to the
risk of market decline in the underlying security during such
period. The Fund will write an option on a particular security
only if management believes that a liquid secondary market will
exist on an exchange for options of the same series which will
permit the Fund to make a closing purchase transaction in order
to close out its position.
Convertible securities
entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a
preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise
the conversion privilege. Synthetic convertible securities may
be either (i) a debt security or preferred stock that may be
convertible only under certain contingent circumstances or that
may pay the holder a cash amount based on the value of shares of
underlying common stock partly or wholly in lieu of a
conversion right (a “Cash-Settled Convertible”), (ii) a
combination of separate securities chosen by the Investment
Adviser in order to create the economic characteristics of a
convertible security,
i.e.
, a fixed income security
paired with a security with equity conversion features, such as
an option or warrant (a “Manufactured Convertible”) or
(iii) a synthetic security manufactured by another
party.
The characteristics of
convertible securities make them appropriate investments for an
investment company seeking a high total return from capital
appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of
the underlying common stock increases, the relatively high yield
received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their
fixed-income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing
convertible securities, the Investment Adviser will consider
both the yield on the convertible security relative to its
credit quality and the potential capital appreciation that is
offered by the underlying common stock, among other
things.
Convertible securities
are issued and traded in a number of securities markets. Even in
cases where a substantial portion of the convertible securities
held by the Fund are denominated in United States dollars, the
underlying equity securities may be quoted in the currency of
the country where the issuer is domiciled. With respect to
convertible securities denominated in a currency different from
that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time
the security is issued. As a result, fluctuations in the
exchange rate between the currency in which the debt security is
denominated and the currency in which the share price is quoted
will affect the value of the convertible security. As described
below, the Fund is authorized to enter into foreign currency
hedging transactions in which it may seek to reduce the effect
of such fluctuations.
Apart from currency
considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of
comparable issuers and by the value of the underlying common
stock. The value of a convertible security viewed without regard
to its conversion feature (i.e., strictly on the basis of its
yield) is sometimes referred to as its “investment value.
” To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However,
at the same time, the value of the convertible security will be
influenced by its “conversion value,” which is the
market value of the underlying common stock that would be
obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the common stock the
conversion value is substantially below the investment value of
the convertible security, the price of the convertible security
is governed principally by its investment value.
To the extent the
conversion value of a convertible security increases to a point
that approximates or exceeds its investment value, the price of
the convertible security will be influenced principally by its
conversion value. A convertible security will sell at a premium
over the conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a
fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value
to affect their market value more than the securities’
investment value.
Holders of convertible
securities generally have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to
other debt securities of the same issuer. A convertible security
may be subject to redemption at the option of the issuer at a
price established in the charter provision, indenture or other
governing instrument pursuant to which the convertible security
was issued. If a convertible security held by the Fund is called
for redemption, the Fund will be required to redeem the
security, convert it into the underlying common stock or sell it
to a third party. Certain convertible debt securities may
provide a put option to the holder which entitles the holder to
cause the security to be redeemed by the issuer at a premium
over the stated principal amount of the debt security under
certain circumstances.
As indicated above,
synthetic convertible securities may include either Cash-Settled
Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and
have the
economic characteristics of traditional convertible securities but
may not actually permit conversion into the underlying equity
securities in all circumstances. As an example, a private
company may issue a Cash-Settled Convertible that is convertible
into common stock only if the company successfully completes a
public offering of its common stock prior to maturity and
otherwise pays a cash amount to reflect any equity appreciation.
Manufactured Convertibles are created by the Investment Adviser
by combining separate securities that possess one of the two
principal characteristics of a convertible security,
i.e.,
fixed income (“fixed income component”)
or a right to acquire equity securities (“convertibility
component”). The fixed income component is achieved by
investing in nonconvertible fixed income securities, such as
nonconvertible bonds, preferred stocks and money market
instruments. The convertibility component is achieved by
investing in call options, warrants, or other securities with
equity conversion features (“equity features”)
granting the holder the right to purchase a specified quantity
of the underlying stocks within a specified period of time at a
specified price or, in the case of a stock index option, the
right to receive a cash payment based on the value of the
underlying stock index.
The Fund may invest in
warrants, which are securities permitting, but not obligating,
the warrant holder to subscribe for other securities. Buying a
warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no right to dividends or votes on
the underlying stock. A warrant does not carry any right to
assets of the issuer, and for this reason investment in warrants
may be more speculative than other equity-based
investments.
Other Investment Policies and Practices
When Issued
Securities, Delayed Delivery Securities and Forward
Commitments
. The Fund may purchase or
sell securities that it is entitled to receive on a when issued
basis. The Fund may also purchase or sell securities on a
delayed delivery basis. The Fund may also purchase or sell
securities through a forward commitment. These transactions
involve the purchase or sale of securities by the Fund at an
established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what
is considered an advantageous price to the Fund at the time of
entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in
connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase
commitments.
There can be no
assurance that a security purchased on a when issued basis will
be issued or that a security purchased or sold through a forward
commitment will be delivered. The value of securities in these
transactions on the delivery date may be more or less than the
Fund’s purchase price. The Fund may bear the risk of a
decline in the value of the security in these transactions and
may not benefit from an appreciation in the value of the
security during the commitment period.
Standby Commitment
Agreements
. The Fund may enter into
standby commitment agreements. These agreements commit the Fund,
for a stated period of time, to purchase a stated amount of
securities which may be issued and sold to that Fund at the
option of the issuer. The price of the security is fixed at the
time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued. The Fund will
enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered
advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will
limit its investment in such commitments so that the aggregate
purchase price of securities subject to such commitments,
together with the value of portfolio securities subject to legal
restrictions on resale that affect their marketability, will not
exceed 15% of its net assets taken at the time of the
commitment. The Fund segregates liquid assets in an aggregate
amount equal to the purchase price of the securities underlying
the commitment.
There can be no
assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since
the issuance of the security underlying the commitment is at the
option of the issuer, the Fund may bear the risk of a decline in
the value of such security and may not benefit from an
appreciation in the value of the security during the commitment
period.
The purchase of a
security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value
of the security thereafter will be reflected in the calculation
of the Fund’s net asset value. The cost basis of the
security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will
be recorded as income on the expiration date of the standby
commitment.
Repurchase
Agreements and Purchase and Sale Contracts
.
The Fund may invest in securities pursuant to repurchase
agreements or purchase and sale contracts. Repurchase agreements
and purchase and sale contracts may be entered into only with
financial institutions which have capital of at least $50
million or whose obligations are guaranteed by an entity having
capital of at least $50 million. Under such agreements, the
other party agrees, upon entering into the contract with the
Fund, to repurchase the security at a mutually agreed upon time
and price in a specified currency, thereby determining the yield
during the term of the agreement. This results in a fixed rate
of return insulated from market fluctuations during such period,
although such return may be affected by currency fluctuations.
In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the
underlying obligation; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such
agreements usually cover sort periods, such as under one week.
Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the
securities falls below the repurchase price at any time during
the term of the repurchase agreement; the Fund does not have the
right to seek additional collateral in the case of purchase and
sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only
constitute collateral for the seller’s obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays
and incur costs or possible losses in connection with
disposition of the collateral.
A purchase and sale
contract differs from a repurchase agreement in that the
contract arrangements stipulate that securities are owned by the
Fund. In the event of a default under such a repurchase
agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund would be
dependent upon intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In
such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements or
purchase and sale contracts maturing in more than seven days if
such investments, together with the Fund’s other illiquid
investments, would exceed 15% of the Fund’s total
assets.
Securities
Lending
. The Fund may lend securities
with a value not exceeding 33
1
/
3
% of its
total assets to banks, brokers and other financial institutions.
In return, the Fund receives collateral in cash or securities
issued or guaranteed by the U.S. Government which will be
maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. This
limitation is a fundamental policy and it may not be changed
without the approval of the holders of a majority of the Fund
’s outstanding voting securities, as defined in the
Investment Company Act of 1940. During the period of such a
loan, the Fund typically receives the income on both the loaned
securities and the collateral and thereby increases its yield.
In certain circumstances, the Fund may receive a flat fee for
its loans. Such loans 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, administrative and custodial fees in
connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because
of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls
below the market value of the borrowed securities.
Illiquid or
Restricted Securities
. The Fund may
invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered
illiquid. Liquidity of a security relates to the ability to
dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be
obtained for a comparable more liquid security. Illiquid
securities may trade at a discount from comparable, more liquid
investments. Investment of the Fund’s assets in illiquid
securities may restrict the ability
of the Fund to dispose of its investments in a timely fashion and
for a fair price as well as its ability to take advantage of
market opportunities. The risks associated with illiquidity will
be particularly acute where the Fund’s operations require
cash, such as when the Fund redeems shares or pays dividends,
and could result in the Fund borrowing to meet short term cash
requirements or incurring capital losses on the sale of illiquid
investments.
The Fund may invest in
securities that are not registered (“restricted securities
”) under the Securities Act of 1933, as amended (the
“Securities Act”). Restricted securities may be sold
in private placement transactions between issuers and their
purchasers and may be neither listed on an exchange nor traded
in other established markets. In many cases, privately placed
securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on
resale. As a result of the absence of a public trading market,
privately placed securities may be less liquid and more
difficult to value than publicly traded securities. To the
extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the
sales, due to illiquidity, could be less than those originally
paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Fund may be
required to bear the expenses of registration. Certain of the
Fund’s investments in private placements may consist of
direct investments and may include investments in smaller, less
seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. In
making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the
Fund’s ability to conduct portfolio transactions in such
securities.
144A Securities
.
The Fund may purchase restricted
securities that can be offered and sold to “qualified
institutional buyers” under Rule 144A under the Securities
Act. The Directors have determined to treat as liquid Rule 144A
securities that are either freely tradable in their primary
markets offshore or have been determined to be liquid in
accordance with the policies and procedures adopted by the Fund
’s Directors. The Directors have adopted guidelines and
delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities.
The Directors, however, will retain sufficient oversight and be
ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will
continue to develop, the Directors will carefully monitor the
Fund’s investments in these securities. This investment
practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in
purchasing these securities.
Suitability
.
The economic benefit of an investment in
the Fund depends upon many factors beyond the control of the
Fund, the Investment Adviser and its affiliates. The Fund should
be considered a vehicle for diversification and not as a
balanced investment program. The suitability for any particular
investor of a purchase of shares in the Fund will depend on,
among other things, such investor’s investment objectives
and such investor’s ability to accept the risks associated
with investing in securities, including the risk of loss of
principal.
The Fund is classified
as non-diversified within the meaning of the Investment Company
Act, which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a
single issuer. The Fund’s investments are limited, however,
in order to qualify for the special tax treatment afforded
regulated investment companies under the Internal Revenue Code
of 1986, as amended (the “Code”). See “Taxes.
” To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25%
of the market value of the Fund’s total assets will be
invested in the securities of a single issuer and (ii) with
respect to 50% of the market value 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 the Fund will not own
more than 10% of the outstanding voting securities of a single
issuer. A fund which elects to be classified as “diversified
” under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its
total assets. To the extent that the Fund assumes large
positions in
the securities of a small number of issuers, the Fund’s net
asset value may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and
the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified
company.
The Program has
adopted the following restrictions and policies relating to the
investment of the Fund’s assets and its activities. The
fundamental restrictions set forth below may not be changed with
respect to the Fund without the approval of the holders of a
majority of the Fund’s outstanding voting securities (which
for this purpose and under the Investment Company Act means the
lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). Unless otherwise
provided, all references to the assets of the Fund below are in
terms of current market value.
The Fund may
not:
|
|
1. Invest
more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and
instrumentalities).
|
|
|
2. Make
investments for the purpose of exercising control or
management.
|
|
|
3.
Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or
interests therein.
|
|
|
4. Make
loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment
in governmental obligations, commercial paper, pass-through
instruments, certificates of deposit, bankers’
acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Fund’s Prospectus and Statement of
Additional Information, as they may be amended from time to
time.
|
|
|
5. Issue
senior securities to the extent such issuance would violate
applicable law.
|
|
|
6. Borrow
money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to
33
1
/
3
% of
its total assets (including the amount borrowed), (ii) the
Fund may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund’s
investment policies as set forth in the Fund’s Prospectus
and Statement of Additional Information, as they may be
amended from time to time, in connection with hedging
transactions, short sales, when issued and forward commitment
transactions and similar investment strategies. The Fund will
not purchase securities while borrowings exceed 5% of its
assets. The Fund has no present intention to borrow money in
amounts exceeding 5% of its assets.
|
|
|
7.
Underwrite securities of other issuers except insofar as
the Fund technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
|
|
|
8.
Purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may do so in
accordance with applicable law and the Fund’s Prospectus
and Statement of Additional Information, as they may be
amended from time to time, and without registering as a
commodity pool operator under the Commodity Exchange
Act.
|
Additional investment
restrictions adopted by the Fund that may be changed by the
Program’s Board of Directors without shareholder approval,
provide that the Fund may not:
|
|
(a)
Purchase securities of other investment companies,
except to the extent such purchases are permitted by
applicable law. As a matter of policy, however, the Fund will
not purchase shares of any registered open-end investment
company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the “fund of funds”
provisions) of the Investment Company Act, at any time the Fund
’s shares are owned by another investment company that is
part of the same group of investment companies as the
Program.
|
|
|
(b) Make
short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
|
|
|
(c)
Invest in securities that cannot be readily resold
because of legal or contractual restrictions or that cannot
otherwise be marketed, redeemed or put to the issuer or a
third party, if at the time of acquisition more than 15% of
its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within
seven days or securities that the Directors of the Program
have otherwise determined to be liquid pursuant to applicable
law. Securities purchased in accordance with Rule 144A under
the Securities Act and determined to be liquid by the Program
’s Board of Directors are not subject to the limitations
set forth in this investment restriction.
|
|
|
(d)
Notwithstanding fundamental investment restriction (6)
above, borrow amounts in excess of 10% of its total assets,
taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes such as
redemption of Fund shares. The Fund will not purchase
securities while borrowing exceeds 5% (taken at market value)
of its total assets.
|
Portfolio securities
of the Fund generally may not be purchased from, sold or loaned
to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless
pursuant to a rule or exemptive order under the Investment
Company Act.
The staff of the
Commission has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options if,
as a result of such transaction, the sum of the market value of
OTC options currently outstanding that are held by the Fund, the
market value of the underlying securities covered by OTC call
options currently outstanding that were sold by the Fund and
margin deposits on the Fund’s existing OTC options on
futures contracts exceeds 15% of the net assets of the Fund
taken at market value, together with all other Fund assets that
are illiquid or are not otherwise readily marketable. However,
if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid
such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is
“in-the-money” (i.e., current market value of the
underlying securities minus the option’s strike price). The
repurchase price with the primary dealers is typically a formula
price that is generally based on a multiple of the premium
received for the option plus the amount by which the option is
“in-the-money.” This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the
Directors without the approval of the shareholders. However, the
Directors will not change or modify this policy prior to the
change or modification by the Commission staff of its
position.
Because of the
affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“Merrill Lynch”) with the Investment
Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch or its affiliates except
for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment
Company Act. See “Portfolio Transactions and Brokerage.
” Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with Merrill
Lynch or any of its affiliates acting as principal.
While the Fund
generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to
holding period if, in Fund management’s judgement, such
transactions are advisable
in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or
financial conditions. A high rate of portfolio turnover results
in certain tax consequences, such as increased capital gain
dividends and in correspondingly greater transaction costs in
the form of dealer spreads and brokerage commissions, which are
borne directly by the Fund.
MANAGEMENT OF THE PROGRAM
The
Directors of the Program consist of seven individuals, five of
whom are not “interested persons” of the Program as
defined in the Investment Company Act. The Directors are
responsible for the overall supervision of the operations of the
Program and perform the various duties imposed on the directors
of investment companies by the Investment Company
Act.
Information about the
Directors, executive officers and the portfolio manager of the
Program, including their ages and their principal occupations
for at least the last five years, is set forth below. Unless
otherwise noted, the address of each executive officer, Director
and the portfolio manager is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
T
ERRY
K. G
LENN
(59) —
President and Director
(1)(2) — Executive
Vice President of the Investment Adviser and Merrill Lynch Asset
Management, L.P. (“MLAM”) (which terms as used herein
include their corporate predecessors) since 1983; Executive Vice
President and Director of Princeton Services, Inc. (
“Princeton Services”) since 1993; President of
Princeton Funds Distributor, Inc. (“PFD”) since 1986
and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
J
OE
G
RILLS
(64)
— Director
(2)(3) — P.O. Box 98,
Rapidan, Virginia 22733. Member of the Committee of Investment
of Employee Benefit Assets of the Financial Executives Institute
(“CIEBA”) since 1986; Member of CIEBA’s Executive
Committee since 1988 and its Chairman from 1991to 1992;
Assistant Treasurer of International Business Machines
Incorporated (“IBM”) and Chief Investment Officer of
IBM Retirement Funds from 1986 until 1993; Member of the
Investment Advisory Committees of the State of New York Common
Retirement Fund and the Howard Hughes Medical Institute since
1997; Director, Duke Management Company since 1992 and elected
Vice Chairman in May 1998; Director, LaSalle Street Fund since
1995; Director, Hotchkis and Wiley Mutual Funds since 1996;
Director, Kimco Realty Corporation since 1997; Member of the
Investment Advisory Committee of the Virginia Retirement System
since 1998; Director, Montpelier Foundation since December
1998.
W
ALTER
M
INTZ
(70) —
Director
(2)(3) — 1114 Avenue of the
Americas, New York, New York 10036. Special Limited Partner of
Cumberland Associates (investment partnership) since
1982.
R
OBERT
S. S
ALOMON
, J
R
. (63) —
Director
(2)(3) — 106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management
(investment adviser) since 1994; Trustee, The Common Fund since
1980; Chairman and CEO of Salomon Brothers Asset Management from
1992 until 1995; Chairman of Salomon Brothers equity mutual
funds from 1992 until 1995; Monthly columnist with
Forbes
magazine since 1992; Director of Stock Research and U.S. Equity
Strategist at Salomon Brothers from 1975 until 1991.
M
ELVIN
R. S
EIDEN
(69) —
Director
(2)(3) — 780 Third Avenue, Suite
2502, New York, New York 10017. Director of Silbanc Properties,
Ltd. (real estate, investment and consulting) since 1987;
Chairman and President of Seiden & de Cuevas, Inc. (private
investment firm) from 1964 to 1987.
S
TEPHEN
B. S
WENSRUD
(66) —
Director
(2)(3) — 24 Federal Street, Suite
400, Boston, Massachusetts 02110. Chairman of Fernwood Advisors
(investment adviser) since 1996; Principal, Fernwood Associates
(financial consultant) since 1975; Chairman of RPP Corporation
(manufacturing) since 1978; Director of International Mobile
Communications, Inc. (telecommunications) since
1998.
A
RTHUR
Z
EIKEL
(67) —
Director
(1)(2) — 300 Woodland Avenue,
Westfield, New Jersey 07090. Chairman of the Investment Adviser
and MLAM from 1997 to 1999 and President thereof from 1977 to
1997; Chairman of Princeton Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. (
“ML & Co.”) from 1990 to 1999.
J
OSEPH
T. M
ONAGLE
, J
R
. (51) —
Senior Vice President
(1)(2) — Senior
Vice President of the Investment Adviser and MLAM since 1990;
Department Head of the Global Fixed Income Division of the
Investment Adviser and MLAM since 1997; Senior Vice President of
Princeton Services since 1993.
L
AWRENCE
R. F
ULLER
(58) —
Senior Vice President and Portfolio
Manager
(1)(2) — First Vice President of the Investment
Adviser since 1997 and Vice President of the Investment Adviser
from 1992 to 1997.
R. E
LISE
B
AUM
(39) —
Senior Vice President and Portfolio
Manager
(1)(2) — First Vice President of the Investment
Adviser since 1999; Director of the Investment Adviser from 1997
to 1999; Vice President of the Investment Adviser from 1995 to
1997.
R
OBERT
C. D
OLL
, J
R
. (45) —
Senior Vice President
(1)(2) — Senior
Vice President of the Investment Adviser and MLAM since 1999;
Senior Vice President of Princeton Services since 1999; Chief
Investment Officer of Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from 1991 to 1999.
T
HOMAS
R. R
OBINSON
(54) —
Senior Vice President
(1)(2) — First Vice
President of the Investment Adviser since 1997; Vice President
of the Investment Adviser from 1995 to 1997; Senior Portfolio
Manager of the Investment Adviser since November 1995; Manager
of International Equity Strategy of ML & Co.’s Global
Securities Research and Economics Group from 1989 to
1995.
C
HRISTOPHER
G. A
YOUB
(41) —
Senior Vice President
(1)(2) — First Vice
President of the Investment Adviser since 1998; Vice President
of the Investment Adviser from 1985 to 1997; Assistant Vice
President of the Investment Adviser from 1984 to 1985 and
employee since 1982.
G
REGORY
M
ARK
M
AUNZ
(45) —
Senior Vice President
(1)(2) — First Vice
President of the Investment Adviser since 1997; Vice President
of the Investment Adviser from 1985 to 1997 and Portfolio
Manager since 1984.
D
ONALD
C. B
URKE
(39) —
Vice President and Treasurer
(1)(2) —
Senior Vice President and Treasurer of the Investment Adviser
and MLAM since 1999; Senior Vice President and Treasurer of
Princeton Services since 1999; Vice President of PFD since 1999;
First Vice President of MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997; Director of Taxation of MLAM since
1990.
|
(1)
|
Interested person, as defined in the Investment Company
Act, of the Program.
|
|
(2)
|
Such
Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or one
of its affiliates, acts as investment adviser or
manager.
|
|
(3)
|
Member
of the Program’s Audit and Nominating Committee, which is
responsible for the selection of the independent auditors and
the selection and nomination of non-interested
Directors.
|
As of March 1, 2000,
the officers and Directors of the Program as a group (15
persons) owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co. and owned an aggregate of
less than 1% of the outstanding shares of the
Program.
Compensation of Directors
The Program pays each
non-interested Director, for service to the Program, a fee of
$1,500 per year plus $250 per in-person meeting attended,
together with such individual’s actual out-of-pocket
expenses relating to attendance at meetings. The Program also
compensates members of the Audit and Nominating Committee, which
consists of all of the non-affiliated Directors at the rate of
$1,500 annually for service to the Program plus $250 per
Committee meeting attended.
The following table
sets forth the compensation earned by the non-interested
Directors for the fiscal year ended January 31, 2000 and the
aggregate compensation paid to them from all investment
companies advised by the Investment Adviser or its affiliates (
“Affiliate-Advised Funds”) for the calendar year ended
December 31, 1999.
Name
|
|
Position with
Program
|
|
Compensation
from
Program
|
|
Pension or
Retirement Benefits
Accrued as Part of
Program Expense
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Aggregate
Compensation from
Program and
Other Affiliate-
Advised Funds(1)
|
|
Joe
Grills
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$245,250
|
|
Walter
Mintz
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Robert
S. Salomon, Jr.
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Melvin
R. Seiden
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Stephen
B. Swensrud
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$232,250
|
|
(1)
|
The
Directors serve on the boards of Affiliate-Advised Funds as
follows: Joe Grills (31 registered investment companies
consisting of 46 portfolios), Walter Mintz (21 registered
investment companies consisting of 43 portfolios), Robert S.
Salomon, Jr. (21 registered investment companies consisting of
43 portfolios), Melvin R. Seiden (21 registered investment
companies consisting of 43 portfolios), Stephen B. Swensrud
(30 registered investment companies consisting of 67
portfolios).
|
The Directors of the
Program may be eligible for reduced sales charges on purchases
of Class I shares. See “Reduced Initial Sales Charges
—Purchase Privileges of Certain Persons.”
Management and Advisory Arrangements
Investment Advisory
Services
. The Investment Adviser
provides the Program with investment advisory and management
services. Subject to the supervision of the Directors, the
Investment Adviser is responsible for the actual management of
the Program’s portfolio and constantly reviews the Program
’s holdings in light of its own research analysis and that
from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with
the Investment Adviser. The Investment Adviser performs certain
of the other administrative services and provides all the office
space, facilities, equipment and necessary personnel for
management of the Program.
Investment Advisory
Fee
. As compensation for its services
to the Fund, the Investment Adviser will receive a fee at the
annual rate of 0.65% of the average daily net assets of the
Fund.
The table below sets
forth for the periods indicated the total advisory fee paid by
the Fund to MLAM:
Prior to April 3,
2000, Merrill Lynch Asset Management, L.P. (“MLAM”),
an affiliate of the Investment Adviser under common control and
management as the Investment Adviser, acted as investment
adviser to the Fund. The table below sets forth for the periods
indicated the total advisory fee paid by the Fund to
MLAM.
For
the fiscal year ended January 31,
|
|
Fee
Amount($)
|
|
2000
|
|
$992,233
|
|
1999
|
|
$475,238
|
|
1998
|
|
$176,230
|
The Investment Adviser
has also entered into a sub-advisory agreement with Merrill
Lynch Asset Management U.K. Limited, which does business as
Funds Asset Management U.K. (the “Sub-Advisor”),
pursuant to which the Sub-Advisor provides investment advisory
services to the Manager with respect to the Fund. For the fiscal
years ended January 31, 2000, 1999 and 1998, the Investment
Adviser paid no fees to the Sub-Advisor pursuant to this
agreement.
Payment of Program
Expenses
. The Investment Advisory
Agreement obligates the Investment Adviser to provide investment
advisory services and to pay all compensation of and furnish
office space for officers and employees of the Program connected
with investment and economic research, trading and investment
management of the Program, as well as the fees of all Directors
of the Program who are affiliated persons of ML & Co. or any
of its affiliates. The Program pays all other expenses incurred
in the operation of the Program, including among other things:
taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports,
prospectuses and statements of additional information, except to
the extent paid by Mercury
Funds Distributor, a division of PFD (the “Distributor
”); charges of the custodian and the transfer agent;
expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal and state securities laws;
fees and expenses of unaffiliated Directors; accounting and
pricing costs (including the daily calculations of net asset
value); insurance; interest; brokerage costs; litigation and
other extraordinary or non-recurring expenses; and other
expenses properly payable by the Program. Accounting services
are provided for the Program by the Investment Adviser and the
Program reimburses the Investment Adviser for its costs in
connection with such services. See “Purchase of Shares
—Distribution Plans.”
Organization of the
Investment Adviser
. The Investment
Adviser is a limited partnership, the partners of which are ML
& Co., a financial services holding company and the parent
of Merrill Lynch, and Princeton Services. ML & Co. and
Princeton Services are “controlling persons” of the
Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their
power to exercise a controlling influence over its management or
policies.
The following entities
may be considered “controlling persons” of the
Sub-Advisor: Merrill Lynch Europe PLC (the Sub-Advisor parent),
a subsidiary of Merrill Lynch International Holdings, Inc., a
subsidiary of Merrill Lynch International, Inc., a subsidiary of
ML & Co.
Duration and
Termination.
Unless earlier
terminated as described herein, the Investment Advisory
Agreement and Sub-Advisory Agreement for the Fund will continue
in effect from year to year if approved annually (a) by the
Directors of the Program or by a majority of the outstanding
shares of the subject Fund and (b) by a majority of the
Directors who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such
party. Such contracts are not assignable and may be terminated
without penalty on 60 days’ written notice at the option of
either party or by vote of the shareholders of the
Fund.
Transfer Agency
Services
. Financial Data Services,
Inc. (the “Transfer Agent”), a subsidiary of ML &
Co., acts as the Program’s Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the “Transfer Agency Agreement
”). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption
of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the
Transfer Agent receives a fee ranging from $11.00 to $20.00 per
Class I or Class A account and $14.00 to $23.00 per Class B or
Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be
assessed on all accounts that close during the calendar year.
Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no
further fee will be due. For purposes of the Transfer Agency
Agreement, the term “account” includes a shareholder
account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML &
Co.
Distribution
Expenses
. The Fund has entered into
separate distribution agreements with the Distributor in
connection with the continuous offering of each class of shares
of the Fund (the “Distribution Agreements”). The
Distribution Agreements obligate the Distributor to pay certain
expenses in connection with the offering of each class of shares
of the Fund. After the prospectuses, statements of additional
information and periodic reports have been prepared, set in type
and mailed to shareholders, the Distributor pays for the
printing and distribution of copies thereof used in connection
with the offering to financial intermediaries and potential
investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement
described above.
The Board of Directors
of the Program has adopted a Code of Ethics under Rule 17j-1 of
the Investment Company Act that covers the Fund and the Fund
’s Investment Adviser and Distributor (the “Code of
Ethics”). The Code of Ethics significantly restricts the
personal investing activities of all employees of the Investment
Adviser and Distributor and, as described below, imposes
additional, more onerous, restrictions on fund investment
personnel.
The Code of Ethics
requires that all employees of the Investment Adviser and
Distributor pre-clear any personal securities investment (with
limited exceptions, such as mutual funds, high-quality
short-term securities and direct obligations of the U.S.
government). The pre-clearance requirement and associated
procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. The
substantive restrictions applicable to all employees of the
Investment Adviser and Distributor include a ban on acquiring
any securities in a “hot” initial public offering and
a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the
case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Code of Ethics provides for
trading “blackout periods” that prohibit trading by
investment personnel of the Fund within seven calendar days
before or after trading by the Fund in the same or equivalent
security.
Reference is made to
“Account Choices—How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus for certain information
as to the purchase of Fund shares.
The Fund issues four
classes of shares: shares of Class I and Class A are sold to
investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the
deferred sales charge alternatives. Each Class I, Class A, Class
B and Class C share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same
rights, except that Class A, Class B and Class C shares bear the
expenses of the ongoing account maintenance fees (also known as
service fees) and Class B and Class C shares bear the expenses
of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge
arrangements. The contingent deferred sales charges (“CDSCs
”), distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class A shares, are imposed
directly against those classes and not against all assets of the
Fund, and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund
for each class of shares are calculated in the same manner at
the same time and differ only to the extent that account
maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne
exclusively by that class. Class A, Class B and Class C shares
each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to
which the account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material
changes to expenses charged under the distribution plan for
Class A shares). Each class has different exchange privileges.
See “Shareholder Services—Exchange Privilege.
”
Investors should
understand that the purpose and function of the initial sales
charges with respect to the Class I and Class A shares are the
same as those of the CDSCs and distribution fees with respect to
the Class B and Class C shares in that the sales charges and
distribution fees applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for
selling different classes of shares.
The Fund offers its
shares at a public offering price equal to the next determined
net asset value per share plus any sales charge applicable to
the class of shares selected by the investor. The applicable
offering price for purchase orders is based upon the net asset
value of the Fund next determined after receipt of the purchase
order by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the NYSE
(generally 4:00 p.m., Eastern time) which includes orders
received after the determination of net asset value on the
previous day, the applicable offering price will be based on the
net asset value on the day the order is placed with the
Distributor, provided that the orders are received by the
Distributor prior to 30 minutes after the close of business on
the NYSE on that day. If the purchase orders are not received
prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next
business day. Dealers have the responsibility of submitting
purchase orders to the Fund not later than 30 minutes after the
close of business on the NYSE in order to purchase shares at
that day’s offering price.
The Fund or the
Distributor may suspend the continuous offering of Fund shares
of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the
Fund or the Distributor. Neither the Distributor nor any
financial intermediary is permitted to withhold placing orders
to benefit themselves by a price change. Certain securities
dealers may charge a processing fee to confirm a sale of shares
to such customers. For example, the fee currently charged by
Merrill Lynch is $5.35. Purchases made directly through the
Transfer Agent are not subject to the processing
fee.
Initial Sales Charge Alternatives—Class I and Class A
Shares
Investors who prefer
an initial sales charge alternative may elect to purchase Class
A shares or, if an eligible investor, Class I
shares.
Investors choosing the
initial sales charge alternatives who are eligible to purchase
Class I shares should purchase Class I shares rather than Class
A shares because there is an account maintenance fee imposed on
Class A shares.
Investors qualifying
for significantly reduced initial sales charges may find the
initial sales charge alternative particularly attractive,
because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying
for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the
accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charges,
and, in the case of Class A shares, the account maintenance fee.
Although some investors who previously purchased Class I shares
may no longer be eligible to purchase Class I shares of other
Affiliated-Advised Funds, those previously purchased Class I
shares, together with Class A, Class B and Class C share
holdings, will count toward a right of accumulation which may
qualify the investor for a reduced initial sales charge on new
initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay
lower dividends and have lower total returns than the initial
sales charge shares. The ongoing Class A account maintenance
fees will cause Class A shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Class I
shares.
The term
“purchase,” as used in the Prospectus and this
Statement of Additional Information in connection with an
investment in Class I and Class A shares of the Fund, refers to
a single purchase by an individual or to concurrent purchases,
which in the aggregate are at least equal to the prescribed
amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or
their own account and to single purchases by a trustee or other
fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is
involved. The term “purchase” also includes purchases
by any “company,” as that term is defined in the
Investment Company Act, but does not include purchases by any
such company that has not been in existence for at least six
months or which has no purpose other than the purchase of shares
of a Fund or shares of other registered investment companies at
a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class I
Investors.
The Distributor may
reallow discounts to selected dealers or other financial
intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to
such dealers or other financial intermediaries. Since securities
dealers or other financial intermediaries selling Class I and
Class A shares of the Fund will receive a concession equal to
most of the sales charge, they may be deemed to be underwriters
under the Securities Act.
Class I shares are
offered to a limited group of investors and also will be issued
upon reinvestment of dividends paid on outstanding Class I
shares. Investors who currently own Class I shares in a
shareholder account are entitled to purchase additional Class I
shares of a Fund in that account. Certain employer sponsored
retirement or savings plans, including eligible 401(k) plans,
may purchase Class I shares at net asset value provided such
plans meet the required minimum number of eligible employees or
required amount of assets advised by the Investment Adviser or
any of its affiliates. Also eligible to purchase Class I shares
at net asset value are participants in certain investment
programs including certain managed accounts for which a trust
institution, thrift, or bank trust department provides
discretionary trustee services, certain collective investment
trusts for which a trust institution, thrift, or bank trust
department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases
made through certain financial advisers that meet and adhere to
standards established by the Investment Adviser. In addition,
Class I shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees, to
members of the Boards of Mercury and Affiliate-Advised Funds,
including the Fund, and to employees of certain selected
dealers. Class I shares may also be offered at net asset value
to certain accounts over which the Investment Adviser or an
affiliate exercises investment discretion.
The following table
sets forth information regarding Class I and Class A sales
charge information for the Fund.
Class
I Shares*
For
the Fiscal year
ended January 31,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received on
Redemption of
Load-Waived
Shares
|
|
2000
|
|
$550
|
|
$26
|
|
$524
|
|
$0
|
|
1999
|
|
$171
|
|
$
8
|
|
$163
|
|
$0
|
|
1998
|
|
$
25
|
|
$
1
|
|
$
24
|
|
$0
|
Class
A Shares*
For
the Fiscal year
ended January 31,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received on
Redemption of
Load-Waived
Shares
|
|
2000
|
|
$44,411
|
|
$2,192
|
|
$42,219
|
|
$0
|
|
1999
|
|
$43,620
|
|
$2,177
|
|
$41,443
|
|
$0
|
|
1998
|
|
$24,165
|
|
$1,165
|
|
$23,000
|
|
$0
|
|
*
|
As of
April 3, 2000, Class A shares were redesignated Class I and
Class D shares were redesignated Class A.
|
The Distributor may
reallow discounts to selected dealers and financial
intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to
such dealers and financial intermediaries. Since securities
dealers and financial intermediaries selling Class I and Class A
shares of the Fund will receive a concession equal to most of
the sales charge, they may be deemed to be underwriters under
the Securities Act.
Reduced Initial Sales Charges
Reductions in or
exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that
will be needed to obtain such investments.
Reinvested
Dividends
. No initial sales charges
are imposed upon Class I and Class A shares issued as a result
of the automatic reinvestment of dividends.
Right of
Accumulation
. Reduced sales charges
are applicable through a right of accumulation under which
eligible investors are permitted to purchase shares of the Fund
subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser’s combined holdings of all classes of shares of
the Fund and of other Mercury mutual funds. For any such right
of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the
purchaser’s securities dealer and financial intermediary,
with sufficient information to permit confirmation of
qualification. Acceptance
of the purchase order is subject to such confirmation. The right
of accumulation may be amended or terminated at any time. Shares
held in the name of a nominee or custodian under pension,
profit-sharing, or other employee benefit plans may not be
combined with other shares to qualify for the right of
accumulation.
Letter of
Intent
. Reduced sales charges are
applicable to purchases aggregating $25,000 or more of Class I
or Class A shares of the Fund or any other Mercury mutual funds
made within a 13-month period starting with the first purchase
pursuant to the Letter of Intent. The Letter of Intent is
available only to investors whose accounts are established and
maintained at the Fund’s Transfer Agent. The Letter of
Intent is not available to employee benefit plans for which
affiliates of the Investment Adviser provide plan participant
record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class I or Class A shares;
however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intent may
be included under a subsequent Letter of Intent executed within
90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of
Class I and Class A shares of the Fund and of other Mercury
mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under
the Letter of Intent, may be included as a credit toward the
completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intent (minimum of
$25,000), the investor will be notified and must pay, within 20
days of the execution of such Letter, the difference between the
sales charge on the Class I or Class A shares purchased at the
reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class I or Class A shares
equal to 5.0% of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.0% of the dollar
amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be
entitled on that purchase and subsequent purchases to that
further reduced percentage sales charge but there will be no
retroactive reduction of the sales charges on any previous
purchase.
The value of any
shares redeemed or otherwise disposed of by the purchaser prior
to termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter. An
exchange from the Summit Cash Reserves Fund (“Summit
”), a series of Financial Institutions Series Trust, into
the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the
Fund.
Employer-Sponsored
Retirement or Savings Plans and Certain Other Arrangements
.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase Class
I or Class A shares at net asset value, based on the number of
employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares
with a waiver of the CDSC upon redemption, based on similar
criteria. Such Class B shares will convert into Class A shares
approximately ten years after the plan purchases the first share
of any Mercury mutual fund. Minimum purchase requirements may be
waived or varied for such plans. For additional information
regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements, call your plan
administrator or your selected dealer.
Managed Trusts
.
Class I shares are offered at net asset
value to certain trusts to which trust institutions, thrifts,
and bank trust departments provide discretionary trustee
services.
Purchase Privileges
of Certain Persons
. Directors of the
Program, members of the Boards of other investment companies
advised by the Investment Adviser or its affiliates, directors
and employees of ML & Co. and its subsidiaries (the term
“subsidiaries,” when used herein with respect to ML
& Co., includes the Investment Adviser, MLAM, Mercury Asset
Management International, Ltd. and certain other entities
directly or indirectly wholly owned and controlled by ML &
Co.), employees of certain selected dealers and financial
intermediaries, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class I shares of
the Fund at net asset value. The Fund realizes economies of
scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and
directors or trustees wishing to purchase shares of the Fund
must satisfy the Fund’s suitability standards.
Class I and Class A
shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate
exercises investment discretion.
Acquisition of
Certain Investment Companies
. Class A
shares may be offered at net asset value in connection with the
acquisition of the assets of or merger or consolidation with a
personal holding company or a public or private investment
company.
Purchases Through
Certain Financial Advisers
. Reduced
sales charges may be applicable for purchases of Class I or
Class A shares of the Fund through certain financial advisers
that meet and adhere to standards established by the Investment
Adviser from time to time.
Deferred Sales Charges—Class B and Class C
Shares
Investors choosing the
deferred sales charge alternatives should consider Class B
shares if they intend to hold their shares for an extended
period of time and Class C shares if they are uncertain as to
the length of time they intend to hold their assets in Mercury
mutual funds.
Because no initial
sales charges are deducted at the time of the purchase, Class B
and Class C shares provide the benefit of putting all of the
investor’s dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for the reduction in
initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B
or Class C shares. In addition, Class B shares will be converted
into Class A shares of the Fund after a conversion period of
approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
The public offering
price of Class B and Class C shares for investors choosing the
deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge
at the time of purchase. See “Pricing of Shares
—Determination of Net Asset Value” below.
Contingent Deferred
Sales Charges—Class B Shares.
Class B shares that are redeemed within six years of
purchase may be subject to a CDSC at the rates set forth below
charged as a percentage of the dollar amount subject thereto. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC
will be assessed on shares derived from reinvestment of
dividends. It will be assumed that the redemption is first of
shares held for over six years or shares acquired pursuant to
reinvestment of dividends and then of shares held longest during
the six-year period. A transfer of shares from a shareholder
’s account to another account will be assumed to be made in
the same order as a redemption.
The following table
sets forth the Class B CDSC:
Year
Since Purchase Payment Made
|
|
CDSC
as a Percentage
of Dollar amount
Subject to Charge
|
|
0-1
|
|
4.0%
|
|
1-2
|
|
4.0%
|
|
2-3
|
|
3.0%
|
|
3-4
|
|
3.0%
|
|
4-5
|
|
2.0%
|
|
5-6
|
|
1.0%
|
|
6 and
thereafter
|
|
None
|
To provide an example,
assume an investor purchased 100 shares at $10 per share (at a
cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor
has acquired 10 additional shares upon dividend reinvestment. If
at such time the investor makes his or her first redemption of
50 shares (proceeds of $600), 10 shares will not be subject to a
CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.0% (the applicable rate in the
third year after purchase).
As discussed in the
Prospectus under “Account Choices—Pricing of Shares
—Class B and C Shares—Deferred Sales Charge Options,
” while Class B shares redeemed within six years of
purchase are subject to a CDSC under most circumstances, the
charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an individual
retirement account (“IRA”) or other retirement plan or
redemption of Class B shares in certain circumstances following
the death of a Class B shareholder. In the case of such
withdrawal, the reduction or waiver applies to: (a) any partial
or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan on
attaining age 59
1
/
2
in the
case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made
for life (or life expectancy) or any redemption resulting from
the tax-free return of an excess contribution to an IRA (certain
legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution); or (b) any
partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code of 1986, as amended
(the “Code”)) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of
the death or initial determination of disability, or if later,
reasonably promptly following completion of probate or in
connection with involuntary termination of an account in which
Fund shares are held (certain legal documentation may be
required at the time of liquidation establishing eligibility for
qualified distribution).
The change may also be
reduced or waived in other instances, such as: (a) redemptions
by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers; (b) redemptions in connection with
participation in certain fee-based programs managed by the
Investment Adviser or its affiliates; (c) redemptions in
connection with participation in certain fee-based programs
managed by selected dealers that have agreements with the
Investment Adviser; or (d) withdrawals through the Systematic
Withdrawal Plan of up to 10% per year of your account value at
the time the plan is established. See “Shareholder Services
—Fee-Based Programs” and “—Systematic
Withdrawal Plan.”
Conversion of Class
B Shares to Class A Shares
. After
approximately eight years (the “Conversion Period”),
Class B shares of the Fund will be converted automatically into
Class A shares of that Fund. Class A shares are subject to an
ongoing account maintenance fee of 0.25% of the average daily
net assets of a Fund but are not subject to the distribution fee
that is borne by Class B shares. Automatic conversion of Class B
shares into Class A shares will occur at least once each month
(on the “Conversion Date”) on the basis of the
relative net asset value of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class A shares
will not be deemed a purchase or sale of the shares for Federal
income tax purposes.
In addition, shares
purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class A shares. The
Conversion Date for dividend reinvestment shares will be
calculated taking into account the length of time the shares
underlying such dividend reinvestment shares were outstanding.
If at the Conversion Date the conversion of Class B shares to
Class A shares of the Fund in a single account will result in
less than $50 worth of Class B shares being left in the account,
all of the Class B shares of the Fund held in the account on the
Conversion Date will be converted to Class A shares of the
Fund.
The Conversion Period
may be modified for investors that participate in certain
fee-based programs. See “Shareholder Services
—Fee-Based Programs.”
Class B shareholders
of the Fund exercising the exchange privilege described under
“Shareholder Services—Exchange Privilege” will
continue to be subject to the Fund’s CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred
Sales Charges—Class C Shares.
Class C shares that are redeemed within one year of
purchase may be subject to a 1.0% CDSC charged as a percentage
of the dollar amount subject thereto. In determining whether a
Class C CDSC is applicable to a redemption, the calculation will
be determined in the
manner that results in the lowest possible rate being charged. The
charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from
reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over one year or shares
acquired pursuant to reinvestment of dividends and then of
shares held longest during the one-year period. A transfer of
shares from a shareholder’s account to another account will
be assumed to be made in the same order as a redemption. The
Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held and
withdrawals through the Systematic Withdrawal Plans. See
“Shareholder Services—Systematic Withdrawal Plan.
”
Class
B and Class C Sales Charge Information
.
For
the fiscal year
ended January 31,
|
|
CDSCs
Paid to by
Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2000
|
|
$198,131
|
|
$198,131
|
|
1999
|
|
$
71,336
|
|
$
71,336
|
|
1998
|
|
$
28,794
|
|
$
28,794
|
|
|
*
|
Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended January 31, 1998, 1999
and 2000 may have been waived or converted to a contingent
obligation in connection with a shareholder’s
participation in certain fee-based programs.
|
For
the fiscal year
ended January 31,
|
|
CDSCs
Paid to by
Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2000
|
|
$24,460
|
|
$24,460
|
|
1999
|
|
$
8,070
|
|
$
8,070
|
|
1998
|
|
$
3,019
|
|
$
3,019
|
Proceeds from the CDSC
and the distribution fee are paid to the Distributor and are
used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) and financial
intermediaries related to providing distribution-related
services to the Fund in connection with the sale of the Class B
and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares
from the dealer’s own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. See
“Distribution Plans” below. Imposition of the CDSC and
the distribution fee on Class B and Class C shares is limited by
the National Association of Securities Dealers, Inc. (the
“NASD”) asset-based sales charge rule. See
“Limitations on the Payment of Deferred Sales Charges”
below.
Reference is made to
“Account Choices—Pricing of Shares” in the
Prospectus for certain information with respect to separate
distribution plans for Class A, Class B, and Class C shares
pursuant to Rule 12b-1 under the Investment Company Act (each a
“Distribution Plan”) with respect to the account
maintenance and/or distribution fees paid by the Funds to the
Distributor with respect to such classes.
The Distribution Plan
for each of the Class A, Class B and Class C shares provides
that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and
paid monthly, at the annual rate of 0.25% of the average daily
net assets of the Fund attributable to shares of the relevant
class in order to compensate the Distributor and selected
dealers and financial intermediaries (pursuant to
sub-agreements) in connection with account maintenance
activities with respect to Class A, Class B and Class C shares.
Each of those classes has exclusive voting rights with respect
to the Distribution Plan adopted with respect
to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may
vote on any material changes to expenses charged under the Class
A Distribution Plan).
The Distribution Plans
for Class B and Class C shares provide that the Fund also pays
the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual
rate of 1.00% of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to
compensate the Distributor and selected dealers and financial
intermediaries (pursuant to sub-agreements) for providing
shareholder and distribution services, and bearing certain
distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of
the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B
and Class C shares through dealers and financial intermediaries
without the assessment of an initial sales charge and at the
same time compensate the dealer and financial intermediaries to
compensate its financial consultants in connection with the sale
of the Class B and Class C shares. In this regard, the purpose
and function of the ongoing distribution fees and the CDSC are
the same as those of the initial sales charge with respect to
the Class I and Class A shares of the Fund in that the ongoing
distribution fees and deferred sales charges provide for the
financing of the distribution of the Fund’s Class B and
Class C shares.
The Fund’s
Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each
Distribution Plan, the Directors must consider all factors they
deem relevant, including information as to the benefits of each
Distribution Plan to the Fund and the related class of
shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection
and nomination of non-interested Directors shall be committed to
the discretion of the non-interested Directors then in office.
In approving each Distribution Plan in accordance with Rule
12b-1, the non-interested Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit
the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the non-interested
Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are
required to be approved by the vote of Directors, including a
majority of the non-interested Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of its Distribution Plans
and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or
such report, the first two years in an easily accessible
place.
Among other things,
each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees
paid to the Distributor. Payments under the Distribution Plans
are based on a percentage of average daily net assets
attributable to the shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues from
each Distribution Plan may be more or less than
distribution-related expenses of the related class. Information
with respect to the distribution-related revenues and expenses
is presented to the Directors for their consideration in
connection with their deliberations as to the continuance of the
Class B and Class C Distribution Plans. This information is
presented annually as of December 31 of each year on a
“fully allocated accrual” basis and quarterly on a
“direct expense and revenue/cash” basis. On the fully
allocated basis, revenues consist of the account maintenance
fees, the distribution fees, the CDSCs and certain other related
revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the
distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
For the fiscal year
ended January 31, 2000, the Fund paid the Distributor based on
the average net assets of the Fund, the amounts set forth below
under the Plans.
Class A*
Distribution Plan
|
|
Class B
Distribution Plan
|
|
Class C
Distribution Plan
|
Account Maintenance
and Distribution Fees
|
|
Account Maintenance
and Distribution Fees
|
|
Account Maintenance
Fees
|
|
$14,271
|
|
$906,628
|
|
$555,404
|
*
As of April 3, 2000, Class D shares were redesignated
Class A shares.
As of December 31,
1999, the last date for which fully allocated accrual data is
available, the fully allocated accrual expenses of the
Distributor and Merrill Lynch for the period since the
commencement of operations of Class B shares of the Fund
exceeded fully allocated accrual revenues by approximately
$1,602,000 (1.42% of Class B net assets at that date). As of
January 31, 2000, direct cash revenues for the period since the
commencement of operations of Class B shares exceeded direct
cash expenses by $805,268 (0.70% of Class B net assets at that
date). As of December 31, 1999, the fully allocated accrual
expenses of the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded
the fully allocated accrual revenues by approximately $8,739,000
(12.36% of Class C net assets at that date). As of January 31,
2000, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by
$677,148 (0.93% of Class C net assets at that date).
Limitations on the Payment of Deferred Sales
Charges
The maximum sales
charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C
shares, but not the account maintenance fee. The maximum sales
charge rule is applied separately to each class. As applicable
to the Fund, the maximum sales charge rule limits the aggregate
of distribution fee payments and CDSCs payable by the Fund to
(1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In
connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor
(referred to as the “voluntary maximum”) in connection
with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest
charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any
CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstance payment in excess
of the amount payable under the NASD formula will not be
made.
The following table
sets forth comparative information as of January 31, 2000 with
respect to the Class B and Class C shares indicating the maximum
allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the
Distributor’s voluntary maximum for the periods
indicated.
|
|
|
Data
Calculated as of January 31, 2000
|
|
|
|
(In
thousands)
|
|
|
|
Eligible
Gross
Sales(1)
|
|
Aggregate
Sales
Charges(2)
|
|
Allowable
Interest
on Unpaid
Balance(3)
|
|
Maximum
Amount
Payable
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current
Net Asset
Level(5)
|
Class B Shares, for the period
February 1, 1995 (commencement
of operations) to January 31,
2000:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as
Adopted
|
|
77,236
|
|
4,831
|
|
597
|
|
5,428
|
|
1,510
|
|
3,918
|
|
864
|
Under Distributor
’s Voluntary
Waiver
|
|
77,236
|
|
4,827
|
|
386
|
|
5,213
|
|
1,510
|
|
3,703
|
|
864
|
|
|
|
Class C Shares, for the period
February 1, 1995 (commencement
of operations) to January 31,
2000:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as
Adopted
|
|
57,091
|
|
3,567
|
|
419
|
|
3,986
|
|
723
|
|
3,263
|
|
545
|
|
(1)
|
Purchase price of all eligible Class B or Class C
shares sold during the periods indicated other than shares
acquired through dividend reinvestment and the exchange
privilege.
|
|
(2)
|
Included amounts attributable to exchanges from Summit
Cash Reserves Fund (“Summit”) which are not
reflected in Eligible Gross Sales. Shares of Summit can only
be purchased by exchange from another fund (the “redeemed
fund”). Upon such an exchange, the maximum allowable
sales charge payment to the redeemed fund is reduced in
accordance with the amount of the redemption. This amount is
then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum
allowable sales charge payment to Summit and added to the
maximum allowable sales charge payment to the fund into which
the exchange is made.
|
|
(3)
|
Interest is computed on a monthly basis based upon the
prime rate, as reported in
The Wall Street Journal
,
plus 1.0%, as permitted under the NASD Rule.
|
|
(4)
|
Consists of CDSC payments, distribution fee payments
and accruals. Of the distribution fee payments made with
respect to Class B shares prior to July 6, 1993 under the
distribution plan in effect at that time, at a 1.0% rate,
0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the
NASD maximum sales charge rule. See “What are the Program
’s fees and expenses?” in the Prospectus. This
figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC
period and invested the proceeds, without the imposition of a
sales charge, in class A shares in conjunction with the
shareholder’s participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA
SM
)
Program (the “MFA Program”). The CDSC is booked as a
contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
|
|
(5)
|
Provided to illustrate the extent to which the current
level of distribution fee payments (not including any CDSC
payments) is amortizing the unpaid balance. No assurance can
be given that payments of the distribution fee will reach
either the voluntary maximum (with respect to Class B shares)
or the NASD maximum (with respect to Class B and Class C
shares).
|
Reference is made to
“How to Buy, Sell, Transfer and Exchange Shares” in
the Prospectus.
The Fund is required
to redeem for cash all shares upon receipt of a written request
in proper form. The redemption price is the net asset value per
share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there
will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating
their holdings will receive upon redemption all dividends
reinvested through the date of redemption.
The right to redeem
shares or to receive payment with respect to any such redemption
may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by
the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during
which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of
shareholders.
The value of shares of
the Fund at the time of redemption may be more or less than the
shareholder’s cost, depending in part on the market value
of the securities held by the Fund at such time.
A shareholder wishing
to redeem shares held with the Transfer Agent may do so without
charge by tendering the shares directly to the Fund’s
Transfer Agent, Financial Data Services, Inc., P.O. Box 44062,
Jacksonville, Florida 32232-4062. Redemption requests delivered
other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Redemption requests should
not be sent to the Program or the Fund. A redemption request in
either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such
name(s) appear(s) on the Transfer Agent’s register. The
signature(s) on the redemption request may require a guarantee
by an “eligible guarantor institution” as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934 (the
“Exchange Act”), the existence and validity of which
may be verified by the Transfer Agent through the use of
industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general,
signature guarantees are waived on redemptions of less than
$50,000 as long as the following requirements are met: (i) all
requests require the signature(s) of all persons in whose
name(s) shares are recorded on the Transfer Agent’s
register; (ii) all checks must be mailed to the stencil address
of record on the Transfer Agent’s register and (iii) the
stencil address must not have changed within 30 days. Certain
rules may apply regarding certain account types such as but not
limited to UGMA/UTMA accounts, Joint Tenancies With Rights of
Survivorship, contra broker transactions and institutional
accounts. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or
administrator, or certificates of corporate
authority.
A shareholder may also
redeem shares held with the Transfer Agent by telephone request.
To request a redemption from your account, call the Transfer
Agent at 1-800-MER-FUND. The request must be made by the
shareholder of record and be for an amount less than $50,000.
Before telephone requests will be honored, signature approval
from all shareholders of record on the account must be obtained.
The shares being redeemed must have been held for at least 15
days. Telephone redemption requests will not be honored in the
following situations: the accountholder is deceased, the
proceeds are to be sent to someone other than the shareholder of
record, funds are to be wired to the client’s bank account,
a systematic withdrawal plan is in effect, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are divorced, the address on the
account has changed within the last 30 days or share
certificates have been issued on the account.
Since this account
feature involves a risk of loss from unauthorized or fraudulent
transactions, the Transfer Agent will take certain precautions
to protect your account from fraud. Telephone redemption may be
refused if the caller is unable to provide: the account number,
the name and address registered on the account and the social
security number registered on the account. The Fund or the
Transfer Agent may temporarily suspend telephone transactions at
any time.
For shareholders
redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of
redemption. At various times the Fund may be requested to redeem
shares for which it has not yet received good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of such Fund
shares, which will not usually exceed 10 days. In the event that
a shareholder account held directly with the Transfer Agent
contains a fractional share balance, such fractional share
balance will be automatically redeemed by the Fund.
The Fund also will
repurchase its shares through a shareholder’s listed
securities dealer. The Fund normally will accept orders to
repurchase shares by wire or telephone from dealers for their
customers at the net asset value
next computed after the order is placed. Shares will be priced at
the net asset value calculated on the day the request is
received, provided that the request for repurchase is submitted
to the dealer prior to the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) and such
request is received by the Fund from such dealer not later than
30 minutes after the close of business on the NYSE on the same
day.
Dealers have the
responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on
the NYSE in order to obtain that day’s closing
price.
The foregoing
repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected
dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Certain securities dealers may
charge a processing fee to confirm a repurchase of shares. For
example, the fee currently charged by Merrill Lynch is $5.35.
Fees charged by other securities dealers may be higher or lower.
Repurchases made through the Fund’s Transfer Agent, on
accounts held at the Transfer Agent, are not subject to the
processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase
procedure. A shareholder whose order for repurchase is rejected
by the Fund, however, may redeem Fund shares as set forth
above.
Reinstatement Privilege—Class I and Class A
Shares
Shareholders of the
Fund who have redeemed their Class I and Class A shares have a
privilege to reinstate their accounts by purchasing Class I or
Class A shares, as the case may be, at net asset value without a
sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer
Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised
through the investor’s financial consultant within 30 days
after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the
notice of reinstatement is received and cannot exceed the amount
of the redemption proceeds.
Determination of Net Asset Value
Reference is made to
“How Shares are Priced” in the Prospectus.
The net asset value of
the shares of all classes of the Fund is determined once daily
Monday through Friday as of the close of business on the NYSE on
each day the NYSE is open for trading based on prices at the
time of closing. The NYSE generally closes at 4:00 p.m., Eastern
time. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at
the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The NYSE is not open for
trading on New Year’s Day, Martin Luther King, Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is
computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares of
the Fund outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser
and Distributor, are accrued daily.
The per share net
asset value of Class A, Class B and Class C shares generally
will be lower than the per share net asset value of Class I
shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares, and the
daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. Moreover, the per
share net asset value of the Class B and Class C shares of the
Fund generally will be lower than the per share net asset value
of Class A shares, reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected,
however, that the per share net
asset value of the four classes of the Fund will tend to converge
(although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the
expense accrual differentials between the classes.
Portfolio securities
that are traded on stock exchanges are valued at the last sale
price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available ask
price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of
Directors of the Program as the primary market. Long positions
in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC
market prior to the time of valuation. Portfolio securities that
are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium
received is recorded on its books as an asset and an equivalent
liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on
the last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last ask
price. Options purchased by the Fund are valued at their last
sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last bid price.
Other investments, including financial futures contracts and
related options, are stated at market value. Securities and
assets for which market quotations are not readily available are
stated at fair value as determined in good faith by or under the
direction of the Board of Directors of the Program. Such
valuations and procedures will be reviewed periodically by the
Board of Directors.
The Fund values debt
securities on the basis of valuations provided by dealers or by
a pricing service which uses information with respect to
transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships
between securities and yield to maturity. Portfolio securities
(other than short-term obligations but including listed issues)
may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal,
institutional-size trading units of such securities using market
information, transactions for comparable securities and various
relationships between securities which are generally recognized
by institutional traders. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless this
method no longer produces fair valuations.
Generally, trading in
non-U.S. securities, as well as U.S. Government securities and
money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The
values of such securities used in computing the net asset value
of the Fund’s shares are determined as of such times.
Foreign currency exchange rates also are generally determined
prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates
may occur between the times at which they are determined and the
close of business on the NYSE that may not be reflected in the
computation of the Fund’s net asset value.
Option Accounting
Principles
. When the Fund sells an
option, an amount equal to the premium received by the Fund is
included in that Fund’s Statement of Assets and Liabilities
as a deferred credit. The amount of such liability subsequently
will be marked-to-market to reflect the current market value of
the option written. If current market value exceeds the premium
received there is an unrealized loss; conversely, if the premium
exceeds current market value there is an unrealized gain. The
current market value of a traded option is the last sale price
or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date or if the Fund
enters into a closing purchasing transaction, the affected Fund
will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option
will be extinguished. If an option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security
and the proceeds of sales are increased by the premium
originally received.
Each investor in the
Program may add to or reduce its investment in the Fund on each
day the NYSE is open for trading. The value of each investor
’s interest in the Fund will be determined after the close
of business on the NYSE by multiplying the net asset value of
the Fund by the percentage, effective for that day, that
represents that
investor’s share of the aggregate interests in the Fund. The
close of business on the NYSE is generally 4:00 p.m., Eastern
time. Any additions or withdrawals to be effected on that day
will then be effected. The investor’s percentage of the
aggregate beneficial interests in the Fund will then be
recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor’s
investment in the Fund as of the time of determination on such
day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor’s investment
in the Fund effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Fund as of such
time on such day plus or minus, as the case may be, the amount
of the net additions to or withdrawals from the aggregate
investments in the Fund by all its investors. The percentage so
determined will then be applied to determine the value of the
investor’s interest in the Fund after the close of business
of the NYSE on the next determination of net asset value of the
Fund.
Computation of Offering Price Per Share
An illustration of the
computation of the offering price for Class I, Class A, Class B
and Class C shares of the Fund based on the value of its
estimated net assets and number of shares outstanding on January
31, 2000 is as follows:
|
|
|
Class I*
|
|
Class A*
|
|
Class B
|
|
Class C
|
|
Net
Assets
|
|
$938,601
|
|
$7,658,947
|
|
$115,215,881
|
|
$72,650,473
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares Outstanding
|
|
42,647
|
|
349,290
|
|
5,373,187
|
|
3,394,563
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value Per Share (net assets divided by number
of shares outstanding)
|
|
22.01
|
|
21.93
|
|
21.44
|
|
21.40
|
Sales
Charge (for Class I and Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))**
|
|
1.22
|
|
1.22
|
|
***
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
Offering Price
|
|
$
23.23
|
|
$
23.15
|
|
$
21.44
|
|
$
21.40
|
|
|
|
|
|
|
|
|
|
|
|
*
|
As of
April 3, 2000, Class A shares were redesignated Class I and
Class D shares were redesignated Class A.
|
|
**
|
Rounded
to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
|
|
***
|
Class B
and Class C shares are not subject to an initial sales charge
but may be subject to a CDSC on redemption. See “Purchase
of Shares—Deferred Sales Charges—Class B and Class C
Shares” herein.
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies
established by the Directors of the Program, the Investment
Adviser is primarily responsible for the execution of the Fund
’s portfolio transactions and the allocation of brokerage.
The Fund has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities
and does not use any particular broker or dealer. In executing
transactions with brokers and dealers, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable
brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm
and the firm’s risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay
the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies
established by the Directors of the Program, the Investment
Adviser may consider sales of Fund shares as a factor in the
selection of brokers or dealers to execute portfolio
transactions for the Fund; however, whether or not a particular
broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for
the Fund.
Subject to obtaining
the best net results, brokers who provide supplemental
investment research to the Investment Adviser may receive orders
for transactions by the Fund. Such supplemental research
services ordinarily consist of assessments and analyses of the
business or prospects of a company, industry or economic sector.
Information so received will be in addition to and not in lieu
of the services required to be performed by the Investment
Adviser under the Investment Advisory Agreements, and the
expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental
information. If in the judgment of
the Investment Adviser, the Fund will benefit from supplemental
research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services that
are in excess of commission that another broker may have charged
for effecting the same transactions. Certain supplemental
research services may primarily benefit one or more other
investment companies or other accounts for which the Investment
Adviser exercises investment discretion. Conversely, the Fund
may be the primary beneficiary of the supplemental research
services received as a result of portfolio transactions effected
for such other accounts or investment companies.
The Fund anticipates
that its brokerage transactions involving securities of issuers
domiciled in countries other than the United States generally
will be conducted primarily on the principal stock exchanges of
such countries. Brokerage commissions and other transaction
costs on foreign stock exchange transactions generally are
higher than in the United States, although the Fund will
endeavor to achieve the best net results in effecting its
portfolio transactions. There generally is less governmental
supervision and regulation of foreign stock exchanges and
brokers than in the United States.
Foreign equity
securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity
securities. ADRs, EDRs and GDRs may be listed on stock
exchanges, or traded in over-the-counter markets in the United
States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to
negotiated commission rates. The Fund’s ability and
decisions to purchase or sell portfolio securities of foreign
issuers may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Because the shares of
each Fund are redeemable on a daily basis in U.S. dollars, the
Program intends to manage each Fund so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will
have significant effect on the Program’s portfolio
strategies.
The Fund may invest in
certain securities traded in the OTC market and intends to deal
directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment
Company Act, persons affiliated with the Fund and persons who
are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions
is obtained from the Commission. Since transactions in the OTC
market usually involve transactions with the dealers acting as
principal for their own accounts, the program will not deal with
affiliated persons, including Merrill Lynch and its affiliates,
in connection with such transactions. However, an affiliated
person of the Fund may serve as its broker in OTC transactions
conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received
by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities
during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Directors of the
Program that either comply with rules adopted by the Commission
or with interpretations of the Commission staff. See
“Investment Objective and Policies—Investment
Restrictions.”
Section 11(a) of the
Exchange Act generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least
annually furnishes the account with a statement setting forth
the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Program in any of its
portfolio transactions executed on any such securities exchange
of which it is a member, appropriate consents have been obtained
from the Program and annual statements as to aggregate
compensation will be provided to the Program. Securities may be
held by, or be appropriate investments for, the Program as well
as other funds or investment advisory clients of the Investment
Adviser or its affiliates.
The Directors have
considered the possibility of seeking to recapture for the
benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage
commissions received by affiliated brokers could be offset
against the
advisory fee paid to the Investment Adviser. After considering all
factors deemed relevant, the Directors made a determination not
to seek such recapture. The Directors will reconsider this
matter from time to time.
Information about the
brokerage commissions paid by the Fund, including commissions
paid to Merrill Lynch, is set forth in the following
table:
Fiscal Year Ended January 31,
|
|
Aggregate Brokerage
Commissions Paid
|
|
Commissions Paid
to Merrill Lynch
|
|
|
|
|
2000
|
|
$266,711
|
|
$20,491
|
|
1999
|
|
$
76,819
|
|
$
7,398
|
|
1998
|
|
$
39,108
|
|
$
971
|
For the fiscal year
ended January 31, 2000, the brokerage commissions paid to
Merrill Lynch represented 7.68% of the aggregate brokerage
commissions paid and involved 8.19% of the Fund’s dollar
amount of transactions involving payment of brokerage
commissions.
Because of different
objectives or other factors, a particular security may be bought
for one or more clients of the Investment Adviser or its
affiliates when one or more clients of the Investment Adviser or
its affiliates are selling the same security. If purchases or
sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate act as investment
adviser, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its
affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
The Fund offers a
number of shareholder services described below that are designed
to facilitate investment in its shares. Full details as to each
such service and copies of the various plans or how to change
options with respect thereto, can be obtained from the Fund by
calling the telephone number on the cover page hereof, or from
the Distributor or your selected dealer. Certain of these
services are available only to U.S. investors.
Each shareholder whose
account is maintained at the Transfer Agent has an Investment
Account and will receive statements, at least quarterly, from
the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the
reinvestment of dividends. The statements also will show any
other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each
purchase or sale transaction other than automatic investment
purchases and the reinvestment of dividends. A shareholder with
an account held at the Transfer Agent may make additions to his
or her Investment Account at any time by mailing a check
directly to the Transfer Agent. The Fund does not issue share
certificates.
Shareholders
considering transferring their Class I or Class A shares from a
selected dealer or financial intermediary to another brokerage
firm or financial institution should be aware that, if the firm
to which the Class I or Class A shares are to be transferred
will not take delivery of Fund shares, a shareholder either must
redeem the Class I or Class A shares so that the cash proceeds
can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at
the Transfer Agent for those Class I or Class A
shares.
Shareholders
interested in transferring their Class B or Class C shares from
a selected dealer or financial intermediary and who do not wish
to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain
such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder at the
Transfer Agent.
Certain shareholder
services may not be available for the transferred shares. After
the transfer, the shareholder may purchase additional shares of
funds owned before the transfer, and all future trading of these
assets must be coordinated by the new firm.
Shareholders
considering transferring a tax-deferred retirement account, such
as an individual retirement account, from a selected dealer or
financial intermediary to another brokerage firm or financial
institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery
of shares of each Fund, a shareholder must either redeem the
shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at a
selected dealer for those shares.
U.S. shareholders of
each class of shares of the Fund have an exchange privilege with
certain other Mercury mutual funds and Summit, a series of
Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated as
available for exchange by holders of Class I, Class A, Class B
and Class C shares. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege and any
shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange,
shareholders should obtain a currently effective prospectus of
the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares
and a purchase of the acquired shares for Federal income tax
purposes.
Exchanges of Class
I and Class A Shares
. Under the Fund
’s pricing system, Class I shareholders may exchange Class
I shares of the Fund for Class I shares of a second Mercury
mutual fund. If the Class I shareholder wants to exchange Class
I shares for shares of a second Mercury mutual fund, but does
not hold Class I shares of the second fund in his or her account
at the time of exchange and is not otherwise eligible to acquire
Class I shares of the second fund, the shareholder will receive
Class A shares of the second fund as a result of the exchange.
Class A shares also may be exchanged for Class I shares of a
second Mercury mutual fund at any time as long as, at the time
of the exchange, the shareholder is eligible to acquire Class I
shares of any Mercury mutual fund.
Exchanges of Class I
or Class A shares outstanding (“outstanding Class I or
Class A shares”) for Class I or Class A shares of another
Mercury mutual fund, or for Class A shares of Summit (“new
Class I or Class A shares”) are transacted on the basis of
relative net asset value per Class I or Class A share,
respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding
Class I or Class A shares and the sales charge payable at the
time of the exchange on the new Class I or Class A shares. With
respect to outstanding Class I or Class A shares as to which
previous exchanges have taken place, the “sales charge
previously paid” shall include the aggregate of the sales
charges paid with respect to such Class I or Class A shares in
the initial purchase and any subsequent exchange. Class I or
Class A shares issued pursuant to dividend reinvestment are sold
on a no-load basis in each of the funds offering Class I or
Class A shares. For purposes of the exchange privilege, Class I
and Class A shares acquired through dividend reinvestment shall
be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class I or Class A shares on
which the dividend was paid. Based on this formula, Class I and
Class A shares of each Fund generally may be exchanged into the
Class I and Class A shares, respectively, of the other funds
with a reduced or without a sales charge.
Exchanges of Class B
and Class C Shares
. In addition,
outstanding Class B or Class C shares can be exchanged for Class
B or Class C shares, respectively, of another Mercury mutual
fund or for Class B shares of Summit (“new Class B or Class
C shares”) on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that
might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund’s CDSC
schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through
use of the exchange privilege. In addition, Class B shares of the
Fund acquired through use of the exchange privilege will be
subject to the Fund’s CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of
the fund from which the exchange was made. For purposes of
computing the CDSC that may be payable on a disposition of the
new Class B or Class C shares, the holding period for the
outstanding Class B shares is “tacked” to the holding
period of the new Class B or Class C shares. For example, an
investor may exchange Class B shares of the Fund for those of
another Mercury fund (“new Mercury Fund”) after having
held the Fund’s Class B shares for two-and-a-half years.
The 3% CDSC that generally would apply to a redemption would not
apply to the exchange. Four years later the investor may decide
to redeem the Class B shares of new Mercury Fund and receive
cash. There will be no CDSC due on this redemption since by
“tacking” the two-and-a-half year holding period of
the Fund’s Class B shares to the four year holding period
for the new Mercury Fund Class B shares, the investor will be
deemed to have held the new Mercury Fund Class B shares for more
than six years.
Exchanges for
Shares of a Money Market Fund
. Class
I and Class A shares are exchangeable for Class A shares of
Summit and Class B and Class C shares are exchangeable for Class
B shares of Summit. Class A shares of Summit have an exchange
privilege back into Class I or Class A shares of
Affiliate-Advised Funds; Class B shares of Summit have an
exchange privilege back into Class B or Class C shares of
Affiliate-Advised Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will
count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any
Conversion Period with respect to Class B shares. Class B shares
of Summit will be subject to a distribution fee at an annual
rate of 0.75% of average daily net assets of such Class B
shares. This exchange privilege does not apply with respect to
certain fee-based programs for which alternative exchange
arrangements may exist. Please see your financial consultant for
further information.
Prior to October 12,
1998, exchanges from the Fund and other Affiliated-Advised Funds
into a money market fund were directed to certain
Affiliate-Advised money market funds other than Summit.
Shareholders who exchanged Affiliate-Advised Fund shares for
such other money market funds and subsequently wish to exchange
those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to Fund shares, if any.
The holding period for those money market fund shares will not
count toward satisfaction of the holding period requirement for
reduction of the CDSC imposed on such shares, if any, and, with
respect to Class B shares, toward satisfaction of the Conversion
Period. However, the holding period for Class B or Class C
shares of the Fund received in exchange for such money market
fund shares will be aggregated with the holding period for the
fund shares originally exchanged for such money market fund
shares for purposes of reducing the CDSC or satisfying the
Conversion Period.
Exercise of the
Exchange Privilege
. To exercise the
exchange privilege, a shareholder should contact his or her
financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund and shareholders of the other funds
described above with shares for which certificates have not been
issued may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a
properly completed Exchange Application.
Telephone exchange
requests are also available in accounts held with the Transfer
Agent for amounts up to $50,000. To request an exchange from
your account, call the Transfer Agent at 1-800-MER-FUND. The
request must be from the shareholder of record. Before telephone
requests will be honored, signature approval from all
shareholders of record must be obtained. The shares being
exchanged must have been held for at least 15 days. Telephone
requests for an exchange will not be honored in the following
situations: the accountholder is deceased, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are divorced or the address on the
account has changed within the last 30 days. Telephone exchanges
may be refused if the caller is unable to provide: the account
number, the name and address registered on the account and the
social security number registered on the account. The Fund or
the Transfer Agent may temporarily suspend telephone
transactions at any time.
This exchange
privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit
the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may
thereafter resume
such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange
legally may be made. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
Certain fee-based
programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a
“program”), may permit the purchase of Class I shares
at net asset value. Under specified circumstances, participants
in certain Programs may deposit other classes of shares, which
will be exchanged for Class I shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in certain
programs may result in the redemption of shares held therein or
the automatic exchange thereof to another class at net asset
value. In addition, upon termination of participation in a
program, shares that have been held for less than specified
periods within such program may be subject to a fee based on the
current value of such shares. These programs also generally
prohibit such shares from being transferred to another account,
to another broker-dealer or to the Transfer Agent. Except in
limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class
of shares purchased (which may involve the imposition of initial
or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject
to program fees. Additional information regarding certain
specific programs offered through particular selected dealers or
financial intermediaries (including charges and limitations on
transferability applicable to shares that may be held in such
programs) is available in each such program’s client
agreement and from the Transfer Agent at
1-888-763-2260.
Retirement and Education Savings Plans
The minimum initial
purchase to establish a retirement plan or an education savings
plan is $100. Dividends received in retirement plans are exempt
from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans and educational
savings plans. Investors considering participation in any
retirement or education savings plan should review specific tax
laws relating thereto and should consult their attorneys or tax
advisers with respect to the establishment and maintenance of
any such plan.
Dividends received in
each of the plans referred to above are exempt from Federal
taxation until distributed from the plans. Different tax rules
apply to Roth IRA plans and education savings plans. Investors
considering participation in any retirement or education savings
plan should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make
additions to an Investment Account at any time by purchasing
Class I shares (if he or she is an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public
offering price. These purchases may be made either through the
shareholder’s securities dealer or financial intermediary
or by mail directly to the Transfer Agent, acting as agent for
such securities dealer or financial intermediary. You may also
add to your account by automatically investing a specific amount
in the Fund on a periodic basis through your selected dealer or
financial intermediary. The current minimum for such automatic
additional investments is $100. This minimum may be waived or
revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends paid by the
Fund may be taken in cash or automatically reinvested in shares
of the Fund at net asset value without a sales charge. You
should consult with your financial consultant about which option
you would like. If you choose the reinvestment option, dividends
paid with respect to Fund shares will be automatically
reinvested, without sales charge, in additional full and
fractional shares of the Fund. Such reinvestment will be at the
net asset value of shares of the Fund as determined after the
close of business on the NYSE on the monthly payment date for
such dividends. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of
dividends.
Shareholders may,
at any time, by written notification to their selected dealer or
financial intermediary if their account is maintained with a
selected dealer or financial intermediary, or by written
notification or by telephone (1-888-763-2260) to the Transfer
Agent, if their account is maintained with the Transfer Agent,
elect to have subsequent dividends paid with respect to shares
of the Fund in cash, rather than reinvested in Fund shares
(provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares).
Commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder
’s address of records and no interest will accrue on
amounts represented by uncashed dividend checks. Cash payments
can also be directly deposited to the shareholder’s bank
account.
Systematic Withdrawal Plan
A shareholder may
elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by
direct deposit to his or her bank account on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired Fund shares having
a value, based on cost or the current offering price, of $5,000
or more, and monthly withdrawals are available for shareholders
with shares having a value of $10,000 or more.
At the time of each
withdrawal payment, sufficient shares are redeemed from those on
deposit in the shareholder’s account to provide the
withdrawal payment specified by the shareholder. The shareholder
may specify the dollar amount and class of shares to be
redeemed. Redemptions will be made at net asset value as
determined after the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on
such date, the shares will be redeemed at the net asset value
determined after the close of business on the following business
day. The check for the withdrawal payment will be mailed, or the
direct deposit for withdrawal payment will be made on the next
business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all
shares in the Investment Account are reinvested automatically in
Fund shares. A shareholder’s systematic withdrawal plan may
be terminated at any time, without a charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the
Distributor.
With respect to
redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or
Class C shares that can be redeemed from an account annually
shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived.
Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are
otherwise redeemed. See “Purchase of Shares—Deferred
Sales Charge Alternatives—Class B and C Shares.” Where
the systematic withdrawal plan is applied to Class B shares,
upon conversion of the last Class B shares in an account to
Class A shares, a shareholder must make a new election to join
the systematic withdrawal program with respect to the Class A
shares. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should
contact his or her financial consultant.
Withdrawal payments
should not be considered as dividends. Each withdrawal is a
taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder’s original investment
may be reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a systematic withdrawal
plan unless such purchase is equal to at least one year’s
scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which
the shareholder has elected to make systematic
withdrawals.
The Fund intends to
distribute substantially all of its net investment income, if
any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be
distributed to the
Fund’s shareholders at least annually. From time to time, the
Fund may declare a special distribution at or about the end of
the calendar year in order to comply with Federal tax
requirements that certain percentages of its ordinary income and
capital gains be distributed during the year. If in any fiscal
year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least
annually.
See “Shareholder
Services—Automatic Dividend Reinvestment Plan” for
information concerning the manner in which dividends may be
reinvested automatically in shares of the Fund. A shareholder
whose account is maintained at the Transfer Agent or whose
account is maintained through his or her selected dealer may
elect in writing to receive any such dividends in cash.
Dividends are taxable to shareholders, as discussed below,
whether they are reinvested in shares of the Fund or received in
cash. The per share dividends on Class B and Class C shares will
be lower than the per share dividends on Class I and Class A
shares as a result of the account maintenance, distribution and
higher transfer agency fees applicable with respect to the Class
B and Class C shares; similarly, the per share dividends on
Class A shares will be lower than the per share dividends on
Class I shares as a result of the account maintenance fees
applicable with respect to the Class A shares. See “Pricing
of Shares—Determination of Net Asset Value.
”
The Fund intends to
continue to qualify for the special tax treatment afforded
regulated investment companies (“RICs”) under the
Internal Revenue Code of 1986, as amended (the “Code
”). As long as the Fund so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains
that it distributes to Class I, Class A, Class B and Class C
shareholders (together, the “shareholders”). The Fund
intends to distribute substantially all of such
income.
The Code requires a
RIC to pay a nondeductible 4% excise tax to the extent the RIC
does not distribute during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of
its capital gains, determined, in general, on an October 31 year
end, plus certain undistributed amounts from previous years.
While the Fund intends to distribute its income and capital
gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of
the Fund’s taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution
requirements.
Dividends paid by the
Fund from its ordinary income or from an excess of net short
term capital gains over net long term capital losses (together
referred to hereafter as “ordinary income dividends”)
are taxable to shareholders as ordinary income. Distributions
made from an excess of net long term capital gains over net
short term capital losses (including gains or losses from
certain transactions in warrants, futures and options) (
“capital gain dividends”) are taxable to shareholders
as long term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss upon the sale or
exchange of Fund shares held for six months or less will be
treated as long term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in
excess of the Fund’s earnings and profits will first reduce
the adjusted tax basis of a holder’s shares and, after such
adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital
asset). Certain categories of capital gains are taxable at
different rates. Generally not later than 60 days after the
close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amount of any
capital gain dividends as well as any amount of capital gain
dividends in the different categories of capital gain referred
to above.
Dividends are taxable
to shareholders even though they are reinvested in additional
shares of the Fund. A portion of the Fund’s ordinary income
dividends may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements
are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class I,
Class A, Class B and Class C shareholders according to a method
(which it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to Class I, Class A,
Class B and Class C shareholders during the taxable year, or
such other method as the Internal Revenue Service (“IRS
”) may prescribe. If the Fund pays a dividend in January
that was declared in the previous October, November or
December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was
declared.
No gain or loss will
be recognized by Class B shareholders on the conversion of their
Class B shares into Class A shares. A shareholder’s basis
in the Class A shares acquired will be the same as such
shareholder’s basis in the Class B shares converted, and
the holding period of the acquired Class A shares will include
the holding period for the converted Class B shares.
If a shareholder
exercises an exchange privilege within 90 days of acquiring the
shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent
any sales charge paid on the exchanged shares reduces any sales
charge the shareholder would have owed upon the purchase of the
new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a
sale or exchange of shares of the Fund will be disallowed if
such shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed
loss.
Ordinary income
dividends paid to shareholders who are non-resident aliens or
foreign entities will be subject to a 30% U.S. withholding tax
under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or
a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax
advisers concerning the applicability of the U.S. withholding
tax.
Under certain
provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain
dividends and redemption payments (“backup withholding
”). Generally, shareholders subject to backup withholding
will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to such Fund’s
knowledge, have furnished an incorrect number. When establishing
an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not
otherwise subject to backup withholding.
Dividends and interest
received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between
certain countries and the United States may reduce or eliminate
such taxes.
The Fund may invest in
securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated
securities (“high yield bonds”), as previously
described. Some of these high yield bonds may be purchased at a
discount and may therefore cause the Fund to accrue income
before amounts due under the obligations are paid. In addition,
a portion of the interest payments on such high yield bonds may
be treated as dividends for Federal income tax purposes; in such
case, if the issuer of such high yield bonds is a domestic
corporation, dividend payments by the Fund will be eligible for
the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions
The Fund may write,
purchase or sell options, futures and forward foreign exchange
contracts. Options and futures contracts that are “Section
1256 Contracts” will be “marked to market” for
Federal income tax purposes at the end of each taxable year,
i.e
., each such option or futures contract will be
treated as sold for its fair market value on the last day of the
taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures
contract for a non-U.S. currency for which the Fund elects to
have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts
held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price
or interest or currency exchange rates with respect to its
investments.
A forward foreign
exchange contract that is a Section 1256 contract will be marked
to market, as described above. However, the character of gain or
loss from such a contract will generally be ordinary under Code
Section 988. The Fund may, nonetheless, elect to treat the gain
or loss from certain forward foreign exchange contracts as
capital. In this case, gain or loss realized in connection with
a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40%
short-term capital gain or loss.
Code Section 1092,
which applies to certain “straddles,” may affect the
taxation of the Fund’s sales of securities and transactions
in options, futures and forward foreign exchange contracts.
Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales
of securities and certain closing transactions in options,
futures and forward foreign exchange contracts.
Special Rules for Certain Foreign Currency
Transactions
In general, gains from
“foreign currencies” and from foreign currency
options, foreign currency futures and forward foreign exchange
contracts relating to investments in stocks, securities or
foreign currencies will be qualifying income for purposes of
determining whether the Fund qualifies as a RIC. It is currently
unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options or futures
will be valued for purposes of the RIC diversification
requirements applicable to the Fund.
Under Code Section
988, special rules are provided for certain transactions in a
foreign currency other than the taxpayer’s functional
currency (
i.e
., unless certain special rules apply,
currencies other than the U.S. dollar). In general, foreign
currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not
“regulated futures contracts” and from unlisted
options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated
futures contracts, as described above, will be taxed under Code
Section 1256 unless application of Section 988 is elected by the
Fund. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund’s investment
company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income of the
Fund during a taxable year, the Fund would not be able to make
any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the
same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each
shareholder’s Fund shares and resulting in a capital gain
for any shareholder who received a distribution greater than
such shareholder’s basis in Fund shares (assuming the
shares were held as a capital asset). These rules and the
mark-to-market rules described above, however, will not apply to
certain transactions entered into by the Fund solely to reduce
the risk of currency fluctuations with respect to its
investments.
The foregoing is a
general and abbreviated summary of the applicable provisions of
the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent
Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to
change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and
capital gain dividends may also be subject to state and local
taxes.
Certain states exempt
from state income taxation dividends paid by RICs that are
derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S.
Government obligations is exempt from state income
tax.
Shareholders are urged
to consult their tax advisers regarding specific questions as to
Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an
investment in the Funds.
From time to time the
Fund may include its average annual total return and other total
return data in advertisements or information furnished to
present or prospective shareholders. Total return is based on
the Fund’s historical performance and is not intended to
indicate future performance. Average annual total return is
determined separately for Class I, Class A, Class B and Class C
shares in accordance with a formula specified by the
Commission.
Average annual total
return quotations for the specified periods are computed by
finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value
of such investment at the end of each period. Average annual
total return is computed assuming all dividends and
distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the
maximum sales charge in the case of Class I and Class A shares
and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period as in the
case of Class B and Class C shares and the maximum sales charge
in the case of Class I and A shares. Dividends paid by the Fund
with respect to all shares, to the extent any dividends are
paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account
maintenance and the distribution charges and any incremental
transfer agency cost relating to each class of shares will be
borne exclusively by that class. The Fund will include
performance data for all classes of shares in any advertisement
or information including performance data of the
Fund.
The Fund also may
quote annual, average annual and annualized total return and
aggregate total return performance data, both as a percentage
and as a dollar amount based on a hypothetical $1,000
investment, for various periods other than those noted below.
Such data will be computed as described above, except that (1)
as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data,
may be quoted and (2) the maximum applicable sales charges will
not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance
data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total
return data generally will be lower than average annual total
return data since the average rates of return reflect
compounding of return; aggregate total return data generally
will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer
period of time. The Fund’s total return may be expressed
either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified
period.
The Fund may provide
information designed to help investors understand how the Fund
is seeking to achieve its investment objective. This may include
information about past, current or possible economic, market,
political, or other conditions, descriptive information on
general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of the Fund
’s portfolio composition, investment philosophy, strategy
or investment techniques, comparisons of the Fund’s
performance or portfolio composition to that of other funds or
types of investments, indices relevant to the comparison being
made, or to a hypothetical or model portfolio. The Fund may also
quote various measures of volatility and benchmark correlation
in advertising and other materials, and may compare these
measures to those of other funds or types of
investments.
Set forth below is
total return information for the Class I, Class A, Class B and
Class C shares of the Fund for the periods
indicated.
|
|
|
Class I Shares*
|
|
Class A Shares*
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the
end of the period
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
One
year ended January 31,
2000
|
|
18.54%
|
|
$1,185.40
|
|
18.25%
|
|
$1,182.50
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 2000
|
|
25.17%
|
|
$2,451.70
|
|
24.91%
|
|
$2,431.80
|
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
Year
Ended January 31,
|
|
|
|
|
|
|
|
|
|
2000
|
|
25.11%
|
|
$1,251.10
|
|
24.80%
|
|
$1,248.00
|
|
1999
|
|
42.02%
|
|
$1,420.20
|
|
41.59%
|
|
$1,415.90
|
|
1998
|
|
23.52%
|
|
$1,235.20
|
|
23.30%
|
|
$1,233.00
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 1997
|
|
17.90%
|
|
$1,179.00
|
|
17.80%
|
|
$1,178.00
|
|
|
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 2000
|
|
145.17%
|
|
$2,451.70
|
|
143.18%
|
|
$2,431.80
|
|
|
|
|
|
|
Class B Shares
|
|
Class C Shares
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the
end of the period
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable Value of
a hypothetical $1,000
investment at the end
of the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
One
year ended January 31,
2000
|
|
19.76%
|
|
$1,197.60
|
|
22.68%
|
|
$1,226.80
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 2000
|
|
25.39%
|
|
$2,469.20
|
|
25.47%
|
|
$2,475.50
|
|
|
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
Year
Ended January 31,
|
|
|
|
|
|
|
|
|
|
2000
|
|
23.76%
|
|
$1,237.60
|
|
23.68%
|
|
$1,236.80
|
|
1999
|
|
40.41%
|
|
$1,404.10
|
|
40.39%
|
|
$1,403.90
|
|
1998
|
|
22.16%
|
|
$1,221.60
|
|
22.17%
|
|
$1,221.70
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 1997
|
|
16.80%
|
|
$1,168.00
|
|
16.70%
|
|
$1,167.00
|
|
|
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 2, 1996)
through the fiscal year ended
January 31, 2000
|
|
146.92%
|
|
$2,469.20
|
|
147.55%
|
|
$2,475.50
|
*
As of April 3, 2000, Class A shares were redesignated
Class I shares and Class D shares were redesignated Class A
shares.
In order to reflect
the reduced sales charges in the case of Class I or Class A
shares or the waiver of the CDSC in the case of Class B or Class
C shares applicable to certain investors, as described under
“Purchase of Shares” and “Redemption of Shares,
” respectively, the total return data quoted by the Fund in
advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into
account the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales
charges, a lower amount of expenses is deducted.
On occasion, the Fund
may compare its performance to various indices including, among
other things, the Standard & Poor’s 500 Index, the
Value Line Composite Index, the Dow Jones Industrial Average, or
other published indices, or to data contained in publications
such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc. (“Morningstar”), other competing
universes,
Money Magazine, U.S. News & World Report,
Business Week, Forbes Magazine, Fortune Magazine
and CDA
Investment Technology, Inc. When comparing its performance to a
market index, the Fund may refer to various statistical measures
derived from the historic performance of the Fund and the index,
such as standard deviation and beta. As with other performance
data, performance comparisons should not be considered
indicative of the Fund’s relative performance for any
future period. From time to time, the Fund may include its
Morningstar risk-adjusted performance rating in advertisements
or supplemental sales literature. The Fund may from time to time
quote in advertisements or other materials other applicable
measures of performance and may also make reference to awards
that may be given to the Investment Adviser.
The Program was
incorporated under Maryland law on May 12, 1994. As of the date
of this Statement of Additional Information, the Program has an
authorized capital of 200,000,000 shares of Common Stock par,
value $0.10 per share, of which 47,500,000 has been designated
to the Fund as follows: 6,250,000 Class I shares, 6,250,000
Class A shares, 25,000,000 Class B shares, and 10,000,000 Class
C shares. The Board of Directors of the Program may classify and
reclassify the shares of a Fund into additional classes of
Common Stock at a future date.
Shareholders are
entitled to one vote for each share held and fractional votes
for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote.
The Program does not intend to hold meetings of shareholders in
any year in which the Investment Company Act does not require
shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Generally,
under Maryland law, a meeting of shareholders may be called for
any purpose on the written request of the holders of at least
10% of the outstanding shares of the Program. Voting rights for
Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights.
Redemption rights are discussed elsewhere herein and in the
Prospectus. Each share is entitled to participate equally in
dividends declared by the Program and in the net assets of the
Program on liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the
Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
Deloitte & Touche
LLP
,
Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Program. The independent auditors
are responsible for auditing the annual financial statements of
the Program.
The Bank of New York,
100 Church Street, New York, New York 10286, (the “Custodian
”) acts as the Custodian of the Program’s assets.
Under its contract with the Program, the Custodian is authorized
to establish separate accounts in foreign currencies and to
cause foreign securities owned by the Program to be held in its
offices outside the United States and with certain foreign banks
and securities depositories. The Custodian is responsible for
safeguarding and controlling the Program’s cash and
securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Program’s
investments.
Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, which is a wholly owned subsidiary of ML & Co.,
acts as the Fund’s Transfer Agent pursuant to a transfer
agency, dividend disbursing agency and shareholder servicing
agency agreement (the “Transfer Agency Agreement”).
The Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening, maintenance and servicing
of shareholder accounts.
Brown & Wood
LLP
, One World Trade Center, New York, New York 10048-0557, is
counsel for the Program and the Fund.
The fiscal year of the
Fund ends on January 31 of each year. The Fund sends to its
shareholders at least semi-annually reports showing its
portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year, shareholders
will receive Federal income tax information regarding
dividends.
Shareholder inquiries
may be addressed to the Fund at the address or telephone number
set forth on the cover page of this Statement of Additional
Information.
The Prospectus and
this Statement of Additional Information do not contain all the
information set forth in the Registration Statement and the
exhibits relating thereto, which the Corporation has filed with
the Commission, Washington, D.C., under the Securities Act and
the Investment Company Act, to which reference is hereby
made.
Under a separate
agreement, Mercury Asset Management International Ltd. and
Mercury Asset Management Group Ltd. (“Mercury”) has
granted the Fund the right to use the “Mercury” name
and has reserved the right to withdraw its consent to the use of
such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Mercury
under certain conditions, the use of any other name it might
assume in the future, with respect to any corporation organized
by Mercury.
To the knowledge of
the Fund, no persons or entities owned beneficially 5% or more
of any class of the stock of the Fund as of March 1,
2000.
APPENDIX: Long Term and Short Term Obligation
Ratings
(Including Mortgage Backed and Asset-Backed
Securities)
Description of Standard & Poor’s (
“Standard & Poor’s”) Long Term Issue Credit
Ratings
A Standard & Poor
’s issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific
financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium
term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is
denominated. The issue credit rating is not a recommendation to
purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a
particular investor.
Issue credit ratings
are based on current information furnished by the obligors or
obtained by Standard & Poor’s from other sources it
considers reliable. Standard & Poor’s does not perform
an audit in connection with any credit rating and may, on
occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on
other circumstances.
Issue credit ratings
can be either long term or short term. Short term ratings are
generally assigned to those obligations considered short term in
the relevant market. In the U.S., for example, that means
obligations with an original maturity of no more than 365 days
including commercial paper. Short term ratings are also used to
indicate the creditworthiness of an obligor with respect to put
features on long term obligations. The result is a dual rating,
in which the short term rating addresses the put feature, in
addition to the usual long term rating. Medium term notes are
assigned long term ratings.
Issue credit ratings
are based, in varying degrees, on the following
considerations:
1.
Likelihood of payment capacity and willingness of the
obligor to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
2.
Nature of and provisions of the obligation;
3.
Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws
affecting creditors’ rights.
The issue rating
definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations,
to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation applies when an entity has both senior and
subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly,
in the case of junior debt, the rating may not conform exactly
with the category definition.
|
AAA
|
An
obligation rated AAA has the highest rating assigned by
Standard & Poor’s. The obligor’s capacity to
meet its financial commitment is extremely strong.
|
|
AA
|
An
obligation rated AA differs from the highest rated obligations
only in small degree. The obligor’s capacity to meet its
financial commitment is very strong.
|
|
A
|
An
obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. However, the
obligor’s capacity to meet its financial commitment on
the obligation is still strong.
|
|
BBB
|
An
obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor
to meet its financial commitment on the
obligation.
|
Obligations rated BB, B,
CCC, CC and C are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse
conditions.
|
BB
|
An
obligation rated BB is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the
obligation.
|
|
B
|
An
obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor’s capacity or willingness to
meet its financial commitment on the obligation. The B rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB-
rating.
|
|
CCC
|
An
obligation rated CCC is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B-
rating.
|
|
CC
|
An
obligation rated CC is currently highly vulnerable to
nonpayment.
|
|
C
|
The C
rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on this obligation are continued.
|
|
CI
|
The
rating CI is reserved for income bonds on which no interest is
being paid.
|
|
D
|
An
obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor’s believes that such
payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or
the taking of similar action if payments on an obligation are
jeopardized.
|
|
Plus
(+) or minus (-):
|
|
The ratings from AA to CCC may be modified by the addition of
a plus or minus sign to show relative standing within the
major rating categories.
|
|
|
c
|
The
letter c indicates that the holder’s option to tender the
security for purchase may be canceled under certain prestated
conditions enumerated in the tender option
documents.
|
|
L
|
The
letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying
deposit collateral is federally insured and interest is
adequately collateralized. In the case of certificates of
deposit, the letter L indicates that the deposit, combined
with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest
up to the federal insurance limits within 30 days after
closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon
maturity.
|
|
p
|
The
letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or
entirely depending upon the successful and timely completion
of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon
failure of, such completion. The investor should exercise his
own judgment with respect to such likelihood and
risk.
|
|
*
|
Continuance of the rating is contingent upon Standard
& Poor’s receipt of an executed copy of the escrow
agreement or closing documentation confirming investments and
cash flows.
|
Obligations of issuers
outside the United States and its territories are rated on the
same basis as domestic long term and short term issues. The
ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related
uncertainties.
Bond Investment
Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the
top four categories (“AAA”, “AA”, “A
”, “BBB”, commonly known as “Investment Grade
” ratings) are generally regarded as eligible for bank
investment. In addition, the laws of various states governing
legal investments impose certain rating or other standards for
obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries
generally.
Description of Standard & Poor’s Short Term
Issue Credit Ratings
A Standard & Poor
’s short term issue credit rating is a current opinion of
the likelihood of timely payment of an obligation considered
short term in the relevant market. Ratings are graded into
several categories, ranging from A-1 for the highest quality
obligations to D for the lowest. These categories are as
follows:
|
A-1
|
A short
term obligation rated “A-1” is rated in the highest
category by Standard & Poor’s. The obligor’s
capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the
obligor’s capacity to meet its financial commitment on
these obligations is extremely strong.
|
|
A-2
|
An
obligation rated “A-2” is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rating
categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is
satisfactory.
|
|
A-3
|
An
obligation rated “A-3” exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
|
|
B
|
An
obligation rated “B” is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor’s inadequate capacity to
meet its financial commitment on the obligation.
|
|
C
|
An
obligation rated “C” is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
|
|
D
|
An
obligation rated “D” is in payment default. The
“D” rating category is used when payments on an
obligation are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor
’s believes that such payments will be made during such
grace period. The “D” rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are
jeopardized.
|
A short term issue
credit rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on
current information furnished to Standard & Poor’s by
the issuer or obtained by Standard & Poor’s from other
sources it considers reliable. Standard & Poor’s does
not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings
may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other
circumstances.
Description of Moody’s Investors Service, Inc. (
“Moody’s”) Long Term Debt Ratings
|
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 as 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 desirable
investments. 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 which 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.
|
Note: Moody’s
applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates
that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of its generic
rating category.
Description of Moody’s Short Term Debt
Ratings
Moody’s short
term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have
an original maturity not exceeding one year, unless explicitly
noted. Moody’s employs the following three designations,
all judged to be investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated
Prime-1
(or supporting institutions) have a superior
ability for repayment of short term promissory obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
|
|
—
|
Leading
market positions in well-established industries.
|
|
|
—
|
High
rates of return on funds employed.
|
|
|
—
|
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
|
|
|
—
|
Broad
margins in earnings coverage of fixed financial charges and
high internal cash generation.
|
|
|
—
|
Well-established access to a range of financial markets
and assured sources of alternate liquidity.
|
Issuers rated
Prime-2
(or supporting institutions) have a strong
ability for repayment of short term debt obligations. This will
normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is
maintained.
Issuers rated
Prime-3
(or supporting institutions) have an acceptable
ability for repayment of senior short term obligations. The
effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated
Not
Prime
do not fall within any of the Prime rating
categories.
If an issuer
represents to Moody’s that its short term debt obligations
are supported by the credit of another entity or entities, in
assigning ratings to such issuers, Moody’s evaluates the
financial strength of the affiliated corporations, commercial
banks, insurance companies, foreign governments or other
entities, but only as one factor in the total rating assessment.
Moody’s makes no representation and gives no opinion on the
legal validity or enforceability of any support
arrangement.
Description of Fitch IBCA, Inc.’s (“Fitch
”) International Long Term Credit Ratings
Fitch investment grade
bond ratings provide a guide to investors in determining the
credit risk associated with a particular security. The ratings
represent Fitch’s assessment of the issuer’s ability
to meet the obligations of a specific debt issue or class of
debt in a timely manner.
The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment
that might affect the issuer’s future financial strength
and credit quality.
Fitch ratings do not
reflect any credit enhancement that may be provided by insurance
policies or financial guarantees unless otherwise
indicated.
Bonds that have the
same rating are of similar but not necessarily identical credit
quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not
recommendations to buy, sell, or hold any security. Ratings do
not comment on the adequacy of market price, the suitability of
any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security. Fitch
ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch
believes to be reliable. Fitch does not audit or verify the
truth or accuracy of such information. Ratings may be changed,
suspended, or withdrawn as a result of changes in, or the
unavailability of, information or for other reasons.
|
AAA
|
ratings
denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable
events.
|
|
AA
|
ratings
denote a very low expectation of credit risk. They indicate
very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
|
|
A
|
ratings
denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes
in circumstances or in economic conditions than is the case
for higher ratings.
|
|
BBB
|
ratings
indicate that there is currently a low expectation of credit
risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade
category.
|
|
BB
|
ratings
indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives
may be available to allow financial commitments to be met.
Securities rated in this category are not investment
grade.
|
|
B
|
ratings
indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment
is contingent upon a sustained, favorable business and
economic environment.
|
|
CCC,
CC, C
|
|
Default
is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable
business or economic developments. A “CC” rating
indicates that default of some kind appears probable. “C
” ratings signal imminent default.
|
|
|
DDD,
DD,
and D
|
|
Securities are not meeting current obligations and are
extremely speculative. “DDD” designates the highest
potential for recovery of amounts outstanding on any
securities involved. For U.S. corporates, for example, “DD
” indicates expected recovery of 50%-90% of such
outstandings, and “D” the lowest recovery potential,
i.e. below 50%.
|
|
Description of Fitch’s International Short Term
Credit Ratings
A short term rating
has a time horizon of less than 12 months for most obligations,
or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet
financial commitments in a timely manner.
|
F1
|
Indicates the strongest capacity for timely payment of
financial commitments; may have an added “+” to
denote any exceptionally strong credit feature.
|
|
F2
|
A
satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in
the case of the higher ratings.
|
|
F3
|
The
capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
|
|
B
|
Minimal
capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and
economic conditions.
|
|
C
|
Default
is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable
business and economic environment.
|
|
D
|
Denotes
actual or imminent payment default.
|
Notes:
“+” or
“-” may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not
added to the “AAA” long-term rating category, to
categories below “CCC,” or to short-term ratings other
than “FI”.
“NR”
indicates that Fitch does not rate the issuer or issue in
question.
“Withdrawn”:
A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingWatch: Ratings
are placed on RatingWatch to notify investors that there is a
reasonable probability of a rating change and the likely
direction of such change. These are designated as “Positive
”, indicating a potential upgrade, “Negative”,
for a potential downgrade, or “Evolving”, if ratings
may be raised, lowered or maintained. RatingWatch is typically
resolved over a relatively short period.
[This page intentionally left blank]
CODE #18472-04-00
PROSPECTUS
·
April 3, 2000
Mercury U.S. Government
Securities Fund
[GRAPHIC]
This
Prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.
The
Securities And Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal
offense.
Table of
Contents
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
Fund Facts
In an
effort to help you better understand the many concepts involved
in making an investment decision, we have defined the
highlighted terms in this prospectus in the
sidebar.
Government Agencies —
entities that are part of or sponsored by the federal
government, such as the Government National Mortgage
Administration (“GNMA”), the Tennessee Valley
Authority or the Federal Housing Administration.
Government-sponsored enterprises
—
private corporations sponsored by the federal government
that have the legal status of government agencies, such as the
Federal Home Loan Mortgage Corporation, the Student Loan
Marketing Association or Fannie Mae.
Mortgage-backed securities —
securities that give their holder the right to receive a portion
of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases
are guaranteed by government agencies.
Maturity —
the time at which the principal amount of a bond is
scheduled to be returned to investors.
Prepayment Risk —
the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the proceeds may be
invested in securities with lower yields.
Extension Risk —
the
risk that certain obligations will be paid off more slowly by
the obligor than anticipated and the value of these securities
will fall.
Volatility —
the
amount and frequency of changes in a security’s
value.
ABOUT THE MERCURY U.S. GOVERNMENT SECURITIES FUND
What is
the Fund’s investment objective?
The Fund
’s investment objective is to seek a high current return
through investments in securities issued or guaranteed by the
U.S. government,
government agencies
or
government-sponsored enterprises
, including GNMA
mortgage backed certificates and other
mortgage-backed
securities
.
What are
the Fund’s main investment strategies?
The Fund
invests in a portfolio of bonds and other debt securities that
are issued or guaranteed by the U.S. government, government
agencies or government-sponsored enterprises. The Fund may
invest a substantial portion of its portfolio in mortgage-backed
securities issued or guaranteed by government- sponsored
enterprises. The Fund invests in securities of any
maturity
. The Investment Adviser selects
securities depending on its assessment of the relative yields
available on securities of different maturities and its
assessment of future interest rate patterns. Thus, at various
times the average maturity may be relatively short, (under five
years, for example) or relatively long (over ten years, for
example).
What are
the main risks of investing in the Fund?
As with
any mutual fund, the value of the Fund’s investments
— and therefore the value of Fund shares —
may fluctuate. Although government securities involve
minimal credit risk, changes in the value of government
securities may occur in response to interest rate movements
— generally, when interest rates go up, the value of
most government securities, like other fixed income investments,
goes down. If the value of the Fund’s investments goes
down, you may lose money.
The Fund
may invest a substantial portion of its portfolio in
mortgage-backed securities. Mortgage-backed securities involve
special risks, including
prepayment risk
and
extension risk
, and may involve more
volatility
than other fixed income securities of similar
maturities.
Who
should invest?
The Fund
may be an appropriate investment for you if you:
|
|
Ÿ
|
Are
looking for an investment that provides income
|
|
|
Ÿ
|
Want a
professionally managed portfolio
|
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
Fund Facts
|
|
Ÿ
|
Are
willing to accept the risk that the value of your investment
may decline as the result of interest rate movements in order
to seek high current return
|
|
|
Ÿ
|
Are
looking for an investment that provides current return with
relatively minimal credit risk
|
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
Fund Facts
The bar
chart and table shown below provide an indication of the risk of
investing in the Fund. The bar chart shows changes in the Fund
’s performance for Class B shares for each complete
calendar year since the Fund’s inception. Sales charges are
not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the
average annual total returns for each class of the Fund’s
shares for the periods shown with those of the Salomon Brothers
Mortgage Index. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the
future.
[BAR CHART]
1996 1997 1998 1999
---- ---- ---- ----
4.57% 8.95% 8.42% 0.08%
During
the period shown in the bar chart, the highest return for a
quarter was 4.44% (quarter ended September 30, 1998) and the
lowest return for a quarter was -0.85% (quarter ended June 30,
1999).
Average
Annual Total Returns
(as of the calendar year ended
December 31, 1999)
|
|
Past
One Year
|
|
Since
Inception
|
|
Mercury
U.S. Government Securities
Fund*††† I
|
|
-3.20
|
%
|
|
7.02
|
%
†
|
|
Salomon
Brothers Mortgage Index**
|
|
1.83
|
%
|
|
7.67
|
%†
†
|
|
Mercury
U.S. Government Securities
Fund*††† A
|
|
-3.35
|
%
|
|
6.77
|
%
†
|
|
Salomon
Brothers Mortgage Index**
|
|
1.83
|
%
|
|
7.67
|
%†
†
|
|
Mercury
U.S. Government Securities
Fund* B
|
|
-3.70
|
%
|
|
7.06
|
%
†
|
|
Salomon
Brothers Mortgage Index**
|
|
1.83
|
%
|
|
7.67
|
%†
†
|
|
Mercury
U.S. Government Securities
Fund* C
|
|
-0.92
|
%
|
|
7.00
|
%
†
|
|
Salomon
Brothers Mortgage Index**
|
|
1.83
|
%
|
|
7.67
|
%†
†
|
|
|
*
Includes sales charges.
|
|
**
This unmanaged Index reflects the performance of a
capital market weighting of the outstanding agency-issued
mortgage-backed securities. Past performance is not predictive
of future performance.
|
|
† Inception date is February 1,
1995.
|
|
†† Since February 1, 1995.
|
|
††† As of April 3, 2000, Class A shares
were redesignated Class I shares and Class D shares were
redesignated Class A shares.
|
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] Fund Facts
UNDERSTANDING EXPENSES
Fund
investors pay various expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all
mutual funds may charge:
Expenses paid directly by the
shareholder:
Shareholder Fees —
these fees include sales charges which you may pay when
you buy or sell shares of the Fund.
Expenses paid indirectly by the
shareholder:
Annual Fund Operating Expenses
—
expenses that cover the costs of operating the
Fund.
Management Fee —
a
fee paid to the Investment Adviser for managing the
Fund.
Distribution Fees —
fees used to support the Fund’s marketing and
distribution efforts, such as compensating financial
consultants, advertising and promotion.
Service (Account Maintenance) Fees
—
fees used to compensate securities dealers and other
financial intermediaries for services to beneficial
shareholders and/or account maintenance activities.
The Fund
offers four different classes of shares. Although your money
will be invested the same way no matter which class of shares
you buy, there are differences among the fees and expenses
associated with each class. Not everyone is eligible to buy
every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your
financial consultant can help you with this
decision.
This
table shows the different fees and expenses that you may pay if
you buy and hold the different classes of shares of the Fund.
Future expenses may be greater or less than those indicated
below.
Shareholder Fees (Fees paid
directly from your
investment)(a):
|
|
Class
I*
|
|
Class
A*
|
|
Class
B(b)
|
|
Class
C
|
|
Maximum
Sales Charge (Load) imposed on
purchases (as a percentage of offering price)
|
|
4.00
|
%(c)
|
|
4.00
|
%(c)
|
|
None
|
|
|
None
|
|
|
Maximum
Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption
proceeds, whichever is lower)
|
|
None
|
(d)
|
|
None
|
(d)
|
|
4.00
|
%(c)
|
|
1.00
|
%(c)
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fee(g)
|
|
0.50
|
%
|
|
0.50
|
%
|
|
0.50
|
%
|
|
0.50
|
%
|
|
|
Distribution and/or Service (12b-1)
Fees(e)
|
|
None
|
|
|
0.25
|
%
|
|
0.75
|
%
|
|
0.80
|
%
|
|
Other
Expenses (including transfer agency
fees)(f)(g)
|
|
0.88
|
%
|
|
0.92
|
%
|
|
0.97
|
%
|
|
1.03
|
%
|
|
|
Total Annual Fund Operating Expenses
|
|
1.38
|
%
|
|
1.67
|
%
|
|
2.22
|
%
|
|
2.33
|
%
|
|
|
*
|
As
of April 3, 2000, Class A shares were redesignated Class I
shares and Class D shares were redesignated Class A
shares.
|
|
(a)
|
Certain securities dealers or other financial
intermediaries may charge a fee to process a purchase or sale
of shares. See “How to Buy, Sell, Transfer and Exchange
Shares.”
|
|
(b)
|
Class B shares automatically convert to Class
A shares about ten years after you buy them and will no longer
be subject to distribution fees.
|
|
(c)
|
Some investors may qualify for reductions in
the sales charge (load).
|
|
(d)
|
You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one
year.
|
|
(e)
|
The Fund calls the “Service Fee” an
“Account Maintenance Fee.” Account Maintenance Fee
is the term used elsewhere in this Prospectus and in all other
Fund materials. If you hold Class B or C shares for a long
time, it may cost you more in distribution (12b-1) fees than
the maximum sales charge that you would have paid if you had
bought one of the other classes.
|
|
(f)
|
The Fund pays the Transfer Agent a fee for
each shareholder account and reimburses it for out-of-pocket
expenses. The fee ranges from $11.00 to $23.00 per account
(depending on the level of services required), but is set at
0.10% for certain accounts that participate in certain
fee-based programs. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close
during the calendar year. The fee begins the month following
the month the
account is closed and ends at the end of the calendar year.
For the fiscal year ended January 31, 2000, the Fund paid the
Transfer Agent fees totaling $62,789. The Investment Adviser
provides accounting services to the Fund at its cost. For
fiscal year ended January 31, 2000, the Fund reimbursed the
Investment Adviser $13,556 for these services.
|
|
(g)
|
The Investment Adviser has agreed to
voluntarily waive management fees and/or reimburse expenses.
The Total Annual Fund Operating Expenses shown in the table
does not reflect such voluntary management fee waiver and/or
reimbursement of expenses because they may be discontinued by
the Investment Adviser at any time without notice. During the
fiscal year ended January 31, 2000, the Investment Adviser
waived management fees and reimbursed expenses totaling
$298,716. After taking into account the fee levels described
above and such waiver and reimbursement, the total expense
ratio was 0.25% for Class A, 0.75% for Class B and 0.80% for
Class C. All expenses for Class I were
reimbursed.
|
Example:
These
examples are intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual
funds.
These
examples assume that you invest $10,000 in the Fund for the time
periods indicated, that your investment has a 5% return each
year, that you pay the sales charges, if any, that apply to the
particular class and that the Fund’s operating expenses
remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may
be more or less than the 5% used in these examples. Although
your actual costs may be higher or lower, based on these
assumptions, your costs would be:
|
|
|
|
|
|
|
|
|
|
|
Expenses if you
did
redeem your
shares:
|
|
|
|
|
Class
I*
|
|
Class
A*
|
|
Class
B
|
|
Class
C
|
|
|
One
Year
|
|
$
535
|
|
$
563
|
|
$
625
|
|
$
336
|
|
|
Three
Years
|
|
$
819
|
|
$
905
|
|
$
994
|
|
$
727
|
|
|
Five
Years
|
|
$1,125
|
|
$1,271
|
|
$1,289
|
|
$1,245
|
|
|
Ten
Years
|
|
$1,991
|
|
$2,297
|
|
$2,554
|
|
$2,666
|
|
|
|
Expenses if you
did not
redeem your
shares:
|
|
|
|
|
Class
I*
|
|
Class
A*
|
|
Class
B
|
|
Class
C
|
|
|
One
Year
|
|
$
535
|
|
$
563
|
|
$
225
|
|
$
236
|
|
|
Three
Years
|
|
$
819
|
|
$
905
|
|
$
694
|
|
$
727
|
|
|
Five
Years
|
|
$1,125
|
|
$1,271
|
|
$1,190
|
|
$1,245
|
|
|
Ten
Years
|
|
$1,991
|
|
$2,297
|
|
$2,554
|
|
$2,666
|
|
|
*
|
As
of April 3, 2000, Class A shares were redesignated Class I
shares and Class D shares were redesignated Class A
shares.
|
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
About the Details
About
the Portfolio Manager —
Gregory Mark Maunz is a Senior Vice President and the Portfolio
Manager of the Fund. Mr. Maunz was a Vice President of the
Investment Adviser from 1985 to 1997. He has been a First Vice
President of the Investment Adviser since 1997 and Portfolio
Manager since 1984.
About
the Investment Adviser —
The Fund is managed by Fund Asset Management.
The Fund
’s investment objective is to seek high current return
through investments in a portfolio of bonds and other debt
securities that are issued or guaranteed by the U.S. government,
government agencies or government- sponsored enterprises,
including GNMA mortgage backed certificates and other
mortgage-backed government securities.
The Fund
may invest in all securities issued or guaranteed by the U.S.
government or its agencies of any maturity. Certain securities,
such as U.S. Treasury obligations, are direct obligations of the
U.S. government. The Fund also invests in securities that are
issued by government-sponsored enterprises or agencies but that
are not direct obligations of the U.S. government. These
securities are, however, backed by the credit of the particular
agency or government-sponsored enterprise that issued the
securities and are generally considered to have a relatively low
risk of default.
It is
anticipated that under certain circumstances, a significant
portion of the Fund’s assets may consist of GNMA
mortgage-backed certificates and other U.S. government
securities representing ownership interests in mortgage
pools.
The Fund
will normally invest a portion of its assets in short term U.S.
government and government agency debt securities, such as
Treasury bills. As a temporary measure for defensive purposes,
the Fund may invest more heavily in these securities, without
limitation. The Fund may also increase its investment in these
securities when Fund management is unable to find enough
attractive longer term investments, to reduce exposure to longer
term investments when management believes it is advisable to do
so on a temporary basis, or to meet redemptions. Investments in
short term securities can be sold easily and have limited risk
of loss but earn only limited returns. Short term investments
may, therefore, limit the potential for the Fund to achieve its
investment objective.
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
About the Details
This
section contains a summary discussion of the general risks of
investing in the Fund. As with any fund, there can be no
guarantee that the Fund will meet its objective, or that the Fund
’s performance will be positive over any period of
time.
The
Fund’s principal risks include:
Market
and Selection Risk
Market
risk is the risk that the bond market will go down in value,
including the possibility that the market will go down sharply
and unpredictably. Selection risk is the risk that the
securities that Fund management selects will underperform the
bond market or other funds with similar investment objectives
and investment strategies.
Interest
Rate Risk
Interest
rate risk is the risk that prices of bonds generally increase
when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more
in response to interest rate changes than prices of shorter term
securities.
Credit
Risk
Credit
risk is the risk that the issuer of a security owned by the Fund
will be unable to pay the interest or principal when due. The
degree of credit risk depends on both the financial condition of
the issuer and the terms of the obligation. Because the
obligations in which the Fund invests are typically guaranteed
by the U.S. government or government agencies, there is minimal
credit risk.
Call and
Redemption Risk
A bond
’s issuer may call a bond for redemption before it matures.
If this happens to a bond the Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower
yields.
Mortgage-Backed Securities
Mortgage-backed securities represent the right to receive
a portion of principal and/or interest payments made on a pool
of residential or commercial mortgage loans. When interest rates
fall, borrowers may refinance or otherwise repay principal on
their mortgages earlier than scheduled. When this happens,
certain types of mortgage-backed securities will be paid off
more quickly than originally anticipated and the Fund has to
invest the proceeds in securities with lower
yields. This risk is known as prepayment risk. When interest rates
rise, certain types of mortgage-backed securities will be paid
off more slowly than originally anticipated and the value of
these securities will fall. This risk is known as extension
risk.
Because
of prepayment risk and extension risk, mortgage-backed
securities react differently to changes in interest rates than
other fixed income securities. Small movements in interest rates
(both increases and decreases) may quickly and significantly
reduce the value of certain mortgage-backed
securities.
Most
mortgage-backed securities are issued by Federal government
agencies, such as the Government National Mortgage Association,
the Federal Home Loan Mortgage Corporation or Federal National
Mortgage Association. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies
are guaranteed by either the Federal government or the
government agency. Such securities have very little credit risk,
but may be subject to substantial interest rate
risk.
Mortgage-backed securities may be either pass-through
securities or collateralized mortgage obligations (CMOs).
Pass-through securities represent a right to receive principal
and interest payment collected on a pool of mortgages, which are
passed through to security holders (less servicing costs). CMOs
are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams
(tranches) with different priority rights to portions of the
underlying mortgage payments. Certain CMO tranches may represent
a right to receive interest only (IOs), principal only (POs) or
an amount that remains after other floating-rate tranches are
paid (an inverse floater). These securities are frequently
referred to as “mortgage derivatives” and may be
extremely sensitive to changes in interest rates. If the Fund
invests in CMO tranches (including CMO tranches issued by
government agencies) and interest rates move in a manner not
anticipated by Fund Management, it is possible that the Fund
could lose all or substantially all of its
investment.
The
Fund also may be subject, to a lesser extent, to risks
associated with the following investment
strategies:
Derivatives
The Fund
may use derivative instruments including futures, forwards,
options, indexed securities and inverse securities. Derivatives
allow the Fund to increase or decrease its risk exposure more
quickly and efficiently than other types of
instruments.
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
About the Details
Derivatives are volatile and involve significant risks,
including:
|
|
Ÿ
|
Credit
Risk
— the risk that the counterparty (the party on the
other side of the transaction) on a derivative transaction
will be unable to honor its financial obligations to the
Fund.
|
|
|
Ÿ
|
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.
|
|
|
Ÿ
|
Liquidity Risk
— the risk that certain securities may be difficult
or impossible to sell at the time that the seller would like
or at the price that the seller believes the security is
currently worth.
|
The Fund
may use derivatives such as futures and options for hedging
purposes, including anticipatory hedges and cross-hedges, and to
increase its return. Hedging is a strategy in which the Fund
uses a derivative to offset the risk that other Fund holdings
may decrease in value. While hedging can reduce losses, it can
also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of
the derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the derivative
will not match those of the holdings being hedged as expected by
the Fund, in which case any losses on the holdings being hedged
may not be reduced. There can be no assurance that the Fund
’s hedging strategy will reduce risk or that hedging
transactions will be either available or cost effective. The
Fund is not required to use hedging and may choose not to do
so.
Indexed
and Inverse Floater Securities
The Fund
may invest in debt securities the potential returns of which are
directly related to changes in an underlying index or interest
rate, known as indexed securities. The return on indexed
securities will rise when the underlying index or interest rate
rises and fall when the index or interest rate falls. The Fund
may also invest in securities whose return is inversely related
to changes in an index or interest rate. In general, inverse
securities change in value in a manner that is opposite to most
securities—that is, the return of inverse securities will
decrease. Investments in indexed and inverse securities may
subject the Fund to the risks of reduced or eliminated interest
payments and losses of principal. In addition, certain indexed
and inverse securities may increase or decrease in value at a
greater rate than the underlying index, which effectively
leverages the Fund’s investment. As a result, the market
value of such securities will generally be more volatile than
that of other securities.
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
About the Details
Covered Call Options
The Fund
can sell covered call options, which are options that give the
purchaser the right to require the Fund to sell a security owned
by the Fund to the purchaser at a specified price within a
limited time period. The Fund may also sell the purchaser a
right to require the Fund to make a payment based on the level
of an index that is closely correlated with some of the Fund
’s holdings. The Fund will receive a premium (an upfront
payment) for selling a covered call option, and if the option
expires unexercised because the price of the underlying security
has gone down the premium received by the Fund will partially
offset any losses on the underlying security. By writing a
covered call option, however, the Fund limits its ability to
sell the underlying security and gives up the opportunity to
profit from any increase in the value of the underlying security
beyond the sale price specified in the option.
Repurchase Agreement Risk
The Fund
may enter into repurchase agreements. Under a repurchase
agreement, the seller agrees to repurchase a security at a
mutually agreed upon time and price. If the other party to a
repurchase agreement defaults on its obligation under the
agreement, the Fund may suffer delays and incur costs or even
lose money in exercising its rights under the
agreement.
When
Issued Securities, Delayed Delivery Securities and Forward
Commitments
When
issued and delayed delivery securities and forward commitments
involve the risk that a security the Fund buys will lose value
prior to its delivery. There also is the risk that the security
will not be issued or that the other party will not meet its
obligation. If this occurs, the Fund both loses the investment
opportunity for the assets it has set aside to pay for the
security and any gain in the security’s price.
Borrowing
and Leverage
The Fund
may borrow for temporary emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset
value of the Fund’s shares and in the yield on the Fund
’s portfolio. Borrowing will cost the Fund interest expense
and other fees. The costs of borrowing may reduce the Fund
’s return. Certain securities that the Fund buys may create
leverage including, for example, derivatives, when issued
securities, forward commitments and options. The use of
investments that create leverage subjects the Fund to the risk
that relatively small market movement may result in large
changes in the value of an investment and may result in losses
that greatly exceed the amount invested.
MERCURY
U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC]
About the Details
Illiquid
securities
The Fund
may invest up to 15% of its net assets in illiquid securities
that it cannot easily resell within seven days at current value
or that have contractual or legal restrictions on resale. If the
Fund buys illiquid securities it may be unable to quickly resell
them or may be able to sell them only at a price below current
value.
Restricted securities
Restricted securities have contractual or legal
restrictions on their resale. They may include private placement
securities that the Fund buys directly from the issuer. Private
placement and other restricted securities may not be listed on
an exchange and may have no active trading market.
Restricted securities may be illiquid. The Fund may be
unable to sell them on short notice or may be able to sell them
only at a price below current value. The Fund may get only
limited information about the issuer, so it may be less able to
predict a loss. In addition, if Fund management receives
material adverse nonpublic information about the issuer, the
Fund will not be able to sell the security.
Rule 144A
Securities
Rule 144A
securities are restricted securities that can be resold to
qualified institutional buyers but not to the general public.
Rule 144A securities may have an active trading market, but
carry the risk that the active trading market may not
continue.
Securities Lending
The Fund
may lend securities to financial institutions that provide
government securities as collateral. Securities lending involves
the risk that the borrower to which the Fund has loaned its
securities may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be
a delay in recovering the loaned securities. The Fund could also
lose money if it does not recover the securities and the value
of the collateral falls. These events could trigger adverse tax
consequences to the Fund.
STATEMENT OF ADDITIONAL INFORMATION
Mercury U.S. Government Securities
Fund
P.O.
Box 9011, Princeton, New Jersey 08543-9011
Ÿ
Phone No. (888) 763-2260
The Mercury U.S.
Government Securities Fund (the “Fund”) is a series of
The Asset Program, Inc. (the “Program”), a
professionally-managed open-end management investment company
organized as a Maryland corporation. The Fund seeks high current
return by investing in a diversified portfolio of U.S.
Government and Government agency securities, including
Government National Mortgage Association (“GNMA”)
mortgage backed securities and other mortgage backed government
securities. There can be no assurance that the investment
objective of the Fund will be realized. For more information on
the Fund’s investment objective and policies, see
“Investment Objective and Policies.”
The Fund offers four
classes of shares, each with a different combination of sales
charges, ongoing fees and other features. These alternatives
permit an investor to choose the method of purchasing shares
that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold
the shares and other relevant circumstances. See “Purchase
of Shares.”
This Statement of
Additional Information is not a prospectus and should be read in
conjunction with the Prospectus of the Fund, dated April 3, 2000
(the “Prospectus”), which has been filed with the
Securities and Exchange Commission (the “Commission”)
and can be obtained, without charge, by calling the Fund at
1-888-763-2260 or your financial consultant, or by writing to
the address listed above. The Prospectus is incorporated by
reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund’s audited financial
statements are incorporated in this Statement of Additional
Information by reference to the Program’s 1999 annual
report to shareholders. You may request a copy of the annual
report or the Prospectus at no charge by calling 1-800-456-4587
ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
Fund
Asset Management — Investment Adviser
Mercury Funds Distributor —
Distributor
The date
of this Statement of Additional Information is April 3,
2000.
TABLE
OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES
The investment
objective of the Fund is to seek high current return through
investments in U.S. Government and Government agency securities,
including Government National Mortgage Association (“GNMA
”) mortgage-backed certificates and other mortgage-backed
government securities. The investment objective of the Fund is a
fundamental policy of the Fund which may not be changed without
a vote of a majority of the Fund’s outstanding voting
securities. Reference is made to “How the Fund Invests
” and “Investment Risks” in the Prospectus. The
Fund is classified as a diversified fund under the Investment
Company Act of 1940, as amended (the “Investment Company Act
”). There can be no assurance that the investment objective
of the Fund will be achieved.
The Fund invests in a
portfolio of bonds and other debt securities that are issued or
guaranteed by the U.S. Government, by various agencies of the
U.S. Government and by various instrumentalities which have been
established or sponsored by the U.S. Government (“U.S.
Government securities”). Certain of these obligations,
including U.S. Treasury bills, notes and bonds and securities of
GNMA and the Federal Housing Administration (“FHA”),
are issued or guaranteed by the U.S. Government and supported by
the full faith and credit of the United States. Other U.S.
Government securities are issued or guaranteed by Federal
agencies or government-sponsored enterprises and are not direct
obligations of the United States but involve sponsorship or
guarantees by Government agencies or enterprises. The guarantee
by Federal agencies or government-sponsored enterprises of their
securities does not extend to the Program’s shares. These
obligations include securities that are supported by the right
of the issuer to borrow from the Treasury, such as obligations
of Federal Home Loan Banks, and securities that are supported
only by the credit of the instrumentality, such as Federal
National Mortgage Association (“FNMA”) bonds. Because
the U.S. Government is not obligated to provide support to its
instrumentalities, the Fund will invest in obligations issued by
these instrumentalities where the Fund is satisfied that the
credit risk with respect to the issuers is minimal. In addition,
the Fund may invest up to 5% of its assets in obligations issued
or guaranteed by the International Bank for Reconstruction and
Development (the “World Bank”), an international
organization of which the United States is a member
country.
The Fund has authority
to invest in all U.S. Government securities. A significant
portion of its portfolio of U.S. Government securities may
consist of GNMA mortgaged-backed certificates (“GNMA
Certificates”) and other U.S. Government securities
representing ownership interests in mortgage pools. For a
description of GNMA Certificates and other eligible securities
representing interests in mortgage pools, see “GNMA
Certificates and Other Mortgage-Backed Government Securities
” below. Determinations as to the types of U.S. Government
securities held by the Fund will be made by the Investment
Adviser. The Investment Adviser’s decisions will be based
on, among other factors, the relative yields of the various
types of U.S. Government securities, its assessment of future
interest rate patterns and the desirability of holding U.S.
Government securities on which it may write covered options, as
described below.
The Investment Adviser
will effect portfolio transactions without regard to any holding
period if, in its judgment, such transactions are advisable in
light of a change in general market, economic or financial
conditions. A high portfolio turnover rate involves
correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by
the Fund. Such turnover also has certain tax consequences for
the Fund.
The average maturity
of the Fund’s holdings will vary based on the Investment
Adviser’s assessment of pertinent economic and market
conditions. As with all debt securities, changes in market
yields will affect the value of such securities. Prices
generally increase when interest rates decline and decrease when
interest rates rise. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do
shorter term securities. In as much as the Fund invests in
mortgage-backed securities, however, it is also important to
note that the Fund’s net asset value may also fall when
interest rates fall to the extent the Fund’s holdings
expose the Fund to losses from prepayment risk. See “GNMA
Certificates and Other Mortgage-Backed Government Securities
” below.
GNMA Certificates and Other Mortgage-Backed Government
Securities
The Fund will invest a
significant portion of its assets in GNMA Certificates and other
mortgage-backed government securities. GNMA Certificates are
mortgage-backed securities of the modified pass-through type,
which means that both interest and principal payments (including
prepayments) are passed through monthly to the holder of the
Certificate. The National Housing Act provides that the full
faith and credit of the United States is pledged to the timely
payment of principal and interest by GNMA of amounts due on
these GNMA Certificates. Each Certificate evidences an interest
in a specific pool of mortgage loans insured by the FHA or the
Farmers Home Administration or guaranteed by the Veterans
Administration (“VA”). GNMA is a wholly-owned
corporate instrumentality of the United States within the
Department of Housing and Urban Development.
The average life of
GNMA Certificates varies with the maturities of the underlying
mortgage instruments which have maximum maturities of 30 years.
The average life is likely to be substantially less than the
original maturity of the mortgage pools underlying the
securities as a result of prepayments or refinancing of such
mortgages. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and
interest. In addition, GNMA offers a pass-through security
backed by adjustable-rate mortgages. As prepayment rates vary
widely, it is not possible to predict accurately the average
life of a particular pool. The actual yield of each GNMA
Certificate is influenced by the prepayment experience of the
mortgage pool underlying the certificate.
In addition to GNMA
Certificates, the Fund may invest in mortgage backed securities
issued by FNMA and by the Federal Home Loan Mortgage Corporation
(“FHLMC”). FNMA, a federally-chartered and
privately-owned corporation, issues pass-through securities and
certificates representing an interest in a pool of FNMA
pass-through securities which are guaranteed as to payment of
principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States, issues participation
certificates which represent an interest in mortgages from FHLMC
’s portfolio and securities representing an interest in a
pool of FHLMC participation certificates. FHLMC guarantees the
timely payment of interest and the ultimate collection of
principal. As is the case with GNMA Certificates, the actual
maturity of and realized yield on particular FNMA and FHLMC
mortgage backed securities will vary based on the prepayment
experience of the underlying pool of mortgages. Securities
guaranteed by FNMA and FHLMC are not backed by the full faith
and credit of the United States.
Mortgage-backed U.S.
Government securities typically provide a higher potential for
current income than other types of U.S. Government securities;
however, U.S. Treasury bills, notes and bonds typically provide
a higher potential for capital appreciation than mortgage-backed
securities.
Payments of principal
of and interest on mortgage-backed securities are made more
frequently than are payments on conventional debt securities. In
addition, holders of mortgage backed securities may receive
unscheduled payments of principal at any time representing
prepayments on the underlying mortgage loans or financial
assets. Such prepayments may usually be made by the relating
obligor without penalty. Prepayment rates are affected by
changes in prevailing interest rates and numerous other
economic, geographic, social and other factors. Changes in the
rate of prepayments will generally affect the yield to maturity
of the security. Moreover, when the holder of the security
attempts to reinvest prepayments or even the scheduled payments
of principal and interest, it may receive a rate of interest
which is higher or lower than the rate on the mortgage backed
securities originally held. To the extent that mortgage backed
securities are purchased at a premium, mortgage foreclosures and
principal prepayments may result in a loss to the extent of the
premium paid. If such securities are bought at a discount, both
scheduled payments of principal and unscheduled prepayments will
increase current and total returns of the Fund and will
accelerate the recognition of income, which, when distributed to
shareholders, will be taxable as ordinary income.
Stripped
Mortgage-Backed Securities
. The Fund
may invest in stripped mortgage-backed securities (“SMBSs
”) issued by agencies or instrumentalities of the United
States. SMBSs are derivative multiclass mortgage-backed
securities. SMBS arrangements commonly involve two classes of
securities that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A
common variety of SMBS is where one class (the principal-only or
“PO” class) receives some of the interest and most of
the principal from the underlying assets, while the other class
(the interest-only or “IO” class) receives most of the
interest and the remainder of the principal. In the most extreme
case, the IO class receives all of the interest, while the PO
class receives all of the principal. The yield to maturity of an
IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying
assets, and a rapid rate of principal payments in excess of that
considered in pricing the securities will have a material
adverse effect on an IO security’s yield to
maturity. If the underlying mortgage assets experience greater
than anticipated payments of principal, the Fund may fail to
recoup fully its initial investment in IOs. In addition, there
are certain types of IOs which represent the interest portion of
a particular class as opposed to the interest portion of the
entire pool. The sensitivity of this type of IO to interest rate
fluctuations may be increased because of the characteristics of
the principal portion to which they relate. As a result of the
above factors, the Fund generally will purchase IOs only as a
component of so-called “synthetic” securities. This
means that purchases of IOs will be matched with certain
purchases of other securities such as POs, inverse floating rate
collateralized mortgage obligations (“CMOs”) or fixed
rate securities; as interest rates fall, presenting a greater
risk of unanticipated prepayments of principal, the negative
effect on the Fund because of its holdings of IOs should be
diminished somewhat because of the increased yield on the
inverse floating rate CMOs or the increased appreciation on the
POs or fixed rate securities. IOs and POs of SMBSs are
considered by the staff of the Commission to be illiquid
securities and, consequently, as long as the staff maintains
this position, the Fund will not invest in IOs or POs in an
amount which, taken together with the Fund’s other
investments in illiquid securities, exceeds 15% (10% to the
extent required by certain state laws) of the Fund’s total
assets.
Other Investment Policies and Practices
For temporary or
defensive purposes or in anticipation of redemptions, the Fund
is authorized to invest up to 100% of its assets in money market
instruments (short term, high quality debt instruments),
including obligations of or guaranteed by the U.S. Government or
its instrumentalities or agencies, certificates of deposit,
bankers’ acceptances and other bank obligations, commercial
paper rated in the highest category by a nationally recognized
rating agency or other fixed income securities deemed by the
Investment Adviser to be consistent with the objectives of the
Fund, or the Fund may hold its assets in cash.
When Issued and Delayed Delivery Securities and Forward
Commitments
The Fund may purchase
or sell securities that it is entitled to receive on a when
issued or delayed delivery basis. The Fund may also purchase or
sell securities through a forward commitment. These transactions
involve the purchase or sale of securities by the Fund at an
established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what
is considered an advantageous price to the Fund at the time of
entering into the transaction. The Fund has not established any
limit on the percentage of their assets that may be committed in
connection with these transactions. When the Fund is purchasing
securities in these transactions, it maintains a segregated
account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities in an amount
equal to the amount of its purchase commitments.
There can be no
assurance that a security purchased on a when-issued basis will
be issued, or a security purchased or sold through a forward
commitment will be delivered. The value of securities in these
transactions on the delivery date may be more or less than the
Fund’s purchase price. The Fund may bear the risk of a
decline in the value of the security in these transactions and
may not benefit from an appreciation in the value of the
security during the commitment period.
Standby Commitment Agreements
The Fund may enter
into standby commitment agreements. These agreements commit the
Fund, for a stated period of time, to purchase a stated amount
of securities which may be issued and sold to that Fund at the
option of the issuer. The price of the security is fixed at the
time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued. The Fund will
enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that it considers
advantageous. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase
price of securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions
on resale that affect their marketability, will not exceed 15%
of its net assets taken at the time of the commitment. The Fund
will maintain a segregated account with its custodian of cash,
cash equivalents, U.S. Government securities or other liquid
securities in an aggregate amount equal to the purchase price of
the securities underlying the commitment.
There can be no
assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since
the issuance of the security underlying the commitment is at the
option of the issuer, the Fund may bear the risk of a decline in
the value of such security and may not benefit from an
appreciation in the value of the security during the commitment
period.
The purchase of a
security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value
of the security thereafter will be reflected in the calculation
of the Fund’s net asset value. The cost basis of the
security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will
be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements and Purchase and Sale
Contracts
The Fund may invest in
U.S. Government securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase
and sale contracts may be entered into only with a member bank
of the Federal Reserve System or primary dealer in U.S.
Government securities or an affiliate thereof. Under such
agreements, the other party agrees, upon entering into the
contract with the Fund, to repurchase the security at a mutually
agreed upon time and price, thereby determining the yield during
the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period. In
the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the
underlying obligation; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such
agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the
securities falls below the repurchase price at any time during
the term of the repurchase agreement; the Fund does not have the
right to seek additional collateral in the case of purchase and
sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only
constitute collateral for the seller’s obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays
and incur costs or possible losses in connection with
disposition of the collateral.
A purchase and sale
contract differs from a repurchase agreement in that the
contract arrangements stipulate that the securities are owned by
the Fund. In the event of a default under such a repurchase
agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund would be
dependent upon intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In
such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements or
purchase and sale contracts maturing in more than seven days if
such investments, together with the Fund’s other illiquid
investments, would exceed 15% of the Fund’s total
assets.
The Fund may use
instruments referred to as Derivatives. Derivatives allow the
Fund to increase or decrease the level of risk to which the Fund
is exposed more quickly and efficiently than transactions in
other types of instruments.
Hedging
.
The Fund may use Derivatives for hedging
purposes. Hedging is a strategy in which a Derivative is used to
offset the risk that other Fund holdings may decrease in value.
Losses on the other investment may be substantially reduced by
gains on a Derivative that reacts in an opposite manner to
market movements. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different
manner than anticipated by the fund investing in the Derivative
or if the cost of the Derivative outweighs the benefit of the
hedge. Hedging also involves the risk that changes in the value
of the Derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. The Fund is not
required to use hedging and may choose not to do so.
The Fund may use the
following types of derivative investments and trading
strategies:
Indexed and Inverse
Floating Rate Securities.
The Fund
may invest in securities the potential return of which is based
on an index. As an illustration, the Fund may invest in a debt
security that pays interest based on the current value of an
interest rate index, such as the prime rate. The Fund may also
invest in a debt security which returns principal at maturity
based on the level of a securities index or a basket of
securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return
of which is based inversely on the change in an index (that is,
a security the value of which will move in the opposite
direction of changes to an index). For example, the Fund may
invest in securities that pay a higher rate of interest when a
particular index decreases and pay a lower rate of interest (or
do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of
principal in the event of an adverse movement in the relevant
index or indices. Indexed and inverse securities involve credit
risk, and certain indexed and inverse securities may involve
leverage risk, liquidity risk, and currency risk. The Fund may
invest in indexed and inverse securities for hedging purposes,
to increase return or to vary the degree of portfolio leverage
relatively efficiently under different market conditions. When
used for hedging purposes, indexed and inverse securities
involve correlation risk. Indexed and inverse securities are
currently issued by a number of U.S. governmental agencies such
as FHLMC and FNMA, as well as a number of other financial
institutions. To the extent the Fund invest in such instruments,
under current market conditions, it most likely will purchase
indexed and inverse securities issued by the above-mentioned
U.S. governmental agencies.
Options and Futures
Transactions.
The Fund may engage in
various portfolio strategies to seek to increase its return
through the use of listed or over-the-counter (“OTC”)
options on its portfolio securities and to hedge its portfolio
against adverse movements in the markets in which it invests.
The Fund is authorized to write (
i.e.
, sell) covered put
and call options on its portfolio securities or securities in
which it anticipates investing and purchase put and call options
on securities. The Fund may also engage in transactions in
interest rate futures and related options on such futures.
Although certain risks are involved in options and futures
transactions, the Investment Adviser believes that, because the
Fund will (i) write only covered options on portfolio securities
or securities in which they anticipate investing and (ii) engage
in other options and futures transactions only for hedging
purposes, the options and portfolio strategies of the Fund will
not subject it to the risks frequently associated with the
speculative use of options and futures transactions. While the
Fund’s use of hedging strategies is intended to reduce the
volatility of the net asset value of its shares, its net asset
value will fluctuate. There can be no assurance that the Fund
’s hedging transactions will be effective. Furthermore, the
Fund will only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when
movements in the equity or debt markets, interest rates or
currency exchange rates occur.
Writing of Covered
Options.
The Fund may from time to
time write (
i.e.
, sell) covered call options on its
portfolio securities and may enter into closing purchase
transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium
gives another party a right to buy specified securities owned by
the Fund at a specified future date and price set at the time of
the contract. A call option is considered covered where the
writer of the option owns the underlying securities. The
principal reason for writing covered call options is to attempt
to realize, through the receipt of premiums, a greater return
than would be realized on the securities alone. By writing a
covered call option, the Fund, in return for the premium income
realized from the sale of the option, may give up the
opportunity to profit from a price increase in the underlying
security above the option exercise price. In addition, the Fund
will not be able to sell the underlying security until the
option expires, is exercised or the Fund effects a closing
purchase transaction as described below. A closing purchase
transaction cancels out the Fund’s position as the writer
of an option by means of an offsetting purchaser of an identical
option prior to the expiration of the option it has written. If
the option expires unexercised, the Fund realizes a gain in the
amount of the premium received for the option which may be
offset by a decline in the market price of the underlying
security during the option period. The use of covered call
options is not a primary investment technique of the Fund and
such options normally will be written on underlying securities
as to which management does not anticipate significant short
term capital appreciation. Covered call options serve as a
partial hedge against the price of the underlying security
declining. The Fund may not write covered options on underlying
securities exceeding 15% of its total assets.
The Fund also may
write put options which give the holder of the option the right
to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a
put option, which
increases the Fund’s return. The Fund writes only covered put
options, which means that so long as the Fund is obligated as
the writer of the option it will, through its custodian, have
deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities
denominated in U.S. dollars with a securities depository with a
value equal to or greater than the exercise price of the
underlying securities. By writing a put, the Fund will be
obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time
of exercise for so long as the option is outstanding. The Fund
may engage in closing transactions in order to terminate put
options that it has written.
A closing purchase
transaction is effected by purchasing on an exchange an option
of the same series (
i.e.
, same underlying security,
exercise price and expiration date) as the option previously
written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction ordinarily will be
effected to realize a profit on an outstanding call option, to
prevent an underlying security from being called, to permit the
sale of the underlying security or to permit the writing of a
new call option containing different terms on such underlying
security. The cost of such a liquidation purchase plus
transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred
a loss in the transaction. An option may be closed out only on
an exchange which provides a secondary market for an option of
the same series and there is no assurance that a liquid
secondary market on an exchange will exist for any particular
option. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying
security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer will be
subject to the risk of market decline in the underlying security
during such period. The Fund will write an option on a
particular security only if management believes that a liquid
secondary market will exist on an exchange for options of the
same series which will permit the Fund to make a closing
purchase transaction in order to close out its
position.
Purchasing Options.
The Fund is authorized to purchase
put options to hedge against a decline in the market value of
its securities. By buying a put option, the Fund has a right to
sell the underlying security at the exercise price, thus
limiting the Fund’s risk of loss through a decline in the
market value of the security until the put option expires. The
amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior
to its expiration, a put option may be sold in a closing sale
transaction, and profit or loss from the sale will depend on
whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A
closing sale transaction cancels out the Fund’s position as
the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has
purchased. In certain circumstances, the Fund may purchase call
options on securities held in its portfolio on which it has
written call options or on securities which it intends to
purchase. The Fund will not purchase options on securities if,
as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed
5% of the market value of the Fund’s total
assets.
Interest Rate Futures
Contracts.
The Fund may purchase and
sell interest rate futures contracts, as a hedge against adverse
changes in the market value of portfolio securities, as
described below. Interest rate futures contracts are herein
referred to as “futures contracts.”
A futures contract is
an agreement between two parties which obligates the purchaser
of the futures contract to buy and seller of a futures contract
to sell a financial instrument for a set price on a future date.
The terms of a futures contract require actual delivery of the
financial instrument underlying the contract. The Fund may
invest in interest rate futures contracts in connection with the
debt securities in which it invests. Transactions by the Fund in
futures contracts are subject to limitations as described below
under “Restrictions on the Use of Futures Transactions.
”
The Fund may sell
futures contracts in anticipation of or during a market decline
to attempt to offset the decrease in market value of the
securities that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a
significant advance, it may purchase futures in order to gain
rapid market exposure. This technique generally will allow the
Fund to gain exposure to a market in a manner which is more
efficient than purchasing individual securities and may in part
or entirely offset increases in the cost of securities in such
market that the Fund ultimately purchases. As such purchases are
made, an equivalent amount of futures
contracts will be terminated by offsetting sales. The Fund does
not consider purchases of futures contracts to be a speculative
practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures
position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a
put option on a future, but under unusual circumstances
(
e.g.
, a Fund experiences a significant amount of
redemptions), a long futures position may be terminated without
the corresponding purchase of securities.
The Fund also has
authority to purchase and write call and put options on futures
contracts in connection with its hedging (including anticipatory
hedging) activities. Generally, these strategies are utilized
under the same market and market sector conditions (
i.e.
,
conditions relating to specific types of investments) in which
the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts rather
than selling the underlying futures contract in anticipation of
a decrease in the market value of its securities. Similarly, the
Fund may purchase call options, or write put options on futures
contracts, as a substitute for the purchase of such futures
contract to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund
intends to purchase.
The Fund may engage in
options and futures transactions on U.S. exchanges and in the
over-the-counter markets (“OTC options”). In general,
exchange-traded contracts are third-party contracts
(
i.e.,
performance of the parties’ obligations is
guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options are
two-party contracts with prices and terms negotiated by the
buyer and seller. See “Restrictions on OTC Options”
below for information as to restrictions on the use of OTC
options.
Restrictions on the
Use of Futures Transactions.
Regulations of the Commodity Futures Trading
Commission (the “CFTC”) applicable to the Fund provide
that the futures trading activities described herein will not
result in the Fund being deemed a “commodity pool” as
defined under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for
bona fide
hedging purposes and (ii) for non-hedging purposes, if the
aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of
the liquidation value of the Fund’s holdings, after taking
into account unrealized profits and unrealized losses on any
such contracts and options. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract
market.
When the Fund
purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash
equivalents will be deposited in a segregated account in the
name of the Fund with the Fund’s custodian so that the
amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market
value of the futures contracts, thereby ensuring that the use of
such futures contract is unleveraged.
Restrictions on OTC
Options.
The Fund may engage in OTC
options only with such banks or dealers which have capital of at
least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million.
The staff of the
Commission has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of
such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market
value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and market
deposits on the Fund’s existing OTC options of futures
contracts exceed 15% (10% to the extent required by certain
state laws) of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are
illiquid or are not otherwise readily marketable. However, if
the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined
price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the
repurchase price less the amount by which the option is
“in-the-money” (
i.e.
, current market value of
the underlying security minus the option’s strike price).
The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the
premium received for the option, plus the amount by which the
option is “in-the-money”. This policy as to OTC
options is not a fundamental policy of the Fund and may be
amended by the Directors of the Program without the approval of
the Fund’s shareholders. However, the Fund will not change
or modify this policy prior to the change or modification by the
SEC staff of its position.
Options on GNMA
Certificates.
The following
information relates to unique characteristics of options on GNMA
Certificates. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage
payments, the Fund, as a writer of a GNMA call holding GNMA
Certificates as “cover” to satisfy its delivery
obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund
will purchase additional GNMA Certificates from the same pool
(if obtainable) of other GNMA Certificates in the cash market in
order to maintain its “cover.”
A GNMA Certificate
held by the Fund to cover an options position in any but the
nearest expiration month may cease to represent cover for the
option in the event of a decline in the GNMA coupon rate at
which new pools are originated under the FHA/VA loan ceiling in
effect at any given time. If this should occur, the Fund will no
longer be covered, and the Fund will either enter into a closing
purchase transaction or replace such Certificate with a
certificate which represents cover. When the Fund closes its
position or replaces such Certificate, it may realize an
unanticipated loss and incur transaction costs.
Risks Factors in
Options and Futures Transactions.
Utilization of options and futures transactions to
hedge a Fund involves the risk of imperfect correlation in
movements in the price of options and futures and movements in
the price of the securities which are the subject of the hedge.
If the price of the options or futures moves more or less than
the price of the hedged securities, the Fund will experience a
gain or loss which will not be completely offset by movements in
the price of the subject of the hedge. The successful use of
options and futures also depends on the Investment Adviser
’s ability to correctly predict price movements in the
market involved in a particular options or futures transaction.
To compensate for imperfect correlations, the Fund may purchase
or sell options or futures contracts in a greater dollar amount
than the hedged securities if the volatility of the hedged
securities is historically greater than the volatility of the
options or futures contracts. Conversely, the Fund may purchase
or sell fewer options or futures contracts if the volatility of
the price of the hedged securities is historically less than
that of the options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of
the options or futures contract approaches.
The Fund intends to
enter into options and futures transactions, on an exchange or
in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the
case of over-the-counter transactions, the Investment Adviser
believes the Fund can receive in each business day at least two
independent bids or offers. However, there can be no assurance
that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions
also could have an adverse impact on the Fund’s ability to
hedge effectively its portfolio. There is also a risk of loss by
the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position
in an option, a futures contract or a related
option.
The exchanges on which
the Fund intends to conduct options transactions have generally
established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether
or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of
whether such options are written on the same or different
exchanges or are held or written on one or more accounts or
through one or more brokers). “Trading limits” are
imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser does
not believe that these trading and position limits will have any
adverse impact of the portfolio strategies for hedging the Fund
’s holdings.
All options referred
to herein and in the Fund’s Prospectus are options issued
by the Options Clearing Corporation (the “Clearing
Corporation”) which are currently traded on the Chicago
Board Options Exchange, American Stock Exchange, Philadelphia
Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange (“NYSE”).
The Fund may lend
securities with a value not exceeding 33
1
/
3
% of its
total assets. In return, the Fund receives collateral in an
amount equal to at least 100% of the current market value of the
loaned securities in cash or securities issued or guaranteed by
the U.S. Government. This limitation is a fundamental policy and
it may not be changed without the approval of the holders of a
majority of the Fund’s outstanding voting securities, as
defined in the Investment Company Act. The Fund receives
securities as collateral for the loaned securities and the Fund
and the borrower negotiate a rate for the loan premium to be
received by the Fund for the loaned securities, which increases
the Fund’s yield. The Fund may receive a flat fee for its
loans. The loans 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,
administrative and custodial fees in connection with its loans.
In the event that the borrower defaults on its obligation to
return borrowed securities because of insolvency or for any
other reason, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the
extent the value of the collateral falls below the market value
of the borrowed securities.
Illiquid or Restricted Securities
The Fund may invest up
to 15% of its net assets in securities that lack an established
secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily
of the security and the price to be obtained upon disposition of
the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade
at a discount from comparable, more liquid investments.
Investment of the Fund’s assets in illiquid securities may
restrict the ability of the Fund to dispose of that investment
in a timely fashion and for a fair price as well as its ability
to take advantage of market opportunities. The risks associated
with illiquidity will be particularly acute where the Fund
’s operations require cash, such as when the Fund redeems
shares or pays dividends, and could result in the Fund borrowing
to meet short-term cash requirements or incurring capital losses
on the sale of illiquid investments.
The Fund may invest in
securities that are “restricted securities.”
Restricted securities have contractual or legal restrictions on
their resale and include “private placement”
securities that the Fund may buy directly from the issuer.
Restricted securities may be sold in private placement
transactions between issuers and their purchasers and may be
neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities may or may
not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately
placed securities may be more difficult to value than publicly
traded securities and may be less liquid, or illiquid, and
therefore may be subject to the risks associated with illiquid
securities, as described in the preceding paragraph. Some
restricted securities, however, may be liquid. To the extent
that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due
to illiquidity, could be less than those originally paid by the
Fund or less than their fair market value. In addition, issuers
whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If
any privately placed securities held by the Fund are required to
be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to
bear the expenses of registration. Certain of the Fund’s
investments in private placements may consist of direct
investments and may include investments in smaller,
less-seasoned issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management
group. In making investments in such securities, the Fund may
obtain access to material nonpublic information which may
restrict its ability to conduct portfolio transactions in such
securities.
Although not a
fundamental policy, the Fund will include OTC options and
securities underlying such options in calculating the amount of
its assets subject to the limitation on restricted securities.
The Fund will not change or modify this policy prior to the
change or modification by the Commission staff of its positions
regarding OTC options.
The Fund may purchase
restricted securities that can be offered and sold to
“qualified institutional buyers” under Rule 144A under
the Securities Act of 1933, as amended (the “Securities Act
”). The Directors have determined to treat as liquid Rule
144A securities that are either freely tradable in their primary
markets offshore or have been determined to be liquid in
accordance with the policies and procedures adopted by the
Program’s Directors. The Directors have adopted guidelines
and delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities.
The Directors, however, will retain sufficient oversight and be
ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will
continue to develop, the Directors will carefully monitor the
Fund’s investments in these securities. This investment
practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in
purchasing these securities.
The Fund may borrow up
to 33
1
/
3
% of its
total assets, taken at market value, but only from banks as a
temporary measure for extraordinary or emergency purposes,
including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities at any time
when borrowings exceed 5% of its total assets, except (a) to
honor prior commitments or (b) to exercise subscription rights
when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect
of leveraging the Fund. Such leveraging increases the Fund
’s exposure to capital risk, and borrowed funds are subject
to interest costs that will reduce net income. The use of
leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund’s
portfolio. Although the principal of such borrowings will be
fixed, the Fund’s assets may change in value during the
time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund which can exceed the income from
the assets purchased with the borrowings. To the extent the
income or capital appreciation derived from securities purchased
with borrowed funds exceeds the interest the Fund will have to
pay on the borrowings, the Fund’s return will be greater
than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such
borrowed funds is not sufficient to cover the cost of borrowing,
the return to the Fund will be less than if leverage had not
been used, and therefore the amount available for distribution
to shareholders as dividends will be reduced. In the latter
case, the Investment Adviser in its best judgment nevertheless
may determine to maintain the Fund’s leveraged position if
it expects that the benefits to the Fund’s shareholders of
maintaining the leveraged position will outweigh the current
reduced return.
Certain types of
borrowings by the Fund may result in the Fund being subject to
covenants in credit agreements relating to asset coverage,
portfolio composition requirements and other matters. It is not
anticipated that observance of such covenants would impede the
Investment Adviser from managing the Fund’s portfolio in
accordance with the Fund’s investment objectives and
policies. However, a breach of any such covenants not cured
within the specified cure period may result in acceleration of
outstanding indebtedness and require the Fund to dispose of
portfolio investments at a time when it may be disadvantageous
to do so.
The Fund at times may
borrow from affiliates of the Investment Adviser, provided that
the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the
marketplace.
The Program has
adopted the following restrictions and policies relating to the
investment of the Fund’s assets and its activities. The
fundamental restrictions set forth below may not be changed with
respect to the Fund without the approval of the holders of a
majority of the Fund’s outstanding voting securities (which
for this purpose and under the Investment Company Act means the
lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). Unless otherwise
provided, all references to the assets of the Fund below are in
terms of current market value. The Fund may not:
|
|
1. Make
any investment inconsistent with the Fund’s
classification as a diversified company under the Investment
Company Act.
|
|
|
2. Invest
more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and
instrumentalities).
|
|
|
3. Make
investments for the purpose of exercising control or
management.
|
|
|
4.
Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or
interests therein.
|
|
|
5. Make
loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment
in governmental obligations, commercial paper, pass-through
instruments, certificates of deposit, bankers’
acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Fund’s Prospectus and Statement of
Additional Information, as they may be amended from time to
time.
|
|
|
6. Issue
senior securities to the extent such issuance would violate
applicable law.
|
|
|
7. Borrow
money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to
33
1
/
3
% of
its total assets (including the amount borrowed), (ii) the
Fund may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund’s
investment policies as set forth in the Fund’s Prospectus
and Statement of Additional Information, as they may be
amended from time to time, in connection with hedging
transactions, short sales, when issued and forward commitment
transactions and similar investment strategies. The Fund will
not purchase securities while borrowings exceed 5% of its
assets. The Fund has no present intention to borrow money in
amounts exceeding 5% of its assets.
|
|
|
8.
Underwrite securities of other issuers except insofar as
the Fund technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
|
|
|
9.
Purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may do so in
accordance with applicable law and the Fund’s Prospectus
and Statement of Additional Information, as they may be
amended from time to time, and without registering as a
commodity pool operator under the Commodity Exchange
Act.
|
Additional investment
restrictions adopted by the Fund that may be changed by the
Program’s Board of Directors without shareholder approval,
provide that the Fund may not:
|
|
(a)
Purchase securities of other investment companies,
except to the extent such purchases are permitted by
applicable law. As a matter of policy, however, the Fund will
not purchase shares of any registered open-end investment
company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the “fund of funds”
provisions) of the Investment Company Act, at any time the Fund
’s shares are owned by another investment company that is
part of the same group of investment companies as the
Program.
|
|
|
(b) Make
short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
|
|
|
(c)
Invest in securities that cannot be readily resold
because of legal or contractual restrictions or that cannot
otherwise be marketed, redeemed or put to the issuer or a
third party, if at the time of acquisition more than 15% of
its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within
seven days or securities that the Directors of the Program
have otherwise determined to be liquid pursuant to applicable
law. Securities purchased in accordance with Rule 144A under
the Securities Act and determined to be liquid by the Program
’s Board of Directors are not subject to the limitations
set forth in this investment restriction.
|
|
|
(d)
Notwithstanding fundamental investment restriction (7)
above, borrow amounts in excess of 10% of its total assets,
taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes such as
redemption of Fund shares. The Fund will not purchase
securities while borrowing exceeds 5% (taken at market value)
of its total assets.
|
Portfolio securities
of the Fund generally may not be purchased from, sold or loaned
to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless
pursuant to a rule or exemptive order under the Investment
Company Act.
The staff of the
Commission has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options if,
as a result of such transaction, the sum of the market value of
OTC options currently outstanding that are held by the Fund, the
market value of the underlying securities covered by OTC call
options currently outstanding that were sold by the Fund and
margin deposits on the Fund’s existing OTC options on
futures contracts exceeds 15% of the net assets of the Fund
taken at market value, together with all other assets of the
Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid
such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is
“in-the-money” (
i.e.
, current market value of
the underlying securities minus the option’s strike price).
The repurchase price with the primary dealers is typically a
formula price that is generally based on a multiple of the
premium received for the option plus the amount by which the
option is “in-the-money.” This policy as to OTC
options is not a fundamental policy of the Fund and may be
amended by the Directors without the approval of the
shareholders. However, the Directors will not change or modify
this policy prior to the change or modification by the
Commission staff of its position.
Because of the
affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“Merrill Lynch”) with the Investment
Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch or its affiliates except
for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment
Company Act. See “Portfolio Transactions.” Without
such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
The Investment Adviser
will effect portfolio transactions without regard to any holding
period if, in its judgment, such transactions are advisable in
light of a change in general market, economic or financial
conditions. A high portfolio turnover rate involves certain tax
consequences such as increased capital gain dividends and/or
ordinary income dividends of accrued market discount and
correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by
the Fund. See “Portfolio Transactions.”
MANAGEMENT OF THE PROGRAM
The Directors of the
Program consist of seven individuals, five of whom are not
“interested persons” of the Program as defined in the
Investment Company Act. The Directors are responsible for the
overall supervision of the operations of the Program and perform
the various duties imposed on the directors of investment
companies by the Investment Company Act.
Information about the
Directors, executive officers and the portfolio managers of the
Program, including their ages and their principal occupations
for at least the last five years, is set forth below. Unless
otherwise noted, the address of each executive officer, Director
and portfolio manager is P.O. Box 9011, Princeton, New Jersey
08543-9011.
T
ERRY
K. G
LENN
(59)—
President and Director
(1)(2)—Executive Vice
President of the Investment Adviser and Merrill Lynch Asset
Management, L.P. (“MLAM”) (which terms as used herein
include their corporate
predecessors) since 1983; Executive Vice President and Director of
Princeton Services, Inc. (“Princeton Services”) since
1993; President of Princeton Funds Distributor, Inc. (“PFD
”) since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
J
OE
G
RILLS
(64)—
Director
(2)(3)—P.O. Box 98, Rapidan,
Virginia 22733. Member of the Committee of Investment of
Employee Benefit Assets of the Financial Executives Institute (
“CIEBA”) since 1986; Member of CIEBA’s Executive
Committee since 1988 and its Chairman from 1991 to 1992;
Assistant Treasurer of International Business Machines
Incorporated (“IBM”) and Chief Investment Officer of
IBM Retirement Funds from 1986 until 1993; Member of the
Investment Advisory Committees of the State of New York Common
Retirement Fund and the Howard Hughes Medical Institute since
1997; Director, Duke Management Company since 1992 and Vice
Chairman since 1998; Director, LaSalle Street Fund since 1995;
Director, Hotchkis and Wiley Mutual Funds since 1996; Director,
Kimco Realty Corporation since 1997; Member of the Investment
Advisory Committee of the Virginia Retirement System since 1998;
Director, Montpelier Foundation since December 1998.
W
ALTER
M
INTZ
(70)—
Director
(2)(3)—1114 Avenue of the Americas,
New York, New York 10036. Special Limited Partner of Cumberland
Associates (investment partnership) since 1982.
R
OBERT
S. S
ALOMON
, J
R
. (63)—
Director
(2)(3)—106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management
(investment adviser) since 1994; Trustee, The Common Fund since
1980; Chairman and CEO of Salomon Brothers Asset Management from
1992 until 1995; Chairman of Salomon Brothers equity mutual
funds from 1992 until 1995; Monthly columnist with
Forbes
magazine since 1992; Director of Stock Research and U.S. Equity
Strategist at Salomon Brothers from 1975 until 1991.
M
ELVIN
R. S
EIDEN
(69)—
Director
(2)(3)—780 Third Avenue, Suite 2502,
New York, New York 10017. Director of Silbanc Properties, Ltd.
(real estate, investment and consulting) since 1987; Chairman
and President of Seiden & de Cuevas, Inc. (private
investment firm) from 1964 to 1987.
S
TEPHEN
B. S
WENSRUD
(66)—
Director
(2)(3)—24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors
(investment adviser) since 1996; Principal, Fernwood Associates
(financial consultant) since 1975; Chairman of RPP Corporation
(manufacturing) since 1978; Director of International Mobile
Communications, Inc. (telecommunications) since
1998.
A
RTHUR
Z
EIKEL
(67)—
Director
(1)(2)—300 Woodland Avenue,
Westfield, New Jersey 07090. Chairman of the Investment Adviser
and MLAM from 1997 to 1999 and President thereof from 1977 to
1997; Chairman of Princeton Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. (
“ML & Co.”) from 1990 to 1999.
J
OSEPH
T. M
ONAGLE
, J
R
. (51)—
Senior Vice President
(1)(2)—Senior Vice
President of the Investment Adviser and FAM since 1990;
Department Head of the Global Fixed Income Division of the
Investment Adviser and FAM since 1997; Senior Vice President of
Princeton Services since 1993.
L
AWRENCE
R. F
ULLER
(58)—
Senior Vice President and Portfolio Manager
(1)(2)
—First Vice President of the Investment Adviser since 1997
and Vice President of the Investment Adviser from 1992 to
1997.
R. E
LISE
B
AUM
(39)—
Senior Vice President and Portfolio Manager
(1)(2)
—First Vice President of the Investment Adviser since 1999;
Director of the Investment Adviser from 1997 to 1999; Vice
President of the Investment Adviser from 1995 to
1997.
R
OBERT
C. D
OLL
, J
R
. (45)—
Senior Vice President
(1)(2)—Senior Vice
President of the Investment Adviser and MLAM since 1999; Senior
Vice President of Princeton Services since 1999; Chief
Investment Officer of Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from 1991 to 1999.
T
HOMAS
R. R
OBINSON
(54)—
Senior Vice President
(1)(2)—First Vice
President of the Investment Adviser since 1997; Vice President
of the Investment Adviser from 1995 to 1997; Senior Portfolio
Manager of the Investment Adviser since November 1995; Manager
of International Equity Strategy of ML & Co.’s Global
Securities Research and Economics Group from 1989 to
1995.
C
HRISTOPHER
G. A
YOUB
(41)—
Senior Vice President
(1)(2)—First Vice
President of the Investment Adviser since 1998; Vice President
of the Investment Adviser from 1985 to 1997; Assistant Vice
President of the Investment Adviser from 1984 to 1985 and
employee since 1982.
G
REGORY
M
ARK
M
AUNZ
(45)—
Senior Vice President and Portfolio Manager
(1)(2)
—First Vice President of the Investment Adviser since 1997;
Vice President of the Investment Adviser from 1985 to 1997 and
Portfolio Manager since 1984.
D
ONALD
C. B
URKE
(39)—
Vice President and Treasurer
(1)(2)—Senior
Vice President and Treasurer of the Investment Adviser and MLAM
since 1999; Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since 1999; First
Vice President of MLAM from 1997 to 1999; Vice President of MLAM
from 1990 to 1997; Director of Taxation of MLAM since
1990.
|
(1)
|
Interested person, as defined in the Investment Company
Act, of the Trust and the Corporation.
|
|
(2)
|
Such
Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or one
of its affiliates, acts as investment adviser or
manager.
|
|
(3)
|
Member
of the Program’s Audit and Nominating Committee, which is
responsible for the selection of the independent auditors and
the selection and nomination of non-interested
Directors.
|
As of March 1, 2000,
the officers and Directors of the Program as a group (15
persons) owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co. and owned an aggregate of
less than 1% of the outstanding shares of the
Program.
Compensation of Directors/Trustees
The Program pays each
non-interested Director, for service to the Program, a fee of
$1,500 per year plus $250 per in-person meeting attended,
together with such individual’s actual out-of-pocket
expenses relating to attendance at meetings. The Program also
compensates members of the Audit and Nominating Committee, which
consists of all of the non-affiliated Directors at the rate of
$1,500 annually for service to the Program plus $250 per
Committee meeting attended.
The following table
sets forth the compensation earned by the non-interested
Directors for the fiscal year ended January 31, 2000 and the
aggregate compensation paid to them from all investment
companies advised by the Investment Adviser or its affiliates (
“Affiliate-Advised Funds”) for the calendar year ended
December 31, 1999.
Name
|
|
Position with
Program
|
|
Compensation
from Program
|
|
Pension or
Retirement Benefits
Accrued as Part of
Program Expense
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Aggregate
Compensation from
Program and Other
Affiliate-Advised
Funds(1)
|
|
Joe
Grills
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$245,250
|
|
Walter
Mintz
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Robert
S. Salomon, Jr.
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Melvin
R. Seiden
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$211,250
|
|
Stephen
B. Swensrud
|
|
Director
|
|
$5,000
|
|
None
|
|
None
|
|
$232,250
|
|
(1)
|
The
Directors serve on the boards of Affiliate-Advised Funds as
follows: Joe Grills (31 registered investment companies
consisting of 46 portfolios), Walter Mintz (21 registered
investment companies consisting of 43 portfolios), Robert S.
Salomon, Jr. (21 registered investment companies consisting of
43 portfolios), Melvin R. Seiden (21 registered investment
companies consisting of 43 portfolios), Stephen B. Swensrud
(30 registered investment companies consisting of 67
portfolios).
|
The Directors of the
Program may be eligible for reduced sales charges on purchases
of Class I shares. See “Reduced Initial Sales Charges
—Purchase Privileges of Certain Persons.”
Management and Advisory Arrangements
Investment Advisory
Services
. The Investment Adviser
provides the Program with investment advisory and management
services. Subject to the supervision of the Board of Directors,
the Investment Adviser is responsible for the actual management
of the Program’s portfolio and constantly reviews the
Program’s holdings in light of its own research analysis
and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and
provides all the office space, facilities, equipment and
necessary personnel for management of the Program.
Investment Advisory
Fee
. As compensation for its services
to the Fund, the Investment Adviser will receive from the Fund a
fee at an annual rate of 0.50% of the average daily net assets
of the Fund.
Prior to April 3,
2000, Merrill Lynch Asset Management, L.P. (“MLAM”),
an affiliate of the Investment Adviser under common control and
management as the Investment Adviser, acted as investment
adviser to the Fund. The table below sets forth for the periods
indicated the total advisory fee paid by the Fund to MLAM. For
the fiscal year ended January 31, 2000, MLAM had voluntarily
waived management fees.
For
the fiscal year ended January 31,
|
|
Fee
Amount ($)
|
|
Investment Advisory
Fee Waived
|
|
2000
|
|
$100,949
|
|
$100,949
|
|
1999
|
|
$
75,332
|
|
$
0
|
|
1998
|
|
$
55,861
|
|
$
0
|
Payment of Program
Expenses
. The Investment Advisory
Agreement obligates the Investment Adviser to provide investment
advisory services and to pay all compensation of and furnish
office space for officers and employees of the Program connected
with investment and economic research, trading and investment
management of the Program, as well as the fees of all Directors
of the Program who are affiliated persons of ML & Co. or any
of its affiliates. The Program pays all other expenses incurred
in the operation of the Program, including among other things:
taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports,
prospectuses and statements of additional information, except to
the extent paid by Mercury Funds Distributor, a division of PFD
(the “Distributor”); charges of the custodian and the
transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal and state
securities laws; fees and expenses of unaffiliated Directors;
accounting and pricing costs (including the daily calculations
of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Program. Accounting
services are provided for the Program by the Investment Adviser
and the Program reimburses the Investment Adviser for its costs
in connection with such services. See “Purchase of Shares
—Distribution Plans.”
Organization of the
Investment Adviser
. The Investment
Adviser is a limited partnership, the partners of which are ML
& Co., a financial services holding company and the parent
of Merrill Lynch and Princeton Services. ML & Co. and
Princeton Services are “controlling persons” of the
Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their
power to exercise a controlling influence over its management or
policies.
Duration and
Termination.
Unless earlier
terminated as described herein, the Investment Advisory
Agreement for the Fund will remain in effect from year to year
if approved annually (a) by the Board of Directors of the
Program or by a majority of the outstanding shares of the
subject Fund and (b) by a majority of the Directors who are not
parties to such contract or interested persons (as defined in
the Investment Company Act) of any such party. Such contracts
are not assignable and may be terminated without penalty on 60
days’ written notice at the option of either party or by
vote of the shareholders of the Fund.
Transfer Agency
Services
. Financial Data Services,
Inc. (the “Transfer Agent”), a subsidiary of ML &
Co., acts as the Program’s Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the “Transfer Agency Agreement
”). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption
of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the
Transfer Agent receives a fee ranging from $11.00 to $20.00 per
Class I or Class A account and $14.00 to $23.00 per Class B or
Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be
assessed on all accounts that close during the calendar year.
Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no
further fee will be due. For purposes of the Transfer Agency
Agreement, the term “account” includes a shareholder
account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML &
Co.
Distribution
Expenses
. The Fund has entered into
separate distribution agreements with the Distributor in
connection with the continuous offering of each class of shares
of the Fund (the “Distribution Agreements”). The
Distribution Agreements obligate the Distributor to pay certain
expenses in connection with the offering of each class of shares
of the Fund. After the prospectuses, statements of additional
information and periodic reports have been prepared, set in type
and mailed to shareholders, the Distributor pays for the
printing and distribution of copies thereof used in connection
with the offering to financial intermediaries and potential
investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement
described above.
The Board of Directors
of the Program has approved a Code of Ethics under Rule 17j-1 of
the Investment Company Act that covers the Fund and the Fund
’s Investment Adviser and Distributor (the “Code of
Ethics”). The Code of Ethics significantly restricts the
personal investing activities of all employees of the Investment
Adviser and Distributor and, as described below, imposes
additional, more onerous, restrictions on fund investment
personnel.
The Code of Ethics
requires that all employees of the Investment Adviser and
Distributor pre-clear any personal securities investment (with
limited exceptions, such as mutual funds, high-quality
short-term securities and direct obligations of the U.S.
government). The pre-clearance requirement and associated
procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. The
substantive restrictions applicable to all employees of the
Investment Adviser and Distributor include a ban on acquiring
any securities in a “hot” initial public offering and
a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the
case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Code of Ethics provides for
trading “blackout periods” that prohibit trading by
investment personnel of the Fund within seven calendar days
before or after trading by the Fund in the same or equivalent
security.
Reference is made to
“Account Choices—How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus for certain information
as to the purchase of Fund shares.
The Fund issues four
classes of shares: shares of Class I and Class A are sold to
investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the
deferred sales charge alternatives. Each Class I, Class A, Class
B and Class C share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same
rights, except that Class A, Class B and Class C shares bear the
expenses of the ongoing account maintenance fees (also known as
service fees) and Class B and Class C shares bear the expenses
of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge
arrangements. The contingent deferred sales charges (“CDSCs
”), distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class A shares, are imposed
directly against those classes and not against all assets of the
Fund, and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund
for each class of shares are calculated in the same manner at
the same time and differ only to the extent that account
maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne
exclusively by that class. Class A, Class B and Class C shares
each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to
which the account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material
changes to expenses charged under the distribution plan for
Class A Shares). Each class has different exchange privileges.
See “Shareholder Services—Exchange Privilege.
”
Investors should
understand that the purpose and function of the initial sales
charges with respect to the Class I and Class A shares are the
same as those of the CDSCs and distribution fees with respect to
the Class B and Class C shares in that the sales charges and
distribution fees applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will
not be
used to finance the distribution expenditures of another class.
Sales personnel may receive different compensation for selling
different classes of shares.
The Fund offers its
shares at a public offering price equal to the next determined
net asset value per share plus any sales charge applicable to
the class of shares selected by the investor. The applicable
offering price for purchase orders is based upon the net asset
value of the Fund next determined after receipt of the purchase
order by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the NYSE
(generally 4:00 p.m., Eastern time) which includes orders
received after the determination of net asset value on the
previous day, the applicable offering price will be based on the
net asset value on the day the order is placed with the
Distributor, provided that the orders are received by the
Distributor prior to 30 minutes after the close of business on
the NYSE on that day. If the purchase orders are not received
prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next
business day. Dealers have the responsibility of submitting
purchase orders to the Fund not later than 30 minutes after the
close of business on the NYSE in order to purchase shares at
that day’s offering price.
The Fund or the
Distributor may suspend the continuous offering of the Fund
’s shares of any class at any time in response to
conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may
be rejected by the Fund or the Distributor. Neither the
Distributor nor any financial intermediary is permitted to
withhold placing orders to benefit themselves by a price change.
Certain securities dealers or financial intermediaries may
charge a processing fee to confirm a sale of shares to such
customers. For example, the fee currently charged by Merrill
Lynch is $5.35. Purchases made directly through the Transfer
Agent are not subject to the processing fee.
Initial Sales Charge Alternatives—Class I and Class A
Shares
Investors who prefer
an initial sales charge alternative may elect to purchase Class
A shares or, if an eligible investor, Class I shares. Investors
choosing the initial sales charge alternatives who are eligible
to purchase Class I shares should purchase Class I shares rather
than Class A shares because there is an account maintenance fee
imposed on Class A shares. Investors qualifying for
significantly reduced initial sales charges may find the initial
sales charge alternative particularly attractive, because
similar sales charge reductions are not available with respect
to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying
for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the
accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charges,
and, in the case of Class A shares, the account maintenance fee.
Although some investors who previously purchased Class I shares
may no longer be eligible to purchase Class I shares of other
Affiliated-Advised Funds, those previously purchased Class I
shares, together with Class A, Class B and Class C share
holdings, will count toward a right of accumulation which may
qualify the investor for a reduced initial sales charge on new
initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay
lower dividends and have lower total returns than the initial
sales charge shares. The ongoing Class A account maintenance
fees will cause Class A shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Class I
shares.
The term
“purchase,” as used in the Prospectus and this
Statement of Additional Information in connection with an
investment in Class I and Class A shares of the Fund, refers to
a single purchase by an individual or to concurrent purchases,
which in the aggregate are at least equal to the prescribed
amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or
their own account and to single purchases by a trustee or other
fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is
involved. The term “purchase” also includes purchases
by any “company,” as that term is defined in the
Investment Company Act, but does not include purchases by any
such company that has not been in existence for at least six
months or which has no purpose other than the purchase of shares
of the Fund or shares of other registered investment companies
at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class
I Investors.
The Distributor may
reallow discounts to selected dealers or other financial
intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to
such dealers or other financial intermediaries. Since securities
dealers or other financial intermediaries selling Class I and
Class A shares of the Fund will receive a concession equal to
most of the sales charge, they may be deemed to be underwriters
under the Securities Act.
Class I shares are
offered to a limited group of investors and also will be issued
upon reinvestment of dividends paid on outstanding Class I
shares. Investors who currently own Class I shares in a
shareholder account are entitled to purchase additional Class I
shares of a Fund in that account. Certain employer sponsored
retirement or savings plans, including eligible 401(k) plans,
may purchase Class I shares at net asset value provided such
plans meet the required minimum number of eligible employees or
required amount of assets advised by the Investment Adviser or
any of its affiliates. Also eligible to purchase Class I shares
at net asset value are participants in certain investment
programs including certain managed accounts for which a trust
institution, thrift, or bank trust department provides
discretionary trustee services, certain collective investment
trusts for which a trust institution, thrift, or bank trust
department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases
made through certain financial advisers that meet and adhere to
standards established by the Investment Adviser. In addition,
Class I shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees, to
members of the Boards of Mercury and Affiliate-Advised Funds,
including the Fund, and to employees of certain selected
dealers. Class I shares may also be offered at net asset value
to certain accounts over which the Investment Adviser or an
affiliate exercises investment discretion.
The following table
sets forth information regarding Class I and Class A sales
charge information for the Fund.
Class I Shares*
|
For
the
Fiscal year
ended
January 31,
|
|
Gross
Sales
Charges
Collected
|
|
Sales
Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSC
’s Received
on
Redemption of
Load-Waived Shares
|
|
2000
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
1999
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
1998
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Class A Shares*
|
For
the
Fiscal year
ended
January 31,
|
|
Gross
Sales
Charges
Collected
|
|
Sales
Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSC
’s Received
on
Redemption of
Load-Waived Shares
|
|
2000
|
|
$1,179
|
|
$73
|
|
$1,106
|
|
$0
|
|
1999
|
|
$2,465
|
|
$207
|
|
$2,258
|
|
$0
|
|
1998
|
|
$611
|
|
$38
|
|
$573
|
|
$0
|
|
*
|
As of
April 3, 2000, Class A shares were redesignated Class I and
Class D shares were redesignated Class A.
|
The Distributor may
reallow discounts to selected dealers and financial
intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to
such dealers and financial intermediaries. Since securities
dealers and financial intermediaries selling Class I and Class A
shares of the Fund will receive a concession equal to most of
the sales charge, they may be deemed to be underwriters under
the Securities Act.
Reduced Initial Sales Charges
Reductions in or
exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that
will be needed to obtain such investments.
Reinvested
Dividends
. No initial sales charges
are imposed upon Class I and Class A shares issued as a result
of the automatic reinvestment of dividends.
Right of
Accumulation
. Reduced sales charges
are applicable through a right of accumulation under which
eligible investors are permitted to purchase shares of the Fund
subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser’s combined holdings of all classes of shares of
the Fund and of other Mercury mutual funds. For any such right
of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the
purchaser’s securities dealer or financial intermediary,
with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or
custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify
for the right of accumulation.
Letter of
Intent
. Reduced sales charges are
applicable to purchases aggregating $25,000 or more of Class I
or Class A shares of the Fund or any other Mercury mutual funds
made within a 13-month period starting with the first purchase
pursuant to the Letter of Intent. The Letter of Intent is
available only to investors whose accounts are established and
maintained at the Fund’s Transfer Agent. The Letter of
Intent is not available to employee benefit plans for which
affiliates of the Investment Adviser provide plan participant
record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class I or Class A shares;
however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intent may
be included under a subsequent Letter of Intent executed within
90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of
Class I and Class A shares of the Fund and of other Mercury
mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under
the Letter of Intent, may be included as a credit toward the
completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intent (minimum of
$25,000), the investor will be notified and must pay, within 20
days of the execution of such Letter, the difference between the
sales charge on the Class I or Class A shares purchased at the
reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class I or Class A shares
equal to 5.0% of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.0% of the dollar
amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be
entitled on that purchase and subsequent purchases to that
further reduced percentage sales charge but there will be no
retroactive reduction of the sales charges on any previous
purchase.
The value of any
shares redeemed or otherwise disposed of by the purchaser prior
to termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter. An
exchange from the Summit Cash Reserves Fund (“Summit
”), a series of Financial Institutions Series Trust, into
the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the
Fund.
Employer-Sponsored
Retirement or Savings Plans and Certain Other Arrangements
.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase Class
I or Class A shares at net asset value, based on the number of
employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares
with a waiver of the CDSC upon redemption, based on similar
criteria. Such Class B shares will convert into Class A shares
approximately ten years after the plan purchases the first share
of any Mercury mutual fund. Minimum purchase requirements may be
waived or varied for such plans. For additional information
regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements, call your plan
administrator or your selected dealer.
Managed Trusts
.
Class I shares are offered at net asset
value to certain trusts to which trust institutions, thrifts,
and bank trust departments provide discretionary trustee
services.
Purchase
Privileges of Certain Persons
.
Directors of the Program, members of the Boards of other
investment companies advised by the Investment Adviser or its
affiliates, directors and employees of ML & Co. and its
subsidiaries (the term “subsidiaries,” when used
herein with respect to ML & Co., includes the Investment
Adviser, MLAM, Mercury Asset Management International, Ltd. and
certain other entities directly or indirectly wholly owned and
controlled by ML & Co.), employees of certain selected
dealers and financial intermediaries, and any trust, pension,
profit-sharing or other benefit plan for such persons, may
purchase Class I shares of the Fund at net asset value. The Fund
realizes economies of scale and reduction of sales-related
expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors or trustees wishing to purchase
shares of the Fund must satisfy the Fund’s suitability
standards.
Class I and Class A
shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate
exercises investment discretion.
Acquisition of
Certain Investment Companies
. Class A
shares may be offered at net asset value in connection with the
acquisition of the assets of or merger or consolidation with a
personal holding company or a public or private investment
company.
Purchases Through
Certain Financial Advisers
. Reduced
sales charges may be applicable for purchases of Class I or
Class A shares of the Fund through certain financial advisers
that meet and adhere to standards established by the Investment
Adviser from time to time.
Deferred Sales Charges—Class B and Class C
Shares
Investors choosing the
deferred sales charge alternatives should consider Class B
shares if they intend to hold their shares for an extended
period of time and Class C shares if they are uncertain as to
the length of time they intend to hold their assets in Mercury
mutual funds.
Because no initial
sales charges are deducted at the time of the purchase, Class B
and Class C shares provide the benefit of putting all of the
investor’s dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for the reduction in
initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B
or Class C shares. In addition, Class B shares will be converted
into Class A shares of the Fund after a conversion period of
approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
The public offering
price of Class B and Class C shares for investors choosing the
deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge
at the time of purchase. See “Pricing of Shares
—Determination of Net Asset Value” below.
Contingent Deferred
Sales Charges—Class B Shares
.
Class B shares that are redeemed within six years of
purchase may be subject to a CDSC at the rates set forth below
charged as a percentage of the dollar amount subject thereto. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC
will be assessed on shares derived from reinvestment of
dividends. It will be assumed that the redemption is first of
shares held for over six years or shares acquired pursuant to
reinvestment of dividends and then of shares held longest during
the six-year period. A transfer of shares from a shareholder
’s account to another account will be assumed to be made in
the same order as a redemption.
The following table
sets forth the Class B CDSC:
Year
Since Purchase Payment Made
|
|
CDSC
as a Percentage
of Dollar amount
Subject to Charge
|
|
0-1
|
|
4.0%
|
|
1-2
|
|
4.0%
|
|
2-3
|
|
3.0%
|
|
3-4
|
|
3.0%
|
|
4-5
|
|
2.0%
|
|
5-6
|
|
1.0%
|
|
6 and
thereafter
|
|
None
|
To provide an example,
assume an investor purchased 100 shares at $10 per share (at a
cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor
has acquired 10 additional shares upon dividend reinvestment. If
at such time the investor makes his or her first redemption of
50 shares (proceeds of $600), 10 shares will not be subject to a
CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.0% (the applicable rate in the
third year after purchase).
As discussed in the
Prospectus under “Account Choices—Pricing of Shares
—Class B and C Shares—Deferred Sales Charge Options,
” while Class B shares redeemed within six years of
purchase are subject to a CDSC under most circumstances, the
charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an individual
retirement account (“IRA”) or other retirement plan or
redemption of Class B shares in certain circumstances following
the death of a Class B shareholder. In the case of such
withdrawal, the reduction or waiver applies to: (a) any partial
or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan on
attaining age 59
1
/
2
in the
case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made
for life (or life expectancy) or any redemption resulting from
the tax-free return of an excess contribution to an IRA (certain
legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution); or (b) any
partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code of 1986, as amended
(the “Code”)) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of
the death or initial determination of disability, or if later,
reasonably promptly following completion of probate or in
connection with involuntary termination of an account in which
Fund shares are held (certain legal documentation may be
required at the time of liquidation establishing eligibility for
qualified distribution).
The charge may also be
reduced or waived in other instances, such as: (a) redemptions
by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers; (b) redemptions in connection with
participation in certain fee-based programs managed by the
Investment Adviser or its affiliates; (c) redemptions in
connection with participation in certain fee-based programs
managed by selected dealers that have agreements with the
Investment Adviser; or (d) withdrawals through the Systematic
Withdrawal Plan of up to 10% per year of your account value at
the time the plan is established. See “Shareholder Services
—Fee-Based Programs” and “—Systematic
Withdrawal Plan.”
Conversion of Class
B Shares to Class A Shares
. After
approximately ten years (the “Conversion Period”),
Class B shares of the Fund will be converted automatically into
Class A shares of that Fund. Class A shares are subject to an
ongoing account maintenance fee of 0.25% of the average daily
net assets of a Fund but are not subject to the distribution fee
that is borne by Class B shares. Automatic conversion of Class B
shares into Class A shares will occur at least once each month
(on the “Conversion Date”) on the basis of the
relative net asset value of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class A shares
will not be deemed a purchase or sale of the shares for Federal
income tax purposes.
In addition, shares
purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class A shares. The
Conversion Date for dividend reinvestment shares will be
calculated taking
into account the length of time the shares underlying such
dividend reinvestment shares were outstanding. If at the
Conversion Date the conversion of Class B shares to Class A
shares of the Fund in a single account will result in less than
$50 worth of Class B shares being left in the account, all of
the Class B shares of the Fund held in the account on the
Conversion Date will be converted to Class A shares of the
Fund.
The Conversion Period
may be modified for investors that participate in certain
fee-based programs. See “Shareholder Services
—Fee-Based Programs.”
Class B shareholders
of the Fund exercising the exchange privilege described under
“Shareholder Services—Exchange Privilege” will
continue to be subject to the Fund’s CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred
Sales Charges—Class C Shares.
Class C shares that are redeemed within one year of
purchase may be subject to a 1.0% CDSC charged as a percentage
of the dollar amount subject thereto. In determining whether a
Class C CDSC is applicable to a redemption, the calculation will
be determined in the manner that results in the lowest possible
rate being charged. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on
shares derived from reinvestment of dividends. It will be
assumed that the redemption is first of shares held for over one
year or shares acquired pursuant to reinvestment of dividends
and then of shares held longest during the one-year period. A
transfer of shares from a shareholder’s account to another
account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with
involuntary termination of an account in which Fund shares are
held and withdrawals through the Systematic Withdrawal Plans.
See “Shareholder Services—Systematic Withdrawal Plan.
”
Class
B and Class C Sales Charge Information.
Class B Shares*
|
For
the fiscal year
ended January 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2000
|
|
$43,635
|
|
$43,635
|
|
1999
|
|
$23,267
|
|
$23,267
|
|
1998
|
|
$12,110
|
|
$12,110
|
*
Additional Class B CDSCs payable to the Distributor with
respect to the fiscal years ended January 31,
1998, 1999 and 2000 may have been waived or converted to a
contingent obligation in connection with a
shareholder’s participation in certain fee-based
programs.
|
|
|
Class C Shares
|
For
the fiscal year
ended January 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2000
|
|
$
5,163
|
|
$
5,163
|
|
1999
|
|
$
1,694
|
|
$
1,694
|
|
1998
|
|
$
432
|
|
$
432
|
Proceeds from the CDSC
and the distribution fee are paid to the Distributor and are
used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) and financial
intermediaries related to providing distribution-related
services to the Fund in connection with the sale of the Class B
and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares
from the dealer’s own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. See
“Distribution Plans” below. Imposition of the CDSC and
the distribution fee on Class B and Class C shares is limited by
the National Association of Securities Dealers, Inc. (the
“NASD”) asset-based sales charge rule. See
“Limitations on the Payment of Deferred Sales Charges”
below.
Reference is made to
“Account Choices—Pricing of Shares” in the
Prospectus for certain information with respect to separate
distribution plans for Class A, Class B, and Class C shares
pursuant to Rule 12b-1 under the Investment Company Act (each a
“Distribution Plan”) with respect to the account
maintenance and/or distribution fees paid by the Funds to the
Distributor with respect to such classes.
The Distribution Plan
for each of the Class A, Class B and Class C shares provides
that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and
paid monthly, at the annual rate of 0.25% of the average daily
net assets of the Fund attributable to shares of the relevant
class in order to compensate the Distributor and selected
dealers and financial intermediaries (pursuant to
sub-agreements) in connection with account maintenance
activities with respect to Class A, Class B and Class C shares.
Each of those classes has exclusive voting rights with respect
to the Distribution Plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees
are paid (except that Class B shareholders may vote on any
material changes to expenses charged under the Class A
Distribution Plan).
The Distribution Plans
for Class B and Class C shares provide that the Fund also pays
the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual
rate of 0.50% for Class B shares and 0.55% for Class C shares of
the average daily net assets of the Fund attributable to the
shares of the relevant class in order to compensate the
Distributor and selected dealers and financial intermediaries
(pursuant to sub-agreements) for providing shareholder and
distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial
consultants for selling Class B and Class C shares of the Fund.
The Distribution Plans relating to Class B and Class C shares
are designed to permit an investor to purchase Class B and Class
C shares through dealers and financial intermediaries without
the assessment of an initial sales charge and at the same time
compensates the dealers and financial intermediaries in
connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the
initial sales charge with respect to the Class I and Class A
shares of the Fund in that the ongoing distribution fees and
deferred sales charges provide for the financing of the
distribution of the Fund’s Class B and Class C
shares.
The Fund’s
Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each
Distribution Plan, the Directors must consider all factors they
deem relevant, including information as to the benefits of each
Distribution Plan to the Fund and the related class of
shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection
and nomination of non-interested Directors shall be committed to
the discretion of the non-interested Directors then in office.
In approving each Distribution Plan in accordance with Rule
12b-1, the non-interested Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit
the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the non-interested
Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are
required to be approved by the vote of Directors, including a
majority of the non-interested Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of its Distribution Plans
and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or
such report, the first two years in an easily accessible
place.
Among other things,
each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees
paid to the Distributor. Payments under the Distribution Plans
are based on a percentage of average daily net assets
attributable to the shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues from
each Distribution Plan may be more or less than
distribution-related expenses of the related class. Information
with respect to the distribution-related revenues and expenses
is presented to the Directors for their consideration in
connection with their deliberations as to the continuance of the
Class B and Class C Distribution Plans. This information is
presented annually as of December 31 of each year on a
“fully allocated accrual” basis
and quarterly on a “direct expense and revenue/cash”
basis. On the fully allocated basis, revenues consist of the
account maintenance fees, the distribution fees, the CDSCs and
certain other related revenues, and expenses consist of
financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses,
advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance
fees, the distribution fees and CDSCs and the expenses consist
of financial consultant compensation.
As of December 31,
1999,the last date for which fully allocated accrual data is
available, the fully allocated accrual expenses of the
Distributor and Merrill Lynch for the period since the
commencement of operations of Class B shares of the Fund
exceeded fully allocated accrual revenues by approximately
$172,000 (1.31% of Class B net assets at that date). As of
January 31, 2000, direct cash revenues for the period since the
commencement of operations of Class B shares exceeded direct
cash expenses by $193,101 (1.60% of Class B net assets at that
date). As of December 31, 1999, the fully allocated accrual
expenses of the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded
the fully allocated accrual revenues by approximately $115,000
(3.15% of Class C net assets at that date). As of January 31,
2000, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by
$67,741 (1.99% of Class C net assets at that date).
For the fiscal year
ended January 31, 2000, the Fund paid the Distributor $107,898
pursuant to the Class B Distribution Plan (based on average
daily net assets subject to such Class B Distribution Plan of
approximately $14.4 million), all of which was paid to Merrill
Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. For
the fiscal year ended January 31, 2000, the Fund paid the
Distributor $32,974 pursuant to the Class C Distribution Plan
(based on average daily net assets subject to such Class C
Distribution Plan of approximately $4.1 million), all of which
was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with
Class C shares. For the fiscal year ended January 31, 2000, the
Fund paid the Distributor $2,963 pursuant to the Class A
Distribution Plan (based on average daily net assets subject to
such Class A Distribution Plan of approximately $1.2 million),
all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class A
shares.
Limitations on the Payment of Deferred Sales
Charges
The maximum sales
charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C
shares, but not the account maintenance fee. The maximum sales
charge rule is applied separately to each class. As applicable
to the Fund, the maximum sales charge rule limits the aggregate
of distribution fee payments and CDSCs payable by the Fund to
(1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In
connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor
(referred to as the “voluntary maximum”) in connection
with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest
charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any
CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstance payment in excess
of the amount payable under the NASD formula will not be
made.
The following table
sets forth comparative information as of January 31, 2000 with
respect to the Class B and Class C shares indicating the maximum
allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the
Distributor’s voluntary maximum for the periods
indicated.
|
|
|
Data
Calculated as of January 31, 2000
|
|
|
|
(In
thousands)
|
|
|
|
Eligible
Gross
Sales(1)
|
|
Allowable
Aggregate
Sales
Charges(2)
|
|
Allowable
Interest
on
Unpaid
Balance(3)
|
|
Maximum
Amount
Payable
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current
Net Asset
Level(5)
|
Class B
Shares, for the period
February 1, 1995 (commencement of
operations) to January 31,
2000
|
|
Under NASD Rule as
Adopted
|
|
10,242
|
|
627
|
|
122
|
|
749
|
|
262
|
|
487
|
|
60
|
Under Distributor
’s Voluntary
Waiver
|
|
10,242
|
|
640
|
|
51
|
|
691
|
|
262
|
|
429
|
|
60
|
|
|
Class C
Shares, for the period
February 1, 1995 (commencement of
operations) to January 31, 2000
|
|
Under NASD Rule as
Adopted
|
|
4,924
|
|
307
|
|
67
|
|
374
|
|
68
|
|
306
|
|
19
|
|
(1)
|
Purchase price of all eligible Class B or Class C
shares sold during the periods indicated other than shares
acquired through dividend reinvestment and the exchange
privilege.
|
|
(2)
|
Includes amounts attributable to exchanges from Summit
Cash Reserves Fund (“Summit”) which are not
reflected in Eligible Gross Sales. Shares of Summit can only
be purchased by exchange from another fund (the “redeemed
fund”). Upon such an exchange, the maximum allowable
sales charge payment to the redeemed fund is reduced in
accordance with the amount of the redemption. This amount is
then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum
allowable sales charge payment to Summit and added to the
maximum allowable sales charge payment to the fund into which
the exchange is made.
|
|
(3)
|
Interest is computed on a monthly basis based upon the
prime rate, as reported in
The Wall Street Journal,
plus 1.0%, as permitted under the NASD Rule.
|
|
(4)
|
Consists of CDSC payments, distribution fee payments
and accruals. Of the distribution fee payments made with
respect to Class B shares prior to July 6, 1993 under the
distribution plan in effect at that time, at a 1.0% rate,
0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the
NASD maximum sales charge rule. See “Fees and Expenses
” in the Prospectus. This figure may include CDSCs that
were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A
shares in conjunction with the shareholder’s
participation in the Merrill Lynch Mutual Fund Advisor
(Merrill Lynch MFA) Program (the “MFA Program”). The
CDSC is booked as a contingent obligation that may be payable
if the shareholder terminates participation in the MFA
Program.
|
|
(5)
|
Provided to illustrate the extent to which the current
level of distribution fee payments (not including any CDSC
payments) is amortizing the unpaid balance. No assurance can
be given that payments of the distribution fee will reach
either the voluntary maximum (with respect to Class B shares)
or the NASD maximum (with respect to Class B and Class C
shares).
|
Reference is made to
“How to Buy, Sell, Transfer and Exchange Shares” in
the Prospectus.
The Fund is required
to redeem for cash all shares upon receipt of a written request
in proper form. The redemption price is the net asset value per
share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there
will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating
their holdings will receive upon redemption all dividends
reinvested through the date of redemption.
The right to redeem
shares or to receive payment with respect to any such redemption
may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by
the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during
which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio
securities or determination of the net asset value of the Fund is
not reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of
shareholders.
The value of shares of
the Fund at the time of redemption may be more or less than the
shareholder’s cost, depending in part on the market value
of the securities held by the Fund at such time.
The Fund has entered
into a joint committed line of credit with other investment
companies advised by the Investment Adviser and its affiliates
and a syndicate of banks that is intended to provide the Fund
with a temporary source of cash to be used to meet redemption
requests from Fund shareholders in extraordinary or emergency
circumstances.
A shareholder wishing
to redeem shares held with the Transfer Agent may do so without
charge by tendering the shares directly to the Fund’s
Transfer Agent, Financial Data Services, Inc., P.O. Box 44062,
Jacksonville, Florida 32232-4062. Redemption requests delivered
other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Redemption requests should
not be sent to the Program or the Fund. A redemption request in
either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such
name(s) appear(s) on the Transfer Agent’s register. The
signature(s) on the redemption request may require a guarantee
by an “eligible guarantor institution” as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934 (the
“Exchange Act”), the existence and validity of which
may be verified by the Transfer Agent through the use of
industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general,
signature guarantees are waived on redemptions of less than
$50,000 as long as the following requirements are met: (i) all
requests require the signature(s) of all persons in whose
name(s) shares are recorded on the Transfer Agent’s
register; (ii) all checks must be mailed to the stencil address
of record on the Transfer Agent’s register and (iii) the
stencil address must not have changed within 30 days. Certain
rules may apply regarding certain account types such as but not
limited to UGMA/UTMA accounts, Joint Tenancies With Rights of
Survivorship, contra broker transactions and institutional
accounts. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or
administrator, or certificates of corporate
authority.
A shareholder may also
redeem shares held with the Transfer Agent by telephone request.
To request a redemption from your account, call the Transfer
Agent at 1-800-MER-FUND. The request must be made by the
shareholder of record and be for an amount less than $50,000.
Before telephone requests will be honored, signature approval
from all shareholders of record on the account must be obtained.
The shares being redeemed must have been held for at least 15
days. Telephone redemption requests will not be honored in the
following situations: the accountholder is deceased, the
proceeds are to be sent to someone other than the shareholder of
record, funds are to be wired to the client’s bank account,
a systematic withdrawal plan is in effect, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are divorced, the address on the
account has changed within the last 30 days or share
certificates have been issued on the account.
Since this account
feature involves a risk of loss from unauthorized or fraudulent
transactions, the Transfer Agent will take certain precautions
to protect your account from fraud. Telephone redemption may be
refused if the caller is unable to provide: the account number,
the name and address registered on the account and the social
security number registered on the account. The Fund or the
Transfer Agent may temporarily suspend telephone transactions at
any time.
For shareholders
redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of
redemption. At various times the Fund may be requested to redeem
shares for which it has not yet received good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment
(
e.g.
,
cash, Federal funds or certified check drawn on a U.S. bank) has
been collected for the purchase of such Fund shares, which will
not usually exceed 10 days. In the event that a shareholder
account held directly with the Transfer Agent contains a
fractional share balance, such fractional share balance will be
automatically redeemed by the Fund.
The Fund also will
repurchase its shares through a shareholder’s listed
securities dealer. The Fund normally will accept orders to
repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after the order
is placed. Shares will be priced at the net asset value
calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to the
close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the
Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day.
Dealers have the
responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on
the NYSE in order to obtain that day’s closing
price.
The foregoing
repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected
dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Certain securities dealers may
charge a processing fee to confirm a repurchase of shares. For
example, the fee currently charged by Merrill Lynch is $5.35.
Fees charged by other securities dealers may be higher or lower.
Repurchases made through the Fund’s Transfer Agent, on
accounts held at the Transfer Agent, are not subject to the
processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase
procedure. A shareholder whose order for repurchase is rejected
by the Fund, however, may redeem Fund shares as set forth
above.
Reinstatement Privilege—Class I and Class A
Shares
Shareholders of the
Fund who have redeemed their Class I and Class A shares have a
privilege to reinstate their accounts by purchasing Class I or
Class A shares, as the case may be, at net asset value without a
sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer
Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised
through the investor’s financial consultant within 30 days
after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the
notice of reinstatement is received and cannot exceed the amount
of the redemption proceeds.
Determination of Net Asset Value
Reference is made to
“How Shares are Priced” in the Prospectus.
The net asset value of
the shares of all classes of the Fund is determined once daily
Monday through Friday as of the close of business on the NYSE on
each day the NYSE is open for trading based on prices at the
time of closing. The NYSE generally closes at 4:00 p.m., Eastern
time. The NYSE is not open for trading on New Year’s Day,
Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Net asset value is
computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares of
the Fund outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser
and Distributor, are accrued daily.
The per share net
asset value of Class A, Class B and Class C shares generally
will be lower than the per share net asset value of Class I
shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares, and the
daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. Moreover, the per
share net asset value of the Class B and Class C shares of the
Fund generally will be lower than the per share net asset value
of Class A shares, reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the four classes
of the Fund will tend to converge (although not necessarily
meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of
the expense accrual differentials between the
classes.
Portfolio securities
that are traded on stock exchanges are valued at the last sale
price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available ask
price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of
Directors of the Program as the primary market. Long positions
in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC
market prior to the time of valuation. Portfolio securities that
are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium
received is recorded on its books as an asset and an equivalent
liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on
the last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last ask
price. Options purchased by the Fund are valued at their last
sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last bid price.
Other investments, including financial futures contracts and
related options, are stated at market value. Securities and
assets for which market quotations are not readily available are
stated at fair value as determined in good faith by or under the
direction of the Board of Directors of the Program. Such
valuations and procedures will be reviewed periodically by the
Board of Directors.
Generally, trading in
U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the
close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund’s shares
are determined as of such times. Occasionally, events affecting
the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the
computation of the Fund’s net asset value.
Each investor in the
Program may add to or reduce its investment in the Fund on each
day the NYSE is open for trading. The value of each investor
’s (including the Fund’s) interest in the Fund will be
determined after the close of business on the NYSE by
multiplying the net asset value of the Fund by the percentage,
effective for that day, that represents that investor’s
share of the aggregate interests in the Fund. The close of
business on the NYSE is generally 4:00 p.m., Eastern time. Any
additions or withdrawals to be effected on that day will then be
effected. The investor’s percentage of the aggregate
beneficial interests in the Fund will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is
the value of such investor’s investment in the Fund as of
the time of determination on such day plus or minus, as the case
may be, the amount of any additions to or withdrawals from the
investor’s investment in the Fund effected on such day, and
(ii) the denominator of which is the aggregate net asset value
of the Fund as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Fund by all its investors.
The percentage so determined will then be applied to determine
the value of the investor’s interest in the Fund after the
close of business of the NYSE on the next determination of net
asset value of the Fund.
Computation of Offering Price Per Share
An illustration of the
computation of the offering price for Class I, Class A, Class B
and Class C shares of the Fund based on the value of its
estimated net assets and number of shares outstanding on January
31, 2000 is as follows:
|
|
|
Class I*
|
|
Class A*
|
|
Class B
|
|
Class C
|
|
Net
Assets
|
|
$140,396
|
|
$707,767
|
|
$12,045,581
|
|
$3,399,746
|
|
Number
of Shares Outstanding
|
|
14,257
|
|
71,943
|
|
1,225,451
|
|
345,894
|
Net
Asset Value Per Share (net assets divided by number of
shares outstanding)
|
|
$
9.85
|
|
$
9.84
|
|
$
9.83
|
|
$
9.83
|
Sales
Charge (for Class I and Class A Shares: 4.00% of
Offering Price (4.17% of net
amount invested))**
|
|
.41
|
|
.41
|
|
***
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
Offering Price
|
|
$
10.26
|
|
$
10.25
|
|
$
9.83
|
|
$
9.83
|
|
|
|
|
|
|
|
|
|
|
|
*
|
As of
April 3, 2000, Class A shares were redesignated Class I and
Class D shares were redesignated Class A.
|
|
**
|
Rounded
to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
|
|
***
|
Class B
and Class C shares are not subject to an initial sales charge
but may be subject to a CDSC on redemption. See “Purchase
of Shares—Deferred Sales Charges—Class B and Class C
Shares” herein.
|
Transactions in Portfolio Securities
Subject to policies
established by the Directors of the Program, the Investment
Adviser is primarily responsible for the execution of the Fund
’s portfolio transactions and the allocation of brokerage.
The Fund has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities
and does not use any particular broker or dealer. In executing
transactions with brokers and dealers, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable
brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm
and the firm’s risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay
the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies
established by the Directors of the Program, the Investment
Adviser may consider sales of Fund shares as a factor in the
selection of brokers or dealers to execute portfolio
transactions for the Fund; however, whether or not a particular
broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for
the Fund.
Subject to obtaining
the best net results, brokers who provide supplemental
investment research to the Investment Adviser may receive orders
for transactions by the Fund. Such supplemental research
services ordinarily consist of assessments and analyses of the
business or prospects of a company, industry or economic sector.
Information so received will be in addition to and not in lieu
of the services required to be performed by the Investment
Adviser, under the Investment Advisory Agreements, and the
expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the
Fund will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of
commission that another broker may have charged for effecting
the same transactions. Certain supplemental research services
may primarily benefit one or more other investment companies or
other accounts for which the Investment Adviser exercises
investment discretion. Conversely, the Fund may be the primary
beneficiary of the supplemental research services received as a
result of portfolio transactions effected for such other
accounts or investment companies.
The Fund invests
primarily in U.S. Government securities traded in the OTC market
and intends to deal directly with the dealers who make a market
in securities involved, except in those circumstances in which
better prices and execution are available elsewhere. Under the
Investment Company Act, persons affiliated with the Program and
persons who are affiliated with such affiliated persons are
prohibited from dealing with the Program as principal in the
purchase and sale of securities unless a permissive order
allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually
involve transactions with the dealers acting as principal for
their own accounts, the program will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, an affiliated person
of the Program may serve as its broker in OTC transactions
conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received
by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities
during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Directors of the
Program that either comply with rules adopted by the Commission
or with interpretations of the Commission staff. See
“Investment Objective and Policies—Investment
Restrictions.”
Section 11(a) of the
Exchange Act generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least
annually furnishes the account with a statement setting forth
the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange
of which it is a member, appropriate consents have been obtained
from the Fund and annual statements as to aggregate compensation
will be provided to the Fund. Securities may be held by, or be
appropriate investments for, the Fund as well as other funds or
investment advisory clients of the Investment Adviser or its
affiliates.
The Directors of the
Program have considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting
portfolio transactions through affiliated entities. For example,
brokerage commissions received by affiliated brokers could be
offset against the advisory fee paid by the Fund to the
Investment Adviser. After considering all factors deemed
relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time
to time.
Because of different
objectives or other factors, a particular security may be bought
for one or more clients of the Investment Adviser or its
affiliates when one or more clients of the Investment Adviser or
its affiliates are selling the same security. If purchases or
sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate act as investment
adviser, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its
affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
The Fund offers a
number of shareholder services described below that are designed
to facilitate investment in its shares. Full details as to each
such service and copies of the various plans or how to change
options with respect thereto, can be obtained from the Fund by
calling the telephone number on the cover page hereof, or from
the Distributor or your selected dealer. Certain of these
services are available only to U.S. investors.
Each shareholder whose
account is maintained at the Transfer Agent has an Investment
Account and will receive statements, at least quarterly, from
the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the
reinvestment of dividends. The statements also will show any
other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each
purchase or sale transaction other than automatic investment
purchases and the reinvestment of dividends. A shareholder with
an account held at the Transfer Agent may make additions to his
or her Investment Account at any time by mailing a check
directly to the Transfer Agent. The Fund does not issue share
certificates.
Shareholders
considering transferring their Class I or Class A shares from a
selected dealer or financial intermediary to another brokerage
firm or financial institution should be aware that, if the firm
to which the Class I or Class A shares are to be transferred
will not take delivery of Fund shares, a shareholder either must
redeem the Class I or Class A shares so that the cash proceeds
can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at
the Transfer Agent for those Class I or Class A
shares.
Shareholders
interested in transferring their Class B or Class C shares from
a selected dealer or financial intermediary and who do not wish
to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain
such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder at the
Transfer Agent.
Certain shareholder
services may not be available for the transferred shares. After
the transfer, the shareholder may purchase additional shares of
funds owned before the transfer, and all future trading of these
assets must be coordinated by the new firm.
Shareholders
considering transferring a tax-deferred retirement account, such
as an individual retirement account, from a selected dealer or
financial intermediary to another brokerage firm or financial
institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the
shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at a
selected dealer for those shares.
U.S. shareholders of
each class of shares of the Fund have an exchange privilege with
certain other Mercury mutual funds and Summit, a series of
Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated as
available for exchange by holders of Class I, Class A, Class B
and Class C shares. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege and any
shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange,
shareholders should obtain a currently effective prospectus of
the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares
and a purchase of the acquired shares for Federal income tax
purposes.
Exchanges of Class
I and Class A Shares
. Under the Fund
’s pricing system, Class I shareholders may exchange Class
I shares of the Fund for Class I shares of a second Mercury
mutual fund. If the Class I shareholder wants to exchange Class
I shares for shares of a second Mercury mutual fund, but does
not hold Class I shares of the second fund in his or her account
at the time of exchange and is not otherwise eligible to acquire
Class I shares of the second fund, the shareholder will receive
Class A shares of the second fund as a result of the exchange.
Class A shares also may be exchanged for Class I shares of a
second Mercury mutual fund at any time as long as, at the time
of the exchange, the shareholder is eligible to acquire Class I
shares of any Mercury mutual fund.
Exchanges of Class I
or Class A shares outstanding (“outstanding Class I or
Class A shares”) for Class I or Class A shares of another
Mercury mutual fund, or for Class A shares of Summit (“new
Class I or Class A shares”) are transacted on the basis of
relative net asset value per Class I or Class A share,
respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding
Class I or Class A shares and the sales charge payable at the
time of the exchange on the new Class I or Class A shares. With
respect to outstanding Class I or Class A shares as to which
previous exchanges have taken place, the “sales charge
previously paid” shall include the aggregate of the sales
charges paid with respect to such Class I or Class A shares in
the initial purchase and any subsequent exchange. Class I or
Class A shares issued pursuant to dividend reinvestment are sold
on a no-load basis in each of the funds offering Class I or
Class A shares. For purposes of the exchange privilege, Class I
and Class A shares acquired through dividend reinvestment shall
be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class I or Class A shares on
which the dividend was paid. Based on this formula, Class I and
Class A shares of the Fund generally may be exchanged into the
Class I and Class A shares, respectively, of the other funds
with a reduced or without a sales charge.
Exchanges of Class
B and Class C Shares
. In addition,
each of the funds with Class B and Class C shares outstanding (
“outstanding Class B or Class C shares”) offers to
exchange its Class B or Class C shares for Class B or Class C
shares, respectively, of another Mercury mutual fund or for
Class B shares of Summit (“new Class B or Class C shares
”) on the basis of relative net asset value per Class B or
Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class
B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund’s CDSC schedule if
such schedule is higher than the CDSC schedule relating to the
new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund
’s CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund from which
the exchange was made. For purposes of computing the CDSC that
may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B shares is
“tacked” to the holding period of the new Class B or
Class C shares. For example, an investor may exchange Class B
shares of the Fund for those of another Mercury fund (“new
Mercury Fund”) after having held the Fund’s Class B
shares for two-and-a-half years. The 3% CDSC that generally
would apply to a redemption would not apply to the exchange.
Four years later the investor may decide to redeem the Class B
shares of the new Mercury Fund and receive cash. There will be
no CDSC due on this redemption since by “tacking” the
two-and-a-half year holding period of the Fund’s Class B
shares to the four year holding period for the new Mercury Fund
Class B shares, the investor will be deemed to have held the new
Mercury Fund Class B shares for more than six years.
Exchanges for
Shares of a Money Market Fund
. Class
I and Class A shares are exchangeable for Class A shares of
Summit and Class B and Class C shares are exchangeable for Class
B shares of Summit. Class A shares of Summit have an exchange
privilege back into Class I or Class A shares of
Affiliate-Advised Funds; Class B shares of Summit have an
exchange privilege back into Class B or Class C shares of
Affiliate-Advised Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will
count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any
Conversion Period with respect to Class B shares. Class B shares
of Summit will be subject to a distribution fee at an annual
rate of 0.75% of average daily net assets of such Class B
shares. This exchange privilege does not apply with respect to
certain fee-based programs for which alternative exchange
arrangements may exist. Please see your financial consultant for
further information.
Prior to October 12,
1998, exchanges from the Fund and other Affiliated-Advised Funds
into a money market fund were directed to certain
Affiliate-Advised money market funds other than Summit.
Shareholders who exchanged Affiliate-Advised Fund shares for
such other money market funds and subsequently wish to exchange
those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will
not count toward satisfaction of the holding period requirement
for reduction of the CDSC imposed on such shares, if any, and,
with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period for Class B or
Class C shares of the Fund received in exchange for such money
market fund shares will be aggregated with the holding period
for the fund shares originally exchanged for such money market
fund shares for purposes of reducing the CDSC or satisfying the
Conversion Period.
Exercise of the
Exchange Privilege
. To exercise the
exchange privilege, a shareholder should contact his or her
financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund and shareholders of the other funds
described above with shares for which certificates have not been
issued may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a
properly completed Exchange Application.
Telephone exchange
requests are also available in accounts held with the Transfer
Agent for amounts up to $50,000. To request an exchange from
your account, call the Transfer Agent at 1-800-MER-FUND. The
request must be from the shareholder of record. Before telephone
requests will be honored, signature approval from all
shareholders of record must be obtained. The shares being
exchanged must have been held for at least 15 days. Telephone
requests for an exchange will not be honored in the following
situations: the accountholder is deceased, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are divorced or the address on the
account has changed within the last 30 days. Telephone exchanges
may be refused if the caller is unable to provide: the account
number, the name and address registered on the account and the
social security number registered on the account. The Fund or the
Transfer Agent may temporarily suspend telephone transactions at
any time.
This exchange
privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit
the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the
exchange privilege may be applicable to other new mutual funds
whose shares may be distributed by the Distributor.
Certain fee-based
programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a
“program”), may permit the purchase of Class I shares
at net asset value. Under specified circumstances, participants
in certain Programs may deposit other classes of shares, which
will be exchanged for Class I shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in certain
programs may result in the redemption of shares held therein or
the automatic exchange thereof to another class at net asset
value. In addition, upon termination of participation in a
program, shares that have been held for less than specified
periods within such program may be subject to a fee based on the
current value of such shares. These programs also generally
prohibit such shares from being transferred to another account,
to another broker-dealer or to the Transfer Agent. Except in
limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class
of shares purchased (which may involve the imposition of initial
or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject
to program fees. Additional information regarding certain
specific programs offered through particular selected dealers or
financial intermediaries (including charges and limitations on
transferability applicable to shares that may be held in such
programs) is available in each such program’s client
agreement and from the Transfer Agent at
1-888-763-2260.
Retirement and Education Savings Plans
The minimum initial
purchase to establish a retirement or an education savings plan
is $100. Dividends received in retirement plans are exempt from
Federal taxation until distributed from the plans. Different tax
rules apply to Roth IRA plans and educational savings plans.
Investors considering participation in any retirement or
education savings plan should review specific tax laws relating
thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such
plan.
Dividends received in
each of the plans referred to above are exempt from Federal
taxation until distributed from the plans. Different tax rules
apply to Roth IRA plans and education savings plans. Investors
considering participation in any retirement or education savings
plan should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make
additions to an Investment Account at any time by purchasing
Class I shares (if he or she is an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public
offering price. These purchases may be made either through the
shareholder’s securities dealer or financial intermediary
or by mail directly to the Transfer Agent, acting as agent for
such securities dealer or financial intermediaries. You may also
add to your account by automatically investing a specific amount
in the Fund on a periodic basis through your selected dealer or
financial intermediary. The current minimum for such automatic
additional investments is $100. This minimum may be waived or
revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends paid by the
Fund may be taken in cash or automatically reinvested in shares
of the Fund at net asset value without a sales charge. You
should consult with your financial intermediary about which
option you
would like. If you choose the reinvestment option, dividends paid
with respect to the Fund’s shares will be automatically
reinvested, without sales charge, in additional full and
fractional shares of the Fund. Such reinvestment will be at the
net asset value of shares of the Fund as determined after the
close of business on the NYSE on the monthly payment date for
such dividends. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of
dividends.
Shareholders may, at
any time, by written notification to their selected dealer or
financial intermediary if their account is maintained with a
selected dealer or financial intermediary, or by written
notification or by telephone (1-888-763-2260) to the Transfer
Agent, if their account is maintained with the Transfer Agent,
elect to have subsequent dividends of ordinary income and/or
capital gains paid with respect to shares of the Fund in cash,
rather than reinvested in shares of the Fund (provided that, in
the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder
will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). Commencing
ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. The Fund is not responsible
for any failure of delivery to the shareholder’s address of
records and no interest will accrue on amounts represented by
uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder’s bank account.
Systematic Withdrawal Plan
A shareholder may
elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by
direct deposit to his or her bank account on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired Fund shares having
a value, based on cost or the current offering price, of $5,000
or more, and monthly withdrawals are available for shareholders
with shares having a value of $10,000 or more.
At the time of each
withdrawal payment, sufficient shares are redeemed from those on
deposit in the shareholder’s account to provide the
withdrawal payment specified by the shareholder. The shareholder
may specify the dollar amount and class of shares to be
redeemed. Redemptions will be made at net asset value as
determined after the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on
such date, the shares will be redeemed at the net asset value
determined after the close of business on the following business
day. The check for the withdrawal payment will be mailed, or the
direct deposit for withdrawal payment will be made on the next
business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all
shares in the Investment Account are reinvested automatically in
Fund shares. A shareholder’s systematic withdrawal plan may
be terminated at any time, without a charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the
Distributor.
With respect to
redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or
Class C shares that can be redeemed from an account annually
shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived.
Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are
otherwise redeemed. See “Purchase of Shares—Deferred
Sales Charge Alternatives—Class B and C Shares.” Where
the systematic withdrawal plan is applied to Class B shares,
upon conversion of the last Class B shares in an account to
Class A shares, a shareholder must make a new election to join
the systematic withdrawal program with respect to the Class A
shares. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should
contact his or her financial consultant.
Withdrawal payments
should not be considered as dividends. Each withdrawal is a
taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder’s original investment
may be reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a systematic withdrawal
plan unless such purchase is equal to at least one year’s
scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which
the shareholder has elected to make systematic
withdrawals.
The Fund intends to
distribute substantially all of its net investment income, if
any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be
distributed to the Fund’s shareholders at least annually.
From time to time, the Fund may declare a special distribution
at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the
year. If in any fiscal year, the Fund has net income from
certain foreign currency transactions, such income will be
distributed at least annually.
See “Shareholder
Services—Automatic Dividend Reinvestment Plan” for
information concerning the manner in which dividends may be
reinvested automatically in shares of the Fund. A shareholder
whose account is maintained at the Transfer Agent or whose
account is maintained through his or her selected dealer may
elect in writing to receive any such dividends in cash.
Dividends are taxable to shareholders, as discussed below,
whether they are reinvested in shares of the Fund or received in
cash. The per share dividends on Class B and Class C shares will
be lower than the per share dividends on Class I and Class A
shares as a result of the account maintenance, distribution and
higher transfer agency fees applicable with respect to the Class
B and Class C shares; similarly, the per share dividends on
Class A shares will be lower than the per share dividends on
Class I shares as a result of the account maintenance fees
applicable with respect to the Class A shares. See “Pricing
of Shares—Determination of Net Asset Value.
”
The Fund intends to
continue to qualify for the special tax treatment afforded
regulated investment companies (“RICs”) under the
Code. As long as the Fund so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains
that it distributes to Class I, Class A, Class B and Class C
shareholders (together, the “shareholders”). The Fund
intends to distribute substantially all of such
income.
The Code requires a
RIC to pay a nondeductible 4% excise tax to the extent the RIC
does not distribute during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of
its capital gains, determined, in general, on an October 31 year
end, plus certain undistributed amounts from previous years.
While the Fund intends to distribute its income and capital
gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of
the Fund’s taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution
requirements.
Dividends paid by the
Fund from its ordinary income or from an excess of net short
term capital gains over net long term capital losses (together
referred to hereafter as “ordinary income dividends”)
are taxable to shareholders as ordinary income. Distributions
made from an excess of net long term capital gains over net
short term capital losses (including gains or losses from
certain transactions in futures and options) (“capital gain
dividends”) are taxable to shareholders as long term
capital gains, regardless of the length of time the shareholder
has owned Fund shares. Any loss upon the sale or exchange of
Fund shares held for six months or less will be treated as long
term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund
’s earnings and profits will first reduce the adjusted tax
basis of a holder’s shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Certain categories of capital gains are taxable at different
rates. Generally not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a
written notice designating the amount of any capital gain
dividends as well as any amount of capital gain dividends in the
different categories of capital gain referred to
above.
Dividends are taxable
to shareholders even though they are reinvested in additional
shares of the Fund. Distributions by the Fund, whether from
ordinary income or capital gains, generally will not be eligible
for the dividends received deduction allowed to corporations
under the Code. If the Fund pays a dividend in January that was
declared in the previous October, November or December to
shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was
declared.
No gain or loss will
be recognized by Class B shareholders on the conversion of their
Class B shares into Class A shares. A shareholder’s basis
in the Class A shares acquired will be the same as such
shareholder’s basis in the Class B shares converted, and
the holding period of the acquired Class A shares will include
the holding period for the converted Class B shares.
If a shareholder
exercises an exchange privilege within 90 days of acquiring the
shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent
any sales charge paid on the exchanged shares reduces any sales
charge the shareholder would have owed upon the purchase of the
new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a
sale or exchange of shares of the Fund will be disallowed if
such shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed
loss.
Ordinary income
dividends paid to shareholders who are non-resident aliens or
foreign entities will be subject to a 30% U.S. withholding tax
under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or
a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax
advisers concerning the applicability of the U.S. withholding
tax.
Under certain
provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain
dividends and redemption payments (“backup withholding
”). Generally, shareholders subject to backup withholding
will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to such Fund’s
knowledge, have furnished an incorrect number. When establishing
an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not
otherwise subject to backup withholding.
Dividends and interest
received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between
certain countries and the United States may reduce or eliminate
such taxes.
The Fund may make
investments that produce taxable income that is not matched by a
corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original
issue discount, accrue negative amortization or are subordinated
in the mortgaged-backed or asset-backed securities structure.
Such taxable income would be treated as income earned by the
Fund and would be subject to the distribution requirements of
the Code. Because such income may not be matched by a
corresponding receipt of cash by the Fund or an offsetting
deduction, the Fund may be required to borrow money or dispose
of other securities to be able to make distributions to
shareholders. The Fund intends to make sufficient and timely
distributions to shareholders so as to qualify for treatment as
a RIC at all times.
Tax Treatment of Options and Futures Transactions
The Fund may write,
purchase or sell options and futures. In general, unless an
election is available to the Fund or an exception applies,
options and futures contracts that are “Section 1256
Contracts” will be “marked to market” for Federal
income tax purposes at the end of each taxable year (i.e., each
such option or futures contract will be treated as sold for its
fair market value on the last day of the taxable year), and any
gain or loss attributable to Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application
of these rules to Section 1256 contracts held by the Fund may
alter the timing and character of distributions to shareholders.
The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to
reduce the risk of changes in price or interest or currency
exchange rates with respect to its investments.
Code Section 1092,
which applies to certain “straddles,” may affect the
taxation of the Fund’s sales of securities and transactions
in options and futures. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses
incurred in certain sales of securities and certain closing
transactions in options and futures.
The foregoing is a
general and abbreviated summary of the applicable provisions of
the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent
Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to
change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and
capital gain dividends may also be subject to state and local
taxes.
Certain states exempt
from state income taxation dividends paid by RICs that are
derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S.
Government obligations is exempt from state income
tax.
Shareholders are urged
to consult their tax advisers regarding specific questions as to
Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an
investment in the Fund.
From time to time the
Fund may include its average annual total return and other total
return data in advertisements or information furnished to
present or prospective shareholders. Total return is based on
the Fund’s historical performance and is not intended to
indicate future performance. Average annual total return is
determined separately for Class I, Class A, Class B and Class C
shares in accordance with a formula specified by the
Commission.
Average annual total
return quotations for the specified periods are computed by
finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value
of such investment at the end of each period. Average annual
total return is computed assuming all dividends and
distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the
maximum sales charge in the case of Class I and Class A shares
and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period as in the
case of Class B and Class C shares and the maximum sales charge
in the case of Class I and A shares. Dividends paid by the Fund
with respect to all shares, to the extent any dividends are
paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account
maintenance and the distribution charges and any incremental
transfer agency cost relating to each class of shares will be
borne exclusively by that class. The Fund will include
performance data for all classes of shares in any advertisement
or information including performance data of the
Fund.
The Fund also may
quote annual, average annual and annualized total return and
aggregate total return performance data, both as a percentage
and as a dollar amount based on a hypothetical $1,000
investment, for various periods other than those noted below.
Such data will be computed as described above, except that (1)
as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data,
may be quoted and (2) the maximum applicable sales charges will
not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance
data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total
return data generally will be lower than average annual total
return data since the average rates of return reflect
compounding of return; aggregate total return data generally
will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer
period of time. The Fund’s total return may be expressed
either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified
period.
The Fund may provide
information designed to help investors understand how the Fund
is seeking to achieve its investment objectives. This may
include information about past, current or possible economic,
market, political, or other conditions, descriptive information
on general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of the Fund
’s portfolio composition, investment philosophy, strategy
or investment techniques, comparisons of the Fund’s
performance or portfolio composition to that of other funds or
types of investments, indices relevant to the comparison being
made, or to a hypothetical or model portfolio. The Fund may also
quote various measures of volatility and benchmark correlation
in advertising and other materials, and may compare these
measures to those of other funds or types of
investments.
Set forth below is
total return information for the Class I, Class A, Class B and
Class C shares of the Fund for the periods
indicated.
|
|
|
Class I Shares*
|
|
Class A Shares*
|
|
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable
Value of a
hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable
Value of a
hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
|
|
|
One
year ended January 31, 2000
|
|
(4.27%
|
)
|
|
$
957.30
|
|
(4.61%
|
)
|
|
$
953.90
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
6.79%
|
|
|
$1,388.90
|
|
6.50%
|
|
|
$1,369.60
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
|
|
|
Year
Ended January 31,
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
(0.28%
|
)
|
|
$
997.20
|
|
(0.63%
|
)
|
|
$
993.70
|
|
1999
|
|
8.39%
|
|
|
$1,083.90
|
|
8.12%
|
|
|
$1,081.20
|
|
1998
|
|
10.66%
|
|
|
$1,106.60
|
|
10.38%
|
|
|
$1,103.80
|
|
1997
|
|
4.76%
|
|
|
$1,047.60
|
|
4.49%
|
|
|
$1,044.90
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 1996
|
|
15.47%
|
|
|
$1,154.70
|
|
15.13%
|
|
|
$1,151.30
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
38.89%
|
|
|
$1,388.90
|
|
36.96%
|
|
|
$1,369.60
|
|
|
|
|
|
|
Class B Shares
|
|
Class C Shares
|
|
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable
Value of a
hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Redeemable
Value of a
hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
One
year ended January 31, 2000
|
|
(4.87%
|
)
|
|
$
951.30
|
|
(2.12%
|
)
|
|
$
978.80
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
6.78%
|
|
|
$1,387.90
|
|
6.72%
|
|
|
$1,383.80
|
|
|
|
Annual Total Return
(excluding maximum applicable sales charges)
|
|
Year
Ended January 31,
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
(1.13%
|
)
|
|
$
988.70
|
|
(1.18%
|
)
|
|
$
988.20
|
|
1999
|
|
7.48%
|
|
|
$1,074.80
|
|
7.43%
|
|
|
$1,074.30
|
|
1998
|
|
9.76%
|
|
|
$1,097.60
|
|
9.79%
|
|
|
$1,097.90
|
|
1997
|
|
3.90%
|
|
|
$1,039.00
|
|
3.83%
|
|
|
$1,038.30
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 1996
|
|
14.53%
|
|
|
$1,145.30
|
|
14.36%
|
|
|
$1,143.60
|
|
|
|
Aggregate Total Return
(including maximum applicable sales charges)
|
Inception (February 1, 1995)
through the fiscal year ended
January 31, 2000
|
|
38.79%
|
|
|
$1,387.90
|
|
38.38%
|
|
|
$1,383.80
|
*
As of April 3, 2000, Class A shares were redesignated
Class I shares and Class D shares were redesignated Class A
shares.
In order to reflect
the reduced sales charges in the case of Class I or Class A
shares or the waiver of the CDSC in the case of Class B or Class
C shares applicable to certain investors, as described under
“Purchase of
Shares” and “Redemption of Shares,” respectively,
the total return data quoted by the Fund in advertisements
directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the
CDSC and therefore may reflect greater total return since, due
to the reduced sales charges or the waiver of sales charges, a
lower amount of expenses is deducted.
On occasion, the Fund
may compare its performance to various indices including, among
other things, the Standard & Poor’s 500 Index, the
Value Line Composite Index, the Dow Jones Industrial Average, or
other published indices, or to data contained in publications
such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc. (“Morningstar”), other competing
universes, Money Magazine, U.S. News & World Report,
Business Week, Forbes Magazine, Fortune Magazine and CDA
Investment Technology, Inc. When comparing its performance to a
market index, the Fund may refer to various statistical measures
derived from the historic performance of the Fund and the index,
such as standard deviation and beta. As with other performance
data, performance comparisons should not be considered
indicative of the Fund’s relative performance for any
future period. From time to time, the Fund may include its
Morningstar risk-adjusted performance rating in advertisements
or supplemental sales literature. The Fund may from time to time
quote in advertisements or other materials other applicable
measures of performance and may also make reference to awards
that may be given to the Investment Adviser.
The Program was
incorporated under Maryland law on May 12, 1994. As of the date
of this Statement of Additional Information, the Program has an
authorized capital of 200,000,000 shares of Common Stock par,
value $0.10 per shares, of which 25,000,000 have been designated
to the Fund as follows: 6,250,000 Class I shares, 6,250,000
Class A shares, 6,250,000 Class B shares and 6,250,000 Class C
shares. The Board of Directors of the Program may classify and
reclassify the shares of a Fund into additional classes of
Common Stock at a future date.
Shareholders are
entitled to one vote for each share held and fractional votes
for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote.
The Program does not intend to hold meetings of shareholders in
any year in which the Investment Company Act does not require
shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Generally,
under Maryland law, a meeting of shareholders may be called for
any purpose on the written request of the holders of at least
10% of the outstanding shares of the Program. Voting rights for
Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights.
Redemption rights are discussed elsewhere herein and in the
Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Program and in the
net assets of the Program on liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates are
issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any
case.
Deloitte & Touche
LLP
, Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Program. The independent auditors
are responsible for auditing the annual financial statements of
the Program.
The Bank of New York,
100 Church Street, New York, New York 10286, (the “Custodian
”) acts as the Custodian of the Program’s assets.
Under its contract with the Program, the Custodian is authorized
to establish separate accounts in foreign currencies and to
cause foreign securities owned by the Program to be held in its
offices outside the United States and with certain foreign banks
and securities depositories. The Custodian is responsible for
safeguarding and controlling the Program’s cash and
securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Program’s
investments.
Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, which is a wholly owned subsidiary of ML & Co.,
acts as the Fund’s Transfer Agent pursuant to a transfer
agency, dividend
disbursing agency and shareholder servicing agency agreement (the
“Transfer Agency Agreement”). The Transfer Agent is
responsible for the issuance, transfer and redemption of shares
and the opening, maintenance and servicing of shareholder
accounts.
Brown & Wood
LLP
, One World Trade Center, New York, New York 10048-0557, is
counsel for the Program and the Fund.
The fiscal year of the
Fund ends on January 31 of each year. The Fund sends to its
shareholders at least semi-annually reports showing its
portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year, shareholders
will receive Federal income tax information regarding
dividends.
Shareholder inquiries
may be addressed to the Fund at the address or telephone number
set forth on the cover page of this Statement of Additional
Information.
The Prospectus and
this Statement of Additional Information do not contain all the
information set forth in the Registration Statement and the
exhibits relating thereto, which the Corporation has filed with
the Commission, Washington, D.C., under the Securities Act and
the Investment Company Act, to which reference is hereby
made.
Under a separate
agreement, Mercury Asset Management International Ltd. and
Mercury Asset Management Group Ltd. (“Mercury”) has
granted the Fund the right to use the “Mercury” name
and has reserved the right to withdraw its consent to the use of
such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund have granted Mercury
under certain conditions, the use of any other name it might
assume in the future, with respect to any corporation organized
by Mercury.
To the knowledge of
the Fund, the following persons or entities owned beneficially
5% or more of any class of the stock of the Fund as of March 1,
2000:
Name
|
|
Address
|
|
Percent and Class
|
MLPF
&S Cust FPO
Edward G. Stacy IRRA
FBO Edward G. Stacy
|
|
1380
Butter Churn Dr.
Herndon, VA 20170
|
|
44.22%
Class A
|
|
|
|
MLPF
&S Cust FPO
Mr. Raymond C. Thompson IRRA
FBO Mr. Raymond C. Thompson
|
|
2
Windsor Rd.
Molford, MA 01757
|
|
23.50%
Class A
|
|
MLPF
&S Cust FPO
Francisco Nebot IRRA
FBO Francisco Nebot
|
|
23572
Mary Kay Cir.
Laguna Niguel, CA 92677
|
|
8.68%
Class A
|
|
Merrill
Lynch Asset Management LP
Attn: Donald C. Burke
|
|
P.O.
Box 9011
Princeton, NJ 08543-9011
|
|
6.42%
Class A
|
|
|
|
MLPF
&S S Cust FPO
Peter S. Deck IRRA
FBO Peter S. Deck
|
|
600A
Revere Blvd.
Sinking Spg., PA 19608
|
|
9.27%
Class D
|
|
|
|
MLPF
&S S Cust FPO
Ronald N. Hayes IRA
FBO Ronald N. Hayes
|
|
900
Cascades Trl.
San Marcos, TX 78666
|
|
6.38%
Class D
|
|
|
|
MLPF
&S S Cust FPO
Godfred Hennig III IRA
FBO Godfred Hennig III
|
|
172
Acacia Ave.
Biloxi, MS 39530
|
|
6.32%
Class D
|
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CODE NO.
18472-04-00