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 June 1, 2001 (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 1-800-MER-FUND or your Merrill Lynch
Financial Advisor, or by writing to the Fund at the address listed above. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to the Fund’s 2001 Annual Report. You may request a copy of the Annual Report or the Prospectus at no charge by
calling 1-800-637-3863 between
8:00 a.m. and 8:00 p.m. Eastern time on any business day.
Merrill Lynch Investment Managers, L.P. — Investment Adviser
FAM Distributors, Inc. — Distributor
The date of this Statement of Additional Information is June 1, 2001.
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 Investment Managers, L.P. (“MLIM” 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. In trying to meet its objective, the Fund normally invests at least 65% of its
total assets in equity securities of mid cap companies. The Fund purchases securities that its management believes have long term potential to grow in size or to become more profitable or that the stock market may value more highly in the future.
Fund management places particular emphasis on stocks trading at the low-end of one or more historical valuation measures, such as price/book value, price/sales or price/earnings ratios. Such companies also may have particular qualities that affect
the outlook for such companies, including an attractive market niche. The Fund purchases primarily common stocks of U.S. companies in trying to meet its objective. The Fund may also invest in securities issued by foreign companies and in securities
denominated in currencies other than the U.S. dollar. 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 MidCap 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 have long term
potential to grow in size or to become more profitable or that the stock market may value more highly in the future. Fund management places particular emphasis on stocks trading at the low-end of one or more historical valuation measures such as
price/book value, price/sales or price/earnings ratios.
In selecting securities, Fund management emphasizes common stocks and, to a lesser extent, securities convertible into
common stocks, that it believes are undervalued. A company’s stock is believed to be undervalued when the stock’s current price is less than what Fund management believes a share of the company is worth. A company’s worth can be
assessed by several factors, such as financial resources, value of tangible and intangible assets, sales and earnings growth rates, return on capital, product development, quality of management, and overall business prospects. A company’s stock
may become undervalued when most investors fail to perceive the company’s strengths in one or more of these areas. Fund management may also determine that a company is undervalued if its stock price is down because of temporary factors from
which Fund management believes the company will recover.
The Fund may also invest up to 35% in equity securities of large cap or small cap companies, including emerging growth
companies when such companies are expected to provide a higher total return than other equity investments. Such emerging growth 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.
Foreign Securities.
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) have been 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.
Description of Certain Investments
Temporary Investments.
For temporary or defensive purposes or in anticipation of
redemptions, the Fund is authorized to invest up to 100% of its assets in money market instruments (short term, high quality debt instruments), including obligations of or guaranteed by the U.S. Government or its instrumentalities or agencies,
certificates of deposit, bankers’ acceptances and other bank obligations, commercial paper rated in the highest category by a nationally recognized rating agency or other fixed income securities deemed by the Investment Adviser to be consistent
with the objectives of the Fund, or the Fund may hold its assets in cash.
Fixed Income Securities.
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.
Convertible Securities.
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.
Warrants.
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.
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.
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 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.
Other Investment Policies and Practices
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, as
amended (the “Investment Company Act”). Where the Fund receives securities as collateral for the loaned securities the Fund typically receives the income on both the loaned securities and the collateral and, as a result, the Fund’s
yield may increase. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. The Fund may receive a fee for its loans. Loans of securities are
terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder’s, lending agent, administrative and custodial fees in connection with its loans. In
the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss
where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral.
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.
Borrowings and Leverage
.
The Fund may borrow up to 33
1
/
3
% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or emergency purposes, including to meet redemptions (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 may use instruments referred to as Derivatives. Derivatives are financial instruments, the value of which is
derived from another security, a commodity (such as gold or oil) or an index (a measure of value or rates, such as the Standard & Poor’s 500 Index or the prime lending rate.) Derivatives allow the 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 risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce
losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the fund investing in the Derivative or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the Derivative will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. The Fund is not required to use hedging and may choose not to do so.
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.
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. Under the fundamental investment restrictions, 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.
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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.
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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.
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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:
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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.
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b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law.
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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.
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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.
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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. The Funds’s portfolio turnover increased to 153.48% in the fiscal year ended January 31, 2001 from 52.89% in the fiscal year
ended January 31, 2000 as a result of the restructuring of the portfolio by the Fund’s new portfolio manager.
MANAGEMENT OF THE PROGRAM
The Directors of the Program consist of six 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
(60)—
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 FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since
1988; Director of Financial Data Services, Inc. since 1985.
J
OE
G
RILLS
(66)—
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 (now associated with the Association of Financial Professionals)
(“CIEBA”) since 1986; Member of CIEBA’s Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Incorporated (“IBM”) and Chief Investment Officer of IBM
Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000;
Director, Duke Management Company since 1992 and 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 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of
the Investment Committee of the National Trust for Historic Preservation since 2000.
W
ALTER
M
INTZ
(72)—
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
. (64)—
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
(70)—
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
(67)—
Director
(2)(3)—88 Broad Street, 2nd floor, 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.
R
OBERT
C. D
OLL
, J
R
. (46)—
Senior Vice President
(1)(2)—First Vice President of the Investment Adviser and FAM since 2000 and Senior Vice President thereof from 1999 to 2000; 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.
L
AWRENCE
R. F
ULLER
(60)—
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
(41)—
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.
T
ERESA
G
IACINO
(38)—
Vice President and Portfolio Manage
r(1)(2)—Vice President of the Investment Adviser since 1992.
G
REGORY
M
ARK
M
AUNZ
(48)—
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
(40)—
Vice President and Treasurer
(1)(2)—First Vice President of the Investment Adviser and FAM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD
since 1999; Vice President of the Investment Adviser and FAM from 1990 to 1997; Director of Taxation of the Investment Adviser since 1990.
A
LLAN
J. O
STER
(37)—
Secretary
(1)(2)—Vice President of MLIM since 2000; Attorney with MLIM from 1999 to 2000; Associate with Drinker, Biddle & Reath LLP from 1996 to 1999; Senior Counsel with the U.S. Securities and Exchange Commission from
1991 to 1996.
|
(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 May 18, 2001, the officers and Directors of the Program as a group (13 persons) owned an aggregate of less than 1%
of the outstanding shares of common stock of Merrill Lynch & Co., Inc. (“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 $2,200 year plus $450 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 $2,200 annually for service to the Program plus $450 per committee meeting attended.
The following table sets forth the compensation earned by the non-interested Directors for the fiscal year ended January
31, 2001 and the aggregate compensation paid to them by all investment companies advised by the Investment Adviser or its affiliates (“MLIM/FAM-Advised Funds”) for the calendar year ended December 31, 2000.
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
MLIM/FAM-Advised
Funds(1)
|
|
Joe Grills
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$224,500
|
|
Walter Mintz
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Robert S. Salomon, Jr.
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Melvin R. Seiden
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Stephen B. Swensrud
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$280,233
|
|
(1)
|
The Directors serve on the boards of MLIM/FAM-Advised Funds as follows: Joe Grills (32 registered investment companies
consisting of 51 portfolios), Walter Mintz (17 registered investment companies consisting of 37 portfolios), Robert S. Salomon, Jr. (17 registered investment companies consisting of 37 portfolios), Melvin R. Seiden (17 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (43 registered investment companies consisting of 89 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
|
|
2001
|
|
$615,299
|
|
2000
|
|
$691,824
|
|
1999
|
|
$606,626
|
The Investment Adviser has entered into a sub-advisory agreement (the “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, 2001, 2000 and 1999, the
Investment Adviser paid no fees to MLAM U.K. pursuant to this agreement.
Payment of Fund Expenses.
The Investment Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and auditing
services, costs of preparing, printing and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by FAMD (the “Distributor”); charges of the custodian and
the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal and state securities laws; fees and expenses of unaffiliated Directors; accounting and pricing costs (including the daily
calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided to the Fund by State
Street Bank and Trust Company (“State Street”) pursuant to an agreement between State Street and the Program on behalf of the Fund. The Fund pays a fee for these services. In addition, the Fund reimburses the Investment Adviser for the
cost of other accounting services. The Distributor will pay certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares—Distribution Plans.”
Organization of the Investment Adviser
. MLIM 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.
Accounting Services.
The Program, on behalf of the Fund, entered into an agreement with
State Street effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Prior to January 1, 2001, the Investment Adviser provided accounting services to the
Fund and was reimbursed by the Fund for such services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser for the cost of these services.
The table below shows the amounts paid by the Fund to State Street and the Investment Adviser for the periods
indicated:
Period
|
|
Paid to
State Street
|
|
Paid to the
Investment Adviser
|
|
Fiscal year ended January 31, 1999
|
|
N/A
|
|
|
$97,773
|
|
Fiscal year ended January 31, 2000
|
|
N/A
|
|
|
$83,333
|
|
Fiscal year ended January 31, 2001
|
|
$3,837*
|
|
|
$95,639
|
* Represents payments pursuant to the agreement with State Street commencing on January 1, 2001.
Distribution Expenses
. The Fund has entered into a distribution agreement with the
Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreement”). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each
class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as
the Investment Advisory Agreement described above.
The Board of Directors of the Fund has approved a Code of Ethics under Rule 17j-1 of the Investment Company Act that
covers the Fund, the Manager, MLAM U.K. and the Distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal
investment accounts, including securities that may be purchased or held by the Fund.
Reference is made to “Your Account—How to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus.
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 MLIM or FAM. Funds advised by MLIM
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 or other financial intermediaries prior to the close of business on the New York Stock Exchange (“NYSE”) (generally 4:00 p.m. Eastern time) which includes orders received after the
determination of net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30
minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or
other financial intermediaries have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE 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, the securities dealers nor other financial
intermediaries 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 MLIM/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
MLIM/FAM-advised investment companies. Certain persons who acquired shares of certain MLIM/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 certain MLIM/FAM-advised
continuously offered closed-end funds 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. See “Purchase of Shares—Closed-End Fund Reinvestment Options.”
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
|
|
2001
|
|
$1,152
|
|
$53
|
|
$1,099
|
|
$0
|
|
2000
|
|
$ 282
|
|
$13
|
|
$ 269
|
|
$0
|
|
1999
|
|
$ 325
|
|
$16
|
|
$ 310
|
|
$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
|
|
2001
|
|
$14,324
|
|
$ 837
|
|
$13,487
|
|
$0
|
|
2000
|
|
$23,567
|
|
$1,195
|
|
$22,373
|
|
$0
|
|
1999
|
|
$41,047
|
|
$2,085
|
|
$38,963
|
|
$0
|
The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the
balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries 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 or other financial intermediaries 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 MLIM/FAM-advised investment companies, ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes the Investment Adviser, MLIM 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 Advisor 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 Advisor’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 Advisor 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 Advisor 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.
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.
Purchases Through Certain Financial Intermediaries
. Reduced sales charges may be
applicable for purchases of Class A or Class D shares of the Fund through certain financial advisors, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to
time.
Deferred Sales Charge—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 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).
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 (the “Code”)) 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 MLIM 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
|
|
2001
|
|
$124,308
|
|
$124,308
|
|
2000
|
|
$164,734
|
|
$164,734
|
|
1999
|
|
$ 94,426
|
|
$ 94,426
|
|
*
|
Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in
connection with a shareholder’s participation in certain fee-based programs.
|
Class C Shares
For the
fiscal year
ended
January 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2001
|
|
$ 12,597
|
|
$ 12,597
|
|
2000
|
|
$ 13,744
|
|
$ 13,744
|
|
1999
|
|
$ 8,822
|
|
$ 8,822
|
Class B and Class C Sales Charge Information
. Merrill Lynch compensates its Financial
Advisors 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 or other financial intermediaries (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
advisors for selling Class B and Class C shares from a dealer’s own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities Dealers, Inc. (the “NASD”)
asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below.
Closed-End Fund Reinvestment Options
Class A shares of the Fund (“Eligible Class A Shares”) are offered at net asset value to holders of the common
stock of certain closed-end funds advised by the Investment Adviser or FAM 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 such shares in Eligible Class A Shares, if the conditions set forth below are satisfied.
Alternatively, holders of the common stock of closed-end funds who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of those shares may purchase Class A shares (if eligible to buy Class A shares)
or Class D shares of the Fund (“Eligible Class D Shares”) at net asset value 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 that fund’s initial public offering or represent dividends paid on 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 reinvestment option.
Subject to the conditions set forth below, shares of the Fund are offered at net asset value to holders of the common
stock of certain MLIM/FAM-advised continuously offered closed-end funds who wish to reinvest the net proceeds from a sale of such shares. Upon exercise of this reinvestment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will
receive Class A shares of the Fund, shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc. will receive Class C 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 of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who already own Class A shares of the Fund may 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 reinvestment 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 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 who wish to exercise this reinvestment 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 shares of the Fund on such day. The Class C CDSC may be waived upon redemption of Class C shares purchased by an investor pursuant to this closed-end fund reinvestment option. Such waiver is subject
to the requirement that the investor have held the tendered shares for a minimum of one year and to such other conditions as are set forth in the prospectus for the related closed-end fund.
Reference is made to “Key Facts—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, Merrill Lynch, a selected securities dealer or other financial intermediary (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, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services and bearing certain distribution-related expenses of the Fund, including
payments to financial advisors or other financial intermediaries 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 selected securities dealers and other financial intermediaries without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial advisors, selected securities dealers or other
financial intermediaries in connection with the sale of the Class B and Class C shares. 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 advisor 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 advisor 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 $1,262,000 (2% of Class B net assets at that date). As of
January 31, 2001, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $2,066,529 (3.09% 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 (3.05% of Class C net assets at that date). As of January
31, 2001, direct cash revenues for the period since the commencement of operations of Class C shares exceeded direct cash expenses by $949,022 (2.53% of Class C net assets at that date).
For the fiscal year ended January 31, 2001, the Fund paid the Distributor $569,248 pursuant to the Class B Distribution
Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $56.9 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, 2001, the Fund paid the Distributor $312,278 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of
approximately $31.2 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, 2001, the Fund paid the
Distributor $14,453 pursuant to the Class D Distribution Plan (based on average daily net assets subject to such Class D Distribution Plan of approximately $5.8 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, 2001 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, 2001
|
|
|
|
(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, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as Adopted
|
|
74,713
|
|
4,759
|
|
1,129
|
|
5,888
|
|
2,567
|
|
3,321
|
|
501
|
|
Under Distributor’s Voluntary Waiver
|
|
74,713
|
|
4,670
|
|
373
|
|
5,043
|
|
2,567
|
|
2,476
|
|
501
|
Class C Shares, for the period
February 1, 1995 (commencement of
operations) to January 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as Adopted
|
|
49,297
|
|
3,120
|
|
821
|
|
3,941
|
|
1,018
|
|
2,923
|
|
281
|
|
(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 “Key Facts—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 “Your Account—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 selected securities dealer or other financial intermediary. The Fund
normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is
received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is
received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE, in order to obtain that day’s closing price.
The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund
(other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch,
selected securities dealers or other financial intermediaries may charge customers a processing fee (Merrill Lynch currently charges $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 Advisor within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption proceeds.
Determination of Net Asset Value
Reference is made to “Your Account—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, 2001 is set forth below.
|
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Class D
|
|
Net Assets
|
|
$3,770,156
|
|
$67,061,655
|
|
$37,475,055
|
|
$7,757,326
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Outstanding
|
|
232,778
|
|
4,227,992
|
|
2,366,085
|
|
480,678
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share (net assets divided by
number of shares outstanding)
|
|
$ 16.20
|
|
$ 15.86
|
|
$ 15.84
|
|
$ 16.14
|
|
|
Sales Charge (Class A and Class D shares: 5.25% of
offering price; 5.54% of net asset value) *
|
|
.90
|
|
**
|
|
**
|
|
.89
|
|
|
|
|
|
|
|
|
|
|
|
Offering Price
|
|
$ 17.10
|
|
$ 15.86
|
|
$ 15.84
|
|
$ 17.03
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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. The
Fund’s ability and decision to purchase and sell portfolio securities may be affected by foreign laws and regulations relating to the convertibility and repatriation of assets.
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
|
|
2001
|
|
$305,505
|
|
$30,941
|
|
2000
|
|
$193,078
|
|
$9,432
|
|
1999
|
|
$101,851
|
|
$4,822
|
For the fiscal year ended January 31, 2001, the brokerage commissions paid to Merrill Lynch represented 10.13% of the
aggregate brokerage commissions paid and involved 6.23% 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, Merrill
Lynch, a selected securities dealer or other financial intermediary. 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 will also 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, or an account maintained with a selected
securities dealer or other financial intermediary, 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, a selected securities dealer or other financial
intermediary, to another selected securities dealer or other financial intermediary that has entered into an agreement with the Distributor. 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 or other financial
intermediary that has not entered into an agreement with the Distributors, 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 or other financial intermediary to maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer or other financial intermediary 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 or other financial intermediary 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 Small Cap Value Fund, Inc. (“Small Cap 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 Small Cap 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 Small Cap Value Fund Class B shares, the investor will be deemed to have held Small Cap 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 Advisor 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 Advisor, 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 dealer or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application.
Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To
request an exchange from your account, call the Transfer Agent at 1-800-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 offered by Merrill Lynch and other financial intermediaries, 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 financial
intermediary, 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 or 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. There may be fees associated with investing through these plans. 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. Under the 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, 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). If the shareholder’s account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-800-MER-FUND). For other accounts, the shareholder
should contact his or her Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder’s bank
account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through
automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired 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 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 Advisor.
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 Advisor.
The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such net
investment income are paid at least annually. All net realized capital gains, if any, will be distributed to the Fund’s shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal year, the Fund have net income from certain foreign currency
transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be reinvested automatically in shares of the Fund, see
“Shareholder Services—Automatic Dividend Reinvestment Plan.” A shareholder may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as described 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 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 foreign 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 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.
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 investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods
of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside
from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates
of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time.
Set forth 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
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
One year ended January 31, 2001
|
|
26.97%
|
|
28.50%
|
|
Five Years Ended January 31, 2001
|
|
15.31%
|
|
15.29%
|
|
Inception (February 1, 1995) through January 31, 2001
|
|
16.10%
|
|
15.88%
|
|
|
|
|
|
|
|
Class C Shares
|
|
Class D Shares
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
One year ended January 31, 2001
|
|
31.55%
|
|
26.64%
|
|
Five Years Ended January 31, 2001
|
|
15.27%
|
|
15.02%
|
|
Inception (February 1, 1995) through January 31, 2001
|
|
15.87%
|
|
15.82%
|
Total return figures are based on the Fund’s historical performance and are not intended to indicate future
performance. The Fund’s total return will vary depending on market conditions, the securities comprising the Fund’s portfolio, the Fund’s operating expenses and the amount of realized and unrealized net capital gains or
losses during the period. The value of an investment in the Fund will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of Class 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, Fortune Magazine
or other industry publications. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard
deviation and beta. In addition, from time to time the Fund may include 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 Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment
objectives. This may include information about past, current or possible economic, market, political, or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance,
discussion of the Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to
the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types
of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period.
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 Fund. The independent auditors are responsible for auditing the annual financial statements of the
Fund.
Accounting Services Provider
State Street Bank and Trust Company, 500 College Road East, Princeton, New Jersey 08540, provides certain accounting
services for 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.
Sidley Austin 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, the following persons or entities owned beneficially or of record 5% or more of any class
of stock of the Fund as of May 18, 2001:
Name
|
|
Address
|
|
Percent of
Class A
|
Merrill Lynch Trust Company*
Trustee FBO MLRAP Plan
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
9.70
|
%
|
|
|
|
|
Merrill Lynch Trust Company*
Trustee FBO MLSIP
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
18.93
|
%
|
|
*
|
Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan
accounts for which it acts as trustee.
|
FINANCIAL STATEMENTS
The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference
to its 2001 Annual Report. You may request a copy of the Annual Report at no charge by calling
1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
[This page intentionally left blank]
[This page intentionally left blank]
CODE #18472-06-01
PROSPECTUS
·
June 1 , 2001
|
|
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.
[LOGO]
MERCURY FUNDS
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. Also, Fund management may select securities which underperform the markets, the relevant indices or other funds with similar investment objectives and investment strategies. If the value of the Fund’s
investments goes down, you may lose money.
The Fund may invest a substantial portion of its portfolio in mortgage-backed securities. Mortgage-backed securities involve special risks, including
prepayment
risk
and
extension risk
, and may involve more
volatility
than other fixed income securities of similar maturities.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] Fund Facts
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
|
|
|
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.
[GRAPH]
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
4.57% 8.95% 8.42% 0.08% 10.05%
During the period shown in the bar chart, the highest return for a quarter was 4.44% (quarter ended September 30, 1998) and the lowest return for a quarter was -0.85%
(quarter ended June 30, 1999). The Year-to-Date return as of March 31, 2001 was
2.23%
.
Average Annual Total Returns
(as of December 31, 2000)
|
|
Past One Year
|
|
Past Five Years
|
|
Since Inception
|
|
|
|
Mercury U.S. Government
Securities Portfolio* I
|
|
6.64
|
%
|
|
6.35
|
%
|
|
7.70
|
%†
|
Salomon Brothers Mortgage
Index**
|
|
11.29
|
%
|
|
6.90
|
%
|
|
8.27
|
%††
|
|
|
|
Mercury U.S. Government
Securities Portfolio* A
|
|
6.27
|
%
|
|
6.06
|
%
|
|
7.42
|
%†
|
Salomon Brothers Mortgage
Index**
|
|
11.29
|
%
|
|
6.90
|
%
|
|
8.27
|
%††
|
|
|
|
Mercury U.S. Government
Securities Portfolio* B
|
|
6.05
|
%
|
|
6.04
|
%
|
|
7.45
|
%†
|
Salomon Brothers Mortgage
Index**
|
|
11.29
|
%
|
|
6.90
|
%
|
|
8.27
|
%††
|
|
|
|
Mercury U.S. Government
Securities Portfolio* C
|
|
9.00
|
%
|
|
6.29
|
%
|
|
7.50
|
%†
|
Salomon Brothers Mortgage
Index**
|
|
11.29
|
%
|
|
6.90
|
%
|
|
8.27
|
%††
|
|
|
*
|
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.
|
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 the Fund may charge:
Expenses paid directly by the shareholder:
Shareholder Fees —
these fees include sales charges which you may pay when you buy or sell
shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses
— expenses that cover the costs of operating the Fund.
Management Fee
—
a fee paid to the Investment Adviser for managing the
Fund.
Distribution Fees
—
fees used to support the Fund’s marketing and distribution
efforts, such as compensating financial advisors and other financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees
—
fees used to compensate securities dealers and
other financial intermediaries for services to beneficial shareholders and/or account maintenance activities.
The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among
the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this
decision.
This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or
less than those indicated below.
Shareholder Fees (Fees paid directly from your
investment)(a):
|
|
Class I*
|
|
Class A*
|
|
Class B(b)
|
|
Class C
|
|
|
|
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
|
%
|
|
0.88
|
%
|
|
0.94
|
%
|
|
0.95
|
%
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
1.38
|
%
|
|
1.63
|
%
|
|
2.19
|
%
|
|
2.25
|
%
|
|
|
*
|
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 approximately ten years after you buy them and will no
longer be subject to distribution fees.
|
|
(c)
|
Some investors may qualify for reductions in the sales charge (load).
|
|
(d)
|
You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one
year.
|
|
(e)
|
The Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the
term used elsewhere in this Prospectus and in all other Fund materials. If you hold Class B or C shares, over time, it may cost you more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the
other classes.
|
|
(f)
|
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, 2001, the fee paid by the Fund to the Transfer Agent was $47,537. The Fund entered into an agreement with State Street Bank and Trust effective
January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. For the period January 1, 2001 through January 31, 2001, the Fund paid State Street $897 under this agreement. Prior to January 1, 2001 the Investment
Adviser provided accounting services to the Fund at its cost and the Fund reimbursed the Investment Adviser for these services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the
Investment Adviser at its cost for such services. For the fiscal year ended January 31, 2001, the Fund reimbursed the Investment Adviser an aggregate of $22,200 for the above-described 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, 2001, the Investment Adviser waived management fees and reimbursed expenses totaling $240,017. 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
|
|
$ 559
|
|
$ 622
|
|
$ 328
|
|
|
|
|
Three Years
|
|
$ 819
|
|
$ 894
|
|
$ 985
|
|
$ 703
|
|
|
|
|
Five Years
|
|
$1,125
|
|
$1,251
|
|
$1,375
|
|
$1,205
|
|
|
|
|
Ten Years
|
|
$1,991
|
|
$2,255
|
|
$2,524
|
|
$2,585
|
|
|
|
|
Expenses if you
did not
redeem your shares:
|
|
|
|
|
|
|
|
Class I*
|
|
Class A*
|
|
Class B
|
|
Class C
|
|
|
|
|
One Year
|
|
$ 535
|
|
$ 559
|
|
$ 222
|
|
$ 228
|
|
|
|
|
Three Years
|
|
$ 819
|
|
$ 894
|
|
$ 685
|
|
$ 703
|
|
|
|
|
Five Years
|
|
$1,125
|
|
$1,251
|
|
$1,175
|
|
$1,205
|
|
|
|
|
Ten Years
|
|
$1,991
|
|
$2,255
|
|
$2,524
|
|
$2,585
|
|
|
*
|
Prior to April 3, 2000, Class I shares were designated Class
A shares and Class A shares were designated Class D shares.
|
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] About the Details
About the Portfolio Manager —
Teresa L. Giacino is a Vice President and the Portfolio
Manager of the Fund. Ms. Giacino has been a Vice President of Merrill Lynch Investment Managers since 1992.
About the Investment Adviser —
The Fund is managed by Mercury Advisors.
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, the relevant indices or other funds with similar investment objectives and investment strategies.
Interest Rate Risk
Interest rate risk is the risk that prices of bonds generally increase when interest rates decline and decrease when interest rates increase. Prices of longer term
securities generally change more in response to interest rate changes than prices of shorter term securities.
Credit Risk
Credit risk is the risk that the issuer of a security owned by the Fund will be unable to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation. Because the obligations in which the Fund invests are typically guaranteed by the U.S. government or government agencies, there is minimal credit risk.
Call and Redemption Risk
A bond’s issuer may call a bond for redemption before it matures. If this happens to a bond the Fund holds, the Fund may lose income and may have to invest the
proceeds in bonds with lower yields.
Mortgage-Backed Securities
Mortgage-backed securities represent the right to receive a portion of principal and/or interest payments made on a pool of residential or commercial mortgage loans.
When interest rates fall, borrowers may refinance or otherwise repay principal on their mortgages earlier than scheduled. When this happens, certain types of mortgage-backed securities will be paid off more quickly than originally 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 associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by
the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any
losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging
and may choose not to do so.
Indexed and Inverse Floater Securities
The Fund may invest in debt securities the potential returns of which are directly related to changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the underlying index or interest rate rises and fall when the index or interest rate falls. The Fund may also invest in securities whose return is inversely related to changes in an index
or interest rate. In general, inverse securities change in value in a manner that is opposite to most securities—that is, the return of inverse securities will decrease when interest rates increase. Investments in indexed and inverse securities
may subject the Fund to the risks of reduced or eliminated interest payments and losses of principal. In addition, certain indexed and inverse securities may increase or decrease in value at a greater rate than the underlying index, which
effectively leverages the Fund’s investment. As a result, the market value of such securities will generally be more volatile than that of other securities.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[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 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 return on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other fees. The costs of borrowing may reduce the Fund’s return. Certain securities that the Fund buys may create leverage including, for example,
derivatives, when issued securities, futures, forward commitments and options. The use of investments that create leverage subjects the Fund to the risk that relatively small market movement may result in large changes in the value of an investment
and may result in losses that greatly exceed the amount invested.
MERCURY U.S. GOVERNMENT SECURITIES FUND
[GRAPHIC] About the Details
Illiquid securities
The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal
restrictions on resale. If the Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value.
Restricted securities
Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that the Fund buys directly from the issuer.
Private placement and other restricted securities may not be listed on an exchange and may have no active trading market.
Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may
get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the security.
Rule 144A Securities
Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an
active trading market, but carry the risk that the active trading market may not continue.
Securities Lending
The Fund may lend securities with a value not exceeding 33
1
/
3
% of its assets to financial
institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may
lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/or the value of the collateral falls. 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 June 1, 2001 (the “Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling the Fund at 1-888-763-2260 or your financial
advisor, or by writing to the Fund at the address listed above. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus.
The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to the Fund’s 2001 Annual Report to shareholders. You may request a copy of the Annual Report or the Prospectus at no charge
by calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
Mercury Advisors — Investment Adviser
FAM Distributors, Inc.— Distributor
The date of this Statement of Additional Information is June 1, 2001.
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 are financial instruments the value of which is
derived from another security, a commodity (such as oil or gold), a currency or an index (a measure of value or rates, such as the Standard & Poor’s 500 Index or the prime lending rate. Derivatives allow the Fund to increase or decrease the
level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments.
Hedging
. The Fund may use Derivatives for hedging purposes. Hedging is a strategy in which
a Derivative is used to offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce
losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the fund investing in the Derivative or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. The Fund is not required to use
hedging and may choose not to do so.
The Fund may use the following types of derivative investments and trading strategies:
Indexed and Inverse Floating Rate Securities.
The Fund may invest in securities the
potential return of which is based on an index. As an illustration, the Fund may invest in a debt security that pays interest based on the current value of an interest rate index, such as the prime rate. The Fund may also invest in a debt security
which returns principal at maturity based on the level of a securities index or a basket of securities, or based on the relative changes of two indices. In addition, the Fund may invest in securities the potential return of which is based inversely
on the change in an index (that is, a security the value of which will move in the opposite direction of changes to an index). For example, the Fund may invest in securities that pay a higher rate of interest when a particular index decreases and
pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an
adverse movement in the relevant index or indices. Indexed and inverse securities involve credit risk, and certain indexed and inverse securities may involve leverage risk, liquidity risk, and currency risk. The Fund may invest in indexed and
inverse securities for hedging purposes, to increase return or to vary the degree of portfolio leverage relatively efficiently under different market conditions. When used for hedging purposes, indexed and inverse securities involve correlation
risk. Indexed and inverse securities are currently issued by a number of U.S. governmental agencies such as FHLMC and FNMA, as well as a number of other financial institutions. To the extent the Fund invest in such instruments, under current market
conditions, it most likely will purchase indexed and inverse securities issued by the above-mentioned U.S. governmental agencies.
Options and Futures Transactions.
The Fund may engage in various portfolio strategies to
seek to increase its return through the use of listed or over-the-counter (“OTC”) options on its portfolio securities and to hedge its portfolio against adverse movements in the markets in which it invests. The Fund is authorized to write
(
i.e.
, sell) covered put and call options on its portfolio securities or securities in which it anticipates investing and purchase put and call options on securities. The Fund may also engage in transactions in interest rate futures and
related options on such futures. Although certain risks are involved in options and futures transactions, the Investment Adviser believes that, because the Fund will (i) write only covered options on portfolio securities or securities in which they
anticipate investing and (ii) engage in other options and futures transactions only for hedging purposes, the options and portfolio strategies of the Fund will not subject it to the risks frequently associated with the speculative use of options and
futures transactions. While the Fund’s use of hedging strategies is intended to reduce the volatility of the net asset value of its shares, its net asset value will fluctuate. There can be no assurance that the Fund’s hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities from time to time and may not necessarily be engaging in hedging activities when movements in the equity or debt markets, interest rates or currency exchange rates
occur.
Writing of Covered Options.
The Fund may from time to time write (
i.e.
, sell)
covered call options on its portfolio securities and may enter into closing purchase transactions with respect to certain of such options. A covered call option is an option where the Fund in return for a premium gives another party a right to buy
specified securities owned by the Fund at a specified future date and price set at the time of the contract. A call option is considered covered where the writer of the option owns the underlying securities. The principal reason for writing covered
call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing a covered call option, the Fund, in return for the premium income realized from the sale of the
option, may give up the opportunity to profit from a price increase in the underlying security above the option exercise price. In addition, the Fund will not be able to sell the underlying security until the option expires, is exercised or the Fund
effects a closing purchase transaction as described below. A closing purchase transaction cancels out the Fund’s position as the writer of an option by means of an offsetting purchaser of an identical option prior to the expiration of the
option it has written. If the option expires unexercised, the Fund realizes a gain in the amount of the premium received for the option which may be offset by a decline in the market price of the underlying security during the option period. The use
of covered call options is not a primary investment technique of the Fund and such options normally will be written on underlying securities as to which management does not anticipate significant short term capital appreciation. Covered call options
serve as a partial hedge against the price of the underlying security declining. The Fund may not write covered options on underlying securities exceeding 15% of its total assets.
The Fund also may write put options which give the holder of the option the right to sell the underlying security to
the Fund at the stated exercise price. The Fund will receive a premium for writing a put option, which increases the Fund’s return. The Fund writes only covered put options, which means that so long as the Fund is obligated as the writer of the
option it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt securities denominated in U.S. dollars with a securities depository with a value equal to or
greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for so long
as the option is outstanding. The Fund may engage in closing transactions in order to terminate put options that it has written.
A closing purchase transaction is effected by purchasing on an exchange an option of the same series (
i.e.
, same
underlying security, exercise price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing purchase transaction ordinarily will be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to permit the sale of the underlying security or to permit the writing of a new call option containing different terms on such underlying security. The cost of such a
liquidation purchase plus transaction costs may be greater than the premium received upon the original option, in which event the Fund will have incurred a loss in the transaction. An option may be closed out only on an exchange which provides a
secondary market for an option of the same series and there is no assurance that a liquid secondary market on an exchange will exist for any particular option. A covered option writer unable to effect a closing purchase transaction will not be able
to sell the underlying security until the option expires or the underlying security is delivered upon exercise, with the result that the writer will be subject to the risk of market decline in the underlying security during such period. The Fund
will write an option on a particular security only if management believes that a liquid secondary market will exist on an exchange for options of the same series which will permit the Fund to make a closing purchase transaction in order to close out
its position.
Purchasing Options.
The Fund is authorized to purchase put options to hedge against a
decline in the market value of its securities. By buying a put option, the Fund has a right to sell the underlying security at the exercise price, thus limiting the Fund’s risk of loss through a decline in the market value of the security until
the put option expires. The amount of any appreciation in the value of the underlying security will be partially offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may
be sold in a closing sale transaction, and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out
the Fund’s position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it intends to purchase. The Fund will not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund’s total assets.
Interest Rate Futures Contracts.
The Fund may purchase and sell interest rate futures
contracts, as a hedge against adverse changes in the market value of portfolio securities, as described below. Interest rate futures contracts are herein referred to as “futures contracts.”
A futures contract is an agreement between two parties which obligates the purchaser of the futures contract to buy and
seller of a futures contract to sell a financial instrument for a set price on a future date. The terms of a futures contract require actual delivery of the financial instrument underlying the contract. The Fund may invest in interest rate futures
contracts in connection with the debt securities in which it invests. Transactions by the Fund in futures contracts are subject to limitations as described below under “Restrictions on the Use of Futures Transactions.”
The Fund may sell futures contracts in anticipation of or during a market decline to attempt to offset the decrease in
market value of the securities that might otherwise result. When the Fund is not fully invested in the securities markets and anticipates a significant advance, it may purchase futures in order to gain rapid market exposure. This technique generally
will allow the Fund to gain exposure to a market in a manner which is more efficient than purchasing individual securities and may in part or entirely offset increases in the cost of securities in such market that the Fund ultimately purchases. As
such purchases are made, an equivalent amount of futures
contracts will be terminated by offsetting sales. The Fund does not consider purchases of futures contracts to be a speculative practice under these circumstances. It is anticipated that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position, whether the long position is the purchase of a futures contract or the purchase of a call option or the writing of a put option on a future, but under unusual circumstances
(
e.g.
, a Fund experiences a significant amount of redemptions), a long futures position may be terminated without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on futures contracts in connection with its
hedging (including anticipatory hedging) activities. Generally, these strategies are utilized under the same market and market sector conditions (
i.e.
, conditions relating to specific types of investments) in which the Fund enters into
futures transactions. The Fund may purchase put options or write call options on futures contracts rather than selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly, the Fund may
purchase call options, or write put options on futures contracts, as a substitute for the purchase of such futures contract to hedge against the increased cost resulting from an increase in the market value of securities which the Fund intends to
purchase.
The Fund may engage in options and futures transactions on U.S. exchanges and in the over-the-counter markets (“OTC
options”). In general, exchange-traded contracts are third-party contracts (
i.e.,
performance of the parties’ obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates.
OTC options are two-party contracts with prices and terms negotiated by the buyer and seller. See “Restrictions on OTC Options” below for information as to restrictions on the use of OTC options.
Restrictions on the Use of Futures Transactions.
Regulations of the Commodity Futures
Trading Commission (the “CFTC”) applicable to the Fund provide that the futures trading activities described herein will not result in the Fund being deemed a “commodity pool” as defined under such regulations if the Fund adheres
to certain restrictions. In particular, the Fund may purchase and sell futures contracts and options thereon (i) for
bona fide
hedging purposes and (ii) for non-hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the liquidation value of the Fund’s holdings, after taking into account unrealized profits and unrealized losses on any such contracts and options. Margin deposits may
consist of cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or purchases a call option thereon, an amount of cash
and cash equivalents will be deposited in a segregated account in the name of the Fund with the Fund’s custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the
market value of the futures contracts, thereby ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options.
The Fund may engage in OTC options only with such banks or
dealers which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million.
The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written
OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transaction, the sum of the
market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and market deposits on the Fund’s existing
OTC options of futures contracts exceed 15% (10% to the extent required by certain state laws) of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is “in-the-money” (
i.e.
, current market value of the underlying security minus the option’s strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is “in-the-money”. This policy as to OTC options is not a fundamental policy of the Fund and may be amended by
the Directors of the Program without the approval of the Fund’s shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the SEC staff of its position.
Options on GNMA Certificates.
The following information relates to unique characteristics
of options on GNMA Certificates. Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, the Fund, as a writer of a GNMA call holding GNMA Certificates as “cover” to satisfy its
delivery obligation in the event of exercise, may find that the GNMA Certificates it holds no longer have a sufficient remaining principal balance for this purpose. Should this occur, the Fund will purchase additional GNMA Certificates from the same
pool (if obtainable) of other GNMA Certificates in the cash market in order to maintain its “cover.”
A GNMA Certificate held by the Fund to cover an options position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If this should occur, the Fund will no longer be covered, and the Fund will
either enter into a closing purchase transaction or replace such Certificate with a certificate which represents cover. When the Fund closes its position or replaces such Certificate, it may realize an unanticipated loss and incur transaction
costs.
Risks Factors in Options and Futures Transactions.
Utilization of options and futures
transactions to hedge a Fund involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities which are the subject of the hedge. If the price of the options or futures moves
more or less than the price of the hedged securities, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the subject of the hedge. The successful use of options and futures also depends on the
Investment Adviser’s ability to correctly predict price movements in the market involved in a particular options or futures transaction. To compensate for imperfect correlations, the Fund may purchase or sell options or futures contracts in a
greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the options or futures contracts. Conversely, the Fund may purchase or sell fewer options or futures contracts
if the volatility of the price of the hedged securities is historically less than that of the options or futures contracts. The risk of imperfect correlation generally tends to diminish as the maturity date of the options or futures contract
approaches.
The Fund intends to enter into options and futures transactions, on an exchange or in the over-the-counter market, only
if there appears to be a liquid secondary market for such options or futures or, in the case of over-the-counter transactions, the Investment Adviser believes the Fund can receive in each business day at least two independent bids or offers.
However, there can be no assurance that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an options or futures position. The inability to close options and futures positions also could have an adverse
impact on the Fund’s ability to hedge effectively its portfolio. There is also a risk of loss by the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a futures
contract or a related option.
The exchanges on which the Fund intends to conduct options transactions have generally established limitations governing
the maximum number of call or put options on the same underlying security or currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written
on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). “Trading limits” are imposed on the maximum number of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will have any adverse impact of the portfolio strategies for hedging the Fund’s holdings.
All options referred to herein and in the Fund’s Prospectus are options issued by the Options Clearing Corporation
(the “Clearing Corporation”) which are currently traded on the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock Exchange (“NYSE”).
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 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 not registered “restricted securities under the Securities Act of 1933,
as amended (the “Securities Act”).” 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. 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 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 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 foreign securities, including the risk of loss of principal.
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:
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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 assets, taken at market value, 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 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.
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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 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.
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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.
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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.
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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:
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(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.
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(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law.
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(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.
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(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.
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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 six 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
(60)—
President and Director
(1)(2)—Executive Vice President of the Investment Adviser and Merrill Lynch Investment Managers, L.P. (“MLIM”) (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 FAM Distributors, Inc., (“FAMD” or the “Distributor”) since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985.
J
OE
G
RILLS
(66)—
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 (now associated with the Association of Financial Professionals)
(“CIEBA”) since 1986; Member of CIEBA’s Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Incorporated (“IBM”) and Chief Investment Officer of IBM
Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000;
Director, Duke Management Company since 1992 and Vice Chairman 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 and its Vice Chairman since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since
2000.
W
ALTER
M
INTZ
(72)—
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
. (64)—
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
(70)—
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
(67)—
Director
(2)(3)—88 Broad Street, 2nd Floor, 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.
R
OBERT
C. D
OLL
, J
R
. (46)—
First Vice President
(1)(2)—Senior Vice President of the Investment Adviser and MLIM since 2000 and Senior Vice President thereof from 1999 to 2000; 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.
L
AWRENCE
R. F
ULLER
(60)—
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
(41)—
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.
T
ERESA
L. G
IACINO
(38)—
Vice President and Portfolio Manager
(1)(2)—Vice President of MLIM since 1992.
G
REGORY
M
ARK
M
AUNZ
(48)—
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
(40)—
Vice President and Treasurer
(1)(2)—First Vice President of the Investment Adviser and MLIM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of
FAMD since 1999; Vice President of MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.
A
LLAN
J. O
STER
(37)—
Secretary
(1)(2)—Vice President of MLIM since 2000; Attorney with MLIM from 1999 to 2000; Associate with Drinker, Biddle & Reath
LLP
from 1996 to 1999; Senior Counsel with the U.S. Securities and Exchange Commission from 1991 to 1996.
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(1)
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Interested person, as defined in the Investment Company Act, of the Trust and the Corporation.
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(2)
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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.
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(3)
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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.
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As of May 18, 2001, the officers and Directors of the Program as a group (13 persons) owned an aggregate of less than 1%
of the outstanding shares of common stock of Merrill Lynch & Co., Inc., (“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 $2,200 per year plus $450 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 $2,200 annually for service to the Program plus $450 per Committee meeting attended.
The following table sets forth the compensation earned by the non-interested Directors for the fiscal year ended January
31, 2001 and the aggregate compensation paid to them by all investment companies advised by the Investment Adviser or its affiliates (“Affiliate-Advised Funds”) for the calendar year ended December 31, 2000.
Name
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Position with
Program
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Compensation
from Program
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Pension or
Retirement Benefits
Accrued as Part of
Program Expense
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Estimated Annual
Benefits upon
Retirement
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Aggregate
Compensation from
Program and Other
Affiliate-Advised
Funds(1)
|
|
Joe Grills
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$224,500
|
|
Walter Mintz
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Robert S. Salomon, Jr.
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Melvin R. Seiden
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Stephen B. Swensrud
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$280,233
|
|
(1)
|
The Directors serve on the boards of Affiliate-Advised Funds as follows: Joe Grills (32 registered investment companies
consisting of 51 portfolios), Walter Mintz (17 registered investment companies consisting of 37 portfolios), Robert S. Salomon, Jr. (17 registered investment companies consisting of 37 portfolios), Melvin R. Seiden (17 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (43 registered investment companies consisting of 89 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 Fund with investment
advisory and management services. Subject to the supervision of the Board of Directors, the Investment Adviser is responsible for the actual management of the Fund’s portfolio and constantly reviews the Fund’s holdings in light of its own
research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain of the other administrative
services and provides all the office space, facilities, equipment and necessary personnel for management of the Fund.
Investment Advisory Fee
. As compensation for its services to the Fund, the Investment
Adviser will receive from the Fund a fee at an annual rate of 0.50% of the average daily net assets of the Fund.
Prior to April 3, 2000, MLIM, an affiliate of the Investment Adviser under common control and management as the
Investment Adviser, acted as investment adviser to the Fund. The table below sets forth for the periods indicated the total advisory fee paid by the Fund to MLIM. For the fiscal year ended January 31, 2001, MLIM had voluntarily waived management
fees.
For the fiscal year ended January 31,
|
|
Fee Amount ($)
|
|
Investment Advisory
Fee Waived
|
|
2001
|
|
$ 83,077
|
|
$ 83,077
|
|
2000
|
|
$100,949
|
|
$100,949
|
|
1999
|
|
$ 75,332
|
|
$ 75,332
|
Payment of Fund Expenses
. The Investment Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Program who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and
auditing services, costs of preparing, printing, and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; charges of the custodian and the
transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal and state securities laws; fees and expenses of unaffiliated Directors; accounting and pricing costs (including the daily
calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided for the Fund by State
Street Bank and Trust Company (“State Street”) pursuant to an agreement between State Street and the Program, on behalf of the Fund. The Fund pays a fee for these services. In addition, the Fund reimburses the Investment Adviser for the
cost of other accounting services. The Distributor will pay certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares—Distribution Plans.”
Organization of the Investment Adviser
. Fund Asset Management, L.P., doing business as
Mercury Advisors, is the Fund’s Investment Adviser. The Investment Adviser is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch and Princeton Services. ML &
Co. and Princeton Services are “controlling persons” of the Investment Adviser as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination.
Unless earlier terminated as described herein, the Investment
Advisory Agreement for the Fund will remain in effect from year to year if approved annually (a) by the Board of Directors of the Program or by a majority of the outstanding shares of the subject Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days’ written notice at the option of either party or
by vote of the shareholders of the Fund.
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.
Accounting Services
. The Program, on behalf of the Fund, entered into an agreement with
State Street, effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Prior to January 1, 2001, the Investment Adviser provided accounting services to the
Fund and was reimbursed by the Fund at its cost in connection with such services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser for the cost of these
services.
The table below shows the amounts paid by the Fund to State Street and the Investment Adviser for the periods
indicated:
Period
|
|
Paid to
State Street
|
|
Paid to the
Investment Adviser
|
|
Fiscal year ended January 31, 1999
|
|
N/A
|
|
$15,907
|
|
Fiscal year ended January 31, 2000
|
|
N/A
|
|
$13,556
|
|
Fiscal year ended January 31, 2001
|
|
$897*
|
|
$22,200
|
|
*
|
Represents payments pursuant to the agreement with State Street Commencing on January 1, 2001.
|
Distribution Expenses
. The Fund has entered into a distribution agreement with the
Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreement”). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each
class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to financial intermediaries and potential investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement described above.
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 or other financial intermediaries prior to the close of business on the NYSE (generally 4:00 p.m., Eastern time) which includes orders received after the determination of net asset value on the previous
day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or other financial intermediaries have the responsibility of
submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE 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, the securities dealers nor any other
financial intermediary is permitted to withhold placing orders to benefit themselves by a price change. Certain securities dealers or 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
|
|
2001
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
2000
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
1999
|
|
$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
|
|
2001
|
|
$6,065
|
|
$406
|
|
$5,659
|
|
$0
|
|
2000
|
|
$1,180
|
|
$ 73
|
|
$1,106
|
|
$0
|
|
1999
|
|
$2,464
|
|
$207
|
|
$2,258
|
|
$0
|
|
*
|
Designated Class A shares prior to April 3, 2000.
|
|
**
|
Designated Class D shares prior to April 3, 2000.
|
The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the
balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers and financial intermediaries. Since securities dealers and other financial intermediaries selling Class I and Class A shares of the Fund will
receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the
reduced sales efforts that will be needed to obtain such investments.
Reinvested Dividends
. No initial sales charges are imposed upon Class I and Class A shares
issued as a result of the automatic reinvestment of dividends.
Right of Accumulation
. Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an
amount equal to the then current net asset value or cost, whichever is higher, of the purchaser’s combined holdings of all classes of shares of the Fund and of other Mercury mutual funds. For any such right of accumulation to be made available,
the Distributor must be provided at the time of purchase, by the purchaser or the purchaser’s securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with
other shares to qualify for the right of accumulation.
Letter of Intent
. Reduced sales charges are applicable to purchases aggregating $25,000 or
more of Class I or Class A shares of the Fund or any other Mercury mutual funds made within a 13-month period starting with the first purchase pursuant to the Letter of Intent. The Letter of Intent is available only to investors whose accounts are
established and maintained at the Fund’s Transfer Agent. The Letter of Intent is not available to employee benefit plans for which affiliates of the Investment Adviser provide plan participant record-keeping services. The Letter of Intent is
not a binding obligation to purchase any amount of Class I or Class A shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a
Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class I and Class A shares of the Fund and
of other Mercury mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the execution of such Letter, the difference between the sales charge on the Class I or Class A shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class I
or Class A shares equal to 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0%
of the dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to that further reduced percentage sales charge but there will be no
retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund (“Summit”), a series of Financial Institutions Series Trust, into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intent from the Fund.
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements
. Certain
employer-sponsored retirement or savings plans and certain other arrangements may purchase Class I or Class A shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate
amount invested by the plan in specified investments. Certain other plans may purchase Class B shares with a waiver of the CDSC upon redemption, based on similar criteria. Such Class B shares will convert into Class A shares approximately ten years
after the plan purchases the first share of any Mercury mutual fund. Minimum purchase requirements may be waived or varied for such plans. For additional information regarding purchases by employer-sponsored retirement or savings plans and certain
other arrangements, call your plan administrator or your selected dealer.
Managed Trusts
. Class I shares are offered at net asset value to certain trusts to which
trust institutions, thrifts, and bank trust departments provide discretionary trustee services.
Purchase Privileges of Certain Persons
. Directors of the Program, members of the Boards of
other investment companies advised by the Investment Adviser or its affiliates, directors and employees of ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes the Investment
Adviser, MLIM, Mercury Asset Management International, Ltd. and certain other entities directly or indirectly wholly owned and controlled by ML & Co.), employees of certain selected dealers and financial intermediaries, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund’s suitability standards.
Class I and Class A shares may also be offered at net asset value to certain accounts over which the Investment Adviser
or an affiliate exercises investment discretion.
Acquisition of Certain Investment Companies
. Class A shares may be offered at net asset
value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.
Purchases Through Certain Financial Advisers
. Reduced sales charges may be applicable for
purchases of Class I or Class A shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to
time.
Deferred Sales Charge Alternatives—Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their
shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Mercury mutual funds.
Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the
benefit of putting all of the investor’s dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges.
Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional
funds initially invested in Class B or Class C shares. In addition, Class B shares will
be converted into Class A shares of the Fund after a conversion period of approximately ten years, and thereafter investors will be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is
the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See “Pricing of Shares—Determination of Net Asset Value” below.
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
|
|
2001
|
|
$44,056
|
|
$44,056
|
|
2000
|
|
$43,635
|
|
$43,635
|
|
1999
|
|
$23,267
|
|
$23,267
|
* Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder’s participation in certain fee-based programs.
|
Class C Shares
|
For the fiscal year ended January 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
|
2001
|
|
$1,402
|
|
$1,402
|
|
2000
|
|
$5,163
|
|
$5,163
|
|
1999
|
|
$1,694
|
|
$1,694
|
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 or other financial intermediaries (including Merrill Lynch) and financial intermediaries related to providing distribution-related services to the Fund in connection with the sale of the Class B and
Class C shares, such as the payment of compensation to financial advisors for selling Class B and Class C shares from a dealer’s own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National
Association of Securities Dealers, Inc. (the “NASD”) asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below.
Reference is made to “Account Choices—Pricing of Shares” in the Prospectus for certain information with
respect to separate distribution plans for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the Investment Company Act (each a “Distribution Plan”) with respect to the account maintenance and/or distribution fees paid by
the Funds to the Distributor with respect to such classes.
The Distribution Plan for each of the Class A, Class B and Class C shares provides that the Fund pays the Distributor an
account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the
Distributor, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class A, Class B and Class C shares. Each of those classes has exclusive voting
rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote on any material changes to expenses charged under the
Class A Distribution Plan).
The Distribution Plans for Class B and Class C shares provide that the Fund also pays the Distributor a distribution fee
relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.50% for Class B shares and 0.55% for Class C shares of the average daily net assets of the Fund attributable to the shares of the relevant class in
order to compensate the Distributor, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund,
including payments to financial advisors for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through selected
securities dealers and other financial intermediaries without the assessment of an initial sales charge and at the same time compensates the dealers and other 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 advisor 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 advisor 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, 2001, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $224,679 (1.39% 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,
2001, direct cash revenues for the period since the commencement of operations of Class C shares exceeded direct cash expenses by $90,817 (1.34% of Class C net assets at that date).
For the fiscal year ended January 31, 2001, the Fund paid the Distributor $80,186 pursuant to the Class B Distribution
Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $10.7 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, 2001, the Fund paid the Distributor $37,697 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of approximately
$4.7 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, 2001, the Fund paid the Distributor
$2,458 pursuant to the Class A Distribution Plan (based on average daily net assets subject to such Class A Distribution Plan of approximately $983,410), 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, 2001 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, 2001
|
|
|
|
(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, 2001
|
|
Under NASD Rule as Adopted
|
|
$16,395
|
|
$1,016
|
|
$176
|
|
$1,192
|
|
$364
|
|
$828
|
|
$81
|
|
|
Class C Shares, for the period
February 1, 1995 (commencement of
operations) to January 31, 2001
|
|
Under NASD Rule as Adopted
|
|
$ 8,164
|
|
$ 509
|
|
$111
|
|
$ 620
|
|
$ 95
|
|
$525
|
|
$37
|
|
(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 “Fund Facts Fees and Expenses” in the Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the
applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in Class A shares in conjunction with the shareholder’s participation in the 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 “Account Choices—How to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus.
The Fund is required to redeem for cash all shares upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than
seven days only for any period during which trading on the NYSE is restricted as determined by the Commission or during which the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists, as
defined by the Commission, as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection
of shareholders.
The value of shares of the Fund at the time of redemption may be more or less than the shareholder’s cost,
depending in part on the market value of the securities held by the Fund at such time.
The Fund has entered into a joint committed line of credit with other investment companies advised by the Investment
Adviser and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances.
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 selected securities dealer or other financial intermediary. The Fund
normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is
received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is
received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the
close of business on the NYSE in order to obtain that day’s closing price.
The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund
(other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Certain
securities dealers or other financial intermediaries may charge a processing fee to confirm a repurchase of shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees charged by other securities dealers may be higher or lower.
Repurchases made through the Fund’s Transfer Agent, on accounts held at the Transfer Agent, are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem Fund shares as set forth above.
Reinstatement Privilege—Class I and Class A Shares
Shareholders of the Fund who have redeemed their Class I and Class A shares have a privilege to reinstate their accounts
by purchasing Class I or Class A shares, as the case may be, at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount
to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor’s financial
advisor within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds.
Determination of Net Asset Value
Reference is made to “Account Choices—How Shares are Priced” in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the
close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. The NYSE is not open for trading on New Year’s Day, Martin Luther King, Jr.
Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares of the Fund outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable
to the Investment Adviser and Distributor, are accrued daily.
The per share net asset value of Class A, Class B and Class C shares generally will be lower than the per share net
asset value of Class I shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares, and the daily expense accruals of the account
maintenance fees applicable with respect to Class A shares. Moreover, the per share net asset value of the Class B and Class C shares of the Fund generally will be lower than the per share net asset value of Class A shares, reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the four classes of the Fund will tend to converge
(although not necessarily meet) immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differentials between the classes.
Portfolio securities 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 foreign securities as well as U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s shares are determined as of such times. Occasionally, events
affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund’s net asset
value.
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, 2001 is as follows:
|
|
|
Class I
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Net Assets
|
|
$600,446
|
|
$1,979,682
|
|
$16,120,858
|
|
$6,789,641
|
|
Number of Shares Outstanding
|
|
57,661
|
|
190,249
|
|
1,550,888
|
|
653,221
|
Net Asset Value Per Share (net assets divided by number
of shares outstanding)
|
|
$ 10.41
|
|
$ 10.41
|
|
$ 10.39
|
|
$ 10.39
|
Sales Charge (for Class I and Class A Shares: 4.00% of
Offering Price (4.17% of net amount invested))*
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|
.43
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.43
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**
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**
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|
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|
|
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Offering Price
|
|
$ 10.84
|
|
$ 10.84
|
|
$ 10.39
|
|
$ 10.39
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
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Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption. See
“Purchase of Shares—Deferred Sales Charge Alternatives—Class B and Class C Shares” herein.
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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, a selected
securities dealer or other financial intermediary. 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 securities dealer or other
financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the Class I or Class A shares are to be transferred will not take delivery of Fund shares, a shareholder either must redeem the
Class I or Class A shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class I or Class A shares.
Shareholders interested in transferring their Class B or Class C shares from a selected dealer or financial intermediary
and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may
purchase additional shares of funds owned before the transfer, and all future trading of these assets must be coordinated by the new firm.
Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from
a selected securities dealer or other financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at a selected dealer for those
shares.
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 advisor 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 advisor, who will advise the Fund of the exchange. Shareholders of the Fund and shareholders of the other funds described above with shares for which certificates have not been issued may exercise the exchange
privilege by wire through their securities dealers or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application.
Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To
request an exchange from your account, call the Transfer Agent at 1-800-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.
The minimum initial purchase to establish a retirement 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.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by purchasing Class I shares (if he or she is an
eligible Class I investor) or Class A, Class B or Class C shares at the applicable public offering price. These purchases may be made either through the shareholder’s securities dealer or financial intermediary or by mail directly to the
Transfer Agent, acting as agent for such securities dealer or financial intermediaries. You may also add to your account by automatically investing a specific amount in the Fund on a periodic basis through your selected dealer or financial
intermediary. The current minimum for such automatic additional investments is $100. This minimum may be waived or revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends paid by the Fund may be taken in cash or automatically reinvested in shares of the Fund at net asset value
without a sales charge. You should consult with your financial intermediary about which option you would like. If you choose the reinvestment option, dividends paid with respect to the Fund’s shares will be automatically reinvested, without
sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund as determined after the close of business on the NYSE on the monthly payment date for such dividends. No CDSC
will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to their selected dealer or financial intermediary if their
account is maintained with a selected dealer or financial intermediary, or by written notification or by telephone (1-888-763-2260) to the Transfer Agent, if their account is maintained with the Transfer Agent, elect to have subsequent dividends of
ordinary income and/or capital gains paid with respect to shares of the Fund in cash, rather than reinvested in shares of the Fund (provided that, in the event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or
less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). If the shareholder’s account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in
writing or by telephone (1-888-763-2260). For other accounts, the shareholder should contact his or her financial advisor, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can
also be directly deposited to the shareholder’s bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through
automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Fund shares having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder’s
account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and class of shares to be redeemed. Redemptions will be made at net asset value 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
advisor.
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 are paid at least annually. All net realized capital gains, if any, will be distributed to the Fund’s shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be reinvested automatically in shares of the Fund, see
“Shareholder Services—Automatic Dividend Reinvestment Plan.” A shareholder whose account is maintained at the Transfer Agent or whose account is maintained through his or her selected dealer may elect in writing to receive any such
dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on Class B and Class C shares will be lower than the per share dividends on
Class I and Class A shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends on Class A shares will be lower than the
per share dividends on Class I shares as a result of the account maintenance fees applicable with respect to the Class A shares. See “Pricing of Shares—Determination of Net Asset Value.”
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 investment of $1,000 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
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales
charges)
|
|
|
|
|
|
One year ended January 31, 2001
|
|
8.33%
|
|
8.17%
|
|
Five years ended January 31, 2001
|
|
6.30%
|
|
6.04%
|
|
Inception (February 1, 1995) through January 31, 2001
|
|
7.78%
|
|
7.50%
|
|
|
|
|
|
Class B Shares
|
|
Class C Shares
|
|
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales
charges)
|
|
One year ended January 31, 2001
|
|
8.02%
|
|
10.97%
|
|
Five years ended January 31, 2001
|
|
5.99%
|
|
6.26%
|
|
Inception (February 1, 1995) through January 31, 2001
|
|
7.52%
|
|
7.57%
|
|
*
|
Prior to April 3, 2000, Class I shares were designated Class A shares.
|
|
**
|
Prior to April 3, 2000, Class A shares were designated Class D 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.
Accounting Services Provider
State Street Bank and Trust Company, 500 College Road East, Princeton, New Jersey 08540, provides certain accounting
services for the Fund.
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.
Sidley Austin 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 Advisors (“Mercury”) has granted the Fund the right to use the
“Mercury” name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund have granted Mercury under certain conditions, the use of
any other name it might assume in the future, with respect to any corporation organized by Mercury.
To the knowledge of the Fund, the following persons or entities owned beneficially 5% or more of any class of the stock
of the Fund as of May 18, 2001:
Name
|
|
Address
|
|
Percent and Class
|
Merrill Lynch Trust Company*
Trustee FBO MLSIP
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
20.66% Class I
|
|
|
|
|
|
|
|
Merrill Lynch Trust Company*
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
43.86% Class I
|
|
|
|
|
|
|
|
99 DEF Compensation
|
|
400 Atrium Drive, 4th Floor
Somerset, NJ 08873
Attn: Victoria Niles
|
|
11.51% Class I
|
|
|
|
|
|
|
96 DEFCOM Hedge FBO ML&CO/PFS
Deferred Compensation
|
|
265 Davidson Avenue
Somerset, NJ 08873
Attn: Robert Zieser
|
|
8.69% Class I
|
|
|
|
|
|
|
Don R. Tyson and
Pamela Tyson JTWROS
|
|
HCR 2 Box 14
Higgins, TX 79046
|
|
6.36% Class I
|
|
|
|
|
Merrill Lynch Trust Company*
(Florida) Trustee FBO
The Jones Co. Profit Sharing Plan
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
39.17% Class A
|
|
|
|
|
Merrill Lynch Trust Co.,* FSB
Trustee FBO
Bend Memorial Retirement Plan
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
11.82% Class A
|
|
|
|
|
|
Hamster Inc.
|
|
818 N. Washington St., No. 300
Wilmington, DE 19801-1510
Attn: Arleen Reed
|
|
9.70% Class C
|
|
|
|
|
|
|
|
Bauer, Inc.
|
|
818 N. Washington St.
Wilmington, DE 19801
|
|
9.42% Class C
|
|
|
|
|
|
*
|
Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan
accounts for which it acts as trustee.
|
The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference
to its 2001 Annual Report. You may request a copy of the Annual Report at no additional charge by calling 1-888-673-2260 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
CODE NO. 19097-06-01
PROSPECTUS
·
June 1 , 2001
|
|
Mercury Growth Opportunity 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.
[LOGO] MERCURY FUNDS
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.
MERCURY GROWTH OPPORTUNITY FUND
[GRAPHIC] Fund Facts
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
|
|
|
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.
[GRAPH]
1997 1998 1999 2000
------ ------ ------ ----
27.19% 32.05% 32.45% (8.03)%
During the period shown in the bar chart, the highest return for a quarter was 26.74% (quarter ended December 31, 1999) and the lowest return for a quarter was -13.47%
(quarter ended December 31, 2000). The year-to-date return as of March 31, 2001 was -14.96%.
Average Annual Total Returns (as of
December 31, 1999)
|
|
Past
One Year
|
|
Since Inception
|
|
|
|
|
Mercury Growth Opportunity Fund*
|
|
(12.14)%
|
|
17.99%
|
†
|
|
Lipper Growth Fund Index** I
|
|
(10.88)%
|
|
16.26%††
|
|
|
|
|
|
Mercury Growth Opportunity Fund* A
|
|
(11.24)%
|
|
18.07%
|
†
|
|
Lipper Growth Fund Index**
|
|
(10.88)%
|
|
16.26%††
|
|
|
|
|
|
Mercury Growth Opportunity Fund* B
|
|
(8.86)%
|
|
18.24%
|
†
|
|
Lipper Growth Fund Index**
|
|
(10.88)%
|
|
16.26%††
|
|
|
|
|
|
Mercury Growth Opportunity Fund* C
|
|
(11.91)%
|
|
18.24%
|
†
|
|
Lipper Growth Fund Index**
|
|
(10.88)%
|
|
16.26%††
|
|
|
*
|
Includes all applicable fees and 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.
|
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 the Fund may charge:
Expenses paid directly by the shareholder:
Shareholder Fees —
these fees include sales charges which you may pay when you buy or
sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses —
expenses that cover the costs of operating the
Fund.
Management Fee —
a fee paid to the Investment Adviser for managing the
Fund.
Distribution Fees —
fees used to support the Fund’s marketing and distribution
efforts, such as compensating financial advisors and other financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees —
fees used to compensate securities dealers and
other financial intermediaries for 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 advisor can help you with this
decision.
This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or
less than those indicated below.
Shareholder Fees
(Fees paid directly from your
investment)(a):
|
|
Class I*
|
|
Class A*
|
|
Class B(b)
|
|
Class C
|
|
|
|
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)
|
|
0.66
|
%
|
|
0.65
|
%
|
|
0.71
|
%
|
|
0.73
|
%
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
1.31
|
%
|
|
1.55
|
%
|
|
2.36
|
%
|
|
2.38
|
%
|
|
|
*
|
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 approximately 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 over time, it may cost you more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the
other classes.
|
|
(f)
|
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, 2001, the fee paid by the Fund to
the Transfer Agent was $848,773. The Fund entered into an agreement with State Street Bank and Trust Company effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. For the period January 1, 2001
through January 31, 2001, the Fund paid State Street $8,898 under this Agreement. Prior to January 1, 2001, the Investment Adviser provided accounting services to the Fund at its cost and the Fund reimbursed the Investment Adviser for these
services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser at its cost for such services. For the fiscal year ended January 31, 2001, the Fund reimbursed the
Investment Adviser and an aggregate of $233,435 for the above-described 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 that you will receive a 5% annual rate of return. Your annual return may be more or less than
the 5% used in this example. 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
|
|
$ 651
|
|
$ 674
|
|
$ 639
|
|
|
$ 341
|
|
|
|
|
Three Years
|
|
$ 918
|
|
$ 989
|
|
$1,036
|
|
|
$ 742
|
|
|
|
|
Five Years
|
|
$1,205
|
|
$1,325
|
|
$1,460
|
|
|
$1,270
|
|
|
|
|
Ten Years
|
|
$2,021
|
|
$2,274
|
|
$2,510*
|
|
|
$2,716
|
|
|
|
|
Expenses if you
did not
redeem your shares:
|
|
|
|
|
|
|
|
Class I**
|
|
Class A**
|
|
Class B
|
|
Class C
|
|
|
|
|
One Year
|
|
$ 651
|
|
$ 674
|
|
$ 239
|
|
|
$ 241
|
|
|
|
|
Three Years
|
|
$ 918
|
|
$ 989
|
|
$ 736
|
|
|
$ 742
|
|
|
|
|
Five Years
|
|
$1,205
|
|
$1,325
|
|
$1,260
|
|
|
$1,270
|
|
|
|
|
Ten Years
|
|
$2,021
|
|
$2,274
|
|
$2,510*
|
|
|
$2,716
|
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*
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Assumes conversion to Class A shares approximately eight years after purchase. See note (b) to the Fees and
Expenses table on the previous page.
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**
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As of April 3, 2000, Class A shares were redesignated Class I shares and Class D shares were redesignated Class A
shares.
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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 Vice President of the Investment Adviser from 1992 to 1997 and has been a First Vice President of the Investment Adviser since 1997.
About the Investment Adviser —
The Fund is managed by Mercury Advisors.
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:
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securities convertible into common stock
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rights to subscribe for common stock
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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 securities that Fund management selects will underperform the markets, the relevant indices 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 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.
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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.
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MERCURY GROWTH OPPORTUNITY FUND
[GRAPHIC] About the Details
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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.
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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:
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Credit risk
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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
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Currency risk
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the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an
investment
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Leverage risk
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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
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Liquidity Risk
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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
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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 associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the
benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced.
There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.
Indexed and Inverse Floater Securities
The Fund may invest in debt securities whose potential returns are directly related to changes in an underlying index or interest rate, known as indexed securities. The
return on indexed securities will rise when the underlying index or interest rate rises and fall when the index or interest rate falls. The 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 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
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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 June 1, 2001 (the “Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling the Fund at 1-888-763-2260 or your financial
advisor, or by writing to the address listed above. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The
Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to the Fund’s 2001 Annual Report to shareholders. You may request a copy of the Annual Report or the Prospectus at no charge by
calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
Mercury Advisors — Investment Adviser
FAM Distributors, Inc. — Distributor
The date of this Statement of Additional Information is June 1, 2001.
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.
|
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|
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.
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|
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.
|
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|
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.
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(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.
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(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 six 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
(60) —
President and Director
(1)(2) — Executive Vice President of the Investment Adviser and Merrill Lynch Investment Managers, L.P. (“MLIM”) (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 FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988; Director of Financial Data Services, Inc. since 1985.
J
OE
G
RILLS
(66)
— 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 (now associated with the Association of Financial
Professionals) (“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 Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from
1997 to 2000; Director, Duke Management Company since 1992 and 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 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000;
Member of the Investment Committee of the National Trust for Historic Preservation since 2000.
W
ALTER
M
INTZ
(72) —
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
. (64) —
Director
(2)(3) — 106 Dolphin Cove Quay, Stamford, Connecticut 06902. Principal of STI Management (investment adviser) since 1994; Trustee, 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; regular 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
(70) —
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
(67) —
Director
(2)(3) — 88 Broad Street, 2nd Floor, 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.
R
OBERT
C. D
OLL
, J
R
. (46) —
Senior Vice President
(1)(2) — First Vice President of the Investment Adviser and MLIM since 2000 and Senior Vice President thereof from 1999 to 2000; 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.
L
AWRENCE
R. F
ULLER
(60) —
Senior Vice President and Portfolio Manager
(1)(2) — First Vice President of MLIM since 1997 and Vice President of MLIM from 1992 to 1997.
R. E
LISE
B
AUM
(41) —
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.
T
ERESA
L. G
IACINO
(38) —
Vice President and Portfolio Manager
(1)(2) — Vice President of MLIM since 1992.
G
REGORY
M
ARK
M
AUNZ
(48) —
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
(40) —
Vice President and Treasurer
(1)(2) — First Vice President of the Investment Adviser and MLIM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President
of FAMD since 1999; Vice President of the Investment Adviser and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.
A
LLAN
J. O
STER
(37) —
Secretary
(1)(2) — Vice President of MLIM since 2000; Attorney with MLIM from 1999 to 2000; Associate with Drinker, Biddle & Reath LLP from 1996 to 1999; Senior Counsel with the U.S. Securities and Exchange Commission
from 1991 to 1996.
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(1)
|
Interested person, as defined in the Investment Company Act, of the Program.
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(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.
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(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.
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As of May 18, 2001, the officers and Directors of the Program as a group (13 persons) owned an aggregate of less than 1%
of the outstanding shares of common stock of Merrill Lynch & Co., Inc. (“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 $2,200 per year plus $450 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 $2,200 annually for service to the Program plus $450 per Committee meeting attended.
The following table sets forth the compensation earned by the non-interested Directors for the fiscal year ended January
31, 2001 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, 2000.
Name
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|
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)
|
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Joe Grills
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$224,500
|
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Walter Mintz
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Robert S. Salomon, Jr.
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Melvin R. Seiden
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$184,000
|
|
Stephen B. Swensrud
|
|
Director
|
|
$5,400
|
|
None
|
|
None
|
|
$280,233
|
|
(1)
|
The Directors serve on the boards of Affiliate-Advised Funds as follows: Joe Grills (32 registered investment companies
consisting of 51 portfolios), Walter Mintz (17 registered investment companies consisting of 37 portfolios), Robert S. Salomon, Jr. (17 registered investment companies consisting of 37 portfolios), Melvin R. Seiden (17 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (43 registered investment companies consisting of 89 portfolios).
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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 Fund with investment
advisory and management services. Subject to the supervision of the Directors, the Investment Adviser is responsible for the actual management of the Fund’s portfolio and constantly reviews the Fund’s holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain of the other administrative services and
provides all the office space, facilities, equipment and necessary personnel for management of the 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 MLIM:
Prior to April 3, 2000, Merrill Lynch Investment Managers, L.P. (“MLIM”), an affiliate of the Investment
Adviser under common control and management as the Investment Adviser, acted as investment adviser to the Fund. The table below sets forth for the periods indicated the total advisory fee paid by the Fund to MLIM.
For the fiscal year ended January 31,
|
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Fee Amount($)
|
|
2001
|
|
$1,354,477
|
|
2000
|
|
$ 992,233
|
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1999
|
|
$ 475,238
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The Investment Adviser has also entered into a sub-advisory agreement (the “Sub-Advisory Agreement”) with
Merrill Lynch Asset Management U.K. Limited, doing business as Funds Asset Management UK (“FAM UK”), pursuant to which the Investment Adviser pays FAM UK a fee for providing investment advisory services to the Investment Adviser with
respect to the Fund in an amount to be determined from time to time by the Investment Adviser and FAM UK but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Fund pursuant to the
Investment Advisory Agreement. MLIM, which served as investment adviser to the Fund prior to April 3, 2000, paid no fees to FAM UK under its sub-advisory agreement for the fiscal years ended January 31, 1999 and 2000, and for the period from
February 1, 2000 to April 2, 2000. For the period from April 3, 2000 to January 31, 2001, the Investment Adviser paid no fees to FAM UK pursuant to the Sub-Advisory 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 Fund connected with investment and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and auditing
services, costs of preparing, printing and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; charges of the custodian and the transfer
agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal and state securities laws; fees and expenses of unaffiliated Directors; accounting and pricing costs (including the daily calculations of net
asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided to the Fund by State Street Bank and Trust
Company (“State Street”) pursuant to an agreement between State Street and the Program on behalf of the Fund. The Fund pays a fee for these services. In addition, the Fund reimburses the Investment Adviser for the cost of other
accounting services. The Distributor will pay certain promotional expenses of the Program incurred in connection with the offering of shares of the Program. Certain expenses will be financed by the Program pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares—Distribution Plans.”
Organization of the Investment Adviser
. Fund Asset Management, L.P., doing business as
Mercury Advisors, is the Fund’s Investment Adviser. The Investment Adviser is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML &
Co. and Princeton Services are “controlling persons” of the Investment Adviser as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its
management or policies.
The following entities may be considered “controlling persons” of FAM UK: Merrill Lynch Europe PLC (FAM
UK’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 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 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.
Accounting Services.
The Program, on behalf of the Fund, entered into an agreement with
State Street, effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Prior to January 1, 2001 the Investment Adviser provided accounting services to the
Fund and was reimbursed by the Fund at its cost in connection with such services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser for the cost of these
services.
The table below shows the amounts paid by the Fund to State Street and the Investment Adviser for the periods
indicated:
Period
|
|
Paid to
State Street
|
|
Paid to the
Investment Adviser
|
|
Fiscal year ended January 31, 1999
|
|
N/A
|
|
$ 76,370
|
|
Fiscal year ended January 31, 2000
|
|
N/A
|
|
$113,160
|
|
Fiscal year ended January 31, 2001
|
|
$8,898*
|
|
$233,435
|
|
*
|
Represents payments pursuant to the agreement with State Street commencing on January 1, 2001.
|
Distribution Expenses
. The Fund has entered into a distribution agreement with the
Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreement”). The
Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set
in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to financial intermediaries and potential investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Investment Advisory Agreement described above.
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 Program, the Investment Adviser, FAM UK and the Distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their
personal investment accounts, including securities that may be purchased or held by the Fund.
Reference is made to “Account Choices—How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus
for certain information as to the purchase of Fund shares.
The Fund issues four classes of shares: shares of Class I and Class A are sold to investors choosing the initial sales
charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Each Class I, Class A, Class B and Class C share of the Fund represents an identical interest in the investment portfolio of
the Fund, and has the same rights, except that Class A, Class B and Class C shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges (“CDSCs”), distribution fees and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on Class A shares, are imposed directly against those classes and not against all assets of the Fund, and, accordingly, such charges do not affect the net asset value of
any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class A, Class B and Class C shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which the account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the distribution plan for Class A shares).
Each class has different exchange privileges. See “Shareholder Services—Exchange Privilege.”
Investors should understand that the purpose and function of the initial sales charges with respect to the Class I and
Class A shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of
shares.
The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any
sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to
purchase orders received by securities dealers or other financial intermediaries prior to the close of business on the NYSE (generally 4:00 p.m., Eastern time) which includes orders received after the determination of net asset value on the previous
day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received
prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or other financial intermediaries have the responsibility of submitting purchase orders to the Fund not
later than 30 minutes after the close of business on the NYSE 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, the securities dealers nor other financial intermediaries
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 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
|
|
2001
|
|
$174
|
|
$ 8
|
|
$166
|
|
$0
|
|
2000
|
|
$550
|
|
$26
|
|
$524
|
|
$0
|
|
1999
|
|
$171
|
|
$ 8
|
|
$163
|
|
$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
|
|
2001
|
|
$38,757
|
|
$1,917
|
|
$36,840
|
|
$0
|
|
2000
|
|
$44,411
|
|
$2,192
|
|
$42,219
|
|
$0
|
|
1999
|
|
$43,620
|
|
$2,177
|
|
$41,443
|
|
$0
|
|
*
|
Designated Class A shares prior to April 3, 2000.
|
|
**
|
Designated Class D shares prior to April 3, 2000.
|
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 other financial intermediaries selling Class I and Class A shares of the Fund will receive a
concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the
reduced sales efforts that will be needed to obtain such investments.
Reinvested Dividends
. No initial sales charges are imposed upon Class I and Class A shares
issued as a result of the automatic reinvestment of dividends.
Right of Accumulation
. Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an
amount
equal to the then current net asset value or cost, whichever is higher, of the purchaser’s combined holdings of all classes of shares of the Fund and of other Mercury mutual funds. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the purchaser’s securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order
is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intent
. Reduced sales charges are applicable to purchases aggregating $25,000 or
more of Class I or Class A shares of the Fund or any other Mercury mutual funds made within a 13-month period starting with the first purchase pursuant to the Letter of Intent. The Letter of Intent is available only to investors whose accounts are
established and maintained at the Fund’s Transfer Agent. The Letter of Intent is not available to employee benefit plans for which affiliates of the Investment Adviser provide plan participant record-keeping services. The Letter of Intent is
not a binding obligation to purchase any amount of Class I or Class A shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a
Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class I and Class A shares of the Fund and
of other Mercury mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the execution of such Letter, the difference between the sales charge on the Class I or Class A shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class I
or Class A shares equal to 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0%
of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to that further reduced percentage sales charge but there will be no retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund (“Summit”), a series of Financial Institutions Series Trust, into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intent from the Fund.
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements
. Certain
employer-sponsored retirement or savings plans and certain other arrangements may purchase Class I or Class A shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate
amount invested by the plan in specified investments. Certain other plans may purchase Class B shares with a waiver of the CDSC upon redemption, based on similar criteria. Such Class B shares will convert into Class A shares approximately ten years
after the plan purchases the first share of any Mercury mutual fund. Minimum purchase requirements may be waived or varied for such plans. For additional information regarding purchases by employer-sponsored retirement or savings plans and certain
other arrangements, call your plan administrator or your selected dealer.
Managed Trusts
. Class I shares are offered at net asset value to certain trusts to which
trust institutions, thrifts, and bank trust departments provide discretionary trustee services.
Purchase Privileges of Certain Persons
. Directors of the Program, members of the Boards of
other investment companies advised by the Investment Adviser or its affiliates, directors and employees of ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes the Investment
Adviser, MLIM, Mercury Asset Management International, Ltd. and certain other entities directly or indirectly wholly owned and controlled by ML & Co.), employees of certain selected dealers and financial intermediaries, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I shares of the
Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must
satisfy the Fund’s suitability standards.
Class I and Class A shares may also be offered at net asset value to certain accounts over which the Investment Adviser
or an affiliate exercises investment discretion.
Acquisition of Certain Investment Companies
. Class A shares may be offered at net asset
value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.
Purchases Through Certain Financial Advisers
. Reduced sales charges may be applicable for
purchases of Class I or Class A shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to
time.
Deferred Sales Charge Alternatives—Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their
shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Mercury mutual funds.
Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the
benefit of putting all of the investor’s dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges.
Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional
funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class A shares of the Fund after a conversion period of approximately 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
|
|
2001
|
|
$214,319
|
|
$214,319
|
|
2000
|
|
$198,131
|
|
$198,131
|
|
1999
|
|
$ 71,336
|
|
$ 71,336
|
|
*
|
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
|
|
2001
|
|
$21,850
|
|
$21,850
|
|
2000
|
|
$24,460
|
|
$24,460
|
|
1999
|
|
$ 8,070
|
|
$ 8,070
|
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 and other financial intermediaries (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 advisors for selling Class B and Class C shares from a dealer’s own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C
shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities
Dealers, Inc. (the “NASD”) asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below.
Reference is made to “Account Choices—Pricing of Shares” in the Prospectus for certain information with
respect to separate distribution plans for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the Investment Company Act (each a “Distribution Plan”) with respect to the account maintenance and/or distribution fees paid by
the Funds to the Distributor with respect to such classes.
The Distribution Plan for each of the Class A, Class B and Class C shares provides that the Fund pays the Distributor an
account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the
Distributor, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class A, Class B and Class C shares. Each of those classes has exclusive voting
rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote on any material changes to expenses charged under the
Class A Distribution Plan).
The Distribution Plans for Class B and Class C shares provide that the Fund also pays the Distributor a distribution fee
relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 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, a selected
securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial advisors or other
financial intermediaries 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 selected securities dealers
and other 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 advisors, selected securities dealers or other financial
intermediaries in connection with the sale of the Class B and Class C shares.
The Fund’s Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In
their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of each Distribution Plan to the Fund and the related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Directors shall be committed to the discretion of the non-interested Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that such Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the non-interested Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the related class of shareholders, and all material amendments are required to be approved by the vote of Directors, including a majority of the non-interested Directors who have
no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of its Distribution Plans and any report made pursuant to such plan
for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place.
Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of
the amount of expenses incurred and, accordingly, distribution-related revenues from each Distribution Plan may be more or less than distribution-related expenses of the related class. Information with respect to the distribution-related revenues
and expenses is presented to the Directors for their consideration 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 advisor 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 advisor compensation.
For the fiscal year ended January 31, 2001, 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
|
|
$22,372
|
|
$1,213,522
|
|
$768,469
|
* Class A shares were designated Class D shares prior to April 3, 2000.
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, 2001, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $1,952,633 (1.78% 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, 2001, direct cash revenues for the period since the commencement of operations of Class C shares exceeded direct cash expenses by $1,248,134 (1.80% of Class C net assets at that date).
For the fiscal year ended January 31, 2001, the Fund paid the Distributor $22,372 pursuant to the Class A Distribution
Plan (based on the average net assets subject to such Class A Distribution Plan of approximately $8.9 million), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class A shares. Prior to April 3,
2000, Class A shares were designated Class D shares. For the fiscal year ended January 31, 2001, the Fund paid the Distributor $1,213,522 pursuant to the Class B Distribution Plan (based on the average net assets subject to such Class B Distribution
Plan of approximately $121.4 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, 2001, the Fund
paid the Distributor $768,469 pursuant to the Class C Distribution Plan (based on the average net assets subject to such Class C Distribution Plan of approximately $76.9 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.
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, 2001 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, 2001
|
|
|
|
(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, 2001:
|
|
95,836
|
|
5,984
|
|
1,030
|
|
7,014
|
|
2,662
|
|
4,352
|
|
822
|
|
Under NASD Rule as Adopted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C Shares, for the period
February 1, 1995 (commencement
of operations) to January 31, 2001:
|
|
73,838
|
|
4,613
|
|
805
|
|
5,418
|
|
1,321
|
|
4,097
|
|
521
|
|
Under NASD Rule as Adopted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 “Fund Facts—Fees and Expenses” in the Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of
the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in class A shares in conjunction with the shareholder’s participation in the 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 “Account Choices—How to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus.
The Fund is required to redeem for cash all shares upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than
seven days only for any period during which trading on the NYSE is restricted as determined by the
Commission or during which the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities or determination
of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders.
The value of shares of the Fund at the time of redemption may be more or less than the shareholder’s cost,
depending in part on the market value of the securities held by the Fund at such time.
The Fund has entered into a joint committed line of credit with other investment companies advised by the Investment
Adviser and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances.
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 selected securities dealer or other financial intermediary. The Fund
normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is
received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is
received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the
close of business on the NYSE in order to obtain that day’s closing price.
The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund
(other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Certain
securities dealers or other financial intermediaries may charge a processing fee to confirm a repurchase of shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees charged by other securities dealers may be higher or lower.
Repurchases made through the Fund’s Transfer Agent, on accounts held at the Transfer Agent, are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem Fund shares as set forth above.
Reinstatement Privilege—Class I and Class A Shares
Shareholders of the Fund who have redeemed their Class I and Class A shares have a privilege to reinstate their accounts
by purchasing Class I or Class A shares, as the case may be, at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount
to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor’s financial
advisor within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds.
Determination of Net Asset Value
Reference is made to “Account Choices—How Shares are Priced” in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the
close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. 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 foreign 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, 2001 is as follows:
|
|
|
Class I
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Net Assets
|
|
$2,142,141
|
|
$10,514,211
|
|
$109,589,132
|
|
$69,476,207
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Outstanding
|
|
122,453
|
|
602,665
|
|
6,397,782
|
|
4,065,282
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share (net assets divided by
number of shares outstanding)
|
|
17.49
|
|
17.45
|
|
17.13
|
|
17.09
|
Sales Charge (for Class I and Class A Shares:
5.25% of Offering Price (5.54% of net amount
invested))*
|
|
.97
|
|
.97
|
|
**
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
Offering Price
|
|
$ 18.46
|
|
$ 18.42
|
|
$ 17.13
|
|
$ 17.09
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption. See
“Purchase of Shares—Deferred Sales Charge Alternatives—Class B and Class C Shares” herein.
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the Directors of the Program, the Investment Adviser is primarily responsible for the
execution of the Fund’s portfolio transactions and the allocation of brokerage. The 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. 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.
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
|
|
|
|
|
|
|
|
2001
|
|
$308,175
|
|
$46,492
|
|
2000
|
|
$266,711
|
|
$20,491
|
|
1999
|
|
$ 76,819
|
|
$ 7,398
|
For the fiscal year ended January 31, 2001, the brokerage commissions paid to Merrill Lynch represented 15.09% of the
aggregate brokerage commissions paid and involved 15.11% 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, a selected
securities dealer or other financial intermediary. 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 securities dealer or other
financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the Class I or Class A shares are to be transferred will not take delivery of Fund shares, a shareholder either must redeem the
Class I or Class A shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class I or Class A shares.
Shareholders interested in transferring their Class B or Class C shares from a selected dealer or financial intermediary
and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may
purchase additional shares of funds owned before the transfer, and all future trading of these assets must be coordinated by the new firm.
Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from
a selected securities dealer or other financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of 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 advisor 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 advisor, who will advise the Fund of the exchange. Shareholders of the Fund and shareholders of the other funds described above with shares for which certificates have not been issued may exercise the exchange
privilege by wire through their securities dealers or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application.
Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To
request an exchange from your account, call the Transfer Agent at 1-888-763-2260. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The
shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the accountholder is deceased, the request is by an individual other than the accountholder of
record, the account is held by joint tenants who are
divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number
registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.
This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the
Distributor.
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.
The minimum initial purchase to establish a retirement 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.
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 advisor 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, 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). If the shareholder’s account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-888-763-2260). For other accounts, the shareholder should contact
his or her financial advisor, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of
delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder’s bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through
automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Fund shares having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder’s
account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and class of shares to be redeemed. Redemptions will be made at net asset value 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
advisor.
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 are paid at least annually. All net realized capital gains, if any, will be distributed to the Fund’s shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be reinvested automatically in shares of the Fund see
“Shareholder Services—Automatic Dividend Reinvestment Plan.” A shareholder may also 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 foreign 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 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.
The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data,
both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the
periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return
calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data
since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. 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
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
One year ended January 31, 2001
|
|
(13.18%)
|
|
(13.37%)
|
|
Inception (February 2, 1996) through January 31, 2001
|
|
17.58%
|
|
17.34%
|
|
|
|
|
|
|
|
Class B Shares
|
|
Class C Shares
|
|
|
|
Expressed as a
percentage based on
a hypothetical $1,000
investment
|
|
Expressed as a
percentage based
on a hypothetical
$1,000 investment
|
|
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
|
One year ended January 31, 2001
|
|
(12.47%)
|
|
(10.13%)
|
|
Inception (February 2, 1996) through January 31, 2001
|
|
17.39%
|
|
17.56%
|
Total return figures are based on the Fund’s historical performance and are not intended to indicate future
performance. The Fund’s total return will vary depending on market conditions, the securities comprising the Fund’s portfolio, the Fund’s operating expenses and amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of Class I or Class A shares or the waiver of the CDSC in the
case of Class B or Class C shares applicable to certain investors, as described under “Purchase of Shares” and “Redemption of Shares,” respectively, the total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge or may take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.
On occasion, the Fund may compare its performance to various indices including, among other things, the Standard &
Poor’s 500 Index, the Value Line Composite Index, the Dow Jones Industrial Average, or other published indices, or to data contained in publications such as Lipper Analytical Services, Inc., Morningstar Publications, Inc.
(“Morningstar”), 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 Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment
objectives. This may include information about past, current or possible economic, market, political or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance,
discussion of the Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to
the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types
of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period.
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 Fund. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
Accounting Services Provider
State Street Bank and Trust Company, 500 College Road East, Princeton, New Jersey 08540, provides certain accounting
services for the Fund.
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.
Sidley Austin 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 Advisors (“Mercury”) has granted the Fund the right to use the
“Mercury” name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund 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, the following persons or entities owned beneficially or of record 5% or more of any class
of the Fund’s shares as of May 18, 2001.
Name
|
|
Address
|
|
Percent of Class
|
Rudolph Groth-Marnat TTEE
U/A DTD 04/10/1984
FBO Rudolph Groth-Marnat
|
|
P.O. Box 50160
Santa Barbara, CA 93150
|
|
5.69% of Class A
|
|
|
|
|
|
|
CAP 100 Equity Portfolio
WY College Savings Plan
Wyoming State Treasurer
|
|
State Capitol Building
Cheyenne, WY 82002
|
|
5.88% of Class A
|
|
|
|
|
|
|
C. Christopher Hagy IRRA
FBO C. Christopher Hagy
|
|
49 Putnam Drive, N.W.
Atlanta, GA 30342
|
|
5.79% of Class I
|
|
|
|
|
|
|
Merill Lynch Trust Company*
Trustee FBO MLRAP Plan
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
7.12% of Class I
|
|
|
|
|
|
|
Merill Lynch Trust Company*
Trustee FBO MLSIP
|
|
P.O. Box 30532
New Brunswick, NJ 08989
|
|
14.82% of Class I
|
|
*
|
Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan
accounts for which it acts as trustee.
|
The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference
to its 2001 Annual Report. You may request a copy of the Annual Report at no additional charge by calling 1-888-673-2260 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
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:
Ÿ
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;
Ÿ
Nature of and provisions of the obligation;
Ÿ
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.
|
|
CCC
|
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and
economic conditions to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the
obligation.
|
|
CC
|
An obligation rated CC is currently highly vulnerable to nonpayment.
|
|
C
|
A subordinated debt or preferred stock obligation rated C is CURRENTLY HIGHLY VULNERABLE to nonpayment. The C rating may be
used to cover a situation where a bankruptcy
|
|
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.
|
|
|
r
|
This symbol is attached to the ratings of instruments with significant non credit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit rating.
|
|
*
|
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.
|
|
N.R.
|
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that
Standard & Poor’s does not rate a particular obligation as a matter of policy.
|
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
|
A short-term 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
|
A short-term 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
|
A short-term 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
|
A short-term 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
|
A short-term 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 edged.” 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 some time 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 the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period of time may be small.
|
|
Caa
|
Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
|
|
Ca
|
Bonds which are rated Ca represent obligations 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 that 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 honor senior financial obligations and
contracts. Such obligations generally have an original maturity not exceeding one year. 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 debt
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, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting
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.
Moody’s ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating
should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
Description of Fitch, Inc. (“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.
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AAA
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Highest credit quality. ‘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.
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AA
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Very High credit quality. ‘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.
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A
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High credit quality. ‘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.
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BBB
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Good credit quality. ‘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.
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BB
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Speculative. ‘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.
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B
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Highly speculative. ‘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, favourable business and economic environment.
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CCC,
CC, C
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High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic
developments. A “CC” rating indicates that default of some kind appears probable. “C” ratings signal imminent default.
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DDD,
DD,
and D
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Default.
The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of
the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. ‘DDD’ obligations have the highest potential for recovery, around 90%-100% of
outstanding amounts and accrued interest. ‘DD’ indicates potential recoveries in the range of 50%-90% and ‘D’ the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated ‘DDD’ have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization process. Entities rated ‘DD’ and ‘D’ are generally undergoing a formal reorganization or liquidation process; those rated ‘DD’ are likely to
satisfy a higher portion of their outstanding obligations, while entities rated ‘D’ have a poor prospect of repaying all obligations.
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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.
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F1
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Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added
“+” to denote any exceptionally strong credit feature.
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F2
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Good credit quality. 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.
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F3
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Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes
could result in a reduction to non-investment grade.
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B
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Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
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C
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High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a
sustained, favourable business and economic environment.
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D
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Default. Denotes actual or imminent payment default.
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Notes to Long-term and Short-term ratings:
“+” 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 “F1”.
“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.
A Rating Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be
positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose outlooks are ‘stable’ could be upgraded or downgraded before an outlook moves to positive or
negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
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