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As filed with the Securities and Exchange Commission on April 28, 1999
Investment Company Act File No. 811-7885
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3 [X]
(Check appropriate box or boxes)
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Merrill Lynch Index Trust
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (609) 282-2800
TERRY K. GLENN
800 Scudders Mill Road,
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Counsel for the Fund: Michael J. Hennewinkel, Esq
Joel H. Goldberg, Esq. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP P.O. Box 9011
919 Third Avenue, New York, New York Princeton, New Jersey 08543-9011
10022
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to
Section 8(b) of the Investment Company Act of 1940, as amended (the
"Investment Company Act"). However, beneficial interests in the Registrant are
not being registered under the Securities Act of 1933, as amended (the "1933
Act") because such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Registrant may be made only
by a limited number of institutional investors, including investment
companies, common or commingled trust funds, group trusts and certain other
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3, 5 and 9 have been omitted pursuant to
paragraph 2(b) of Instruction B of the General Instructions to Form N-1A.
Item 4. -- Investment Objectives, Principal Investment Strategies, and Related
Risks.
Merrill Lynch Index Trust (the "Trust") is a no-load, open-end management
investment company which was organized as a Delaware business trust on August
28, 1996. Merrill Lynch S&P 500 Index Series ("S&P 500 Index Series"), Merrill
Lynch Small Cap Index Series ("Small Cap Index Series"), Merrill Lynch
Aggregate Bond Index Series ("Aggregate Bond Index Series"), and Merrill Lynch
International Index Series ("International Index Series"), (together, the
"Series" and each, a "Series") are each separate series of the Trust. Each
Series is a non-diversified investment company with different investment
objectives and policies. There can, of course, be no assurance that the
respective investment objectives of the Series can be achieved.
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INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
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All Series
The Series will not attempt to buy or sell securities based on Series
management's economic, financial or market analysis, but will instead employ a
"passive" investment approach. This means that Series management will attempt
to invest in a portfolio of assets whose performance is expected to match
approximately the performance of the respective index before deduction of
Series expenses. A Series will only buy or sell securities when Series
management believes it is necessary to do so in order to match the performance
of the respective index. Accordingly, it is anticipated that a Series' portfolio
turnover and trading costs will be lower than "actively" managed funds.
However, the Series have operating and other expenses, while an index does not.
Therefore, each Series will tend to underperform its target index to some
degree over time.
Each Series will be substantially invested in securities in the applicable
index, and will invest at least 80% of its assets in securities or other
financial instruments which are contained in or correlated with securities in
the applicable index. A Series may change its target index if Series management
believes a different index would better enable the Series to match the
performance of the market segment represented by the current index and,
accordingly, the investment objective of a Series may be changed without
shareholder approval. In addition to the investment strategies described below,
each Series may also invest in illiquid securities and repurchase agreements,
and may engage in securities lending.
Each Series will also invest in short term money market instruments as cash
reserves to maintain liquidity. These instruments may include obligations of
the U.S. Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and repurchase
agreements. To the extent a Series invests in short term money market
instruments, it will generally also invest in options, futures or other
derivatives in order to maintain full exposure to the index. The Series will
not invest in options, futures, other derivative instruments or short term
money market instruments in order to lessen the Series' exposure to common
stocks as a defensive strategy, but will instead attempt to remain fully
invested at all times.
S&P 500 Index Series
The S&P 500 is composed of 500 common stocks issued by large-capitalization
U.S. companies in a wide range of businesses. The stocks included in the index
collectively represent a substantial portion of all
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common stocks publicly traded in the U.S. The S&P 500 is generally considered
broadly representative of the performance of publicly traded U.S. large
capitalization stocks. The S&P 500 is a market-weighted index, which means that
the largest stocks represented in the index have the most effect on the index's
performance. Currently, the largest stocks in the S&P 500 have an effect on the
performance of the index that is many times greater than the effect of the
other stocks in the index. The stocks in the S&P 500 are chosen by the Standard
& Poor's Rating Group ("S&P"), a division of the McGraw-Hill Companies, Inc.
S&P chooses stocks for inclusion in the S&P 500 based on market capitalization,
trading activity and the overall mix of industries represented in the index,
among other factors. S&P's selection of a stock for the S&P 500 does not mean
that S&P believes the stock to be an attractive investment.
The Series will normally invest in all 500 stocks in the S&P 500 in roughly the
same proportions as their weightings in the S&P 500. For example, if 5% of the
S&P 500 is made up of the stock of a particular company, the Series will
normally invest approximately 5% of its assets in that company. This strategy
is known as "full replication." However, when Series management believes it
would be cost efficient, Series management is authorized to deviate from full
replication and to instead invest in a statistically selected sample of the 500
stocks in the S&P 500 which has aggregate investment characteristics, such as
average market capitalization and industry weightings, similar to the S&P 500
as a whole. Series management may also purchase stocks not included in the S&P
500 when it believes that it would be a cost efficient way of approximating the
S&P 500's performance to do so. If Series management uses these techniques, the
Series may not track the S&P 500 as closely as it would if it were fully
replicating the S&P 500.
The Series may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the S&P 500. Derivatives allow the Series to increase or
decrease its exposure to the S&P 500 quickly and at less cost than buying or
selling stocks. The Series will invest in options, futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect
the securities' weightings in the target index.
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Small Cap Index Series
The Russell 2000 is composed of the common stocks of the 1,001st through 3,000th
largest U.S. companies by market capitalization, as determined by the Frank
Russell Company. The stocks represented in the index are issued by small-
capitalization (generally less than $1.5 billion) U.S. companies in a wide range
of businesses. The Russell 2000 is a market-weighted index, which means that the
largest stocks represented in the index have the most effect on the index's
performance. The Russell 2000 is generally considered broadly representative of
the performance of publicly traded U.S. smaller-capitalization stocks. Frank
Russell Company's selection of a stock for the Russell 2000 does not mean that
Frank Russell Company believes the stock to be an attractive investment.
The Frank Russell Company updates the Russell 2000 once each year, at which
time there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Series). Stocks of companies that
merge, are acquired or otherwise cease to exist during the year are not
replaced in the index.
The Series may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. Instead, the Series may invest in a
statistically selected sample of the stocks included in the Russell 2000. The
Series will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments in its portfolio are similar to the Russell 2000 as a whole.
The Series may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the Russell 2000. Derivatives allow the Series to increase or
decrease its exposure to the Russell 2000 quickly and at less cost than buying
or selling stocks. The Series will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect
the securities' weightings in the target index.
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Aggregate Bond Index Series
The Aggregate Bond Index is a market-weighted index comprised of 6,500 dollar-
denominated investment grade bonds with maturities greater than one year. The
Aggregate Bond Index includes:
. U.S. government and government
agency securities
. securities issued by
supranational entities, such as
the World Bank
. securities issued by foreign
governments and U.S. and foreign
corporations
. mortgage backed securities
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Series may not invest in all of the bonds in the Aggregate Bond Index, or in
the same weightings as in the Aggregate Bond Index. Instead, the Series may
invest in a statistically selected sample of bonds included in the Aggregate
Bond Index, or in a statistically selected sample of bonds not included in the
index but correlated with bonds that are in the index, and in derivative
instruments linked to the Aggregate Bond Index. The Series may invest in bonds
not included in the index, but which are selected to reflect characteristics
such as maturity, duration, or credit quality similar to bonds in the index.
This may result in different levels of interest rate, credit or other risks from
the levels of risks on the securities included in the Aggregate Bond Index. The
Aggregate Bond Index Series may trade securities to the extent necessary to
maintain the duration of certain segments of the portfolio close to the duration
of corresponding segments of the index, and, accordingly, the Aggregate Bond
Index Series may have a higher portfolio turnover rate than the other Series.
Because the Aggregate Bond Index is composed of investment grade bonds, the
Series will invest in corporate bonds rated investment grade (rated at least
Baa3 by Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings
Group), or if unrated, of comparable quality. The Series may continue to hold a
security that is downgraded below investment grade.
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The Series will usually invest a substantial portion of its assets in mortgage
backed securities. Mortgage backed securities may be either pass through
securities or collateralized mortgage obligations.
The Series may also purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. This is when the Series buys
or sells securities with payment and delivery taking place in the future so
that the Series can lock in a favorable yield and price at the time of entering
into the transaction. The Series may also enter into dollar rolls in which the
Series sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar securities on a future date from
the same party. During the period between the Series' sale of one security and
purchase of a similar security, the Series does not receive principal and
interest on the securities sold. The Series may also enter into standby
commitment agreements in which the Series is committed, for a stated period of
time, to buy a stated amount of a fixed income security which may be issued and
sold to the Series at the option of the issuer. The price of the security is
fixed at the time of the commitment, and the Series is paid a commitment fee
whether the security is issued or not.
The Series may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with the performance of the Aggregate Bond Index. Derivatives may allow the
Fund to increase or decrease its exposure to the Aggregate Bond Index quickly
and at less cost than buying or selling bonds. The Series may invest in options
and futures and other derivative instruments in order to gain market exposure
quickly in the event of subscriptions, to maintain liquidity in the event of
redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Series may enter into short sales in order to
adjust the weightings of particular securities represented in a derivative to
more accurately reflect the securities' weightings in the target index.
International Index Series
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the U.S.
Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The countries currently included in
the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United
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Kingdom. The weighting of the EAFE Index among these countries is based upon
each country's gross domestic product, and not relative market capitalizations.
The stocks in the EAFE Index are chosen by Morgan Stanley & Co. Incorporated
("Morgan Stanley"). Morgan Stanley chooses stocks for inclusion in the EAFE
Index based on market capitalization, trading activity and the overall mix of
industries represented in the index, among other factors. The EAFE Index is
generally considered broadly representative of the performance of stocks traded
in the international markets. Morgan Stanley's selection of a stock for the
EAFE Index does not mean that Morgan Stanley believes the stock to be an
attractive investment.
The Series may not invest in all of the countries, or all of the companies
within a country, represented in the EAFE Index, or in the same weightings as
the EAFE Index. Instead, the International Index Series may invest in a
statistically selected sample of equity securities included in the EAFE Index
and in derivative instruments correlated with countries within the EAFE Index.
The Series may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Series to increase
or decrease its exposure to the EAFE Index quickly and at less cost than buying
or selling stocks. The Series will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
INVESTMENT RISKS.
This section contains a summary discussion of the general risks of investing in
a Series. As with any mutual fund, there can be no guarantee that a Series will
meet its goals or that a Series' performance will be positive for any period of
time.
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S&P 500 Index Series, Small Cap Index Series and International Index Series
Stock Market Risk -- Stock market risk is the risk that the stock markets will
go down in value, including the possibility that the markets will go down
sharply and unpredictably.
Aggregate Bond Index Series
Interest Rate Risk -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities.
Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
Event Risk -- Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
Mortgage Backed Securities -- 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 owners of these securities have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, however, fewer borrowers refinance
and certain types of mortgage backed securities are paid off more slowly than
originally anticipated, which causes the value of these securities to fall.
This risk is known as "extension risk". Because of prepayment risk and
extension risk, small movements in interest rates (both increases and
decreases) may significantly reduce the value of certain mortgage backed
securities.
Dollar Rolls -- Dollar Rolls involve the risk that the market value of the
securities that the Series is committed to buy may decline below the price of
the securities the Series has sold. These transactions may involve leverage.
The Series will engage in dollar rolls to enhance return and not for the
purpose of borrowing.
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Standby Commitment Agreements -- Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less than its
purchase price.
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 Series 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 Series loses both the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
Foreign Government Debt -- The Aggregate Bond Index Series may invest in debt
securities issued or guaranteed by foreign governments or their agencies.
Investments in these securities subject the Series to the risk that a
government entity may delay or refuse to pay interest or repayment of principal
on its debt for various reasons, including cash flow problems, insufficient
foreign currency reserves, political considerations, the relative size of its
debt position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There is no bankruptcy proceeding by which all or part of debt
securities that a government entity has not repaid may be collected.
International Index Series and Aggregate Bond Index Series
Foreign Market Risk -- Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that a Series will
lose money. In particular, a Series is subject to the risk that because there
are generally fewer investors in foreign markets and a smaller number of
securities traded each day, it may make it difficult for a Series to buy and
sell certain securities. In addition, prices of foreign securities may go up
and down more than prices of securities traded in the U.S.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the U.S. 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,
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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 a Series' ability to
purchase or sell foreign securities or transfer a Series' assets or income back
into the U.S., or otherwise adversely affect a Series' operations. Other foreign
market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. does. Other countries may not have laws to protect
investors the way that the United States' securities laws do. For example, some
foreign countries may have no laws or rules against insider trading (this is
when a person buys or sells a company's securities based on "inside" non-public
information about that company). Accounting standards in other countries are not
necessarily the same as in the U.S. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may be
harder for a Series' portfolio manager to completely and accurately determine a
company's financial condition. Also, brokerage commissions and other costs of
buying or selling securities often are higher in foreign countries than they are
in the United States. This reduces the amount the Series can earn on its
investments.
International Index Series
Currency Risk and Exchange Risk -- Securities in which the International Index
Series invests are usually denominated or quoted in currencies other than the
U.S. dollar. Changes in foreign currency exchange rates will affect the value
of the securities of the Series. Generally, when the U.S. dollar rises in value
against a foreign currency, your investment in 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 value against a
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foreign currency, your investment in a security denominated in that currency
gains value because the currency is worth more U.S. dollars. This risk is
generally known as "currency risk" which is the possibility that a stronger
U.S. dollar will reduce returns for U.S. investors investing overseas and a
weak U.S. dollar will increase returns for U.S. investors investing overseas.
Certain Risks of Holding Series Assets Outside the U.S. --The International
Index Series generally holds the foreign securities and cash in which it invests
outside the U.S. in foreign banks and securities depositories. Certain of such
foreign banks and securities depositories may be recently organized or new to
the foreign custody business and/or may have operations subject to limited or no
regulatory oversight. Also, the laws of certain countries may put limits on the
Series' ability to recover its assets if a foreign bank or depository or issuer
of a security or any of their agents goes bankrupt. In addition, it can be
expected that it will be more expensive for the Series to buy, sell, and hold
securities in certain foreign markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other costs. The increased expense to
invest in foreign markets reduces the amount the Series can earn on its
investments and typically results in a higher operating expense ratio for the
Series than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Series to carry out transactions. If a
Series cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If a Series cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Series could be liable to that party for any
losses incurred.
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Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.
European Economic and Monetary Union ("EMU") -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has 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. These securities trade and
make dividend and other payments only in euros. Like other investment companies
and business organizations, including the companies in which the Series invest,
the Series could be adversely affected:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned.
. If a participating country
withdraws from EMU.
. If the computing, accounting and
trading systems used by a Series'
service providers, or by other
entities with which the Series or
its service providers do
business, are not capable of
recognizing the euro as a
distinct currency.
Small Cap Index Series
Small Cap -- Small cap 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 Series'
investment in a small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger cap securities or the
stock market as a whole. Investing in small caps securities requires a long-
term view.
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[DETAILS ABOUT THE FUND LOGO APPEARS HERE]
All Series
Selection Risk -- Selection risk is the risk that a Series' investments, which
may not fully replicate the index, may perform differently from the securities
in the index.
Derivatives -- Derivatives allow a Series to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments. A Series
may use the following types of derivative instruments including: futures,
forwards and options, options on futures, swaps and indexed securities.
Derivatives are volatile and involve significant risks, which may include:
. Leverage risk -- the risk asso-
ciated with certain types of in-
vestments or trading strategies
(such as borrowing money to in-
crease the amount of invest-
ments) that relatively small
market movements may result in
large changes in the value of an
investment. Certain investments
or trading strategies that in-
volve leverage can result in
losses that greatly exceed the
amount originally invested.
. Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction)
on a derivative transaction will
be unable to honor its financial
obligation to a Series.
. Currency risk -- the risk that
changes in the exchange rate be-
tween currencies will adversely
affect the value (in U.S. dollar
terms) of an investment.
. Liquidity risk -- the risk that
certain securities may be diffi-
cult 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 Series may use derivatives for anticipatory hedging. Anticipatory hedging
is a strategy in which a Series uses a derivative to offset the risk that
securities in which the Series intends to invest will increase in value before
the Series has an opportunity to purchase the securities. The Series will use
derivatives for anticipatory hedging in order to gain exposure efficiently to
their underlying indexes in the event the Series receive cash inflows.
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Borrowing and Leverage -- The Series may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Series shares and in the yield on a Series' portfolio.
Borrowing will cost a Series interest expense and other fees. The cost of
borrowing may reduce a Series' return.
Certain securities that a Series buys may create leverage, including, for
example, when issued securities, forward commitments and options.
Illiquid Securities -- Each Series 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 a Series
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 a
Series 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. A Series may be unable to sell them on
short notice or may be able to sell them only at a price below current value. A
Series may get only limited information about the issuer, so may be less able
to predict a loss. In addition, if Series management receives material adverse
non public information about the issuer, a Series 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 -- Each Series may lend securities to financial institutions
that provide cash or 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, a Series may lose money and there may be
a delay in recovering the loaned securities. A Series 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 a Series.
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Short Sales -- A Series may borrow the security sold short to make delivery to
the buyer. The Series must then replace the security it has borrowed. If the
price of a security sold short goes up between the time of the short sale and
the time the Series must deliver the security to the lender, the Series will
incur a loss. The Series must also pay the lender any interest accrued during
the period of the loan.
PART B
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If you would like further information about the Series, including how they
invest, please see Part B.
Investment Adviser
Item 6. Management, Organization, and Capital Structure.
Merrill Lynch Asset Management, manages the Series' investments and their
business operations under the overall supervision of the Board of Trustees of
Merrill Lynch Index Trust. The Investment Adviser has the responsibility for
making all investment decisions for the Series.
The table below shows the fee earned by the Investment Adviser:
<TABLE>
<CAPTION>
Fee Rate for the fiscal year
ended December 31, 1998
Contractual (reflects voluntary waiver,
Series Fee Rate where applicable)
- ------ ----------- ----------------------------
<S> <C> <C>
S&P 500 Index Series .05% .05%
Small Cap Index Series .08% 0%
Aggregate Bond Index Series .06% .06%
International Index Series .11% .04%
</TABLE>
Merrill Lynch Asset Management is part of the Asset Management Group, which had
approximately $ 515 billion in investment company and other portfolio assets
under management as of March 1999. This amount includes assets managed for
Merrill Lynch affiliates.
Capital Stock.
Investors in the Trust have no preemptive or conversion rights and beneficial
interests in the Trust are fully paid and non-assessable. The Trust has no
current intention to hold annual meetings of investors, except to the extent
required by the Investment Company Act, but will hold special meetings of
investors when in the judgment of the Trustees it is necessary or desirable to
submit matters for an investor vote. Upon liquidation of the Trust or any
Series, investors would be entitled to share, in proportion to their investment
in the Trust or Series (as the case may be), in the assets of the Trust or
Series available for distribution to investors.
The Trust is organized as a Delaware business trust and currently consists of
four Series. Each investor is entitled to a vote in proportion to its
investment in the Trust or the Series (as the case may be). Investors in any
Series will participate equally in accordance with their pro rata interests in
the earnings, dividends and assets of the particular Series. The Trust reserves
the right to create and issue interests in additional Series.
Investments in the Trust may not be transferred, but an investor may withdraw
all or any portion of its investment in any Series on any day on which the New
York Stock Exchange is open at net asset value. The complete withdrawal of any
investor from a Series will result in the dissolution of the Series unless the
remaining investors by affirmative vote of over 50% of total outstanding
interests of the Series agree to continue the Series.
15
<PAGE>
Item 7. Shareholder Information.
- --------------------------------------------------------------------------------
Pricing.
Each Series calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open ("Pricing Day"),
fifteen minutes after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining the price of an interest in the Series is the next one calculated
after the purchase or redemption order is placed. The net asset value is
determined by deducting the amount of the Series' total liabilities from the
value of its total assets. Net asset value is generally calculated by valuing
each security at its closing price for the day. Many of the International Index
Series' and Aggregate Bond Index Series' investments are traded on non-U.S.
securities exchanges that close many hours before the New York Stock Exchange.
Events that could affect securities prices that occur between these times
normally are not reflected in a Series' net asset value. Non-U.S. securities
sometimes trade on days that the New York Stock Exchange is closed. As a result,
a Series' net asset value may change on days when an investor will not be able
to purchase or redeem the Series' shares. If an event occurs after the close of
a foreign exchange that is likely to significantly affect a Series net asset
value, "fair value" pricing may be used. This means that a Series' may value its
foreign holdings at prices other than their last closing prices, and the Series'
net asset value will reflect this.
Each investor in the Trust may add to or reduce its investment in a Series on
each Pricing Day. The value of each investor's beneficial interest in a Series
will be determined by multiplying the net asset value of the Series by the
percentage, effective for that day, that represents that investor's share of
the aggregate beneficial interests in such Series. Any additions or
withdrawals, which are to be effected on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in a Series will
then be re-computed as the percentage equal to the fraction (i) the numerator
of which is the value of such investor's investment in the Series 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 Series
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Series 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 Series by all investors in the Portfolio. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Series as of 15 minutes after the close of business
of the New York Stock Exchange on the next Pricing Day of the Series.
Purchase of Securities.
Beneficial interests in the Trust are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in each Series of the Trust may only
be made by a limited number of institutional investors including investment
companies, common or commingled trust funds, group trusts, and certain other
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any "security" within the meaning of the 1933
Act.
There is no minimum initial or subsequent investment in each Series. However,
because each Series intends to be as fully invested at all times as is
reasonably consistent with its investment objectives and policies in order to
enhance the yield on its assets, investments must be made in federal funds
(i.e., monies credited to the account of the respective Series' custodian bank
by a Federal Reserve Bank).
Each Series reserves the right to cease accepting investments at any time or to
reject any investment order.
Redemption.
An investor in the Trust may withdraw all or a portion of its investment in any
Series on any Pricing Day at the net asset value next determined after a
withdrawal request in proper form is furnished by the investor to the Series.
The proceeds of the withdrawal will be paid by the Series normally on the
business day on which the withdrawal is effected, but in any event within seven
days. Investments in any Series of the Trust may not be transferred.
16
<PAGE>
Tax Consequences.
Under the anticipated method of operation of the Series, each Series will be
treated as a separate partnership for tax purposes and, thus, will not be
subject to any income tax. The Series have received a ruling from the Internal
Revenue Service establishing their status as partnerships. Based upon the
status of each Series as a partnership, each investor in a Series will be
taxable on its share (as determined in accordance with the governing
instruments of the Series) of such Series' ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code and Treasury Regulations promulgated
thereunder.
It is intended that each Series' assets, income and distributions will be
managed in such a way that an investor in any Series will be able to satisfy
the requirements of Subchapter M of the Code assuming that the investor
invested all of its assets in the Series.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Series could be adversely
affected if the computer systems used by the Series' management or other Series
service providers do not properly address this problem before January 1, 2000.
The Series' management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Series' other service providers have told the Series' management that they
also expect to resolve the year 2000 Problem, and the Series' management will
continue to monitor the situation as the year 2000 approaches. However, if the
problem has not been fully addressed, the Series could be negatively affected.
The Year 2000 Problem could also have a negative impact on the companies in
which the Series invest. This negative impact may be greater for companies in
foregin markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Series invest have
Year 2000 Problems, the Series could be adversely affected.
Item 8.--Distribution Arrangements.
Investments in a Series will be made without a sales load. All investments are
made at net asset value next determined after an order is received by the
Series. The net asset value of each Series is determined on each Pricing Day.
The Trust's placement agent is Merrill Lynch Funds Distributor, a division of
Princeton Funds Distributor, Inc.
17
<PAGE>
PART B
Except as otherwise indicated herein, all capitalized terms shall have the
meaning assigned to them in Part A hereof.
Item 10.
Merrill Lynch Index Trust (the "Trust") currently consists of four series:
Merrill Lynch S&P 500 Index Series ("S&P 500 Index Series"), Merrill Lynch Small
Cap Index Series ("Small Cap Index Series"), Merrill Lynch Aggregate Bond Index
Series ("Aggregate Bond Index Series") and Merrill Lynch International Index
Series ("International Index Series") (together, the "Series") and each, a
("Series"). This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Series, dated , 1999
(the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
the Trust at (800) 637-3863, or by writing to Merrill Lynch index Trust, P.O.
Box 9011, Princeton, New Jersey 08543-9011. The Prospectus is incorporated by
reference into this Statement of Additional Information, and this Statement of
Additional Information has been incorporated by reference into the Prospectus.
The Series' audited financial statements are incorporated in this Statement of
Additional Information by reference to their 1998 annual reports to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
The date of this Statement of Additional Information is April 28, 1999.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Trust History.............................................................. 3
Description of the Series and Their Investments and Risks.................. 3
Management of the Registrant............................................... 20
Control Persons and Principal Holders of Securities........................ 22
Investment Advisory And Other Services..................................... 23
Brokerage Allocation and Other Practices................................... 25
Capital Stock and Other Securities......................................... 25
Purchase, Redemption and Pricing of Securities............................. 26
Taxation of the Trust...................................................... 27
Underwriters............................................................... 27
Calculation of Performance Data............................................ 27
Financial Statements....................................................... 27
</TABLE>
2
<PAGE>
Item 11. Trust History.
The Trust is a Delaware business trust organized on August 28, 1996. S&P 500
Index Series, Small Cap Index Series, Aggregate Bond Index Series, and
International Index Series are each separate series of the Trust.
Item 12. Description of the Series and Their Investments and Risks.
Investment Objectives, Strategies and Risks.
Each Series is a non-diversified mutual fund whose investment objective is
to provide investment results that, before expenses, seek to replicate the
total return (i.e., the combination of capital changes and income) of a
specified securities index.
The Series' investment objectives are not fundamental policies and may be
changed by the Board of Trustees of the Trust (the "Trustees"), without
shareholder approval. The Trustees may also change the target index of any
respective Series if they consider that a different index would facilitate the
management of the Series in a manner which better enables the Series to seek
to replicate the total return of the market segment represented by the current
index. The investment objectives and policies are described in more detail in
Part A.
S&P 500 Index Series
The investment objective of the S&P 500 Index Series is to match the
performance of the Standard & Poor's(R) 500 Composite Stock Price Index (the
"S&P 500") as closely as possible before the deduction of Series expenses.
There can be no assurance that the investment objective of the Series will be
achieved.
In seeking to replicate the total return of the S&P 500, the Investment
Adviser generally will allocate the S&P 500 Index Series' investments among
common stocks in approximately the same weightings as the S&P 500. In
addition, Merrill Lynch Asset Management, L.P. (the "Investment Adviser") may
use options and futures contracts and other types of financial instruments
relating to all or a portion of the S&P 500. At times the Series may not
invest in all of the common stocks in the S&P 500, or in the same weightings
as in the S&P 500. At those times, the Series chooses investments so that the
market capitalizations, industry weighting and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the S&P 500 as a whole. The S&P 500 Index Series may also engage in securities
lending. See "Other Types of Investments and Investment Techniques."
The S&P 500 is composed of the common stocks of 500 large capitalization
companies from various industrial sectors, most of which are listed on the New
York Stock Exchange Inc. A company's stock market capitalization is the total
market value of its outstanding shares. The S&P 500 represents a significant
portion of the market value of all common stocks publicly traded in the United
States.
Small Cap Index Series
The investment objective of the Small Cap Index Series is to match the
performance of the Russell 2000(R) Index (the "Russell 2000") as closely as
possible before the deduction of Series expenses. There can be no assurance
that the investment objective of the Series will be achieved.
3
<PAGE>
In seeking to replicate the total return of the Russell 2000, the Investment
Adviser may not allocate the Small Cap Index Series' investments among all of
the common stocks in the Russell 2000, or in the same weightings as the
Russell 2000. Instead, the Small Cap Index Series may invest in a
statistically selected sample of the stocks included in the Russell 2000 and
other types of financial instruments. The Investment Adviser may use options
and futures contracts and other types of financial instruments relating to all
or a portion of the Russell 2000. The investments to be included in the Small
Cap Index Series will be selected so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks, and of the
stocks underlying or otherwise related to the foregoing financial instruments,
closely approximate those same factors in the Russell 2000, with the objective
of reducing the selected investment portfolio's deviation from the performance
of the Russell 2000 (this deviation is referred to as "tracking error"). The
Small Cap Index Series may also engage in securities lending. See "Other Types
of Investments and Investment Techniques."
The Russell 2000 is composed of approximately 2,000 smaller-capitalization
common stocks from various industrial sectors. A company's stock market
capitalization is the total market value of its outstanding shares.
Aggregate Bond Index Series
The investment objective of the Aggregate Bond Index Series is to match the
performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond
Index") as closely as possible before the deduction of Series expenses. There
can be no assurance that the investment objective of the Series will be
achieved.
In seeking to replicate the total return of the Aggregate Bond Index, the
Investment Adviser may not allocate the Aggregate Bond Index Series' investments
among all of the bonds in the Aggregate Bond Index, or in the same weightings as
the Aggregate Bond Index. Instead, the Aggregate Bond Index Series may invest in
a statistically selected sample of bonds included in the Aggregate Bond Index,
or in a statistically selected sample of bonds not included in the index but
correlated with bonds that are in the index, and in derivative instruments
linked to the Aggregate Bond Index. The Investment Adviser may use options and
futures contracts and other types of financial instruments relating to all or a
portion of the Aggregate Bond Index. The Series may invest in bonds not included
in the index, but which are selected to reflect characteristics such as
maturity, duration or credit quality simliar to bonds in the index. The
investments to be included in the Aggregate Bond Index Series will be selected
with the objective of reducing the selected investment portfolio's deviation
from the performance of the Aggregate Bond Index (tracking error). Selection of
bonds other than those included in the Aggregate Bond Index, or in different
weightings from the Index, may result in levels of interest rate, credit or
prepayment risks that differ from the levels of risks on the securities
composing the Aggregate Bond Index. See "Risk Factors--Investments in Fixed-
Income Securities." The Aggregate Bond Index Series may also engage in
securities lending. See "Other Types of Investments and Investment Techniques."
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by entities,
such as the World Bank, constituted by the governments of several countries to
promote economic development) and mortgage-backed securities with maturities
greater than one year. Corporate bonds contained in the Aggregate Bond Index
represent issuers from various industrial sectors.
The Aggregate Bond Index Series may invest in U.S. Treasury bills, notes and
bonds and other "full faith and credit" obligations of the U.S. Government.
The Aggregate Bond Index Series may also invest in U.S. Government agency
securities, which are debt obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government. "Agency" securities may not be
backed by the "full faith and credit" of the U.S. Government. U.S. Government
agencies may include the Federal Farm Credit Bank, the Resolution Trust
Corporation and the Government National Mortgage Association. "Agency"
obligations are not explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury bonds.
Because the Aggregate Bond Index is composed of investment grade bonds, the
Aggregate Bond Index Series will invest in corporate bonds rated investment
grade--i.e., those rated at least Baa3 by Moody's
4
<PAGE>
Investors Service, Inc. ("Moody's") or BBB--by Standard & Poor's Ratings Group
("S&P"), the equivalent by another nationally recognized statistical rating
organization ("NRSRO") or, if unrated, of equal quality in the opinion of the
Investment Adviser. Corporate bonds ranked in the fourth highest rating
category, while considered "investment grade", have more speculative
characteristics and are more likely to be downgraded than securities rated in
the three highest ratings categories. In the event that the rating of a security
in the Aggregate Bond Index Series is lowered below Baa or BBB, the Aggregate
Bond Index Series may continue to hold the security. Such securities rated below
investment grade are considered to be speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Descriptions of the ratings of bonds are contained in the Appendix.
The Aggregate Bond Index Series may also invest in other instruments that
"pass through" payments on such obligations, such as collateralized mortgage
obligations ("CMOs").
International Index Series
The investment objective of the International Index Series is to match the
performance of the Morgan Stanley Capital International EAFE(R) GDP Weighted
Index (the "EAFE Index") as closely as possible before the deduction of Series
expenses. There can be no assurance that the investment objective of the
Series will be achieved.
In seeking to replicate the total return of the EAFE Index, the Investment
Adviser may not allocate the International Index Series' investments among all
of the countries, or all of the companies within a country, represented in the
EAFE Index, or in the same weightings as the EAFE Index. Instead, the
International Index Series may invest in a statistically selected sample of
the equity securities included in the EAFE Index and other types of financial
instruments. In addition, the Investment Adviser may use options and futures
contracts and other types of financial instruments relating to all or a
portion of the EAFE Index. The investments to be included in the International
Index Series will be selected so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks, and of the
stocks underlying or otherwise related to the foregoing financial instruments,
closely approximate those same factors in the EAFE Index, with the objective
of reducing the selected investment portfolio's deviation from the performance
of the EAFE Index (tracking error). The International Index Series may also
engage in securities lending. See "Other Types of Investments and Investment
Techniques."
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the
United States and which are selected from among the larger capitalization
companies in such markets. A company's stock market capitalization is the
total market value of its outstanding shares. The countries currently included
in the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United Kingdom.
The weighting of the EAFE Index among these countries is based upon gross
domestic product (GDP). (Market capitalization is the basis for country
weightings in another version of the EAFE Index. Using the GDP weighting tends
to decrease the relative weighting of Japan and the United Kingdom while
increasing the weighting of certain European countries, generally resulting in
a more diversified EAFE Index.)
About Indexing and Management of the Series
About Indexing. The Series are not managed according to traditional methods
of "active" investment management, which involve the buying and selling of
securities based upon economic, financial, and market analyses and investment
judgment. Instead, each Series, utilizing essentially a "passive" or
"indexing" investment approach, seeks to replicate, before each Series'
expenses (which can be expected to reduce the total return of the Series), the
total return of its respective index.
5
<PAGE>
Indexing and Managing the Series. Each Series will be substantially invested
in securities in the applicable index, and will invest at least 80% of its
assets in securities or other financial instruments which are contained in or
correlate with securities in the applicable index (equity securities, in the
case of the S&P 500 Index Series, Small Cap Index Series and International Index
Series (the "Equity Series"), and fixed-income securities in the case of the
Aggregate Bond Index Series (the "Fixed-Income Series")).
Because each Series seeks to replicate the total return of its respective
index, generally the Investment Adviser will not attempt to judge the merits
of any particular security as an investment but will seek only to replicate
the total return of the securities in the relevant index. However, the
Investment Adviser may omit or remove a security which is included in an index
from the portfolio of a Series if, following objective criteria, the
Investment Adviser judges the security to be insufficiently liquid or believes
the merit of the investment has been substantially impaired by extraordinary
events or financial conditions.
The Investment Adviser may acquire certain financial instruments based upon
individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets. Others may provide for the payment to a Series or by a Series of
amounts based upon the performance (positive, negative or both) of a
particular security or basket. The Investment Adviser will select such
instruments when it believes that the use of the instrument will correlate
substantially with the expected total return of a target security or index. In
connection with the use of such instruments, the Investment Adviser may enter
into short sales in an effort to adjust the weightings of particular
securities represented in the basket to more accurately reflect such
securities' weightings in the target index.
Each Series' ability to replicate the total return of its respective index
may be affected by, among other things, transaction costs, administration and
other expenses incurred by the Series, taxes (including foreign withholding
taxes, which will affect the International Index Series and the Aggregate Bond
Index Series due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Series, and the timing and amount
of Series investor contributions and withdrawals, if any. Under normal
circumstances, it is anticipated that each Series' total return over periods
of one year and longer will, on a gross basis and before taking into account
expenses (incurred at either the Series or the Series level) be within 10
basis points (a basis point is one one-hundredth of one percent (0.01%)) for
the S&P 500 Index Series, 100 basis points for the Small Cap Index Series, 150
basis points for the International Index Series, and 50 basis points for the
Aggregate Bond Index Series, of the total return of the applicable indices.
There can be no assurance, however, that these levels of correlation will be
achieved. In the event that this correlation is not achieved over time, the
Trustees will consider alternative strategies for the Series. Information
regarding correlation of a Series' performance to that of a target index may
be found in the Series' annual report.
Each Series' investment objectives and policies are described in Part A.
Certain types of securities in which a Series may invest and certain
investment practices that the Series may employ are discussed more fully
below.
Other Investment Policies, Practices and Risk Factors
Cash Management. Generally, the Investment Adviser will employ futures and
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the Investment Adviser, a portion of a Series'
assets may be invested in certain types of instruments with remaining
maturities of 397 days or less for liquidity purposes. Such instruments would
consist of: (i) obligations of the U.S. Government, its agencies,
instrumentalities, authorities or political subdivisions ("U.S. Government
Securities"); (ii) other fixed-income securities rated Aa or higher by Moody's
or AA or higher by S&P or, if unrated, of comparable quality in the opinion of
the Investment Adviser; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Series invests in
commercial paper, bank obligations or repurchase agreements, the issuer or the
issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA
or higher by S&P or outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of the Investment Adviser.
6
<PAGE>
Dollar Rolls. The Aggregate Bond Index Series may enter into dollar rolls,
in which the Aggregate Bond Index Series will sell securities for delivery in
the current month and simultaneously contract to repurchase substantially
similar (the same type and coupon) securities on a specified future date from
the same party. During the roll period, the Aggregate Bond Index Series
forgoes principal and interest paid on the securities sold. The Aggregate Bond
Index Series is compensated by the difference between the current sales price
and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
Dollar rolls involve the risk that the market value of the securities
subject to the Aggregate Bond Index Series' forward purchase commitment may
decline below the price of the securities the Aggregate Bond Index Series has
sold. In the event the buyer of the securities files for bankruptcy or becomes
insolvent, the Aggregate Bond Index Series' use of the proceeds of the current
sale portion of the transaction may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Aggregate
Bond Index Series' obligation to purchase the similar securities in the
forward transaction. Dollar rolls are speculative techniques which can be
deemed to involve leverage. The Aggregate Bond Index Series will establish a
segregated account with its custodian in which it will maintain liquid
securities in an aggregate amount equal to the amount of the forward
commitment. The Aggregate Bond Index Series will engage in dollar roll
transactions to enhance return and not for the purpose of borrowing. Each
dollar roll transaction is accounted for as a sale of a portfolio security and
a subsequent purchase of a substantially similar security in the forward
market.
Short Sales. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the Investment Adviser may
sell a security a Series does not own, or in an amount greater than the Series
owns (i.e., make short sales). Such transactions will be used only in an
effort to adjust the weightings of particular securities represented in the
basket to reflect such securities' weightings in the target index. The
Investment Adviser will not employ short sales in reflection of the Investment
Adviser's outlook for the securities markets or for the performance of the
securities sold short. Generally, to complete a short sale transaction, a
Series will borrow the security to make delivery to the buyer. The Series is
then obligated to replace the security borrowed. The price at the time of
replacement may be more or less than the price at which the security was sold
by the Series. Until the security is replaced, the Series is required to pay
to the lender any interest which accrues during the period of the loan. To
borrow the security, the Series may be required to pay a premium which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker to the extent necessary to meet margin requirements
until the short position is closed out. Until the Series replaces the borrowed
security, it will (a) maintain in a segregated account with its custodian cash
or liquid securities at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
market value of the security sold short or (b) otherwise cover its short
position.
Cash Flows; Expenses. The ability of each Series to satisfy its investment
objective depends to some extent on the Investment Adviser's ability to manage
cash flow (primarily from purchases and redemptions and distributions from the
Series' investments). The Investment Adviser will make investment changes to a
Series' portfolio to accommodate cash flow while continuing to seek to
replicate the total return of the Series' target index. Investors should also
be aware that the investment performance of each index is a hypothetical
number which does not take into account brokerage commissions and other
transaction costs, custody and other costs of investing, that will be borne by
the Series. Finally, since each Series seeks to replicate the total return of
its target index, the Investment Adviser generally will not attempt to judge
the merits of any particular security as an investment.
Investment in Fixed-Income Securities. Because the Aggregate Bond Index
Series will invest in fixed-income securities, it will be subject to the
general risks inherent in such securities, primarily interest rate risk,
credit risk and prepayment risk.
Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. As a rule bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline; if interest
rates fall, bond prices generally rise. In addition, for a given change in
interest rates, longer-maturity bonds generally
7
<PAGE>
fluctuate more in price than shorter-maturity bonds. To compensate investors
for these larger fluctuations, longer-maturity bonds usually offer higher
yields than shorter-maturity bonds, other factors, including credit quality,
being equal. These basic principles of bond prices also apply to U.S.
Government Securities. A security backed by the "full faith and credit" of the
U.S. Government is guaranteed only as to its stated interest rate and face
value at maturity, not its current market price. Just like other fixed-income
securities, government-guaranteed securities will fluctuate in value when
interest rates change.
Credit risk is the possibility that an issuer of securities held by the
Aggregate Bond Index Series will be unable to make payments of either interest
or principal or will be perceived to have a diminished capacity to make such
payments in the future. The credit risk of the Aggregate Bond Index Series is
a function of the diversification and credit quality of its underlying
securities.
The Aggregate Bond Index Series may also be exposed to event risk, which
includes the possibility that fixed-income securities held by the Aggregate
Bond Index Series may suffer a substantial decline in credit quality and
market value due to issuer restructurings. Certain restructurings such as
mergers, leveraged buyouts, takeovers or similar events, are often financed by
a significant expansion of corporate debt. As a result of the added debt
burden, the credit quality and market value of a firm's existing debt
securities may decline significantly. Other types of restructurings (such as
corporate spinoffs or privatizations of governmental or agency borrowers or
the termination of express or implied governmental credit support) may also
result in decreased credit quality of a particular issuer.
Prepayment risk is the possibility that the principal of the mortgage loans
underlying mortgage-backed securities may be prepaid at any time. As a general
rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates the Aggregate Bond Index Series may be
required to reinvest its assets in securities with lower interest rates. In
periods of increasing interest rates, prepayments generally may decline, with
the effect that the mortgage-backed securities held by the Aggregate Bond
Index Series may exhibit price characteristics of longer-term debt securities.
The corporate substitution strategy used by the Aggregate Bond Index Series
(discussed above) may increase or decrease the Aggregate Bond Index Series'
exposure to the foregoing risks relative to those of the Aggregate Bond Index.
Foreign Investment Risks
Foreign Market Risk. Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that the Series will
lose money. In particular, the Series are 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 be difficult for the Series to buy and sell
securities on those exchanges. In addition, prices of foreign securities may
fluctuate 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 that 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 a Series' ability to purchase or sell foreign securities or
transfer a Series' assets or income back into the United States, or otherwise
adversely affect a Series' operations. Other foreign market risks
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include foreign exchange controls, difficulties in pricing securities,
defaults on foreign government securities, difficulties in enforcing favorable
legal judgments in foreign courts, and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk. Securities in which the International Index
Series invests may be denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value of
the securities of the Series. Generally, when the U.S. dollar rises in value
against a foreign currency, your investment in a security denominated in that
currency loses value because the currency is worth fewer U.S. dollars.
Similarly when the U.S. dollar decreases in value against a foreign currency,
your investment in a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk is generally known as
"currency risk" which is the possibility that a stronger U.S. dollar will
reduce returns for U.S. investors investing overseas and a weak U.S. dollar
will increase returns for U.S. investors investing overseas.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Also, brokerage
commissions and other costs of buying or selling securities often are higher
in foreign countries than they are in the United States. This reduces the
amount the Series can earn on its investments.
Certain Risks of Holding Series Assets Outside the United States. The Series
generally hold the foreign securities and cash in which they invest outside
the United States in foreign banks and securities depositories. Certain of
such foreign banks and securities depositories may be recently organized or
new to the foreign custody business and/or may have operations subject to
limited or no regulatory oversight. Also, the laws of certain countries may
put limits on a Series' ability to recover its assets if a foreign bank or
depository or issuer of a security or any or their agents goes bankrupt. In
addition, it can be expected that it will be more expensive for a Series to
buy, sell, and hold securities in certain foreign markets than in the U.S.
market due to higher brokerage, transaction, custody and/or other costs. The
increased expense to invest in foreign market reduces the amount a Series can
earn on its investments and typically results in a higher operating expense
ratio for the Series than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures
and trade regulations also may involve certain risks (such as delays in
payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Series to carry out
transactions. If a Series cannot settle or is delayed in settling a purchase
of securities, it may miss attractive investment opportunities and certain of
its assets may be uninvested with no return earned thereon for some period. If
a Series cannot settle or is delayed in settling a sale of securities, it may
lose money if the value of the security then declines or, if it has contracted
to sell the security to another party, the Series could be liable to that
party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
European Economic and Monetary Union ("EMU"). 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") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national
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currencies of all EMU participants by July 1, 2002. EMU took effect for the
initial EMU participants as of January 1, 1999, and was implemented over the
weekend January 1, 1999 through January 3, 1999 ("conversion weekend"). Upon
implementation of EMU, certain securities issued in participating EU countries
(beginning with government and corporate bonds) were redenominated in the
euro, and thereafter, were listed, traded, and made dividend and other
payments only in euros.
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 would 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 the 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 that have been 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 Series' investments in Europe generally or in specific countries
participating in EMU. Gains or losses resulting from the euro conversion may
be taxable to Series shareholders under foreign or, in certain limited
circumstances, U.S. tax laws.
When-issued Securities and Forward Commitments. The Aggregate Bond Index
Series may purchase or sell securities that it is entitled to receive on a
when-issued basis. The Aggregate Bond Index Series may also purchase or sell
securities through a forward commitment. These transactions involve the
purchase or sale of securities by the Series at an established price with
payment and delivery taking place in the future. The Aggregate Bond Index
Series enters into these transactions to obtain what is considered an
advantageous price to the Series at the time of entering into the transaction.
The Aggregate Bond Index Series has not established any limit on the
percentage of its assets that may be committed in connection with these
transactions. When the Aggregate Bond Index Series is purchasing securities in
these transactions, the Series 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 Series' purchase price. The
Aggregate Bond Index Series 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.
Illiquid or Restricted Securities. Each Series 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 a Series' assets in
illiquid securities may restrict the ability of a Series 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 a Series' operations require cash, such as
when the Series redeems shares or pays dividends, and could result in the
Series borrowing to meet short-term cash requirements or incurring capital
losses on the sale of illiquid investments.
Each Series 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 the 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 a Series or less than
their fair market value.
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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 a Series are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Series
may be required to bear the expenses of registration. Certain of a Series'
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, a Series may obtain access to
material nonpublic information which may restrict the Series' ability to
conduct portfolio transactions in such securities.
144A Securities. Each Series may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Trustees has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities that the Series'
management determines are as liquid as publicly registered non-investment
grade debt securities. The Board of Trustees has adopted guidelines and
delegated to the Series' management the daily function of determining and
monitoring liquidity of restricted securities. The Board of Trustees,
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 Board of Trustees will carefully monitor the
Series' investments in these securities. This investment practice could have
the effect of increasing the level of illiquidity in the Series to the extent
that qualified institutional buyers become for a time uninterested in
purchasing these securities.
Standby Commitment Agreements. The Aggregate Bond Index Series may enter
into standby commitment agreements. These agreements commit the Aggregate Bond
Index Series, for a stated period of time, to purchase a stated amount of
fixed-income securities that may be issued and sold to the Series at the
option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement the
Aggregate Bond Index Series is paid a commitment fee, regardless of whether or
not the security is ultimately issued. The Aggregate Bond Index Series will
enter into such agreements for the purpose of investing in the security
underlying the commitment at a yield and price that is considered advantageous
to the Series. The Aggregate Bond Index Series will not enter into a standby
commitment with a remaining term in excess of 90 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 all other
illiquid securities, will not exceed 15% of its net assets taken at the time
of the commitment. The Aggregate Bond Index Series 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
Aggregate Bond Index Series may bear the risk of a decline in the value of
such security and may not benefit from an appreciation in the value of the
security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Aggregate Bond Index Series'
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. Each Series may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the
Investment Adviser otherwise deems to be credit worthy. Under such agreements,
the counterparty agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the
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agreement. This insulates the Series from fluctuations in the market value of
the underlying security during such period. A Series may not invest more than
15% of its net assets in repurchase agreements maturing in more than seven
days (together with other illiquid securities). Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. A Series will require the seller
to provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by a Series but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, a Series may suffer time delays and incur
costs or possible losses in connection with the disposition of the collateral.
In the event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to a Series shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Series 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.
Securities Lending. Each Series may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, a Series 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.
If cash collateral is received by a Series, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Series. Alternatively, if securities are
delivered to a Series as collateral, the Series and the borrower negotiate a
rate for the loan premium to be received by the Series for lending its
portfolio securities. In either event, the total yield on a Series' portfolio
is increased by loans of its portfolio securities. A Series 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. A Series 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, a Series 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.
Borrowing and Leverage. The use of leverage by a Series 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 Series shares and in the yield on the Series' portfolio. Although the
principal of such borrowings will be fixed, a Series' assets may change in
value during the time the borrowings are outstanding. Borrowings will create
interest expenses for a Series 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 Series exceeds
the interest a Series will have to pay on the borrowings, the Series' 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 a
Series will be less than if leverage had not been used, and therefore the
amount available for distribution to shareholders as dividends and other
distributions will be reduced. In the latter case, the Investment Adviser in
its best judgment nevertheless may determine to maintain a Series' leveraged
position if it expects that the benefits to the Series' shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Series may result in the Series 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 a Series' portfolio in accordance with the Series' 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 a Series to dispose of portfolio investments at a
time when it may be disadvantageous to do so.
A Series 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.
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Small Cap. An investment in the Small Cap Index Series involves greater risk
than is customarily associated with Series that invest in more established
companies. The securities of smaller companies may be subject to more abrupt
or erratic market movements than larger, more established companies or the
market average in general. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. Because of these factors, the Small Cap Index Series
believes that its shares may be suitable for investment by persons who can
invest without concern for current income and who are in a financial position
to assume above-average investment risk in search of above-average long-term
reward. It is not intended as a complete investment program but is designed
for those long-term investors who are prepared to experience above-average
fluctuations in net asset value.
While the issuers in which the Small Cap Index Series will primarily invest
may offer greater opportunities for capital appreciation than large cap
issuers, investments in smaller companies may involve greater risks and thus
may be considered speculative. Full development of these companies and trends
frequently takes time and, for this reason, the Small Cap Index Series should
be considered as a long-term investment and not as a vehicle for seeking
short-term profits.
The securities in which the Small Cap Index Series invests will often be
traded only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume typical of trading
on a national securities exchange. As a result, the disposition by the Small
Cap Index Series of portfolio securities to meet redemptions or otherwise may
require the Small Cap Index Series to sell these securities at a discount from
market prices.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of
their business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may
be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Mortgage-Backed Securities. The Aggregate Bond Index Series may invest in
mortgage-backed securities. The value of mortgage-backed securities, like that
of traditional fixed-income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage-backed
securities differ from traditional fixed-income securities because of their
potential for prepayment without penalty. The price paid by the Aggregate Bond
Index Series for its mortgage-backed securities, the yield the Aggregate Bond
Index Series expects to receive from such securities and the average life of
the securities are based on a number of factors, including the anticipated
rate of prepayment of the underlying mortgages. In a period of declining
interest rates, borrowers may prepay the underlying mortgages more quickly
than anticipated, thereby reducing the yield to maturity and the average life
of the mortgage-backed securities. Moreover, when the Aggregate Bond Index
Series reinvests the proceeds of a prepayment in these circumstances, it will
likely receive a rate of interest that is lower than the rate on the security
that was prepaid. To the extent that the Aggregate Bond Index Series purchases
mortgage-backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If the
Aggregate Bond Index Series buys such securities at a discount, both scheduled
payments of principal and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income. In a period
of rising interest rates, prepayments of the underlying mortgages may occur at
a slower than expected rate, creating maturity extension risk. This particular
risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Aggregate Bond Index Series. See
"Investments in Fixed-Income Securities" and "Illiquid Securities" above.
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Series Strategies Involving Options, Futures, Swaps, Indexed Instruments and
Foreign Exchange Transactions
Each Series will also utilize options, futures, options on futures, swaps
and other indexed instruments. Futures and options on futures may be employed
to provide liquidity. Futures, options on futures, swaps and other indexed
instruments may be employed as a proxy for a direct investment in securities
underlying the Series' index. In addition, the International Index Series may
engage in futures contracts on foreign currencies in connection with certain
foreign securities transactions.
The Investment Adviser will choose among the foregoing instruments based on
its judgment of how best to meet each Series' goal. In connection therewith,
the Investment Adviser will assess such factors as current and anticipated
securities prices, relative liquidity and price levels in the options, futures
and swap markets compared to the securities markets, and the Series' cash flow
and cash management needs.
Indexed Securities
The Series may invest in securities the potential return of which is based
on the change in particular measurements of value or rate (an "index"). As an
illustration, a Series may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities. If a Series 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.
Options on Securities and Securities Indices
Purchasing Options. Each Series is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of
which is substantially correlated with securities held in its portfolio. When
a Series purchases a put option, in consideration for an upfront payment (the
"option premium") the Series acquires a right to sell to another party
specified securities owned by the Series at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of
an option on securities, or to receive from another party a payment based on
the amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index.
The purchase of a put option limits the Series' risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put
option prior to the option's expiration date. If the market value of the
portfolio holdings associated with the put option increases rather than
decreases, however, the Series will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
Each Series is also authorized to purchase call options on securities it
intends to purchase or securities indices. When a Series purchases a call
option, in consideration for the option premium the Series acquires the right
to purchase from another party specified securities at the exercise price on
or before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified
securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a call option may protect the Series from having to pay more for a security
as a consequence of increases in the market value for the security during a
period when the Series is contemplating its purchase, in the case of an option
on a security, or attempting to maintain exposure to an index prior to
purchasing the underlying securities, in the case of an option on an index (an
"anticipatory hedge"). In the event a Series determines not to purchase a
security underlying a call option, however, the Series may lose the entire
option premium.
Each Series is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. Each Series is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices, the
performance of which is substantially correlated to securities held in its
portfolio. When a Series writes a call option, in return for an option premium
the Series gives another party the right to buy specified securities owned by
the Series at the exercise price on or before the expiration date, in the case
of an option on
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securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. In the event
the party to which a Series has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than
the exercise price, the Series will partially offset any decline in the value
of the underlying securities through the receipt of the option premium. By
writing a call option, however, a Series limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any
increase in the value of the underlying securities beyond the exercise price,
while the option remains outstanding.
Each Series may also write put options on securities or securities indices.
When a Series writes a put option, in return for an option premium the Series
gives another party the right to sell to the Series a specified security at
the exercise price on or before the expiration date, in the case of an option
on a security, or agrees to pay to another party an amount based on any
decline in a specified securities index below a specified level on or before
the expiration date, in the case of an option on a securities index. In the
event the party to which the Series has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Series will profit by the amount of the
option premium. By writing a put option, however, a Series will be obligated
to purchase the underlying security at a price that may be higher than the
market value of the security at the time of exercise as long as the put option
is outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Series writes a put option it is exposed to a risk of
loss in the event the value of the underlying securities falls below the
exercise price, which loss potentially may substantially exceed the amount of
option premium received by the Series for writing the put option. A Series
will write a put option on a security or a securities index only if the Series
would be willing to purchase the security at the exercise price for investment
purposes (in the case of an option on a security) or is writing the put in
connection with trading strategies involving combinations of options--for
example, the sale and purchase of options on the same security or index but
different expiration dates or exercise prices (a technique called a "spread").
Each Series is also authorized to sell call or put options in connection
with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Series will only write
call or put options that are "covered." A put option will be considered
covered if a Series has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will be
considered covered if a Series owns the securities it would be required to
deliver upon exercise of the option (or, in the case of option on a securities
index, securities which substantially replicate the performance of such index)
or owns a call option, warrant or convertible instrument which is immediately
exercisable for, or convertible into, such security.
Types of Options. Each Series may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and seller, but generally do not require the parties to post margin
and are subject to greater risk of counterparty default. See "Additional Risk
Factors of OTC Transactions" below.
Futures
Each Series may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of a
commodity at a specified future date at a specified price. No price is paid
upon entering into a futures contract. Rather, upon purchasing or selling a
futures contract the Series is required to deposit collateral ("margin") equal
to a percentage (generally less than 10%) of the contract value. Each day
thereafter until the futures position is closed, the Series will pay
additional margin representing any loss experienced as a result of the futures
position the prior day or be entitled to a payment representing any profit
experienced as a result of the futures position the prior day. A Series will
further limit transactions in futures and options on futures to the extent
necessary to prevent the Series from being deemed a "commodity pool operator"
under regulations of the Commodity Futures Trading Commission.
15
<PAGE>
Foreign Exchange Transactions. The International Index Series may engage in
futures contracts on foreign currencies and foreign currency forward and spot
transactions in connection with transactions or anticipated transactions in
securities denominated in foreign currencies. Specifically, the Series may
purchase or sell a currency to settle a security transaction or sell a
currency in which the Series has received or anticipates receiving a dividend
or distribution.
Swaps
Each Series is authorized to enter into equity swap agreements, which are
OTC contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of securities or equity index. Swap agreements may also be
used to obtain exposure to a security or market without owning or taking
physical custody of securities in circumstances in which direct investment is
restricted by local law or is otherwise impractical.
Risk Factors in Derivatives
The Series intend to enter into transactions involving derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a derivative or a Series will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a derivative without
incurring substantial losses, if at all.
Certain transactions in derivatives (e.g., futures transactions, sales of
put options) may expose a Series to potential losses which exceed the amount
originally invested by the Series in such instruments. When a Series engages
in such a transaction, the Series will deposit in a segregated account at its
custodian liquid securities with a value at least equal to the Series'
exposure, on a market-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Series has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Series'
exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options may be substantially less liquid than other instruments
in which a Series may invest. The absence of liquidity may make it difficult
or impossible for a Series to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for a Series
to ascertain a market value for such instruments. A Series will therefore
acquire illiquid OTC instruments (i) if the agreement pursuant to which the
instrument is purchased contains a formula price at which the instrument may
be terminated or sold, or (ii) for which the Manager anticipates the Series
can receive on each business day at least two independent bids or offers,
unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Series have therefore adopted an investment policy
pursuant to which they will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by a
Series, the market value of the securities underlying OTC call options
currently outstanding which have been sold by a Series and margin deposits on
the Series' outstanding OTC options exceeds 15% of the total assets of the
Series, taken at market value, together with all other assets of the Series
which are deemed to be illiquid or are otherwise not readily marketable.
However, if an OTC option is sold by a Series to a dealer in U.S. government
securities recognized as a "primary dealer" by the Federal Reserve Bank of New
York and the Series has the unconditional contractual right to repurchase such
OTC option at a predetermined price, then the Series will treat as illiquid
such amount of the underlying securities as is equal to the repurchase price
less the amount by which the option is "in-the-money" (i.e., current market
value of the underlying security minus the option's exercise price).
16
<PAGE>
Because derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that a Series has unrealized gains in such instruments or has deposited
collateral with its counterparty, the Series is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations. The Series
will attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Series with a third-party
guaranty or other credit enhancement.
Additional Limitations on the Use of Derivatives
The Series may not use any derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
Additional Information Concerning the Indices
S&P 500. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by the Corporation and the Trust. The S&P 500 Index
Series is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of the McGraw Hill Companies, Inc. ("Standard & Poor's"). Standard &
Poor's makes no representation regarding the advisability of investing in the
Series. Standard & Poor's makes no representation or warranty, express or
implied, to the owners of shares of the Series or any member of the public
regarding the advisability of investing in securities generally or in the
Series particularly or the ability of the S&P 500 to track general stock
market performance. Standard & Poor's only relationship to the Series is the
licensing of certain trademarks and trade names of Standard & Poor's and of
the S&P 500 which is determined, composed and calculated by Standard & Poor's
without regard to the Series. Standard & Poor's has no obligation to take the
needs of the Series or the owners of shares of the Series into consideration
in determining, composing or calculating the S&P 500. Standard & Poor's is not
responsible for and has not participated in the determination of the prices
and amount of the Series or the timing of the issuance of sale of shares of
the Series and the Series or in the determination or calculation of the
equation by which the Series is to be converted into cash. Standard & Poor's
has no obligation or liability in connection with the administration,
marketing or trading of the Series.
Standard & Poor's does not guarantee the accuracy and/or the completeness or
the S&P 500 Index or any data included therein, and Standard & Poor's shall
have no liability for any errors, omissions, or interruptions therein.
Standard & Poor's makes no warranty, express or implied, as to results to be
obtained by the Series, owners of shares of the Series, or any other person or
entity from the use of the S&P 500 Index or any data included therein.
Standard & Poor's makes no express or implied warranties and expressly
disclaims all warranties of merchantability or fitness for a particular
purpose or use with respect to the S&P 500 Index or any data included therein.
Without limiting any of the foregoing, in no event shall Standard & Poor's
have any liability for any special, punitive, indirect, or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
Russell 2000. The Small Cap Index Series is not promoted, sponsored or
endorsed by, not in any way affiliated with Frank Russell Company. Frank
Russell Company is not responsible for and has not reviewed the Small Cap
Index Series nor any associated literature or publications and Frank Russell
Company makes no representation or warranty, express or implied, as to their
accuracy, or completeness, or otherwise.
17
<PAGE>
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change the Russell 2000(R) Index. Frank
Russell Company has no obligation to take the needs of any particular Series
or its participants or any other product or person into consideration in
determining, composing or calculating the Index.
Frank Russell Company's publication of the Russell 2000(R) Index in no way
suggests or implies an opinion by Frank Russell Company as to the
attractiveness or appropriateness of investment in any or all securities upon
which the Russell 2000 is based. Frank Russell Company makes no
representation, warranty, or guarantee as to the accuracy, completeness,
reliability, or otherwise of the Russell 2000 or any data included in the
Russell 2000. Frank Russell Company makes no representation or warranty
regarding the use, or the results of use, of the Russell 2000 or any data
included therein, or any security (or combination thereof) comprising the
Russell 2000. Frank Russell Company makes no other express or implied
warranty, and expressly disclaims any warranty, or any kind, including,
without means of limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the Russell 2000 or any data or any
security (or combination thereof) included therein.
EAFE Index. The EAFE Index is the exclusive property of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"). The EAFE Index is a service mark of Morgan
Stanley Group Inc. and has been licensed for use by the Investment Adviser and
its affiliates.
The International Index Series is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the International Index Series or any
member of the public regarding the advisability of investing in securities
generally or in the International Index Series particularly or the ability of
the EAFE Index to track general stock market performance. Morgan Stanley is
the licensor of certain trademarks, service marks and trade names of Morgan
Stanley and of the EAFE Index. Morgan Stanley has no obligation to take the
needs of the International Index Series or the owners of shares of the
International Index Series into consideration in determining, composing or
calculating the EAFE Index. Morgan Stanley is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities
of shares of the International Index Series to be issued or in the
determination or calculation of the equation by which the shares of the
International Index Series is redeemable for cash. Morgan Stanley has no
obligation or liability to owners of shares of the International Index Series
in connection with the administration, marketing or trading of the
International Index Series.
Although Morgan Stanley shall obtain information for inclusion in or for use
in the calculation of the EAFE Index from sources which Morgan Stanley
considers reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the EAFE Index or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be obtained by
licensee, licensee's customers and counterparties, owners of shares of the
International Index Series, or any other person or entity from the use of the
EAFE Index or any data included therein in connection with the rights licensed
hereunder or for any other use. Morgan Stanley makes no express or implied
warranties, and hereby expressly disclaims all warranties of merchantability
or fitness for a particular purpose with respect to the EAFE Index or any data
included therein. Without limiting any of the foregoing, in no event shall
Morgan Stanley have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified
of the possibility of such damages.
Investment Restrictions.
The Trust has adopted the following restrictions and policies relating to
the investment of each Series' assets and activities, which are fundamental
policies and may not be changed with respect to a Series without the approval
of the holders of a majority of the Series' 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).
18
<PAGE>
Each may not:
1. Make any investment inconsistent with the Series' classification as a
non-diversified company under the Investment Company Act.
2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities); provided, that in
replicating the weighting of a particular industry in its target index, a
Series may invest more than 25% of its total assets in securities of
issuers in that industry.
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
law, a Series may invest in securities directly or indirectly secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
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 a Series 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 Series' Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) a Series 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) a Series may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) a
Series may obtain such short term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) a Series
may purchase securities on margin to the extent permitted by applicable
law. A Series may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Series' investment policies
as set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a Series
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Series may do so in accordance with applicable law and
the Series' 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.
In addition, although each Series is classified as a non-diversified Series
under the Investment Company Act and is not subject to the diversification
requirements of the Investment Company Act, each Series is required to comply
with certain requirements under the Internal Revenue Code of 1986, as amended
(the "Code"). To ensure that the Series satisfy these requirements, the
Declaration of Trust requires that each Series be managed in compliance with
the Code requirements as though such requirements were applicable to the
Series. These requirements include 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 a Series' total assets are invested in the securities of a single
issuer, or any two or more issuers which are controlled by the Series and
engaged in the same, similar or related businesses, and (ii) with respect to
50% of the market value of its total assets, not more that 5% of the market
value of its total assets are invested in securities of a single issuer, and
the Series does not own more than 10% of the outstanding voting securities of
a single issuer. The U.S. Government, its agencies and instrumentalities are
not included within the definition of "issuer" for purposes of the
diversification requirements of the Code.
19
<PAGE>
In addition, the Trust has adopted as an operating policy, which may be
changed by the Trustees without shareholder approval, that no Series, will
make any additional investments if the amount of its borrowings exceeds 5% of
its total assets. Borrowings do not include the use of investment techniques
that may be deemed to create leverage, including, but not limited to, such
techniques as dollar rolls, when-issued securities, options and futures.
Portfolio securities of a Series generally may not be purchased from, sold
or loaned to the Investment Adviser or its affiliates or any of their
directors, general partners, officers or employees, acting as principal,
unless pursuant to a rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, a Series 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, a
Series is prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal.
Portfolio Turnover
Although each Series will use a passive, indexing approach to investing,
each Series may engage in a substantial number of portfolio transactions. The
rate of portfolio turnover will be a limiting factor when the Investment
Adviser considers whether to purchase or sell securities for a Series only to
the extent that the Investment Adviser will consider the impact of transaction
costs on a Series' tracking error. Changes in the securities comprising a
Series' index will tend to increase that Series' portfolio turnover rate, as
the Investment Adviser restructures the Series' holdings to reflect the
changes in the index. The portfolio turnover rate is, in summary, the
percentage computed by dividing the lesser of a Series' purchases or sales of
securities by the average net asset value of the Series. High portfolio
turnover involves correspondingly greater brokerage commissions for a Series
investing in equity securities and other transaction costs which are borne
directly by a Series. A high portfolio turnover rate may also result in the
realization of taxable capital gains, including short-term capital gains
taxable at ordinary income rates.
Item 13. Management of the Registrant
Trustees and Officers
Information about the Trustees, executive officers and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Trustee is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (58) -- President and Trustee(1)(2) -- Executive Vice President
of the Investment Adviser and Fund Asset Management, L.P. ("FAM") (which terms
as used herein include their corporate predecessors) since 1983; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Jack B. Sunderland (70) -- Trustee(2) -- P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (energy company) since 1987; Member of Council on Foreign Relations since
1971.
20
<PAGE>
Stephen B. Swensrud (65) -- Trustee(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman, Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
J. Thomas Touchton (59) -- Trustee(2) -- Suite 3405, One Tampa City Center,
Tampa, Florida, 33602. Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (private investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy Inc.
(electric utility holding company).
Joseph T. Monagle, Jr. (50) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1990; Department Head of the
Global Fixed Income Division of the Investment Adviser and FAM since 1997;
Senior Vice President of Princeton Services since 1993.
Gregory Mark Maunz (45) -- Senior Vice President and Co-Portfolio Manager of
the Aggregate Bond Index Fund(1)(2) -- First Vice President of the Investment
Adviser since 1997; Vice President of the Investment Adviser from 1985 to
1997; Portfolio Manager of the Investment Adviser since 1984.
Jeff Hewson (47) -- Vice President and Co-Portolio Manager of the Aggregate
Bond Index Fund(1)(2) -- Director (Global Fixed Income) since 1998; Vice
President of the Investment Adviser from 1989 to 1998; Portfolio Manager of
the Investment Adviser since 1985.
Eric S. Mitofsky (43) -- Senior Vice President and Portfolio Manager of the
S&P 500 Index Fund, Small Cap Index Fund and the International Index
Fund(1)(2) -- First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser from 1992 to 1998.
Christopher G. Ayoub (43) -- Senior Vice President and Co-Portfolio Manager
of the Aggregate Bond Index Fund(1)(2) -- First Vice President of the
Investment Adviser since 1998; Vice President of the Investment Adviser from
1985 to 1998.
Donald C. Burke (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Director of Taxation of the Investment Adviser since 1990; Vice President
of the Investment Adviser from 1990 to 1997.
Ira P. Shapiro (35) -- Secretary(1)(2) -- First Vice President of the
Investment Adviser since 1998; Director (Legal Advisory) of the Investment
Adviser from 1997 to 1998; Vice President of the Investment Adviser from 1996 to
1997. Attorney with the Investment Adviser and FAM from 1993 to 1997.
- ----
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or FAM acts as investment
adviser.
As of April 1, 1999, the officers and Trustees of the Trust as a group
(eleven persons) owned an aggregate of less than 1% of the outstanding shares
of Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less
than 1% of the outstanding shares of any of the Series.
Compensation of Directors/Trustees.
Merrill Lynch Index Fund, Inc. (the "Corporation") and the Trust pay each
individual who serves as a Director/Trustee not affiliated with the Investment
Advisor (each a "non-affiliated Director/Trustee") a fee of $2,500 per year
plus $250 per Board meeting attended, together with such individual's actual
out-of-pocket expenses relating to attendance at meetings. The Corporation and
the Trust also compensate members of the Audit and Nominating Committee (the
"Committee"), which consists of all of the non-affiliated Directors/Trustees
of the Funds and the Series, with a fee of $1,000 per year.
The following table sets forth the aggregate compensation earned by the non-
affiliated Directors/Trustees from the Corporation and Trust for the fiscal
year ended December 31, 1998 and the total compensation paid to non-affiliated
Directors/Trustees from all registered investment companies advised by the
Investment Adviser and its affiliate, FAM ("MLAM/FAM-Advised Funds") for the
calendar year ended December 31, 1998.
21
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
From Corporation/Trust and
Aggregate Pension or Retirement MLAM/FAM
Compensation From Benefits Accrued as Advised Funds Paid
Name of Director/Trustee Corporation/Trust Part of Corporation/Trust Expenses to Directors/Trustees(1)
- ------------------------ ------------------ ------------------------------------ ------------------------
<S> <C> <C> <C>
Jack B. Sunderland...... $4,500 None 133,600
Stephen B. Swensrud..... $4,500 None 195,583
J. Thomas Touchton...... $4,500 None 133,600
</TABLE>
- ----------
(1) The Directors/Trustees serve on the boards of MLAM/FAM Advised Funds as
follows: Mr. Sunderland (18 registered investment companies consisting of
30 portfolios); Mr. Swensrud (23 registered investment companies
consisting of 56 portfolios); Mr. Touchton (18 registered investment
companies consisting of 30 portfolios).
Item 14. Control Persons and Principal Holders of Securities.
Merrill Lynch S&P 500 Index Fund ("S&P 500 Index Fund") of Merrill Lynch Index
Funds, Inc. (the "Corporation"), a Maryland corporation, controls S&P 500 Index
Series. As of April 1, 1999, S&P 500 Index Fund owns 100% of the currently
outstanding interests of S&P 500 Index Series. As of April 1, 1999, no person
owned of record or was known by the Corporation to own beneficially 5% or more
of any Class of the S&P 500 Index Fund's outstanding securities.
As of April 1, 1999, S&P 500 Index Fund's holdings of S&P 500 Index Series
represent 0.69% of the Trust as a whole.
Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund") of the
Corporation, and Small Cap Index Trust control Small Cap Index Series. As of
April 1, 1999, Small Cap Index Fund owns 56% of the currently outstanding
interests of Small Cap Index Series, and Small Cap Index Trust owns 44% of the
currently outstanding interests of Small Cap Index Series. As of April 1, 1999,
no person owned of record or was known by the Corporation to own beneficially 5%
or more of any Class of Small Cap Index Fund's outstanding securities.
As of April 1, 1999, Small Cap Index Fund's holdings of Small Cap Index Series
represent 0.02% of the Trust as a whole.
Merrill Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund") of the
Corporation, controls Aggregate Bond Index Series. As of April 1, 1999 Aggregate
Bond Index Fund owns 99.6% of the currently outstanding interests of Aggregate
Bond Index Series, and Aggregate Bond Index Trust owns 0.4% of the currently
outstanding interests of the Aggregate Bond Index Series. The following sets
forth the name, address and percentage of ownership of each person who owns of
record or is known by the Corporation to own beneficially 5% or more of any
Class of Aggregate Bond Index Fund's outstanding securities, as of April 1,
1999:
Piedmont Liability Trust
2568 Ivy #3
Charlottesville, VA 22903
Class D
12.1% of Class
As of April 1, 1999, Aggregate Bond Index Fund's holdings of Aggregate Bond
Index Series represent 0.20% of the Trust as a whole.
Merrill Lynch International Index Fund ("International Index Fund") of the
Corporation, controls International Index Series. As of April 1,1999
International Index Fund owns 85.6% of the currently outstanding interests of
International Index Series, and International Index Trust owns 14.4% of the
currently outstanding interests of the International Index Series. The following
sets forth the name, address and percentage of ownership of each person who owns
of record or is known by the Corporation to own beneficially 5% or more of any
Class of the International Index Fund's outstanding securities as of April 1,
1999:
Ronald I. Shaw
P.O Box 455
Richmond, MA 01254
Class D
5.1% of Class
As of April 1, 1999, International Index Fund's holdings of International
Index Series represent 0.06% of the Trust as a whole.
All holders of interests ("Holders") are entitled to vote in proportion to
the amount of their interest in a Series or in the Trust, as the case may be.
There is no cumulative voting. Accordingly, the Holder or Holders of more than
50% of the aggregate beneficial interests of the Trust would be able to elect
all the Trustees. With respect to the election of Trustees and ratification of
accountants the shareholders of separate Series vote together; they generally
vote separately by Series on other matters.
22
<PAGE>
Item 15. Investment Advisory And Other Services.
The Trust has entered into a management agreement with the Investment
Adviser (the "Management Agreement"). The Investment Adviser provides the
Trust with investment advisory and management services. Subject to the
supervision of the Board of Trustees, the Investment Adviser is responsible
for the actual management of each Series' portfolio and constantly reviews the
Series' 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 Series.
Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Series or
other funds for which it acts as investment adviser or for its advisory
clients arise for consideration at or about the same time, 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.
As discussed in Part A, the Investment Adviser receives for its services to
the Series monthly compensation at the annual rates of the average daily net
assets of each Series as follows
<TABLE>
<CAPTION>
Management
Name of Series Fee
-------------- ----------
<S> <C>
Merrill Lynch S&P 500 Index Series............................... 0.05%
Merrill Lynch Small Cap Index Series............................. 0.08%
Merrill Lynch Aggregate Bond Index Series........................ 0.06%
Merrill Lynch International Index Series......................... 0.11%
</TABLE>
The table below sets forth information about the total investment advisory
fees paid by the Series to the Investment Adviser, and any amount voluntarily
waived by the Investment Adviser.
<TABLE>
<CAPTION>
Small Aggregate
S&P 500 Cap Bond
Index Index Index International
Period Ending Series Series Series Index Series
- ------------- -------- ------- --------- -------------
<S> <C> <C> <C> <C>
December 31, 1997*
Contractual amount................... $148,645 $36,425 $88,609 $100,102
Amount waived (if applicable)........ $148,645 $36,425 $37,562 $ 35,546
December 31, 1998
Contractual amount................... $454,138 $61,476 $238,378 $142,489
Amount waived (if applicable)........ $ 0 $61,476 $ 2,537 $ 87,182
</TABLE>
- ----------
* Period is from commencement of operations (April 3, 1997 for the S&P 500
Index Series and the Aggregate Bond Index Series, and April 9, 1997 for the
Small Cap Index Series and the International Index Series).
Payment of Series Expenses. The Management 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
Trust connected with investment and economic research, trading and investment
management of the Trust, as well as the fees of all Trustees who are
affiliated persons of the Investment Adviser or any of their affiliates.
23
<PAGE>
Each Series pays all other expenses incurred in the operation of the Series,
(except to the extent paid by the Placement Agent), including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, copies of the Registration
Statements, charges of the Custodian, any Sub-custodian and Transfer Agent,
expenses of portfolio transactions, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering the shares
under federal, state or foreign laws, fees and out-of-pocket expenses of
unaffiliated Trustees, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Trust or the Series. The Placement Agent will
pay certain of the expenses of the Trust incurred in connection with the
offering of its shares of beneficial interest of each of the Series.
Organization of the Investment Adviser. Merrill Lynch Asset Management is
located at P.O. Box 9011, Princeton, New Jersey 08543-9011. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. 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 below, the
Management Agreement will remain in effect from year to year with respect to
each Series if approved annually (a) by the Board of Trustees or by a majority
of the outstanding shares of the Series and (b) by a majority of the Trustees
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 Series.
Code of Ethics
The Board of Trustees of the Trust have adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Trust and of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). 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 include a ban on acquiring any
24
<PAGE>
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 Codes
provide for trading "blackout periods" which prohibit trading by investment
personnel of the Trust within periods of trading by the Series in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
Independent Accountants.
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
been selected as the independent auditors of the Trust. The independent
auditors are responsible for auditing the annual financial statements of the
Series.
Custodian.
Merrill Lynch Trust Company, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, acts as the custodian of the assets of the S&P 500 Index Series, Small
Cap Index Series and Aggregate Bond Index Series. State Street Bank and Trust
Company ("State Street"), One Heritage Drive P2N, North Quincy, Massachusetts
02171, acts as the custodian of the assets of International Index Series.
Under its contract with the Trust, State Street is authorized to establish
separate accounts in foreign currencies and to cause foreign securities owned
by the International Index Series to be held in its offices outside the United
States and with certain foreign banks and securities depositors. Each
Custodian is responsible for safeguarding and controlling the Series' cash and
securities, handling the receipt and delivery of securities and collecting
interests and dividends on the Series' investments.
Legal Counsel.
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Trust.
Item 16. Brokerage Allocation and Other Practices.
Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of the Series' portfolio
transactions and the allocation of brokerage. The Trust has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Series. Where possible, the Trust deals directly
with the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best results in conducting portfolio
transactions for the Series, taking into account such factors as price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transaction involved, the firm's general execution and
operations facilities and the firm's risk in positioning the securities
involved. The portfolio securities of the Series generally are traded on a
principal basis and normally do not involve either brokerage commissions or
transfer taxes. The cost of portfolio securities transactions of the Series
primarily consists of dealer or underwriter spreads. While reasonable
competitive spreads or commissions are sought, the Trust will not necessarily
be paying the lowest spread or commission available. Transactions with respect
to the securities of small and emerging growth companies in which the Series
may invest may involve specialized services on the part of the broker or
dealer and thereby entail higher commissions or spreads than would be the case
with transactions involving more widely trading securities.
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a
company, industry or economic sector) to the Investment Adviser may receive
orders for transactions by the Trust. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under its Management Agreement and the expense 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 Trust will be benefitted by supplemental research services, the Investment
Adviser is authorized to pay brokerage commissions to a broker-dealer
furnishing such services which are in excess of commissions which another
broker-dealer may have charged for effecting the same transaction.
Supplemental investment research obtained from such broker-dealers might be
used by the Investment Adviser in servicing all of its accounts and all such
research might not be used by the Investment Adviser in connection with the
Trust. Consistent with the Conduct Rules of the NASD and policies established
by the Trustees, the Investment Adviser may consider sales of shares of the
Funds as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust.
For the fiscal period April 3, 1997 (commencement of operations) to December
31, 1997, the Series paid brokerage commissions of $118,903 and $0 for the S&P
500 Index Series and the Aggregate Bond Index Series, respectively. For the
fiscal period April 9, 1997 (commencement of operations) to December 31, 1997,
the Series paid brokerage commissions of $60,361 and $146,336 for the Small
Cap Index Series and the International Index Series, respectively. The Series
paid no commissions to Merrill Lynch. For the fiscal year ended December 31,
1998, the following table shows the amount of brokerage commissions paid by
each Series to Merrill Lynch, the percentage of each Series' brokerage
commissions paid to Merrill Lynch, the percentage of each Series' aggregate
dollar amount of transactions involving the payment of commissions effected
through Merrill Lynch and aggregate brokerage commissions paid by each Series:
<TABLE>
<CAPTION>
S&P 500 Index Small Cap Aggregate Bond International
Series Index Series Index Series Index Series
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Aggregate brokerage
commissions paid to
Merrill Lynch.......... $ 0 $ 0 $ 0 $ 1,299
% of Series' aggregate
brokerage commissions
paid to Merrill Lynch.. 0.00% 0.00% 0.00% 1.75%
% of Series' aggregate
dollar amount of
transactions effected
through the broker..... 0.00% 0.00% 0.00% 0.20%
Aggregate brokerage
commissions paid....... $105,046 $50,264 $ 0 $74,373
</TABLE>
Under the Investment Company Act, persons affiliated with the Trust and
persons who are affiliated with such persons are prohibited from dealing with
the Trust as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Trust,
including Merrill Lynch and any of its affiliates, will not serve as the
Trust's dealer in such transactions. However, affiliated persons of the Trust
may serve as its broker in listed or OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by
such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Trust may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of Trustees
of the Trust that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Trustees have considered all factors deemed relevant and have made
a determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
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
Trust 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 Trust and annual statements as to aggregate compensation will be provided
to the Trust. Securities may be held by, or be appropriate investments for,
the Series as well as other funds or investment advisory clients of the
Investment Advisor or FAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Trust or other clients or
funds for which the Investment Adviser or an affiliate acts as manager,
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 an affiliate 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.
Item 17.--Capital Stock and Other Securities.
Under the Declaration of Trust that establishes the Trust, a Delaware
business trust, the Trustees are authorized to issue beneficial interests in
each Series of the Trust. Investors are entitled to participate, in proportion
to their investment, in distributions of taxable income, loss, gain and
deduction with respect to the Series in which they have invested. Upon
liquidation or dissolution of a Series, investors are entitled to share in
proportion to their investment in such Series' net assets available for
distribution to its investors. Interests in a Series have no preference,
preemptive, conversion or similar rights and are fully paid and nonassessable,
except as set forth below. Investments in a Series generally may not be
transferred.
Each investor is entitled to a vote in proportion to the amount of its
interest in a Series or in the Trust, as the case may be. Investors in the
Trust, or in any Series, do not have cumulative voting rights, and investors
holding more than 50% of the aggregate beneficial interests in the Trust may
elect all of the Trustees of the Trust if they choose to do so and in such
event the other investors in the Trust would not be able to elect any Trustee.
The Trust is not required and has no current intention to hold annual meetings
of investors but the Trust will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote.
A Series shall be dissolved (i) by the affirmative vote of the Holders
holding not less than two-thirds of the beneficial interests in the Series, at
any meeting of such Holders or by an instrument in writing, without a meeting
signed by a majority of the Trustees and consented to by the Holders holding
not less than two-thirds of the beneficial interests in such Series, (ii) by
unanimous consent of the Trustees by written notice of such dissolution to the
Holders in such Series, (iii) upon the complete withdrawal of a Holder from
the Series, or (iv) upon the bankruptcy or dissolution of a Holder in the
Series; provided that in the case of (iii) or (iv) the Holders in such Series
may by affirmative vote of over 50% of total outstanding interests agree to
continue the Series. The Trust shall be dissolved upon the dissolution of the
last remaining Series.
The Declaration of Trust provides that obligations of the Trust and the
Series are not binding upon the Trustees individually but only upon the
property of the Series and that the Trustees will not be liable for any action
or failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. The Declaration of Trust
provides that the Trust may maintain appropriate insurance (for example,
fidelity bond and errors and omissions insurance) for the protection of the
Series, their Holders, Trustees, officers, employees and agents covering
possible tort and other liabilities.
The Trust currently consists of four Series. The Trust reserves the right to
create and issue interests in a number of additional Series. As indicated
above, Holders of each Series participate equally in the earnings and assets
of the particular series. Holders of each series are entitled to vote
separately to approve advisory agreements or changes in investment policy, but
Holders of all Series vote together in the election or selection of Trustees
and accountants for the Trust. Upon liquidation or dissolution of a Series,
the Holders of such Series are entitled to share in proportion to their
investment in the net assets of such Series available for distribution to
Holders.
25
<PAGE>
Item 18.--Purchase, Redemption and Pricing of Securities.
Beneficial interests in the Trust are not offered to the public and are
issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Trust may be made only by a limited number of institutional
investors, including investment companies, common or commingled trust funds,
group trusts and certain other entities that are "accredited investors" within
the meaning of Regulation D under the 1933 Act. The number of Holders of any
Series shall be limited to fewer than 100. This Registration Statement does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The net asset value of the shares of each Series is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
on each day the NYSE is open for trading (a "Pricing Day"). 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.
26
<PAGE>
The net asset value is computed by deducting the amount of the Series'
total liabilities from the value of its total assets, dividing the market value
of the securities held by a Series plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
A Series' securities which 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 Trustees 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.
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.
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. When the
Series writes an option, the amount of the premium received is recorded on the
books of the Series 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 upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Series 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
Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust. Such valuations and procedures will be reviewed
periodically by the Trustees.
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 a Series' shares are
determined as of such times. Foreign currency exchange rates are also
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 will not be reflected in the computation of a Series' net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
as determined in good faith by the Trustees.
Each investor in the Trust may add to or reduce its investment in any Series
on each Pricing Day. The value of each investor's interest in a Series will be
determined as of 15 minutes after the close of business on the NYSE (generally
4:00 p.m., New York Time) by multiplying the net asset value of the Series by
the percentage, effective for that day, that represents that investor's share
of the aggregate interests in such Series. Any additions or withdrawals, which
are to be effected on that day, will then be effected. The investor's
percentage of the aggregate beneficial interests in a Series 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 Series as of the time or
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 Series
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Series 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 Series by all investors in the Series. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Series as of 15 minutes after the close of
business of the NYSE on the next Pricing Day of the Series. For further
information concerning the Series' net asset value, and the valuation of the
Series' assets, see Part A.
Redemptions.
An investor in the Trust may withdraw all or a portion of its investment in
any Series on any Pricing Day at the net asset value next determined after a
withdrawal request in proper form is furnished by the investor to the Series.
The proceeds of the withdrawal will be paid by the Series normally on the
business day on which the withdrawal is effected, but in any event within
seven days. Investments in any Series of the Trust may not be transferred.
Item 19. Taxation of the Trust
The Trust is organized as a Delaware business trust. Each Series is treated as
a separate partnership under the Internal Revenue Code of 1986 (the "Code")
and, thus, is not subject to income tax. The Series have received rulings from
the Internal Revenue Service establishing their status as partnerships. Based
upon the status of each Series as a partnership, each investor in a Series
will be taxable on its share (as determined in accordance with the governing
instruments of such Series) of such Series' ordinary income and capital gain
in determining its income tax liability. The determination of such share will
be made in accordance with the Code and regulations promulgated thereunder.
Although, as described above, the Series will not be subject to federal income
tax, they will file appropriate income tax returns. Each prospective Investor
Fund which is a regulated investment company ("RIC") will be required to
agree, in its subscription agreement, that, for purposes of determining its
required distribution under Code Section 4982(a), it will account for its
share of its items of income, gain, loss and deduction of a Series as they are
taken into account by the Series.
All of the Series may invest in futures contracts or options, Certain options,
futures contracts and options on futures contracts are "section 1256
contracts." Any gains or losses on section 1256 contracts are generally
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by a Series at the end of each taxable year
are treated for federal income tax purposes as being sold on such date for
their fair market value. The resultant paper gains or losses are also treated
as 60/40 gains or losses. When the section 1256 contract is subsequently
disposed of, the actual gain or loss will be adjusted by the amount of any
preceding year-end gain or loss.
Foreign currency gains or losses on non-U.S. dollar denominated bonds and
other similar debt instruments and on any non-U.S. dollar denominated futures
contracts, options and forward contracts that are not Section 1256 contracts
generally will be treated as ordinary income or loss.
Certain hedging transactions undertaken by a Series may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character
of gains (or losses) realized by the Series. In addition, losses realized by
the Series on positions that are part of a straddle may be deferred, rather
than being taken into account in calculating taxable income for the taxable
year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences of
hedging transactions to the Series are not entirely clear. The Series may make
one or more of the elections available under the Code which are applicable to
straddles. If the Series makes any of the elections, the amount, character and
timing of the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to the elections
made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions. Additionally, the conversion transaction or constructive sale rules
may apply to certain transactions (including straddles) to change the
character of capital gains to ordinary income or require the recognition of
income prior to the economic recognition of such income.
The Series may be subject to a tax on dividend or interest income received
from securities of a non-U.S. issuer withheld by a foreign country at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Series to a reduced rate of tax or exemption from
tax on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of each Series' assets to be invested
within various countries is not known.
The Series may make investments that produce income that is not matched by a
corresponding cash receipt by the Series, such as investments in obligations
having original issue discount or market discount (if a Series elects to
accrue the market discount on a current basis with respect to such
instruments). Because such income may not be matched by a corresponding cash
receipt, the Series may be required to borrow money or dispose of other
securities to be able to make distributions to investors.
Each Series' taxable income will in most cases be determined on the basis of
reports made to such Series by the issuers of the securities in which such
Series invests. The tax treatment of certain securities in which a Series may
invest is not free from doubt, and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of such Series could
result in adjustments to the income of the Series.
Under the Trust, each Series is to be managed in compliance with the
provisions of the Code applicable to RICs as though such requirements were
applied at the Series level. Thus, consistent with its investment objectives,
each Series will meet the income and diversification of assets tests of the
Code applicable to RICs. The Series have received rulings from the Internal
Revenue Service that Holders of interests in the Series that are RICs will be
treated as owners of their proportionate shares of the Series' assets and
income for purposes of the Code's requirements applicable thereto.
Item 20. Underwriters.
The exclusive placement agent for each Series of the Trust is Merrill Lynch
Funds Distributor, a division of Princeton Funds Distributor, Inc., which
receives no compensation for serving in this capacity. The Placement Agent is
located at P.O. Box 9081, Princeton, New Jersey 08543-9081. Investment
companies, common and commingled trust funds and similar organizations and
entities may continuously invest in the Series.
Item 21. Calculation of Performance Data.
Beneficial interests in the Trust are not offered to the public and are issued
solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, the
Trust will not advertise the Series' performance. However, certain of the
Trust's Holders may from time to time advertise their performance, which will
be based upon the Trust's performance.
Total return figures are based on historical performance and are not intended
to indicate future performance. Average annual total return is determined in
accordance with a formula specified by the Securities and Exchange 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.
Annual, average annual and annualized total return and aggregate total return
performance data, both as a percentage and as a dollar amount, are based on a
hypothetical $1,000 investment and computed as described above, except that as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted. 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.
Yield quotations will be computed based on a 30-day period by dividing (a) the
net income based on the yield of each security earned during the period by (b)
the average number of shares outstanding during the period that were entitled
to receive dividends multiplied by the maximum offering price per share on the
last day of the period.
Item 22. Financial Statements.
The Series' audited financial statements are incorporated in this Statement of
Additional Information by reference to their 1998 annual reports to
shareholders. You may request a copy of the annual reports at no charge by
calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
27
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that 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 that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds that 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 that 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 therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds that 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 that 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 that 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 may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier I 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 that the issue ranks in the lower end of its generic
rating category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific
A-1
<PAGE>
note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures 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 related supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will 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 related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for 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 commercial paper 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 parentheses 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
indicated 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. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
A-2
<PAGE>
baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great
length of time.
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. 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 that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt 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 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 for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
A-3
<PAGE>
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments 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
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* 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.
NR 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 type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
A-4
<PAGE>
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 Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-l This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment -- capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
A-5
<PAGE>
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B, predominantly B, speculative with respect to the issuer's capacity to
CCC pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protection characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, 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.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A-6
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(a) --Declaration of Trust of Registrant.(1)
1(b) --Certificate of Trust.(1)
1(c) --Amendment to Declaration of Trust.(2)
2 --By-Laws of Registrant.(1)
3 --Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.(3)
4 --Management Agreement between Registrant and Merrill Lynch Fund Asset
Management, L.P.(3)
5 --Placement Agent Agreement with Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc.(3)
6 --Not applicable.
7(a) --Form of Custody Agreement with Merrill Lynch Trust Company.(3)
7(b) --Form of Custody Agreement with State Street Bank and Trust.(3)
8 --Licensing Agreement.(3)
9 --Not applicable.
10(a) --Accountant's consent.
10(b) --Consent of Swidler Berlin Shereff Friedman, LLP, Counsel for
Registrant.
11 --Not applicable.
12 --Not applicable.
13 --Not applicable.
14(a) --Financial Date Schedule for S&P 500 Index Series.
14(b) --Financial Data Schedule for Small Cap Index Series.
14(c) --Financial Data Schedule for Aggregate Bond Index Series.
14(d) --Financial Data Schedule for International Index Series.
15(a) --Not applicable.
15(b) --Power of Attorneys.(3)
</TABLE>
- ----------
(1) Incorporated by reference to identically numbered Exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 811-7885).
(2) Incorporated by reference to identically numbered Exhibit to Amendment No.
1 to the Registrant's Registration Statement on Form N-1A (File No. 811-
7885).
(3) Incorporated by reference to the corresponding exhibit number in Amendment
No. 1 to Registrant's Registration Statement on Form N-1A (File No. 811-
7885) as set forth below:
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference to
Number Exhibit Number
------- ---------------
<C> <S>
3 4
4 5
5 6
7(a) 8(a)
7(b) 8(b)
15(b) 17(b)
</TABLE>
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<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
Merrill Lynch S&P 500 Index Fund of Merrill Lynch Index Funds, Inc. ("S&P
500 Index Fund") controls Merrill Lynch S&P 500 Index Series ("S&P 500 Index
Series"). As of April 1, 1999, S&P 500 Index Fund owns 100% of the currently
outstanding interests of S&P 500 Index Series, which constitutes 0.69% of the
S&P 500 Index Fund's ownership of Merrill Lynch Index Trust (the "Trust").
Merrill Lynch Index Funds, Inc. is a Maryland corporation.
Merrill Lynch Small Cap Index Fund of Merrill Lynch Index Funds, Inc. ("Small
Cap Index Fund") and Small Cap Index Trust control Merrill Lynch Small Cap
Index Series ("Small Cap Index Series"). As of April 1, 1999, Small Cap Index
Fund owns 56% of the currently outstanding interests of Small Cap Index Series,
and Small Cap Index Trust owns 44% of the currently outstanding interests of
Small Cap Index Series. As of April 1, 1999, Small Cap Index Fund's holdings of
Small Cap Index Series represent 0.02% of the Trust as a whole.
Merrill Lynch Aggregate Bond Index Fund of Merrill Lynch Index Funds, Inc.
("Aggregate Bond Index Fund") controls Merrill Lynch Aggregate Bond Index Series
("Aggregate Bond Index Series"). As of April 1, 1999, Aggregate Bond Index Fund
owns 99.6% of the currently outstanding interests of Aggregate Bond Index
Series, and Aggregate Bond Index Trust owns 0.4% of the currently outstanding
interests of Aggregate Bond Index Series. As of April 1, 1999, Aggregate Bond
Index Fund's holdings of Aggregate Bond Index Series represent 0.20% of the
Trusts as a whole.
Merrill Lynch International Index Fund of Merrill Lynch Index Funds, Inc.
("International Index Fund") controls Merrill Lynch International Index Series
("International Index Series"). As of April 1, 1999, International Index Fund
owns 85.6% of the currently outstanding interests of International Index Series,
and International Index Trust owns 14.4% of the currently outstanding interests
of International Index Series. As of April 1, 1999, International Index Fund's
holdings of International Index Series represent 0.06% of the Trust as a whole.
Item 25. Indemnification.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the "1940 Act"), and pursuant to Sections 8.2, 8.3 and 8.4, of
Article VIII of the Registrant's Declaration of Trust (Exhibit 1 to this
Registrant Statement), Trustees, officers, employees and agents of the Trust
will be indemnified to the maximum extent permitted by Delaware law and the
1940 Act.
Article VIII, Section 8.2 provides, inter alia, that no Trustee, officer,
employee or agent of the Registrant shall be liable to the Registrant, its
holders, or to any other Trustee, officer, employee or agent for any action or
omission except for his own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties.
Article VIII, Section 8.3 of the Registrant's Declaration of Trust provides:
Section 8.3 Indemnification. The Trust shall indemnify each of its
Trustees, officers, employees, and agents (including persons who serve at
its request as directors, officers or trustees of another organization in
which it has any interest, as a shareholder, creditor or otherwise) against
all liabilities and expenses (including amounts paid in satisfaction of
judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, in which
he may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a Trustee, officer,
employee or agent, except with respect to any matter as to which he shall
have been adjudicated to have acted in bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties, such liabilities and
expenses being liabilities belonging to the Series out of which such claim
for indemnification arises; provided, however, that as to any matter
disposed of by a compromise payment by such Person, pursuant to a consent
decree or otherwise, no indemnification either for said payment of for any
other expenses shall be provided unless there has been a determination that
such Person did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office by the court or other body approving the settlement or other
disposition or, in the absence of a judicial determination, by a reasonable
determination, based upon a review of readily available facts (as opposed
to a full trial-type inquiry), that he did not engage in such conduct,
which determination shall be made by a majority of a quorum of Trustees who
are neither interested persons of the Registrant (within the meaning of the
1940 Act) nor parties to the action, suit or proceeding, or by written
opinion from independent legal counsel approved by the Trustees. The rights
accruing to any Person under these provisions shall not exclude any other
right to which he may be lawfully entitled; provided that no Person may
satisfy any right of indemnity or reimbursement granted herein or to which
he may be otherwise entitled except out of the Trust Property. The Trustees
may make advance payments in connection with indemnification under this
Section 8.3; Provided that any advance payment of expenses by the Trust to
any Trustee, officer, employee or agent shall be made only upon the
undertaking by such Trustee, officer, employee or agent to repay the
advance unless it is ultimately determined that he is entitled to
indemnification as above provided, and only if one of the following
conditions is met:
(a) the Trustee, officer, employee or agent to be indemnified provided
a security for an undertaking; or
(b) the Trust shall be insured against losses arising by reason of any
lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reasons to believe that the Trustee, officer,
employee or agent to be indemnified ultimately will be entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of Trustees who are neither Interested
Persons of the Trust nor parties to the Proceedings; or
(ii) an independent legal counsel in a written opinion.
Article VIII, Section 8.4 of the Registrants Declaration of Trust further
provides:
Section 8.4 No Protection Against Certain 1940 Act Liabilities. Nothing
contained in Sections 8.1, 8.2 or 8.3 hereof shall protect any Trustee or
officer of the Trust from any liability to the Trust or its Holders to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Nothing contained in Sections 8.1, 8.2 or 8.3 hereof
or in any agreement of the character described in Section 4.1 or 4.2 hereof
shall protect any Investment Manager or Asset Manager to the Trust or any
Series against any liability to the Trust or any Series to which he would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of his or its duties to the Trust or Series,
or by reason of his or its reckless disregard to his or its obligations and
duties under the agreement pursuant to which he serves as Investment
Manager or Asset Manager to the Trust or any Series.
As permitted by Article VIII, Section 8.7, the Registrant may insure its
Trustees and officers against certain liabilities, and certain costs of
defending claims against such Trustees and officers, to the extent such
Trustees and officers are not found to have committed conduct constituting
conflict of interest, intentional non-compliance with statutes or
regulations or dishonest, fraudulent or criminal acts or omissions. The
Registrant will purchase an insurance policy to cover such indemnification
obligation. The insurance policy also will insure the Registrant against
the cost of indemnification payments to Trustees and officers under certain
circumstances. Insurance will not be purchased that protects, or purports
to protect, any Trustee or officer from liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its Declaration of Trust and Bylaws in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
1940 Act so long as the interpretation of Section 17(h) and 17(i) of such
Act remain in effect and are consistently applied.
C-2
<PAGE>
Item 26. Business and Other Connections of Investment Adviser.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
also acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond
Fund, Inc., and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as a sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Funds,
Inc., MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings
C-3
<PAGE>
California Insured Fund IV, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Fund III, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings
New York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
Muniholdings Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured
Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch Funds Distributor ("MLFD"), a division of Princeton Funds Distributor,
Inc. is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281-1201. The
address of the Fund's transfer agent Financial Data Services, Inc. ("FDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and Director of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since December 31, 1996 for his or her or its own account or in the capacity
of director, officer, employee, partner or trustee. In addition, Mr. Burke is
Vice President and Treasurer and Mr. Glenn is President of all or
substantially all of the investment companies advised by the Manager or FAM
and Mr. Glenn is a director of substantially all of such companies. Messrs.
Giordano and Monagle are directors or officers of one or more of such
companies.
Officers and partners of MLAM are set forth as follows:
<TABLE>
<CAPTION>
Position with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Merrill Lynch
Investment............. Limited Partner Investment Advisory Management, Inc.
Princeton Services...... General Partner General Partner of FAM
Jeffrey M. Peek......... President President of FAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.
Terry K. Glenn.......... Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of Princeton Funds
Distributor, Inc.; Director of FDS;
President of Princeton Administrators
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
Donald C. Burke......... Senior Vice President, Senior Vice President and Treasurer of
Treasurer and Director FAM; Senior Vice President and
of Taxation Treasurer of Princeton Services; Vice
President of Princeton Funds
Distributor, Inc.; First Vice
President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to
1997
Michael G. Clark........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Director and Treasurer of Princeton
Funds Distributor, Inc.; First Vice
President of MLAM from 1997 to 1999;
Vice President of MLAM from 1996 to
1997
Mark A. Desario......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Linda L. Federeci....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President, Senior Vice President of FAM, General
General Counsel and Secretary Counsel and Secretary of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President Senior Vice President of FAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services.
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Vice President of Princeton Funds
Distributor, Inc.
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Brian A. Murdock........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
Item 27. Principal Underwriters.
(a) Merrill Lynch Funds Distributor, a division of Princeton Funds
Distributor, Inc. ("MLFD"), acts as the placement agent for the Registrant,
principal underwriter for Merrill Lynch Index Funds, Inc. and as principal
underwriter for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 26 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., and The Municipal Fund Accumulation Program, Inc. MLFD also
acts as principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of Princeton Funds Distributor, Inc. acts
as the principal underwriter of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) Positions and Offices Positions and Offices
Name with MLFD with Registrant
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn............. President and Director President and Director
Michael G. Clark........... Director and Treasurer None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Donald C. Burke............ Vice President Treasurer and Vice President
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary None
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Trust" in Part
A of the Registration Statement and under "Management of the Trust" in Part B
of the Registration Statement, the Registrant is not party to any management-
related service contract.
Item 30. Undertakings.
None.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 28th day of April,
1999.
Merrill Lynch Index Trust
(Registrant)
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<C> <S>
10(a) --Accountant's consent
10(b) --Consent of Swidler Berlin Shereff Friedman, LLP, Counsel for
Registrant.
14(a) --Financial Data Schedule for S&P 500 Index Series
14(b) --Financial Data Schedule for Small Cap Index Series
14(c) --Financial Data Schedule for Aggregate Bond Index Series
14(d) --Financial Data Schedule for International Index Series
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> MERRILL LYNCH S&P 500 INDEX SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 931945314
<INVESTMENTS-AT-VALUE> 1122299312
<RECEIVABLES> 12863684
<ASSETS-OTHER> 16899
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1135179895
<PAYABLE-FOR-SECURITIES> 13004096
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3955333
<TOTAL-LIABILITIES> 16959429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 926954862
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191265604
<NET-ASSETS> 1118220466
<DIVIDEND-INCOME> 12884019
<INTEREST-INCOME> 2111742
<OTHER-INCOME> 37590
<EXPENSES-NET> (876982)
<NET-INVESTMENT-INCOME> 14156369
<REALIZED-GAINS-CURRENT> 38594945
<APPREC-INCREASE-CURRENT> 145214729
<NET-CHANGE-FROM-OPS> 197966043
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 515419965
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 454138
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 876982
<AVERAGE-NET-ASSETS> 908303121
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> MERRILL LYNCH SMALL CAP INDEX SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 83612126
<INVESTMENTS-AT-VALUE> 82911734
<RECEIVABLES> 979949
<ASSETS-OTHER> 373237
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 84264920
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 434265
<TOTAL-LIABILITIES> 434265
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84057231
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (226576)
<NET-ASSETS> 83830655
<DIVIDEND-INCOME> 920558
<INTEREST-INCOME> 334955
<OTHER-INCOME> 0
<EXPENSES-NET> (130636)
<NET-INVESTMENT-INCOME> 1124877
<REALIZED-GAINS-CURRENT> 6658814
<APPREC-INCREASE-CURRENT> (7991435)
<NET-CHANGE-FROM-OPS> (207744)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (11914454)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61476
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 216477
<AVERAGE-NET-ASSETS> 76813095
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> MERRILL LYNCH AGGREGATE BOND INDEX SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 420481806
<INVESTMENTS-AT-VALUE> 434994245
<RECEIVABLES> 6689048
<ASSETS-OTHER> 254731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 441938024
<PAYABLE-FOR-SECURITIES> 6228786
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 774444
<TOTAL-LIABILITIES> 7003230
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 420422355
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14512439
<NET-ASSETS> 434934794
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25075382
<OTHER-INCOME> 37022
<EXPENSES-NET> (496561)
<NET-INVESTMENT-INCOME> 24615843
<REALIZED-GAINS-CURRENT> 1822916
<APPREC-INCREASE-CURRENT> 7171047
<NET-CHANGE-FROM-OPS> 33609806
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 127194397
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238378
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 499098
<AVERAGE-NET-ASSETS> 395131319
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MERRILL LYNCH INTERNATIONAL INDEX SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 128724987
<INVESTMENTS-AT-VALUE> 150816858
<RECEIVABLES> 913018
<ASSETS-OTHER> 157689
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 151887565
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367330
<TOTAL-LIABILITIES> 367330
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129166792
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22353443
<NET-ASSETS> 151520235
<DIVIDEND-INCOME> 1955714
<INTEREST-INCOME> 531070
<OTHER-INCOME> 0
<EXPENSES-NET> (335746)
<NET-INVESTMENT-INCOME> 2151038
<REALIZED-GAINS-CURRENT> 11405413
<APPREC-INCREASE-CURRENT> 21936836
<NET-CHANGE-FROM-OPS> 35493287
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8102435
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 142489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 422928
<AVERAGE-NET-ASSETS> 129535766
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
Exhibit 10(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Index Trust:
We consent to the incorporation by reference in this Amendment No. 3 to
Registration Statement No. 811-7885 of our reports dated as follows:
February 16, 1999 S&P 500 Index Series
February 17, 1999 Aggregate Bond Index Series
February 18, 1999 Small Cap Index Series
February 18, 1999 International Index Series
appearing in the annual reports to shareholders for the year ended December 31,
1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 23, 1999
<PAGE>
Exhibit 10(b)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in Part A and
Part B of Merrill Lynch Index Trust, filed as part of Registration Statement No.
811-7885.
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP
New York, New York
April 26, 1999
