<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
SECURITIES ACT FILE NO. 333-15265
INVESTMENT COMPANY ACT FILE NO. 811-7899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 2
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 3
(CHECK APPROPRIATE BOX OR BOXES.)
----------------
MERRILL LYNCH INDEX FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
Copies to:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SHEREFF, FRIEDMAN, HOFFMAN & P.O. BOX 9011
GOODMAN, LLP PRINCETON, NEW JERSEY 08543-9011
919 THIRD AVENUE, NEW YORK, NEW YORK
10022
----------------
It is proposed that this filing become effective:
[X] immediately upon filing pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a), or
[_] on (date) pursuant to paragraph (b), or
[_] on (date) pursuant to paragraph (a) of Rule 485
MERRILL LYNCH INDEX TRUST HAS ALSO EXECUTED THIS REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH INDEX FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION IN PROSPECTUS
----------- ----------------------
<C> <S> <C>
PART A
Item 1. Cover Page................... Cover Page
Item 2. Synopsis..................... Fee Table
Item 3. Condensed Financial
Information................. Not Applicable
Item 4. General Description of
Registrant.................. Investment Objectives and Policies;
Management of the Fund; Other
Investment Policies and Practices;
Additional Information
Item 5. Management of the Fund....... Fee Table; Management of the Fund
Item 5A. Management's Discussion of
Fund Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Additional Information
Item 7. Purchase of Securities Being
Offered..................... Purchase of Shares; Additional
Information
Item 8. Redemption or Repurchase..... Fee Table; Redemption of Shares
Item 9. Pending Legal Proceedings.... Not Applicable
PART B
Item 10. Cover Page................... Cover Page
Item 11. Table of Contents............ Back Cover Page
Item 12. General Information and
History..................... Not Applicable
Item 13. Investment Objectives and
Policies.................... Investment Objectives and Policies
Item 14. Management of the Fund....... Management of the Funds
Item 15. Control Persons and Principal
Holders of Securities....... Not Applicable
Item 16. Investment Advisory and Other
Services.................... Management of the Funds; Purchase of
Shares; Additional Information
Item 17. Brokerage Allocation......... Brokerage
Item 18. Capital Stock and Other
Securities.................. Additional Information
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................... Dividends and Distributions; Taxes
Item 21. Underwriters................. Purchase of Shares
Item 22. Calculations of Performance
Data........................ Performance Data
Item 23. Financial Statements......... Financial Statements
PART C
</TABLE>
Information required to be included is set forth under the appropriate Item,
so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MARCH 31, 1998
MERRILL LYNCH INDEX FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Index Funds, Inc. (the "Corporation") currently consists of
four portfolios or series: Merrill Lynch S&P 500 Index Fund ("S&P 500 Index
Fund"), Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund"), Merrill
Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund") and Merrill
Lynch International Index Fund ("International Index Fund") (collectively, the
"Funds," and each, a "Fund"). Each Fund 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 securities index that has been selected as a proxy for the
performance of a selected market segment. The index is subject to change if,
in the Directors' judgment, a different index would serve as a better proxy
for such market segment. Each Fund will seek to achieve its objective by
investing all of its assets in the series (collectively, the "Series," and
each, a "Series") of Merrill Lynch Index Trust (the "Trust") that has the same
investment objective as the Fund. Each Fund's investment experience will
correspond directly to the investment experience of the respective Series in
which it invests. There can be no assurance that the investment objectives of
the Funds will be achieved. For more information on the Funds' and the Series'
investment objectives and policies, see "Investment Objectives and Policies"
on page 6.
----------------
Each Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of each Fund are offered at a price equal to the next
determined net asset value per share without the imposition of any front-end
or deferred sales charge, and are not subject to any ongoing account
maintenance or distribution fee. Distribution of Class A shares of each Fund
is limited to certain eligible investors. Class D shares of each Fund are
offered at a price equal to the next determined net asset value per share
without the imposition of any front-end or deferred sales charge and are not
subject to any ongoing distribution fee, but are subject to an ongoing account
maintenance fee at an annual rate of 0.25% of average daily net assets.
----------------
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609)
282-2800, which has entered into a dealer agreement with Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Shareholders may redeem
their shares at any time at the next determined net asset value. The minimum
initial purchase is $1,000 and the minimum subsequent purchase is $50, except
that for retirement plans the minimum initial investment is $100 and the
minimum subsequent purchase is $1 and for participants in certain fee-based
programs the minimum initial purchase is $500 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the "Transfer Agent") are not subject to processing fees. See "Purchase of
Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Funds that
is relevant to making an investment in the Funds. This Prospectus should be
retained for future reference. A statement containing additional information
about the Funds, dated March 31, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Funds at the above
telephone number or address. The Commission maintains a website
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information about the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT, L.P.--MLAM
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
The following table provides a general comparison of expenses, both recurring
and non-recurring, relating to shares of the Funds and the Series. For purposes
of this table, expenses allocated from the Series in which each Fund invests
are treated as if they were expenses of that Fund, since that is their
practical effect. It is expected that there will be little duplication of
expenses by the Funds and the Series, and that, accordingly, the combined per
share expenses of each Fund and corresponding Series should not be
significantly greater than the expenses of each Fund alone would be if, instead
of investing in shares of the Series, the Fund retained an investment adviser
and invested directly in the types of securities held by the Series.
CLASS A SHARES
<TABLE>
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases...... None None None None
Sales Charge Imposed on
Dividend Reinvestment..... None None None None
Deferred Sales Charge...... None None None None
Redemption Fee............. None None None None
Exchange Fee............... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(a)................... 0.05 % 0.08 % 0.06 % 0.11 %
Other Expenses(b):
Administrative Fees(c)..... 0.20 % 0.22 % 0.14 % 0.24 %
Other (expenses of the
Funds and the Series)(d).. 0.32 % 0.70 % 0.32 % 0.75 %
----- ----- ----- -----
Total Other Expenses...... 0.52 % 0.92 % 0.46 % 0.99 %
----- ----- ----- -----
Reimbursement of
Expenses(e)............... (0.17)% (0.48)% (0.17)% (0.24)%
----- ----- ----- -----
Total Operating Expenses of
the Funds and the Series.. 0.40 % 0.52 % 0.35 % 0.86 %
===== ===== ===== =====
CLASS D SHARES
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases...... None None None None
Sales Charge Imposed on
Dividend Reinvestment..... None None None None
Deferred Sales Charge...... None None None None
Redemption Fee............. None None None None
Exchange Fee............... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(a)................... 0.05 % 0.08 % 0.06 % 0.11 %
Rule 12b-1 Account
Maintenance Fees: ........ 0.25 % 0.25 % 0.25 % 0.25 %
Other Expenses(b):
Administrative Fees(c)..... 0.20 % 0.22 % 0.14 % 0.24 %
Other (expenses of the
Funds and the Series)(d).. 0.32 % 0.70 % 0.32 % 0.75 %
----- ----- ----- -----
Total Other Expenses...... 0.52 % 0.92 % 0.46 % 0.99 %
----- ----- ----- -----
Reimbursement of
Expenses(e)............... (0.17)% (0.48)% (0.17)% (0.24)%
----- ----- ----- -----
Total Operating Expenses of
the Funds and the Series.. 0.65 % 0.77 % 0.60 % 1.11 %
===== ===== ===== =====
</TABLE>
- --------
(a) Paid by the Series of the Trust. See "Management of the Funds--Expenses"--
page 21.
(b) Information under "Other Expenses" is based on estimated amounts through
the end of a Series' and a Fund's first full fiscal year.
(c) Paid by the Funds. See "Management of the Funds--Expenses"--page 21.
(d) Includes fees of the Transfer Agent. See "Management of the Funds--Transfer
Agency Services"--page 22.
(footnotes continued on following page)
2
<PAGE>
(e) Merrill Lynch Asset Management, L.P. ("MLAM") anticipates voluntarily
reimbursing or waiving a portion of the management, administrative and
other expenses, if applicable. MLAM may discontinue or reduce such
reimbursement or waiver at any time without notice. Absent such
reimbursement or waiver, the total operating expenses of the Funds and the
Series are shown below.
CLASS A SHARES
<TABLE>
<CAPTION>
S&P 500 Small Cap Aggregate Bond International
Index Fund Index Fund Index Fund Index Fund
---------- ---------- -------------- -------------
<S> <C> <C> <C>
0.57% 1.00% 0.52% 1.10%
</TABLE>
CLASS D SHARES
<TABLE>
<CAPTION>
S&P 500 Small Cap Aggregate Bond International
Index Fund Index Fund Index Fund Index Fund
---------- ---------- -------------- -------------
<S> <C> <C> <C>
0.82% 1.25% 0.77% 1.35%
</TABLE>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment assuming
(1) the Total Operating Expenses in respect of each class of shares of each
Fund as set forth on page 2, (2) a 5% annual return throughout the period and
(3) redemption at the end of:
Class A Shares
<TABLE>
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
One year................... $ 4 $ 5 $ 4 $ 9
Three years................ $13 $17 $11 $27
Class D Shares
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
One year................... $ 7 $ 8 $ 6 $11
Three years................ $21 $25 $19 $35
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in each class of each Fund will bear
directly or indirectly. The expenses set forth under "Other Expenses" are based
on estimated amounts through the end of a Series' and a Fund's first full
fiscal year.
The example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Securities
and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL
EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions directly through the Funds' transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below for the fiscal period April 3,
1997 (commencement of operations) to December 31, 1997 for the S&P 500 Index
Fund and the Aggregate Bond Index Fund, and for the fiscal period April 9, 1997
(commencement of operations) to December 31, 1997 for the Small Cap Index Fund
and the International Index Fund has been audited in conjunction with the
annual audits of the financial statements of the Funds by Deloitte & Touche
LLP, independent auditors. Further information about the performance of the
Funds is contained in the Funds' most recent annual report to shareholders
which may be obtained, without charge, by calling or writing the Funds at the
telephone number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Funds' audited financial statements.
<TABLE>
<CAPTION>
S&P 500 INDEX FUND SMALL CAP INDEX FUND
----------------------------------- -----------------------------------
CLASS A CLASS D CLASS A CLASS D
----------------- ----------------- ----------------- -----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
APRIL 3, 1997+ TO APRIL 3, 1997+ TO APRIL 9, 1997+ TO APRIL 9, 1997+ TO
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- ------- -------
Investment income--net.. .11 .11 .10 .09
Realized and unrealized
gain on investments
from the Series--net... 2.97 2.95 2.60 2.60
-------- -------- ------- -------
Total from investment
operations............. 3.08 3.06 2.70 2.69
-------- -------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment income--net. (.11) (.10) (.10) (.09)
In excess of investment
income--net........... -- -- -- +++ -- +++
Realized gain on
investments from the
Series--net........... (.42) (.42) (.32) (.32)
-------- -------- ------- -------
Total dividends and dis-
tributions............. (.53) (.52) (.42) (.41)
-------- -------- ------- -------
Net asset value, end of
period................. $ 12.55 $ 12.54 $ 12.28 $ 12.28
======== ======== ======= =======
TOTAL INVESTMENT RETURN:
Based on net asset value
per share.............. 30.80%# 30.53%# 27.04%# 26.87%#
======== ======== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement++........ .40%* .65%* .52%* .77%*
======== ======== ======= =======
Expenses++.............. .57%* .82%* 1.00%* 1.25%*
======== ======== ======= =======
Investment income--net.. 1.71%* 1.47%* 1.45%* 1.20%*
======== ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $445,016 $157,567 $26,478 $38,778
======== ======== ======= =======
</TABLE>
- --------
* Annualized.
+ Commencement of Operations.
++ Includes the Fund's share of the Series' allocated expenses.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
4
<PAGE>
FINANCIAL HIGHLIGHTS--(CONCLUDED)
<TABLE>
<CAPTION>
AGGREGATE BOND INDEX FUND INTERNATIONAL INDEX FUND
----------------------------------- -----------------------------------
CLASS A CLASS D CLASS A CLASS D
----------------- ----------------- ----------------- -----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
APRIL 3, 1997+ TO APRIL 3, 1997+ TO APRIL 9, 1997+ TO APRIL 9, 1997+ TO
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- ------- -------- -------
Investment income--net.. .48 .46 .10 .15
Realized and unrealized
gain on investments and
foreign currency
transactions from the
Series--net............ .45 .45 .75 .67
-------- ------- -------- -------
Total from investment
operations............. .93 .91 .85 .82
-------- ------- -------- -------
Less dividends and
distributions:
Investment income--net. (.48) (.46) (.12) (.10)
In excess of investment
income--net........... -- -- (.02) (.01)
Realized gain on
investments from the
Series--net........... (.03) (.03) (.15) (.15)
In excess of realized
gain on investments
from the Series--net.. -- +++ -- +++ -- --
-------- ------- -------- -------
Total dividends and
distributions.......... (.51) (.49) (.29) (.26)
-------- ------- -------- -------
Net asset value, end of
period................. $ 10.42 $ 10.42 $ 10.56 $ 10.56
======== ======= ======== =======
TOTAL INVESTMENT RETURN:
Based on net asset value
per share.............. 9.49%# 9.29%# 8.45%# 8.22%#
======== ======= ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement++........ .35%* .60%* .86%* 1.11%*
======== ======= ======== =======
Expenses++.............. .52%* .77%* 1.10%* 1.35%*
======== ======= ======== =======
Investment income--net.. 6.22%* 5.98%* 1.64%* 1.67%*
======== ======= ======== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $251,140 $56,134 $115,190 $20,536
======== ======= ======== =======
</TABLE>
- --------
* Annualized.
+ Commencement of Operations.
++ Includes the Fund's share of the Series' allocated expenses.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Corporation currently consists of four series: S&P 500 Index Fund, Small
Cap Index Fund, Aggregate Bond Index Fund and International Index Fund. Each
Fund 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. Each Fund will seek to achieve its objective by investing all of its
assets in the series of Merrill Lynch Index Trust that has the same investment
objective as the Fund. Each Fund's investment experience will correspond
directly to the investment experience of the respective Series in which it
invests. There can be no assurance that the investment objectives of the Funds
will be achieved.
The Funds' and Series' investment objectives are not fundamental policies,
and may be changed by the Board of Directors of the Corporation (the
"Directors") and the Board of Trustees of the Trust (the "Trustees"),
respectively, without shareholder approval. THE TRUSTEES AND THE DIRECTORS MAY
ALSO CHANGE THE TARGET INDEX OF ANY RESPECTIVE SERIES AND FUND IF THEY CONSIDER
THAT A DIFFERENT INDEX WOULD FACILITATE THE MANAGEMENT OF THE SERIES AND FUND
IN A MANNER WHICH BETTER ENABLES THE FUND AND SERIES TO SEEK TO REPLICATE THE
TOTAL RETURN OF THE MARKET SEGMENT REPRESENTED BY THE CURRENT INDEX.
STRUCTURE OF THE FUNDS AND THE SERIES
Unlike many other mutual funds, which directly acquire and manage their own
portfolio securities, each Fund seeks to achieve its investment objective by
investing all of its assets in the corresponding Series of the Trust. Each
Series is a separate series of a registered investment company with the same
investment objective as its corresponding investing Fund. Because the Funds
will not invest in any securities other than shares of the respective Series,
investors in the Funds will acquire an indirect interest in the Series.
In addition to selling their shares to the Funds, the Series may sell their
shares to other mutual funds and institutional investors. All investors in the
Series invest on the same terms and conditions and pay a proportionate share of
the Series' expenses. However, other investors in the Series may sell their
shares at prices different from those of the Funds as a result of the
imposition of sales charges or different operating expenses. Therefore,
investors in the Funds should be aware that these differences may result in
different returns experienced by the various entities investing in the Series.
Information concerning other holders of shares of the Series is available from
Merrill Lynch Financial Data Services, Inc. ("MLFDS" or the "Transfer Agent")
by calling 1-800-MER-FUND.
The Directors believe that this structure may enable the Funds to benefit
from certain economies of scale. This view is based on the premise that (i)
certain of the expenses of managing an investment portfolio that seeks to
replicate the total return of a securities index are relatively fixed so that a
larger investment portfolio may achieve a lower ratio of operating expenses to
net assets and (ii) a larger investment portfolio may be able to reduce certain
securities transaction costs to the extent that contributions to and
redemptions from the investment portfolio from different investing entities may
offset each other and thus produce a lower net cash flow.
A Fund's investment in a Series may be withdrawn by the Directors at any time
if the Directors determine that it is in the best interests of the Fund to do
so. If any such withdrawal were made, the Directors would consider what action
might be taken, including the investment of all of the assets of the
6
<PAGE>
Fund in another pooled investment entity having the same investment objective
as the Fund or the retaining of an investment adviser to manage the Fund's
assets directly in accordance with the investment objective of the Fund. The
inability to find another such pooled entity or equivalent investment
management could have a significant impact on the investments of the Fund's
shareholders.
Investors in the Funds should be aware that smaller entities investing in the
Series may be materially affected by the actions of larger entities investing
in the Series. For example, investors in the Series holding larger positions
than the Funds could have greater voting power and effective voting control
over the operations of the Series. Changes in the investment objective,
policies or restrictions of a Series might cause a Fund to have difficulty in
finding a substitute Series or equivalent investment management and might cause
it to redeem its shares of the Series, and such a redemption could result in a
distribution in kind of portfolio securities held by the Series, instead of
cash. If securities were distributed to a Fund, and the Fund desired to convert
the securities to cash, it would incur brokerage, tax or other charges in
converting securities to cash. In addition, such a distribution in kind might
result in a less diversified portfolio of investments of a Fund. These
possibilities also exist for traditionally structured funds which have large or
institutional investors who may withdraw from the fund.
Whenever a Fund is requested to vote on matters pertaining to a Series, the
Fund will hold a meeting of shareholders, and the Fund's votes with respect to
the Series will all be cast in the same proportion as the shares of the Fund
for which voting instructions are received.
S&P 500 INDEX FUND
The investment objective of the S&P 500 Index Fund is to provide investment
results that, before expenses, seek to replicate the total return (i.e., the
combination of capital changes and income) of the Standard & Poor's (R) 500
Composite Stock Price Index (the "S&P 500"). There can be no assurance that the
investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch S&P 500 Index Series of the Trust ("S&P 500 Index
Series"), which has the same investment objective as the Fund. The following is
a description of the investment policies of the S&P 500 Index Series.
In seeking to replicate the total return of the S&P 500, MLAM 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, MLAM may use
options and futures contracts and other types of financial instruments relating
to all or a portion of the S&P 500. The S&P 500 Index Series may also engage in
securities lending and index arbitrage. 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.
7
<PAGE>
SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to provide investment
results that, before expenses, seek to replicate the total return (i.e., the
combination of capital changes and income) of the Russell 2000 (R) Index (the
"Russell 2000"). There can be no assurance that the investment objective of the
Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch Small Cap Index Series of the Trust ("Small Cap
Index Series"), which has the same investment objective as the Fund. The
following is a description of the investment policies of the Small Cap Index
Series.
In seeking to replicate the total return of the Russell 2000, MLAM 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.
MLAM 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 and index arbitrage. 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 FUND
The investment objective of the Aggregate Bond Index Fund is to provide
investment results that, before expenses, seek to replicate the total return
(i.e., the combination of capital changes and income) of the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"). There can be no assurance
that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch Aggregate Bond Index Series of the Trust
("Aggregate Bond Index Series"), which has the same investment objective as the
Fund. The following is a description of the investment policies of the
Aggregate Bond Index Series.
In seeking to replicate the total return of the Aggregate Bond Index, MLAM
may not allocate the Aggregate Bond Index Series' investments among all of the
fixed-income securities 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 fixed-income securities and other
types of financial instruments. MLAM may use options and futures contracts and
other types of financial instruments relating to all or a portion of the
Aggregate Bond 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). The Aggregate Bond Index Series may, from time to time,
substitute a different type of bond for one included in the Aggregate Bond
Index. Substitution may result in levels of interest rate, credit or prepayment
risks that differ from the levels of risks on the securities
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composing the Aggregate Bond Index. See "Risk Factors--Investments in Fixed-
Income Securities." The Aggregate Bond Index Series may also engage in
securities lending and index arbitrage. See "Other Types of Investments and
Investment Techniques."
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade fixed-income securities 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.
The Aggregate Bond Index Series' corporate fixed-income securities will be
primarily of investment grade quality--i.e., those rated at least Baa3 by
Moody's 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 MLAM. Corporate fixed-income securities 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
fixed-income securities are contained in Appendix B to this Prospectus.
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 FUND
The investment objective of the International Index Fund is to provide
investment results that, before expenses, seek to replicate the total return
(i.e., the combination of capital changes and income) of the Morgan Stanley
Capital International EAFE (R) GDP Weighted Index (the "EAFE Index"). There can
be no assurance that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch International Index Series of the Trust
("International Index Series"), which has the same investment objective as the
Fund. The following is a description of the investment policies of the
International Index Series.
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In seeking to replicate the total return of the EAFE Index, MLAM 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, MLAM 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 and index arbitrage. 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, Malaysia, The Netherlands, New Zealand, Norway,
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). Portugal is expected to be included in the EAFE Index, effective July
1, 1998.
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.
Indexing and Managing the Series. Under normal conditions each Series will
invest at least 80% of its assets (exclusive of assets held as collateral for
securities loans or as margin for futures transactions) in securities or other
financial instruments which are contained in, or related to the securities
contained 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 MLAM 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, MLAM may omit or remove a
security which is included in an index from the portfolio of a Series if,
following objective criteria, MLAM judges the security to be insufficiently
liquid or believes the merit of the investment has been substantially impaired
by extraordinary events or financial conditions.
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In managing the Equity Series, MLAM may employ index arbitrage. Index
arbitrage involves the sale of a replicating selection, or "basket," of stocks
with the simultaneous purchase of an equivalent dollar value of related futures
contracts, or alternatively the purchase of such an equity basket with a
simultaneous sale of related futures contracts. This technique is designed to
take advantage of a possible mispricing which could arise between the
securities market and the futures market.
In addition, MLAM 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. MLAM 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, MLAM 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. In addition, each
Fund's total return will be affected by incremental operating costs (e.g.,
transfer agency, accounting) that will be borne by the Fund. 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, be within 5 basis points (a basis point is one one-hundredth of one
percent (0.01%)) for the S&P 500 Index Fund, 100 basis points for the Small Cap
Index Fund, 150 basis points for the International Index Fund, and 25 basis
points for the Aggregate Bond Index Fund, 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 and the Directors will consider alternative strategies for the
Series and the Funds.
OTHER TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES OF THE SERIES
Cash Management. Generally, MLAM 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
MLAM, 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 MLAM; (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 MLAM.
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Portfolio Strategies Involving Futures, Options, Swaps and Indexed
Instruments. 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 as described in the preceding paragraph,
and may also be employed in connection with a Series' index arbitrage
strategies. 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.
MLAM will choose among the foregoing instruments based on its judgment of how
best to meet each Series' goals. In connection therewith, MLAM 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.
The Series' use of the foregoing instruments and the associated risks are
described in detail in Appendix A to this Prospectus.
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.
OTHER INVESTMENT POLICIES AND PRACTICES OF THE SERIES
Illiquid Investments. Each of the Series may invest up to 15% of its net
assets in illiquid investments. Pursuant to that restriction each Series may
not invest in instruments that cannot be readily resold because of legal or
contractual restrictions, that cannot otherwise be marketed, redeemed, put to
the issuer or a third party, which do not mature within seven days, or that the
Trustees have not determined to be liquid, if, regarding all such instruments,
more than 15% of its net assets, taken at market value, would be invested in
such instruments.
Each Series may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933 (the "Securities Act")
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Trustees, or MLAM pursuant to
guidelines adopted by the Trustees, continuously determines, based on the
trading markets for the specific Rule 144A security, that it is liquid. The
Trustees, however, will retain oversight and are ultimately responsible for
these determinations. The Trustees monitor each Series' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in each Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
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 MLAM
otherwise deems to be creditworthy. Under repurchase agreements, the
counterparty agrees, upon
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entering into the contract, to repurchase the security from the Series at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period although
it may be affected by currency fluctuations. In the event of default by the
seller under a repurchase agreement the Series may suffer time delays and incur
costs or possible losses in connection with disposition of the collateral.
Repurchase agreements maturing in more than seven days are deemed illiquid by
the Securities and Exchange Commission and are therefore subject to the Series'
investment restrictions limiting investments in securities that are not readily
marketable to 15% of the Series' net assets.
Lending of Portfolio Securities. To the extent permitted by law, each Series
may from time to time lend securities from its portfolio to banks, brokers and
other financial institutions and receive collateral in cash or securities
issued or guaranteed by the United States government. Such collateral will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Each Series' policy concerning lending
is fundamental and it may not be changed without the approval of the holders of
a majority of the Series' outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act").
During the period of such a loan, the Series receives the income on the loaned
securities and either receives the income on the collateral or other
compensation, i.e., negotiated loan premium or fee, for entering into the loan
and thereby increases its yield. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Series could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities. Presently,
no Series intends to lend portfolio securities representing in excess of 33
1/3% of its total assets.
When-Issued Securities and Delayed Delivery Transactions. The Aggregate Bond
Index Series may purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. These transactions occur when
securities are purchased or sold by the Series with payment and delivery taking
place in the future to secure what is considered an advantageous yield and
price to the Series at the time of entering into the transaction. Although the
Aggregate Bond Index Series has not established any limit on the percentage of
its assets that may be committed in connection with such transactions, the
Aggregate Bond Index Series will maintain a segregated account with its
custodian of liquid securities in an aggregate amount equal to the amount of
its commitment in connection with such purchase transactions.
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
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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.
Standby Commitment Agreements. The Aggregate Bond Index Series may from time
to time enter into standby commitment agreements. Such agreements commit the
Aggregate Bond Index Series, for a stated period of time, to purchase 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 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 only for the purpose of investing in the security
underlying the commitment at a yield and price which 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 the
securities subject to such commitments, together with the value of all other
illiquid securities, will not exceed 15% of its total assets taken at the time
of acquisition of such commitment or security. The Aggregate Bond Index Series
will at all times maintain a segregated account with its custodian of 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. Because 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.
Short Sales. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, MLAM 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. MLAM will not employ short sales in
reflection of MLAM's outlook for the securities markets or for the performance
of the securities sold short. Generally, to complete a short sale transaction,
the 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
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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.
INVESTMENT RESTRICTIONS
The Funds' and the Series' investment activities are subject to further
restrictions that are described in the Statement of Additional Information.
Investment restrictions and policies which are fundamental policies may not be
changed without the approval of the holders of a majority of the Funds' or
Series' outstanding voting securities as defined in the Investment Company Act.
Among the more significant fundamental restrictions, a Series or Fund may not
invest more than 25% of its total assets (taken at market value at the time of
each investment) in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities);
provided, that in replicating the weighting of a particular industry in its
target index, a Series or Fund may invest more than 25% of its total assets in
securities of issuers in that industry. In addition, although each Fund is
classified as a non-diversified fund under the Investment Company Act and is
not subject to the diversification requirements of the Investment Company Act,
each Fund is required to comply with certain requirements under the Internal
Revenue Code of 1986, as amended (the "Code"). To ensure that the Funds 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 Fund's total assets are invested in the
securities of a single issuer, or any two or more issuers which are controlled
by the Fund 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 than 5%
of the market value of its total assets are invested in the securities of a
single issuer, and the Fund 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. These requirements
will be satisfied at the Series level and not at the level of the Funds based
upon a ruling received from the Internal Revenue Service ("IRS") which entitles
the Funds to "look through" the shares of the Series to the underlying
investments of the Series for purposes of these diversification requirements.
The Funds' and Series' investment objectives are not fundamental policies,
and may be changed by the Directors and the Trustees, respectively, without
shareholder approval. THE TRUSTEES AND THE DIRECTORS MAY ALSO CHANGE THE TARGET
INDEX OF ANY RESPECTIVE SERIES AND FUND IF THEY CONSIDER THAT A DIFFERENT INDEX
WOULD FACILITATE THE MANAGEMENT OF THE SERIES AND FUND IN A MANNER WHICH BETTER
ENABLES THE SERIES AND FUND TO SEEK TO REPLICATE THE TOTAL RETURN OF THE MARKET
SEGMENT REPRESENTED BY THE CURRENT INDEX.
RISK FACTORS
Each Fund will be subject to the risks associated with an investment in its
corresponding Series. These risks are set forth below.
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Cash Flows; Expenses. The ability of each Series to satisfy its investment
objective depends to some extent on MLAM's ability to manage cash flow
(primarily from purchases and redemptions and distributions from the Series'
investments). MLAM 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, which will be borne by the Series, and any incremental
operating costs (e.g., transfer agency, accounting) that will be borne by the
Funds. Finally, since each Series seeks to replicate the total return of its
target index, MLAM generally will not attempt to judge the merits of any
particular security as an investment.
Options, Futures, Swaps and Indexed Instruments. MLAM expects to use options,
futures, options on futures, swaps and indexed instruments as described above
under "About Indexing and Management of the Series--Other Types of Investments
and Techniques--Portfolio Strategies Involving Futures, Options, Swaps and
Indexed Instruments." Use of such instruments may involve investment risks and
transaction costs to which the Series would not be subject absent the use of
these instruments. A discussion of these instruments is contained in Appendix A
to this Prospectus.
Investment in Foreign Securities. Investments on an international basis
involve certain risks not typically involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
or U.S. governmental laws or restrictions applicable to such investments.
Securities prices in different countries are subject to different economic,
financial, political and social factors. Moreover, individual foreign economies
may differ favorably or unfavorably from the United States economy in such
respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Also, it is anticipated that most of the foreign securities held by a Series
will not be registered with the Securities and Exchange Commission nor will the
issuers thereof be subject to the reporting requirements of such agency. In
addition, foreign investors such as the Series may be subject to withholding
taxes in certain countries, which may reduce the returns of the Series.
Since the International Index Series will invest heavily in securities
denominated or quoted in currencies other than the United States dollar,
changes in foreign currency exchange rates will affect the value of securities
in the Series' portfolio and the unrealized appreciation or depreciation of
investments so far as United States investors are concerned. Currencies of
certain foreign countries may be volatile and therefore may affect the value of
securities denominated in such currencies. Changes in foreign currency exchange
rates relative to the United States dollar will affect the United States dollar
value of the Series' assets denominated in that currency and the return on such
assets. The rate of exchange between the dollar and other currencies is
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by the international balance of payments,
the level of interest and inflation rates and other economic and financial
conditions, government intervention, speculation and other factors.
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.
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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 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.
Investments in Small Companies. The Small Cap Index Series will invest
primarily in securities of smaller capitalization issuers. Investments in
securities of smaller capitalization issuers involve special considerations and
risks not typically associated with investments in securities of larger
capitalization issuers, including an issuer's limited product lines, markets or
financial resources, or dependence on a limited management group. In addition,
many smaller capitalization stocks trade less frequently and in smaller volume,
and may be subject to more abrupt or erratic price movements, than stocks of
larger companies. The securities of smaller companies may also be more
sensitive to market changes than the securities of larger companies.
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 MLAM considers whether to purchase or sell securities for a Series
only to the extent that
17
<PAGE>
MLAM 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 MLAM 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.
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
Fund and the S&P 500 Index Series are 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 Fund or the Series. Standard & Poor's makes no
representation or warranty, express or implied, to the owners of shares of the
Fund or the Series or any member of the public regarding the advisability of
investing in securities generally or in the Fund or the Series particularly or
the ability of the S&P 500 to track general stock market performance. Standard
& Poor's only relationship to the Fund and 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 Fund and the Series. Standard & Poor's has no obligation to take
the needs of the Fund and the Series or the owners of shares of the Fund and
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 Fund and the Series or the timing
of the issuance of sale of shares of the Fund and the Series or in the
determination or calculation of the equation by which the Fund and 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 Fund and the
Series.
Standard & Poor's does not guarantee the accuracy and/or the completeness of
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 Fund, the Series, owners of shares of the Fund and 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 Fund and the Small Cap Index Series are not
promoted, sponsored or endorsed by, nor in any way affiliated with Frank
Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Small Cap Index Fund or 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.
18
<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 fund 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, of 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 MLAM and its affiliates.
The International Index Fund and the International Index Series are 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 Fund and the International Index Series or any member
of the public regarding the advisability of investing in securities generally
or in the International Index Fund and 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 Fund and the
International Index Series or the owners of shares of the International Index
Fund and 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 Fund and the International
Index Series to be issued or in the determination or calculation of the
equation by which the shares of the International Index Fund and the
International Index Series is redeemable for cash. Morgan Stanley has no
obligation or liability to owners of shares of the International Index Fund and
the International Index Series in connection with the administration, marketing
or trading of the International Index Fund and 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 Fund and 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
19
<PAGE>
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.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS
The Board of Directors of the Corporation consists of four individuals, three
of whom are not "interested persons" of the Corporation as defined in the
Investment Company Act. The Board of Directors is responsible for the overall
supervision of the operations of the Funds and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Corporation are:
Terry K. Glenn*--Executive Vice President of MLAM and Fund Asset Management,
L.P. ("FAM") since 1983; Executive Vice President and Director of Princeton
Services, Inc. since 1993; President of Merrill Lynch Funds Distributor, Inc.
(the "Distributor") since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Jack B. Sunderland--President and Director of American Independent Oil
Company, Inc. (energy company) since 1987; Member of Council on Foreign
Relations since 1971.
Stephen B. Swensrud--Chairman, Fernwood Associates (investment adviser) since
1996; Principal, Fernwood Associates (financial consultant) since 1975.
J. Thomas Touchton--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).
- --------
*Interested person, as defined by the Investment Company Act, of the
Corporation.
The Directors of the Corporation are also Trustees of the Trust. The
Directors have adopted procedures that they believe are reasonably designed to
resolve any conflicts that arise in connection with this overlap.
ADMINISTRATION OF THE CORPORATION AND THE FUNDS
The Corporation does not have an investment adviser, since all of each Fund's
assets will be invested in its corresponding Series. The Corporation has
retained the services of MLAM as administrator of the Funds. Under the
administration agreement with MLAM (the "Administration Agreement"), MLAM
provides the Funds with administrative services.
ADVISORY ARRANGEMENTS OF THE TRUST AND THE SERIES
MLAM, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey (mailing
address: Box 9011, Princeton, New Jersey 08543-9011) also acts as manager for
the Trust and each Series and provides them with management and investment
advisory services.
MLAM is owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), a
financial services holding company and the parent of Merrill Lynch. The Asset
Management Group of ML & Co. (which includes the Investment Adviser) acts as
the manager and investment adviser for more than 100 other registered
20
<PAGE>
investment companies. MLAM and FAM also offer portfolio management to
individuals and institutions. As of February, 1998, Asset Management Group had
a total of approximately $476 billion in investment company and other portfolio
assets under management. This amount includes assets managed for certain
affiliates of MLAM.
Eric Mitofsky is primarily responsible for the day-to-day management of the
investments of the S&P 500 Index Series, Small Cap Index Series and
International Index Series. Mr. Mitofsky has been associated with MLAM since
1992, has been a First Vice President of MLAM since 1997 and was a Vice
President of MLAM from 1992 to 1997. Jay C. Harbeck and Gregory M. Maunz are
primarily responsible for the day-to-day management of the investments of the
Aggregate Bond Index Series. Mr. Harbeck has been a First Vice President of
MLAM since 1997 and was a Vice President of MLAM from 1986 to 1997, and Mr.
Maunz has been a First Vice President of MLAM since 1997 and was a Vice
President of MLAM from 1985 to 1997.
EXPENSES
The Funds pay MLAM monthly compensation at the annual rates of the average
daily net assets of each Fund as follows:
<TABLE>
<CAPTION>
NAME OF FUND ADMINISTRATION FEE
------------ ------------------
<S> <C>
S&P 500 Index Fund....................................... 0.20%
Small Cap Index Fund..................................... 0.22%
Aggregate Bond Index Fund................................ 0.14%
International Index Fund................................. 0.24%
</TABLE>
In addition, the Administration Agreement obligates the Corporation to pay
certain expenses incurred in its operations including, among other things,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information. For
the fiscal period April 3, 1997 (commencement of operations) to December 31,
1997, the total fee paid by the S&P 500 Index Fund and the Aggregate Bond Index
Fund to MLAM was $594,524 and $204,163, respectively. For the fiscal period
April 9, 1997 (commencement of operations) to December 31, 1997, the total fee
paid by the Small Cap Index Fund and the International Index Fund to MLAM was
$77,969 and $211,373, respectively. Accounting services are provided to each
Fund by MLAM, and each Fund reimburses MLAM for its costs in connection with
such services on a semi-annual basis. For the fiscal period April 3, 1997
(commencement of operations) to December 31, 1997, the amount of such
reimbursement for the S&P 500 Index Fund and the Aggregate Bond Index Fund was
$1,500 and $900, respectively. For the fiscal period April 9, 1997
(commencement of operations) to December 31, 1997, the amount of such
reimbursement for the Small Cap Index Fund and the International Index Fund was
$900 and $3,832, respectively.
The Series of the Trust pay MLAM monthly compensation at the annual rates of
the average daily net assets of each Series as follows:
<TABLE>
<CAPTION>
NAME OF SERIES MANAGEMENT FEE
-------------- --------------
<S> <C>
S&P 500 Index Series....................................... 0.05%
Small Cap Index Series..................................... 0.08%
Aggregate Bond Index Series................................ 0.06%
International Index Series................................. 0.11%
</TABLE>
21
<PAGE>
In addition, the management agreement with MLAM (the "Management Agreement")
obligates the Trust to pay certain expenses incurred in its operations
including, among other things, legal and audit fees, registration fees,
unaffiliated trustees' fees and expenses, custodian and transfer agency fees,
accounting costs, the costs of issuing and redeeming shares and certain of the
costs of printing proxies, shareholder reports, prospectuses and statements of
additional information. For the fiscal period April 3, 1997 (commencement of
operations) to December 31, 1997, the fee earned by MLAM from the S&P 500 Index
Series was $148,645, all of which was voluntarily waived, and the fee earned by
MLAM from the Aggregate Bond Index Series was $88,609, of which $37,562 was
voluntarily waived (based on average daily net assets of approximately $398.9
million and $197.4 million, respectively). For the fiscal period April 9, 1997
(commencement of operations) to December 31, 1997, the fee earned by MLAM from
the Small Cap Index Series was $36,425, all of which was voluntarily waived,
and the fee earned by MLAM from the International Index Series was $100,102, of
which $35,546 was voluntarily waived (based on average daily net assets of
approximately $62.5 million, and $124.9 million, respectively). Shareholders
bear the expenses of a Fund directly and the expenses of the Series in which
the Fund has invested, indirectly. For the fiscal period April 3, 1997
(commencement of operations) to December 31, 1997, the ratio of total expenses
to average net assets was .57% and .82% for Class A shares and Class D shares
of S&P 500 Index Fund, respectively, .52% and .77% for Class A shares and Class
D shares of Aggregate Bond Index Fund, respectively, .17% for the S&P 500 Index
Series and .18% for the Aggregate Bond Index Series. For the fiscal period
April 9, 1997 (commencement of operations) to December 31, 1997, the ratio of
total expenses to average net assets was 1.00% and 1.25% for Class A shares and
Class D shares of Small Cap Index Fund, respectively, 1.10% and 1.35% for Class
A shares and Class D shares of International Index Fund, respectively, .29% for
the Small Cap Index Series and .36% for the International Index Series.
Accounting services are provided to the Trust by MLAM, and each Series
reimburses MLAM for its costs in connection with such services on a semi-annual
basis. For the fiscal period April 3, 1997 (commencement of operations) to
December 31, 1997, the amount of such reimbursement for the S&P 500 Index
Series and the Aggregate Bond Index Series was $192,752 and $113,606,
respectively. For the fiscal period April 9, 1997 (commencement of operations)
to December 31, 1997, the amount of such reimbursement for the Small Cap Index
Series and the International Index Series was $31,090 and $68,823,
respectively.
The Directors believe that the aggregate per share expenses of each Fund and
corresponding Series should not be significantly greater than the expenses
which each Fund would incur if it retained the services of an investment
adviser and the assets of each Fund were invested directly in the type of
securities held by the corresponding Series.
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the
Corporation's transfer agent pursuant to a Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement,
22
<PAGE>
the term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
period April 3, 1997 (commencement of operations) to December 31, 1997, the
total fee paid by the S&P 500 Index Fund and the Aggregate Bond Index Fund to
the Transfer Agent was $171,551 and $72,915, respectively. For the fiscal
period April 9, 1997 (commencement of operations) to December 31, 1997, the
total fee paid by the Small Cap Index Fund, and the International Index Fund to
the Transfer Agent was $22,309, and $60,383, respectively. MLFDS also acts as
the transfer agent to the Trust.
CODES OF ETHICS
The Directors have adopted a Code of Ethics pursuant to Rule 17j-1 under the
Investment Company Act which incorporates the Codes of Ethics of the Trust and
of MLAM (together, the "Ethics Codes"). The Ethics Codes significantly restrict
the personal investing activities of all employees of MLAM and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.
The Ethics Codes require that all employees of MLAM preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance 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 MLAM
include a ban on acquiring any securities in a "hot" initial public offering
and a prohibition from profiting on short-term trading in securities. In
addition, no employee may purchase or sell any security which 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 MLAM.
Furthermore, the Ethics 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).
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both MLAM and Merrill Lynch, acts as the distributor of the shares of the Fund.
The Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of the Fund are offered at a price equal to the next determined
net asset value per share without the imposition of any front-end or deferred
sales charge, and are not subject to any ongoing account maintenance or
distribution fee. Distribution of Class A shares of the Fund is limited to
certain eligible investors. Class D shares of each Fund are offered at a price
equal to the next determined net asset value per share without the imposition
of any front-end or deferred sales charge and are not subject to any ongoing
distribution fee, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets.
Class A shares are offered to a limited group of investors who participate in
certain investment programs which charge a fee for participation, including the
Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares are
offered to ML & Co. and its subsidiaries and their directors and employees and
to members of the Boards of MLAM-advised investment companies, including the
Corporation. Certain employer sponsored retirement or savings plans, including
eligible 401(K) plans, may purchase Class A shares of the Funds provided such
plans meet the required minimum number of eligible employees or required amount
of
23
<PAGE>
assets advised by MLAM or any of its affiliates. For more information about
these programs, contact the Transfer Agent at 1-800-MER-FUND.
Shares of the Corporation may be purchased from securities dealers or by
mailing a purchase order directly to the Transfer Agent. Shareholders may
redeem their shares at any time at the next determined net asset value. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except that for retirement plans the minimum initial investment is $100 and the
minimum subsequent purchase is $1, and for participants in certain fee-based
programs the minimum initial purchase is $500 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchase and
redemptions directly through the Corporation's transfer agent are not subject
to processing fees.
The Distributor also acts as the placement agent for the Trust.
ACCOUNT MAINTENANCE PLAN
Pursuant to a plan adopted by the Corporation with respect to the Class D
shares of each Fund pursuant to Rule 12b-1 under the Investment Company Act
(the "Plan"), the Class D shares of each Series pay the Distributor an ongoing
account maintenance fee, accrued daily and paid monthly, at the annual rate of
0.25% of the average daily net assets attributable to such shares. Pursuant to
a sub-agreement with the Distributor, Merrill Lynch also provides account
maintenance services in respect of the Class D shares of each Fund. The ongoing
account maintenance fee compensates the Distributor and Merrill Lynch for
providing account maintenance services to Class D shareholders. For the fiscal
period April 3, 1997 (commencement of operations) to December 31, 1997, the S&P
500 Index Fund and the Aggregate Bond Index Fund paid the Distributor $202,649
and $71,476, respectively, pursuant to the Plan (based on average daily net
assets, subject to such Class D Plan of approximately $108.8 million and $38.2
million, respectively), all of which was paid to Merrill Lynch for providing
account maintenance activities in connection with Class D shares. For the
fiscal period April 9, 1997 (commencement of operations) to December 31, 1997,
the Small Cap Index Fund and the International Index Fund paid the Distributor
$52,860, and $43,713, respectively, pursuant to the Plan (based on average
daily net assets, subject to such Class D Plan of approximately $29.7 million,
and $24.0 million, respectively), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D Shares.
REDEMPTION OF SHARES
Each Fund is required to redeem all full and fractional shares of the Fund
upon receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of proper
notice of redemption. There will be no additional charge for redemption if the
redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time. The Corporation
will generally pay redemptions in cash; however, if requested by a shareholder,
at the discretion of MLAM the Corporation may pay a redemption or repurchase of
shares in an amount of $10,000,000 or more (which amount may be decreased or
increased by MLAM from time to time) with portfolio securities.
24
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., Transfer Agency Operations Department, 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. Redemption requests should
not be sent to the Corporation. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. The
notice in either event requires the signatures of all persons in whose names
the shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the notice must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. "Eligible guarantor institution(s)" include
certain banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings association. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents, such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice
of redemption.
At various times a Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a United States bank) has
been collected for the purchase of such shares. Normally, this delay will not
exceed 10 days.
REPURCHASE
Each Fund also will repurchase shares through a shareholder's listed
securities dealer. The Funds normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the New York Stock Exchange ("NYSE") on the day received, and such request
is received by a Fund from such dealer not later than 30 minutes after the
close of business on the NYSE (generally 4:00 p.m., New York time), on the same
day. Dealers have the responsibility to submit such repurchase requests to the
Fund not later than 30 minutes after the close of business on the NYSE in order
to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by a Fund. Securities firms that do not have
selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a repurchase of shares to such customers. Repurchases made
directly through the Fund's Transfer Agent are not subject to the processing
fee. The Corporation reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. A shareholder whose order for repurchase is
rejected by a Fund, however, may redeem shares as set forth above.
25
<PAGE>
SHAREHOLDER SERVICES
The Corporation offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various plans and services, or to change options
with respect thereto, can be obtained from the Corporation, the Distributor or
Merrill Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statement will also
show any other activity in the account since the preceding statements.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchase and the
reinvestment of ordinary income dividends and long-term capital gains
distribution. Shareholders may make additions to their Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders interested in transferring their shares
from Merrill Lynch and who do not wish to have an Investment Account maintained
for such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he be issued certificates for his shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence. Shareholders considering transferring from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the account is to be transferred will not take delivery of shares of a
Fund, a shareholder must either redeem the shares so that the cash proceeds can
be transferred to the account at the new firm, or such shareholder must
continue to maintain an account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Funds at the net asset value per share next
determined on the ex-dividend date of such dividends and distributions. A
shareholder may at any time, by written notification or by telephone (1-800-
MER-FUND) or by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch, or the Transfer Agent, if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends, or both dividends and capital gains distributions, paid
in cash rather than reinvested, in which event payment will be mailed on or
about the payment date (provided that, in the event that a payment on an
account maintained at the Transfer Agent would amount to $10.00 or less, a
shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
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SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from such
shareholder's Investment Account in the form of payments by check or through
automatic payment by direct deposit to such shareholder's bank account on
either a monthly or quarterly basis. A shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program, subject to certain conditions.
EXCHANGE PRIVILEGE
Shareholders of certain fee based programs and/or employer-sponsored
retirement plans are allowed to exchange the various share classes for other
classes of a second MLAM-advised mutual fund.
AUTOMATIC INVESTMENT PLANS
Regular additions of shares may be made in an investor's Investment Account
by prearranged charges of $50 or more to such investor's regular bank account.
Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Funds in their CMA(R) or CBA(R) account or in certain
related accounts in amounts of $100 or more through the CMA(R) or CBA(R)
Automated Investment Program.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Funds and in certain of the other mutual funds sponsored by Merrill Lynch as
well as in other securities. Merrill Lynch charges an initial establishment fee
and an annual custodial fee for each account. In addition, eligible
shareholders of a Fund may participate in a variety of qualified employee
benefit plans which are available from the Distributor. The minimum initial
purchase to establish any such plan is $100 and the minimum subsequent purchase
is $1.
PERFORMANCE DATA
From time to time a Fund may include its average annual total return and/or
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed in accordance with formulas specified by the Securities
and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any 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
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses.
Each Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return. Aside from the impact on the performance data
calculations of including or excluding the maximum
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applicable sales charges, actual annual or annualized total return generally
will be lower than average annual total return data since the average annual
rates of return reflect compounding; 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. A Fund's total return
may be expressed either as a percentage or as a dollar amount in order to
illustrate the effect of such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified period.
Total return figures are based on a Fund's historical performance and are not
intended to indicate future performance. A Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a Fund
will fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.
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.
Each Fund will generally compare its performance to the index it attempts to
replicate. A Fund may also compare its performance to data contained in
publications such as Lipper Analytical Services, Inc., or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News and
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine
and Fortune Magazine. From time to time, a Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons
should not be considered representative of a Fund's relative performance for
any future period.
The Funds' annual report will contain additional performance information and
will be available upon request and without charge.
TAXES
The Funds and Their Shareholders. Each Fund intends to continue to qualify
for the special tax treatment afforded regulated investment companies ("RICs")
under the Code. If it so qualifies, in any taxable year in which it distributes
(in cash or additional shares of the Fund) at least 90% of its taxable net
income, the Fund will not be subject to Federal income tax to the extent that
it distributes its net investment income and realized capital gains to its
shareholders. Each Fund intends to distribute substantially all of such income.
Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from a Fund's net realized capital gains from the sale of
assets held for more than 12 months (including long-term gains from certain
transactions in futures and options) ("capital gains dividends") are taxable to
shareholders as mid- or long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gains distributions received by
the shareholder with respect to such shares. Distributions in excess of a
Fund's
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earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Recent legislation creates additional categories of capital gains taxable at
different rates. Not later than 60 days after the close of its taxable year,
the Funds will provide shareholders with a written notice designating the
amounts of any ordinary income dividends or capital gains dividends, as well as
the amount of capital gain dividends in the different categories of capital
gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of a Fund. A portion of the ordinary income dividends paid by
the S&P 500 Index Fund and the Small Cap Index Fund may be eligible for the 70%
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. Distributions paid by the Aggregate Bond Index Fund and
the International Index Fund will not be eligible for the dividends received
deduction. If a Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of
the year in which such dividend was declared.
Ordinary income dividends paid by a Fund to shareholders who are nonresident
aliens or foreign entities generally will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under the applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Foreign source income received by the International Index Fund and the
Aggregate Bond Index Fund may give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the International
Index Fund may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by the Fund. The International Index
Fund expects to be eligible, and intends, to file an election with the IRS
pursuant to which shareholders of the Fund will be required to include their
proportionate share of such withholding taxes in their U.S. income tax returns
as gross income, treat such proportionate shares as taxes paid by them, and
deduct such proportionate shares in computing their taxable incomes or,
alternatively, subject to certain limitations, restrictions, and holding period
requirements, use them as foreign tax credits against their U.S. income taxes.
No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from the Fund's election described in this
paragraph but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. The
International Index Fund will report annually to its shareholders the amount
per share of such withholding taxes.
Redemptions and exchanges of a Fund's shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such events. A loss
realized on a sale or exchange of shares of a Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
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Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Funds or who, to the Funds' knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and these
Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
Ordinary income and capital gains dividends, as well as gains on the sale or
exchange of shares, may also be subject to state and local taxes.
This summary does not discuss the state or local income tax, or the estate or
inheritance tax, consequences of an investment in a Fund.
Shareholders are urged to consult their advisers as to specific questions
regarding Federal, foreign, state or local taxes.
The Series. The Trust and each Fund have received a private letter ruling
from the IRS, in which the IRS has ruled that each Series is classified as a
partnership for tax purposes and, based upon that ruling, that each Fund will
be entitled to look to the underlying assets of the Series in which it has
invested for purposes of satisfying the diversification and other requirements
of the Code applicable to RICs. If any of the facts upon which such ruling is
premised change in any material respect (e.g., if the Trust were required to
register its interests under the Securities Act) and the Trust is unable to
obtain a revised private letter ruling from the IRS indicating that each Series
will continue to be classified as a partnership, then the Board of Directors of
the Corporation will determine, in its discretion, the appropriate course of
action for the Funds. One possible course of action would be to withdraw the
Funds' investments from the Series and to retain an investment adviser to
manage the Funds' assets in accordance with the investment policies applicable
to the respective Fund. See "Investment Objectives and Policies."
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is each Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid at least annually
with respect to each of the S&P 500 Index Fund, Small Cap Index Fund and
International Index Fund. Dividends with respect to the Aggregate Bond Fund are
declared daily and paid monthly. All net realized long- or short-term capital
gains, if any, are distributed to Fund shareholders at least annually.
Dividends will be reduced by account maintenance and transfer agency fees
payable by the shareholders of a Fund. Dividends and distributions will be
reinvested automatically in shares of the Funds, at net asset value.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders whether they are reinvested in shares of a Fund or received in
cash. From time to time, a Fund may declare a special distribution at or about
the end of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains
be distributed during the calendar year.
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See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily as of 15 minutes after the
close of business on the NYSE (generally 4:00 p.m., New York time) on days
during which the NYSE is open for trading (a "Pricing Day"). The net asset
value is computed by dividing the market value of the securities held by a Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the fees payable
to MLAM and the Distributor, and the advisory fees payable indirectly by the
Series of the Trust to MLAM, are accrued daily.
The principal assets of each Fund will normally be its interest of the
underlying Series, which will be valued at its net asset value. A Series'
securities that are traded on stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the closing 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 authority of the Board of Directors as the primary market. Long
positions in securities traded in the over-the-counter ("OTC") market are
valued at the last quoted bid prices as at the close of trading on the NYSE on
each day by brokers that make markets in the securities. Securities traded on
the NASDAQ national market system are valued at the last sale price prior to
the time of valuation. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and most
representative market. Other investments, including 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.
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 (including the respective
Funds') 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 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 or
determination on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the aggregate investments in the Series by all
investors 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.
ORGANIZATION OF THE CORPORATION
The Corporation is a Maryland corporation incorporated on October 25, 1996.
It has an authorized capital of 1,000,000,000 shares of Common Stock, par value
$0.0001 per share, divided into 125,000,000
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shares each of Class A and Class D shares for each of the four Funds: Merrill
Lynch S&P 500 Index Fund, Merrill Lynch Small Cap Index Fund, Merrill Lynch
Aggregate Bond Index Fund and Merrill Lynch International Index Fund. Class A
and Class D shares of a Fund represent interests in the same assets of the
Series and are identical in all respects except that the Class D shares bear
certain expenses related to the account maintenance associated with such
shares. Class D shares have exclusive voting rights with respect to matters
relating to the class' account maintenance expenditures.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of each Fund have equal voting rights, except that
each Fund has exclusive voting rights to matters affecting only such Fund, and
except that as noted above, Class D shares have exclusive voting rights with
respect to matters relating to the class' account maintenance expenditures.
There normally will be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by the shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Corporation will be required to
call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in account maintenance fees or of a change
in fundamental policies, objectives or restrictions. Except as set forth above,
the Directors shall continue to hold office and appoint successor Directors.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared and in net assets upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except
that, as noted above, Class D shares bear certain additional expenses. Shares
issued are fully-paid and non-assessable by the Fund. Voting rights for
Directors are not cumulative.
The Trust consists of four Series, and is organized as a Delaware business
trust. Whenever investors in a Series are requested to vote on a fundamental
policy of a Series, the Corporation will hold a meeting of its shareholders and
will cast its vote as instructed by such shareholders.
YEAR 2000 ISSUES
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"). Like other investment companies
and financial and business organizations, the Fund could be adversely affected
if the computer systems used by MLAM or other Fund service providers do not
properly address this problem prior to January 1, 2000. MLAM has established a
dedicated group to analyze these issues and to implement any systems
modifications necessary to prepare for the Year 2000. Currently, MLAM does not
anticipate that the transition to the 21st century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, MLAM has sought assurances from the Fund's other service providers
that they are taking all necessary steps to ensure that their computer systems
will accurately reflect the Year 2000, and MLAM will continue to monitor the
situation. At this time, however, no assurance can be given that the Fund's
other service providers have anticipated every step necessary to avoid any
adverse effect on the Fund attributable to the Year 2000 Problem.
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SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Funds at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863.
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APPENDIX A
The Series are authorized to use certain instruments, including indexed
securities, options, futures and swaps, as described below. Such instruments,
which may be regarded as derivatives, are referred to collectively herein as
"Strategic Instruments."
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, or based on the relative changes of two indices. 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 or indices.
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 the 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.
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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
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, the 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 Strategic Instruments" 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
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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 which 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. The 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" under regulations of
the Commodity Futures Trading Commission.
SWAPS
The Series are 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 STRATEGIC INSTRUMENTS
The Series intend to enter into transactions involving Strategic Instruments
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 Strategic Instrument 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 Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (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 marked-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
A-3
<PAGE>
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
STRATEGIC INSTRUMENTS
Certain Strategic Instruments 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
the 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 the
Series, the market value of the securities underlying OTC call options
currently outstanding which have been sold by the 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 the 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).
Because Strategic Instruments 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 Strategic Instruments 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 STRATEGIC INSTRUMENTS
The Series may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
A-4
<PAGE>
APPENDIX B--DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER
Description of relevant commercial paper ratings of Standard & Poor's Ratings
Group ("S&P") are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have an adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
Description of the relevant commercial paper ratings of Moody's Investors
Service, Inc. ("Moody's") are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Capitalization characteristics, while still appropriate, may
be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurement and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
CORPORATE BONDS
Descriptions of the bond ratings of S&P are:
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
A-5
<PAGE>
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher 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.
BB, B, CCC, CC or C--Debt rated BB, B, CCC, CC or C is regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
debt conditions.
C1--The rating C1 is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Descriptions of the bond ratings of Moody's are as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat greater than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length
A-6
<PAGE>
of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.
A-7
<PAGE>
[This page is intentionally left blank]
A-8
<PAGE>
MERRILL LYNCH INDEX FUNDS, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class D shares
of the following Funds of Merrill Lynch Index Funds, Inc.
<TABLE>
<S> <C>
[_] Merrill Lynch S&P 500 Index Fund [_] Merrill Lynch Aggregate Bond Index Fund
[_] Merrill Lynch Small Cap Index Fund [_] Merrill Lynch International Index Fund
</TABLE>
and establish an Investment Account as described in the Prospectus. In the
event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
I enclose a check for $............ payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000 per Fund). I
understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address..............................
Name and Address of Employer ........
..................................... .....................................
(Zip Code) .....................................
Occupation........................... .....................................
..................................... Signature of Co-Owner (if any)
Signature of Owner
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Index Funds, Inc. Authorization
Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [_] checking [_] savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
A-9
<PAGE>
MERRILL LYNCH INDEX FUNDS, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - shareholder's signature.
This form, when completed, should .....................................
be mailed to: Dealer Name and Address
ML Index Funds By ..................................
c/o Merrill Lynch Financial Authorized Signature of Dealer
Data Services, Inc.
P.O. Box 45289 [ ][ ][ ] [ ][ ][ ][ ]...............
Jacksonville, FL 32232-5289 Branch Code F/C No. F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
A-10
<PAGE>
MERRILL LYNCH INDEX FUNDS, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner...................... [ ]
Social Security Number or
Taxpayer Identification
Number
Name of Co-Owner (if any)..........
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares of the following Funds of Merrill Lynch
Index Funds, Inc.
<TABLE>
<S> <C>
[_] Merrill Lynch S&P 500 Index Fund [_] Merrill Lynch Aggregate Bond Index Fund
[_] Merrill Lynch Small Cap Index Fund [_] Merrill Lynch International Index Fund
</TABLE>
at cost or current offering price. Withdrawals to be made either (check one)
[_] Monthly on the 24th day of each month, or [_] Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on or as soon as possible thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
[_] $ or [_] % of the current value of [_] Class A or [_] Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address ...................................................................
......................................................................
Signature of Owner............................ Date..................
Signature of Co-Owner (if any)........................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
A-11
<PAGE>
MERRILL LYNCH INDEX FUNDS, INC. -- AUTHORIZATION FORM (PART 2)--(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one):
[_] Class A shares [_] Class D shares
of the following Funds of Merrill Lynch Index Funds, Inc.
<TABLE>
<S> <C>
[_] Merrill Lynch S&P 500 Index Fund [_] Merrill Lynch Aggregate Bond Index Fund
[_] Merrill Lynch Small Cap Index Fund [_] Merrill Lynch International Index Fund
</TABLE>
subject to the terms set forth below. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Index Funds, Inc. as indicated Bank Address.........................
below:
Amount of each ACH debit $........ City....... State........ Zip.......
Account Number....................
As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning charge to my account ACH debits
(month) drawn on my account by and payable
or as soon thereafter as to Merrill Lynch Financial Data
possible. Services, Inc. I agree that your
rights in respect to each such debit
I agree that you are drawing these shall be the same as if it were a
ACH debits voluntarily at my request check drawn on you and signed
and that you shall not be liable for personally by me. This authority is
any loss arising from any delay in to remain in effect until revoked by
preparing or failure to prepare any me in writing. Until you receive
such debit. If I change banks or such notice, you shall be fully
desire to terminate or suspend this protected in honoring any such
program, I agree to notify you debit. I further agree that if any
promptly in writing. I hereby such debit be dishonored, whether
authorize you to take any action to with or without cause and whether
correct erroneous ACH debits of my intentionally or inadvertently, you
bank account or purchases of fund shall be under no liability.
shares including liquidating shares
of the Fund and crediting my bank ............ .....................
account. I further agree that if a Date Signature of
check or debit is not honored upon Depositor
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to ............ .....................
discontinue immediately the Automatic Bank Signature of Depositor
Investment Plan and to liquidate Account (If joint account,
sufficient shares held in my account Number both must sign)
to offset the purchase made with the
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-12
<PAGE>
ADMINISTRATOR OF THE CORPORATION AND MANAGER OF THE TRUST
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
Merrill Lynch S&P 500 Index Fund
Merrill Lynch Small Cap Index Fund
Merrill Lynch Aggregate Bond Index Fund
Merrill Lynch Trust Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Merrill Lynch International Index Fund
State Street Bank Trust Company
P.O. Box 351
Boston Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF AD-
DITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OF-
FERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Financial Highlights....................................................... 4
Investment Objectives and Policies......................................... 6
Structure of the Funds and the Series..................................... 6
S&P 500 Index Fund........................................................ 7
Small Cap Index Fund...................................................... 8
Aggregate Bond Index Fund................................................. 8
International Index Fund.................................................. 9
About Indexing and Management of the Series............................... 10
Other Types of Investments and Investment Techniques of the Series........ 11
Other Investment Policies and Practices of the Series..................... 12
Investment Restrictions................................................... 15
Risk Factors.............................................................. 15
Additional Information Concerning the Indices............................. 18
Management of the Funds.................................................... 20
Board of Directors........................................................ 20
Administration of the Corporation and the Funds........................... 20
Advisory Arrangements of the Trust and the Series......................... 20
Expenses.................................................................. 21
Transfer Agency Services.................................................. 22
Code of Ethics............................................................ 23
Purchase of Shares......................................................... 23
Account Maintenance Plan.................................................. 24
Redemption of Shares....................................................... 24
Redemption................................................................ 25
Repurchase................................................................ 25
Shareholder Services....................................................... 26
Investment Account........................................................ 26
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 26
Systematic Withdrawal Plans............................................... 27
Exchange Privilege........................................................ 27
Automatic Investment Plans................................................ 27
Retirement Plans.......................................................... 27
Performance Data........................................................... 27
Taxes...................................................................... 28
Additional Information..................................................... 30
Dividends and Distributions............................................... 30
Determination of Net Asset Value.......................................... 31
Organization of the Corporation........................................... 31
Year 2000 Issues.......................................................... 32
Shareholder Inquires...................................................... 33
Shareholder Reports....................................................... 33
Appendix A................................................................. A-1
Appendix B................................................................. A-5
Authorization Form......................................................... A-9
</TABLE>
Code #19003-0398
[LOGO] MERRILL LYNCH
Merrill Lynch
Index Funds, Inc.
[ART]
PROSPECTUS
March 31, 1998
Distributor
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH INDEX FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Index Funds, Inc. (the "Corporation") currently consists of
four portfolios or series: Merrill Lynch S&P 500 Index Fund ("S&P 500 Index
Fund"), Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund"), Merrill
Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund") and Merrill Lynch
International Index Fund ("International Index Fund") (collectively, the
"Funds," and each, a "Fund"). Each Fund 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. Each Fund will seek to achieve its
objective by investing all of its assets in the series (collectively, the
"Series," and each, a "Series") of Merrill Lynch Index Trust (the "Trust") that
has the same investment objective as the Fund. Each Fund's investment
experience will correspond directly to the investment experience of the
respective Series in which it invests. There can be no assurance that the
investment objectives of the Funds will be achieved.
Each Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of each Fund are offered at a price equal to the next determined
net asset value per share without the imposition of any front-end or deferred
sales charge, and are not subject to any ongoing account maintenance or
distribution fee. Distribution of Class A shares of each Fund is limited to
certain eligible investors. Class D shares of each Fund are offered at a price
equal to the next determined net asset value per share without the imposition
of any front-end or deferred sales charge and are not subject to any ongoing
distribution fee, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets.
This Statement of Additional Information for the Funds is not a prospectus
and should be read in conjunction with the prospectus of the Funds, dated March
31, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Funds at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT, L.P.--MLAM
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS MARCH 31, 1998
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Merrill Lynch Index Funds, Inc. currently consists of four series: S&P 500
Index Fund, Small Cap Index Fund, Aggregate Bond Index Fund and International
Index Fund. Each Fund 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. Each Fund will seek to achieve its
objective by investing all of its assets in the Series of Merrill Lynch Index
Trust that has the same investment objective as the Fund. Each Fund's
investment experience will correspond directly to the investment experience of
the respective Series in which it invests. Reference is made to the discussion
under "Investment Objectives and Policies" in the Prospectus for information
with respect to each Fund's and each Series' investment objective and policies.
There can be no assurance that the investment objectives of the Funds will be
achieved.
The Funds' and Series' investment objectives are not fundamental policies,
and may be changed by the Directors of the Corporation and the Trustees of the
Trust, respectively, without shareholder approval. THE TRUSTEES AND THE
DIRECTORS MAY ALSO CHANGE THE TARGET INDEX OF ANY RESPECTIVE SERIES AND FUND IF
THEY CONSIDER THAT A DIFFERENT INDEX WOULD FACILITATE THE MANAGEMENT OF THE
SERIES AND FUND IN A MANNER WHICH BETTER ENABLES THE FUND AND SERIES TO SEEK TO
REPLICATE THE TOTAL RETURN OF THE MARKET SEGMENT REPRESENTED BY THE CURRENT
INDEX.
INVESTMENT RESTRICTIONS
The Corporation has adopted the following restrictions and policies relating
to the investment of each Fund's assets and activities, which are fundamental
policies and may not be changed with respect to a Fund without the approval of
the holders of a majority of the Fund's outstanding voting securities (which
for this purpose and under the Investment Company Act of 1940, as amended (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). Provided that none of the
following restrictions shall prevent a Fund from investing all of its assets in
shares of another registered investment company with the same investment
objective (in a master/feeder structure), each Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
non-diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities); provided, that in
replicating the weighting of a particular industry in its target index, a
Series or Fund may invest more that 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
applicable law, a Fund 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,
2
<PAGE>
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 Fund may lend its portfolio securities, provided that
the lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) a Fund may borrow from banks (as defined
in the Investment Company Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) a Fund may borrow up to an additional
5% of its total assets for temporary purposes, (iii) a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) the Fund may purchase securities on
margin to the extent permitted by applicable law. A Fund may not pledge its
assets other than to secure such borrowings or, to the extent permitted by
the Fund's investment policies as set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
The Trust has adopted investment restrictions substantially identical to the
foregoing, which are fundamental policies of the Trust and may not be changed
with respect to any Series without the approval of the holders of a majority of
the interests of the Series.
In addition, the Trust and the Corporation have adopted as an operating
policy, which may be changed by the Trustees and the Directors without
shareholder approval, that no Series or Fund, respectively, 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 each Fund's underlying Series generally may not be
purchased from, sold or loaned to Merrill Lynch Asset Management, L.P. ("MLAM")
or its affiliates or any of their directors, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under the Investment
Company Act.
Because of the affiliation of MLAM with the Corporation, the Series are
prohibited from engaging in certain transactions involving MLAM's affiliate,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order, the Series are
prohibited from engaging in portfolio transactions with Merrill Lynch or its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firms
or any of their affiliates participate as an underwriter or dealer.
3
<PAGE>
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Corporation 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
Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (57)--President and Director(1)(2)--Executive Vice President
of MLAM and Fund Asset Management, L.P. ("FAM") since 1983; Executive Vice
President and Director of Princeton Services, Inc. since 1993; President of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Jack B. Sunderland (69)--Director(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.
Stephen B. Swensrud (64)--Director(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 (58)--Director(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).
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
MLAM and FAM since 1982.
Joseph T. Monagle, Jr. (49)--Senior Vice President(1)(2)--Senior Vice
President and Department Head of the Global Fixed Income Division of MLAM and
FAM since 1990; Vice President of MLAM from 1978 to 1990; Senior Vice President
of Princeton Services since 1993.
Gregory Mark Maunz (44)--Senior Vice President(1)(2)--First Vice President of
MLAM since 1997; Vice President of MLAM from 1985 to 1997; Portfolio Manager of
MLAM since 1984.
Eric S. Mitofsky (43)--Senior Vice President(1)(2)--First Vice President of
MLAM since 1997; Vice President of MLAM from 1992 to 1997; Senior Desk Analyst
with Merrill Lynch Program Trading Desk from 1987 to 1992.
Jay C. Harbeck (62)--Senior Vice President(1)(2)--First Vice President of
MLAM since 1997; Vice President of MLAM and FAM from 1986 to 1997.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of MLAM since 1984; Senior Vice President and Treasurer of FAM since 1984;
Treasurer of the Distributor since 1984 and Vice President since 1981.
Ira P. Shapiro (34)--Secretary(1)(2)--Director (Legal Advisory) of MLAM since
1997; Attorney with MLAM and FAM from 1993 to 1997; Attorney in private
practice prior to 1993.
- --------
(1) Interested person, as defined in the Investment Company Act, of the
Corporation.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which MLAM or FAM acts as investment adviser.
4
<PAGE>
As of the date of this Statement of Additional Information, the officers and
Directors of the Corporation 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 Funds.
Pursuant to the terms of the Administration Agreement with the Corporation,
MLAM pays all compensation of officers of the Corporation as well as the fees
of all Directors who are affiliated persons of MLAM. The Corporation and the
Trust pay each individual who serves as a Director/Trustee not affiliated with
MLAM (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 Director/Trustees of
the Funds and the Series, with a fee of $1,000 per year. For the fiscal period
April 3, 1997 (commencement of operations) to December 31, 1997 for the S&P
500 Index Fund, the S&P 500 Index Series, the Aggregate Bond Index Fund and
the Aggregate Bond Index Series, fees and expenses paid to non-affiliated
Directors/Trustees aggregated $200, $5,797, $750 and $3,065, respectively. For
the fiscal period April 9, 1997 (commencement of operations) to December 31,
1997 for the Small Cap Index Fund, the Small Cap Index Series, the
International Index Fund and the International Index Series, fees and expenses
paid to non-affiliated Directors/Trustees aggregated $0, $2,203, $381 and
$3,361, respectively.
COMPENSATION OF DIRECTORS/TRUSTEES
The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay to the non-affiliated Directors/Trustees for the
current fiscal year and the total compensation paid by all investment
companies advised by MLAM and its affiliate, FAM ("MLAM/FAM-Advised Funds") to
the non-affiliated Directors/Trustees for the calendar year ended December 31,
1997.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM FUNDS/SERIES AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM
COMPENSATION FROM BENEFITS ACCRUED AS ADVISED FUNDS PAID
NAM OF DIRECTOR/TRUSTEEE FUNDS/SERIES PART OF FUND/SERIES EXPENSES TO DIRECTORS/TRUSTEES(1)
- ------------------------ ----------------- ---------------------------- ------------------------
<S> <C> <C> <C>
Jack B. Sunderland...... $4,500 None 132,600
Stephen B. Swensrud..... $4,500 None 175,500
J. Thomas Touchton...... $4,500 None 132,100
</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 54 portfolios); Mr. Touchton (18 registered investment
companies consisting of 30 portfolios).
ADMINISTRATION ARRANGEMENTS
MLAM is owned and controlled by Merrill Lynch & Co., Inc., a financial
services holding company and the parent of Merrill Lynch. Reference is made to
"Management of the Funds" in the Prospectus for certain information concerning
the administration arrangements of the Corporation and the management and
advisory arrangements of the Trust.
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<PAGE>
The Corporation has entered into an administration agreement with MLAM (the
"Administration Agreement"). As discussed in the Prospectus, MLAM receives for
its services to the Funds monthly compensation at the annual rates of the
average daily net assets of each Fund as follows:
<TABLE>
<CAPTION>
NAME OF FUND ADMINISTRATION FEE
------------ ------------------
<S> <C>
S&P 500 Index Fund........................................ 0.20%
Small Cap Index Fund...................................... 0.22%
Aggregate Bond Index Fund................................. 0.14%
International Index Fund.................................. 0.24%
</TABLE>
For the fiscal period April 3, 1997 (commencement of operations) to December
31, 1997, the total fee paid by the S&P 500 Index Fund and the Aggregate Bond
Index Fund to MLAM was $594,524 and $204,163, respectively. For the fiscal
period April 9, 1997 (commencement of operations) to December 31, 1997, the
total fee paid by the Small Cap Index Fund and the International Index Fund to
MLAM was $77,969 and $211,373, respectively.
The Administration Agreement obligates MLAM to provide certain administrative
services to the Corporation and the Funds and to pay all compensation of and
furnish office space for officers and employees of the Corporation as well as
the fees of all Directors who are affiliated persons of MLAM or any of their
affiliates. Each Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports
and prospectuses and statements of additional information (except to the extent
paid by the Distributor), charges of the Custodian, any Sub-custodian and
Transfer Agent, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under federal, state or
foreign laws, fees and expenses of unaffiliated Directors, 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 Corporation or the Fund.
Merrill Lynch Funds Distributor, Inc. (the "Distributor") will pay the
promotional expenses of the Funds incurred in connection with the offering of
their shares.
Duration and Termination. Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years from the date of
its adoption. Thereafter, it will remain in effect from year to year with
respect to each Fund if approved annually (a) by the Board of Directors and (b)
by a majority of the Directors who are not parties to such contract or
interested persons (as defined in the Investment Company Act) of any such
party. Such contract is not assignable and may be terminated with respect to a
Fund without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Each Fund invests all of its assets in shares of the corresponding Series of
the Trust. Accordingly, the Funds do not invest directly in portfolio
securities and do not require investment advisory services. All portfolio
management occurs at the level of the Trust. The Trust has entered into a
management agreement with MLAM (the "Management Agreement"). As discussed in
the Prospectus, MLAM receives for its
6
<PAGE>
services to the Series monthly compensation at the annual rates of the average
daily net assets of each Series as follows:
<TABLE>
<CAPTION>
NAME OF SERIES MANAGEMENT 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>
For the fiscal period April 3, 1997 (commencement of operations) to December
31, 1997, the fee earned by MLAM from the S&P 500 Index Series was 148,645, all
of which was voluntarily waived, and the fee earned by MLAM from the Aggregate
Bond Index Series was $88,609, of which $37,562 was voluntarily waived. For the
fiscal period April 9, 1997 (commencement of operations) to December 31, 1997,
the fee earned by MLAM from the Small Cap Index Series was $36,425, all of
which was voluntarily waived, and the fee earned by MLAM from the International
Index Series was $100,102, of which $35,546 was voluntarily waived.
The Management Agreement obligates MLAM 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 MLAM or any of their affiliates. Each
Series pays all other expenses incurred in the operation of the Series,
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent
paid by the Distributor), charges of the Custodian, any Sub-custodian and
Transfer Agent, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under federal, state or
foreign laws, fees and 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
Distributor will pay the promotional expenses of the Trust incurred in
connection with the offering of its shares.
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 MLAM 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 MLAM 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 MLAM
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.
MLAM is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of MLAM 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. Similarly, the following entities may be
considered "controlling persons" of MLAM
7
<PAGE>
U.K.: Merrill Lynch Europe Limited (MLAM UK's parent), a subsidiary of Merrill
Lynch International Holdings, a subsidiary of Merrill Lynch International Inc.,
a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect for two years from the date of its
adoption. Thereafter, it 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 with respect to a Series without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the shareholders of the Series.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Corporation has entered into a distribution agreement with the
Distributor in connection with the offering of shares of the Funds (the
"Distribution Agreement"). The Distribution Agreement obligates the Distributor
to pay certain expenses in connection with the offering of the shares of the
Funds. After the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to shareholders,
the Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and investors. The Distributor also
pays for other supplementary sales literature and advertising costs. The
Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Management Agreement described above.
The Corporation reserves the right to suspend the offering of its shares at
any time.
Account Maintenance Plan. Reference is made to "Purchase of Shares--Account
Maintenance Plan" in the Prospectus for certain information with respect to the
Account Maintenance Plan (the "Plan") of the Class D shares of the Funds.
The payment of the account maintenance fee is subject to the provisions of
Rule 12b-1 under the Investment Company Act. Among other things, the Plan
provides that the Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the account maintenance fees paid to
the Distributor. In their consideration of the Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Plan to the Funds and their shareholders. The Plan further
provides that, so long as the Plan remains in effect, the selection and
nomination of Directors who are not "interested persons" of the Funds, as
defined in the Investment Company Act (the "Independent Directors"), shall be
committed to the discretion of the Independent Directors then in office. In
approving the Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that the Plan will benefit the
Fund and its shareholders. The Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or with respect
to any Fund by the vote of the holders of a majority of the outstanding Class D
shares of the Fund. The Plan cannot be amended to increase materially the
amount to be spent by the Class D shares of a Fund without shareholder
approval, and all material amendments are required to be approved by the vote
of Directors, including a majority of the
8
<PAGE>
Independent Directors who have no direct or indirect financial interest in the
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Plan and any report made pursuant
to such plan for a period of not less than six years from the date of the Plan
or such report, the first two years in an easily accessible place.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the Securities and Exchange Commission or such Exchange is closed
(other than customary weekend and holiday closings), for any period during
which an emergency exists as defined by the Securities and Exchange Commission
as a result of which disposal of portfolio securities or determination of the
net asset value of a Fund is not reasonably practicable, and for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund and the Series at that time.
Shares are redeemable at the option of the Corporation if, in the opinion of
the Corporation, ownership of the shares has or may become concentrated to the
extent which would cause the Corporation or a Fund to be deemed a personal
holding company within the meaning of the Code.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because the Funds will invest exclusively in shares of their corresponding
Series it is expected that all transactions in portfolio securities will be
entered into by the Series. MLAM is responsible for making the Series'
portfolio decisions, placing the Series' brokerage business, evaluating the
reasonableness of brokerage commissions and negotiating the amount of any
commissions paid subject to a policy established by the Trust's Trustees and
officers. The Trust has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. Orders for
transactions in portfolio securities are placed for the Trust with a number of
brokers and dealers, including Merrill Lynch. In placing orders, it is the
policy of the Trust to obtain the most favorable net results, taking into
account various factors, including price, commissions, if any, size of the
transaction and difficulty of execution. Where practicable, MLAM surveys a
number of brokers and dealers in connection with proposed portfolio
transactions and selects the broker or dealer which offers the Trust the best
price and execution or other services which are of benefit to the Trust.
Securities firms also may receive brokerage commissions on transactions
including covered call options written by the Trust and the sale of underlying
securities upon the exercise of such options. In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc. and
policies established by the Trustees, MLAM 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.
The Trust does not use any particular broker or dealer, and brokers who
provide supplemental investment research to MLAM may receive orders for
transactions by the Trust. Such supplemental research
9
<PAGE>
services ordinarily consist of: quantitative and modeling information,
assessments and analyses of the business or prospects of a company, industry or
economic sector. Information so received will be in addition to and not in lieu
of the services required to be performed by MLAM under the Management
Agreement. If in the judgment of MLAM the Trust will be benefited by
supplemental research services, MLAM is authorized to pay brokerage commissions
to a broker furnishing such services which are in excess of commissions which
another broker may have charged for effecting the same transaction. The
expenses of MLAM will not necessarily be reduced as a result of the receipt of
such supplemental information, and MLAM may use such information in servicing
its other accounts. For the fiscal period April 3, 1997 to December 31, 1997,
the Series did not acquire any securities of brokers or dealers which executed
its portfolio transactions during that period.
The Trust anticipates that brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Trust will
endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Trust invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as
principal in purchase and sale of securities. Since transactions in the over-
the-counter ("OTC") market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Trust, including
Merrill Lynch, will not serve as the Trust's dealer in such transactions.
However, affiliated persons of the Trust may serve as its broker in the OTC
transactions conducted on an agency basis.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as amended,
Merrill Lynch may execute transactions for the Trust on the floor of any
national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Trust
at least annually setting forth the compensation it has received in connection
with such transactions.
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. The Trustees have considered the possibility
of seeking to recapture for the benefit of the Trust brokerage commissions,
dealer spreads and other expenses of possible portfolio transactions, such as
underwriting commissions, by conducting such portfolio transactions through
affiliated entities, including Merrill Lynch. For example, brokerage
commissions received by Merrill Lynch could be offset against the management
fee paid by the Trust to MLAM. After considering all factors deemed relevant,
the Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
Portfolio Turnover. Although the 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
10
<PAGE>
factor when MLAM considers whether to purchase or sell securities for a Series
only to the extent that MLAM 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 MLAM
restructures the Series' holdings to reflect the changes in the index. A high
rate of portfolio turnover would result in correspondingly greater brokerage
commission expenses. Portfolio turnover rate is calculated by dividing the
lesser of the Series' annual sales or purchases of portfolio securities
(exclusive of purchases and sales of Government securities and of all other
securities, including options, whose maturity or expiration dates at the time
of acquisition were one year or less) by the monthly average value of the
securities in the Series during the fiscal year. For the fiscal period April 3,
1997 (commencement of operations) to December 31, 1997, the portfolio turnover
of the S&P 500 Index Series and the Aggregate Bond Index Series was 24.31% and
86.58%, respectively. For the fiscal period April 9, 1997 (commencement of
operations) to December 31, 1997, the portfolio turnover of the Small Cap Index
Series and the International Index Series was 16.45% and 14.79%, respectively.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Funds is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
(generally 4:00 p.m., New York time) on each day the NYSE is open for trading
(a "Pricing Day"). The NYSE is not open for trading on New Year's Day,
Presidents' Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value is computed by dividing the value of the securities held by a Fund plus
any cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the fees payable
to MLAM and the Distributor, and the advisory fees payable indirectly by the
Series of the Trust to MLAM, are accrued daily.
The principal assets of each Fund will normally be its interest of the
underlying Series, which will be valued at its net asset value. A Series'
securities that are traded on stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the closing bid price for long positions, and at the last
available ask price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market. Long
positions in securities traded in the OTC market are valued at the last quoted
bid prices as at the close of trading on the NYSE on each day by brokers that
make markets in the securities. Securities traded on the NASDAQ national market
system are valued at the last sale price prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Other
investments, including 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.
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 (including the respective
Funds') interest in a Series will be determined as of 15
11
<PAGE>
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 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 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.
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services described below which are
designed to facilitate investment in their shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Funds, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statement will also
show any other activity in the account since the preceding statements.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchase and the
reinvestment of ordinary income dividends and long-term capital gains
distribution. Shareholders may make additions to their Investment Account at
any time by mailing a check directly to the Transfer Agents. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders interested in transferring their shares
from Merrill Lynch and who do not wish to have an Investment Account maintained
for such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he be issued certificates for his shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence. Shareholders considering transferring from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the account is to be transferred will not take delivery of shares of a
Fund, a shareholder must either redeem the shares so that the cash proceeds can
be transferred to the account at the new firm, or such shareholder must
continue to maintain an account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares of an Investment Account may be requested by a
shareholder directly from Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent").
12
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Funds. Such reinvestment
will be at the net asset value of shares of a Fund, without sales charge, as of
the close of business on the ex-dividend date of the dividend or distribution.
Shareholders may elect in writing or by telephoning (1-800-MER-FUND) to receive
either their income dividends or capital gains distributions, or both, in cash,
in which event payment will be mailed on or about the payment date (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in additional
shares). The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Shareholders may, at
any time, notify Merrill Lynch in writing if the shareholder's account is
maintained with Merrill Lynch or notify the Transfer Agent in writing if their
account is maintained with the Transfer Agent that they no longer wish to have
their dividends and/or distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from such
shareholder's Investment Account in the form of payments by check or through
automatic payment by direct deposit to such shareholder's bank account on
either a monthly or quarterly basis. Shareholders whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of shares may be made in an investor's Investment Account
by prearranged charges of $50 or more to such investor's regular bank account.
Investors who maintain CMA(R) accounts may arrange to have periodic investments
made in the Funds in their CMA(R) account or in certain related accounts in
amounts of $100 or more through the CMA(R) Automated Investment Program.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in a
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100 and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
13
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Corporation's intention to distribute all of its net investment
income, if any. Dividends from such net investment income are paid at least
annually with respect to each of the S&P 500 Index Fund, Small Cap Index Fund
and International Index Fund. Dividends with respect to the Aggregate Bond
Index Fund are declared daily and paid monthly. All net realized capital gains,
if any, are distributed to Fund shareholders at least annually. From time to
time, a Fund may declare a special distribution at or about the end of the
calendar year in order to comply with a Federal income tax requirement that
certain percentages of its ordinary income and capital gains be distributed
during the taxable year. See "Shareholder Services--Reinvestment of Dividends
and Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Funds. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash.
TAXES
The Funds intend to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as a Fund so qualifies, a Fund
will not be subject to Federal income tax on the part of its net ordinary
income and net realized capital gains which it distributes to shareholders. In
order to qualify, the Fund generally must among other things, (i) derive at
least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, gains from the sale of securities, or other income
(including but not limited to gains from options or futures) derived with
respect to its business of investing in such stock or securities; (ii)
distribute at least 90% of its dividend, interest and certain other taxable
income each year; (iii) at the end of each fiscal quarter maintain at least 50%
of the value of its total assets in cash, government securities, securities of
other RICs, and other securities of issuers which represent, with respect to
each issuer, no more than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer; and (iv) at the end of each
fiscal quarter have no more than 25% of its assets invested in the securities
(other than those of the government or other RICs) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses.
Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from a Fund's net realized capital gains (including long-
term gains from certain transactions in futures and options) are taxable to
shareholders as capital gains, the character of which will be determined at the
Fund level, regardless of the length of time the shareholder has owned Fund
shares. Recent legislation creates additional categories of capital gains
taxable at different rates. Not later than 60 days after the close of its
taxable year, the Funds will provide shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
dividends and the amount and character of any capital gains dividends.
Distributions in excess of a Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends and distributions are taxable to shareholders even though they are
reinvested in additional shares of a Fund. A portion of the ordinary income
dividends paid by the S&P 500 Index Fund and Small
14
<PAGE>
Cap Index Fund may be eligible for the 70% dividends received deduction allowed
to corporations under the Code, if certain requirements are met. For this
purpose, the Funds will allocate dividends eligible for the dividends received
deduction between the Class A and Class D shareholders according to a method
that is based upon the gross income that is allocable to the Class A and Class
D shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. Distributions paid by the Aggregate Bond Index
Fund and the International Index Fund will not be eligible for the dividends
received deduction. If a Fund pays a dividend in January which was declared in
the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Redemptions and exchanges of a Fund's shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such events. A loss
realized on a sale or exchange of shares of a Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss. Any loss upon the sale or exchange of Fund shares held for six months or
less, which is not disallowed, will be treated as long-term capital loss to the
extent of any capital gains distributions received by the shareholder with
respect to such shares.
Ordinary income dividends paid by a Fund to shareholders who are nonresident
aliens or foreign entities generally will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under the applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the International Index Fund and the
Aggregate Bond Index Fund may give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the International
Index Fund may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by the Fund. The International Index
Fund expects to be eligible, and intends, to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their proportionate share of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share in computing their taxable
incomes or, alternatively, subject to certain limitations, restrictions, and
holding period requirements use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporation shareholders who do not itemize deductions. A shareholder that
is a nonresident alien individual or a foreign corporation may be subject to
U.S. withholding tax on the income resulting from the Fund's election described
in this paragraph but may not be able to claim a credit or deduction against
such U.S. tax for the foreign taxes treated as having been paid by such
shareholder. The International Index Fund will report annually to its
shareholders the amount per share of such withholding taxes. For this purpose,
the Fund will allocate foreign taxes and foreign source income among the Class
A and Class D shareholders according to a method similar to that described
above for the allocation of dividends eligible for the dividends received
deduction.
15
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. For purposes of determining its distribution
requirements, each Fund will account for its share of items of income, gain,
loss and deductions of the Series as they are taken into account by the Series.
While each Fund intends to distribute its income and capital gains in the
manner necessary to avoid imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund's taxable income and capital
gains will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
Each Fund may purchase or sell options and futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Newly-enacted Code Section 1259 will require the recognition of gain (but not
loss) if a Fund makes a "constructive sale" of an appreciated financial
position (e.g. debt instruments and stocks). A Fund generally will be
considered to make a constructive sale of an appreciated financial position if
it sells the same or substantially identical property short, enters into a
futures or forward contract to deliver the same or substantially identical
property, or enters into certain other similar transactions.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of each Fund's transactions in options and futures contracts. Under
Section 1092, a Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with "wash sales," may cause a Fund
to postpone recognition of certain losses for tax purposes; and Code Section
1258, which deals with "conversion transactions," may apply to recharacterize
certain capital gains as ordinary income for tax purposes.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether a Series qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to a Series.
16
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts"
and from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, a Series may elect capital gain or loss
treatment for such transactions. In general, however, Code Section 988 gains or
losses will increase or decrease the amount of a Fund's investment company
taxable income available to be distributed to shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital
gains. Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing the basis of each shareholder's
Fund shares.
THE SERIES
The Trust and each Fund have received a private letter ruling from the
Internal Revenue Service ("IRS"), in which the IRS has ruled that each Series
is classified as a partnership for tax purposes and, based upon that ruling,
that each Fund will be entitled to look to the underlying assets of the Series
in which it has invested for purposes of satisfying the diversification
requirements and other requirements of the Code applicable to RICs. If any of
the facts upon which such ruling is premised change in any material respect
(e.g., if the Trust were required to register its interests under the
Securities Act) and the Trust is unable to obtain a revised private letter
ruling from the IRS indicating that each Series will continue to be classified
as a partnership, then the Board of Directors of the Corporation will
determine, in its discretion, the appropriate course of action for the Funds.
One possible course of action would be to withdraw the Funds' investments from
the Series and to retain an investment adviser to manage the Funds' assets in
accordance with the investment policies applicable to the respective Fund. See
"Investment Objectives and Policies."
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, and does
not address the state and local tax, or estate or inheritance tax, consequences
of an investment in a Fund. For the complete provisions, reference should be
made to the pertinent Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to change by
legislative or administrative action either prospectively or retroactively.
Dividends and capital gains distributions and gain on the sale or exchange of
shares in a Fund may also be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes or estate or inheritance
tax. Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in a Fund.
PERFORMANCE DATA
From time to time a Fund may include its Fund's average annual total return,
other total return data and/or yield in advertisements or information furnished
to present or prospective shareholders. Total return figures are based on a
Fund's historical performance and are not intended to indicate future
performance. Average annual total return and yield are determined in accordance
with a formula specified by the Securities and Exchange Commission.
17
<PAGE>
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.
Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment. Such data will be
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.
From time to time, a Fund may include its Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature.
Set forth below is total return and yield information for the Class A and
Class D shares of the Funds for the periods indicated.
S&P 500 INDEX FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to
December 31, 1997..... 43.38% $1,308.00 42.98% $1,305.30
<CAPTION>
ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to
December 31, 1997..... 30.80% $1,308.00 30.53% $1,305.30
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to
December 31, 1997..... 30.80% $1,308.00 30.53% $1,305.30
</TABLE>
18
<PAGE>
SMALL CAP INDEX FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 38.87% $1,270.40 38.61% $1,268.70
<CAPTION>
ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 27.04% $1,270.40 26.87% $1,268.70
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 27.04% $1,270.40 26.87% $1,268.70
</TABLE>
AGGREGATE BOND INDEX FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to December
31, 1997............... 12.94% $1,094.90 12.66% $1,092.90
<CAPTION>
ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to December
31, 1997............... 9.49% $1,094.90 9.29% $1,092.90
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C> <C> <C> <C>
April 3, 1997
(commencement of
operations) to December
31, 1997............... 9.49% $1,094.90 9.29% $1,092.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C>
30 days ending December
31, 1997............... 6.12% 5.86%
</TABLE>
19
<PAGE>
INTERNATIONAL INDEX FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 11.77% $1,084.50 11.45% $1,082.20
<CAPTION>
ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 8.45% $1,084.50 8.22% $1,082.20
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C> <C> <C>
April 9, 1997
(commencement of
operations) to
December 31, 1997..... 8.45% $1,084.50 8.22% $1,082.20
</TABLE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Corporation is a Maryland corporation incorporated on October 25, 1996.
It has an authorized capital of 1,000,000,000 shares of Common Stock, par value
$0.0001 per share, divided into 125,000,000 shares each of Class A and Class D
shares for each of the four Funds: S&P 500 Index Fund, Small Cap Index Fund,
Aggregate Bond Index Fund and International Index Fund. Class A and Class D
shares of a Fund represent interests in the same assets of the Series and are
identical in all respects except that the Class D shares bear certain expenses
related to the account maintenance associated with such shares. Class D shares
have exclusive voting rights with respect to matters relating to the class'
account maintenance expenditures.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of each Fund have equal voting rights, except that
each Fund has exclusive voting rights to matters affecting only such Fund, and
except that as noted above, Class D shares have exclusive voting rights with
respect to matters relating to the class' account maintenance expenditures.
There normally will be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by the shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Corporation will be required to
call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in account maintenance fees or of a change
in fundamental policies, objectives or restrictions. Except as set forth above,
the Directors
20
<PAGE>
shall continue to hold office and appoint successor Directors. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except that, as noted
above, Class D shares bear certain additional expenses. Shares issued are
fully-paid and non-assessable by the Fund. Voting rights for Directors are not
cumulative.
Stock certificates are issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any case.
The Trust consists of four Series, and is organized as a Delaware business
trust. Whenever a Fund is requested to vote on a fundamental policy of a
Series, the Corporation will hold a meeting of the investing Fund's
shareholders and will cast its vote as instructed by such Fund's shareholders.
MLAM provided the initial capital for each Fund by purchasing 2,500 Class A
shares of each Fund (10,000 total) and 2,500 Class D shares of each Fund
(10,000 total), for an aggregate of $50,000 per Fund. Such shares were acquired
for investment and can only be disposed of by redemption. The organizational
expenses of the Corporation were paid by the Corporation and are amortized over
a period not exceeding five years. The proceeds realized by MLAM upon
redemption of any of such shares will be reduced by the proportionate amount of
the unamortized organizational expenses which the number of shares redeemed
bears to the number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class D shares of each of the Funds based
on the value of each Fund's net assets as of December 31, 1997, is calculated
as follows:
S&P 500 INDEX FUND
<TABLE>
<CAPTION>
CLASS A CLASS D
------------ ------------
<S> <C> <C>
Net Assets........................................... $445,015,646 $157,567,040
============ ============
Number of Shares Outstanding......................... 35,473,242 12,565,103
============ ============
Net Asset Value Per Share (net assets divided by num-
ber of shares
outstanding) and Offering Price..................... $ 12.55 $ 12.54
============ ============
SMALL CAP INDEX FUND
<CAPTION>
CLASS A CLASS D
------------ ------------
<S> <C> <C>
Net Assets........................................... $ 26,477,750 $ 38,778,528
============ ============
Number of Shares Outstanding......................... 2,155,745 3,158,238
============ ============
Net Asset Value Per Share (net assets divided by num-
ber of shares
outstanding) and Offering Price..................... $ 12.28 $ 12.28
============ ============
</TABLE>
21
<PAGE>
AGGREGATE BOND INDEX FUND
<TABLE>
<CAPTION>
CLASS A CLASS D
------------ -----------
<S> <C> <C>
Net Assets............................................ $251,140,395 $56,133,534
============ ===========
Number of Shares Outstanding.......................... 24,112,166 5,387,967
============ ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares
outstanding) and Offering Price...................... $ 10.42 $ 10.42
============ ===========
</TABLE>
INTERNATIONAL INDEX FUND
<TABLE>
<CAPTION>
CLASS A CLASS D
------------ -----------
<S> <C> <C>
Net Assets............................................ $115,190,077 $20,535,578
============ ===========
Number of Shares Outstanding.......................... 10,913,229 1,944,655
============ ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares
outstanding) and Offering Price...................... $ 10.56 $ 10.56
============ ===========
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche, LLP, has been selected as the independent auditors of the
Corporation and the Trust. The selection of the Corporation's independent
auditors is subject to ratification by shareholders in years when an annual
meeting of shareholders is held. In addition, employment of such auditors may
be terminated without any penalty by vote of a majority of the outstanding
shares of the Corporation at a meeting called for the purpose of terminating
such employment. The independent auditors are responsible for auditing the
annual financial statements of the Funds.
CUSTODIAN
Merrill Lynch Trust Company, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, acts as the custodian of the assets of S&P 500 Index Series, Small Cap
Index Series and Aggregate Bond Index Series. State Street Bank and Trust
Company ("State Street"), P.O. Box 351, Boston Massachusetts 02101, 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 depositories. Each custodian is responsible for
safeguarding and controlling cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Transfer Agent of the Corporation
and the Trust. The Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening, maintenance and servicing of shareholder
accounts. See "Management of the Funds--Transfer Agency Services" in the
Prospectus.
22
<PAGE>
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Corporation and the Trust.
REPORTS TO SHAREHOLDERS
The Funds' fiscal year ends on December 31 of each year. The Corporation
sends to its shareholders at least quarterly reports showing the Funds'
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Corporation has filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Act and the
Investment Company Act, to which reference is hereby made.
Under separate agreements Merrill Lynch has granted the Corporation and the
Trust the right to use the "Merrill Lynch" name and has reserved the right to
withdraw its consent to the use of such name by the Corporation and the Trust
at any time or to grant the use of such name to any other company, and the
Corporation and the Trust have granted Merrill Lynch, under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by Merrill Lynch.
To the knowledge of the Funds, no person or entity owned beneficially 5% or
more of any class of any of the Fund's shares on March 1, 1998.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders ofMerrill Lynch Index Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch S&P 500 Index Fund (one of the series constituting Merrill Lynch Index
Funds, Inc.) as of December 31, 1997, the related statements of operations and
changes in net assets, and the financial highlights for the period April 3,
1997 (commencement of operations) to December 31, 1997. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch S&P
500 Index Fund of the Merrill Lynch Index Funds, Inc. as of December 31, 1997,
the results of its operations, the changes in its net assets, and the financial
highlights for the period April 3, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
24
<PAGE>
[This page is intentionally left blank]
25
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
S&P 500
INDEX FUND As of December 31, 1997
===================================================================================================================================
<S> <C>
Assets: Investment in Merrill Lynch S&P 500 Index Series, at value
(identified cost--$556,749,518) (Note 1a)........................................... $602,800,370
Receivable from administrator (Note 2)............................................... 22,452
Deferred organization expenses (Note 1d)............................................. 18,553
Prepaid registration fees and other assets (Note 1d)................................. 55,387
------------
Total assets......................................................................... 602,896,762
------------
===================================================================================================================================
Liabilities: Payable to distributor (Note 2)...................................................... 34,316
Accrued expenses..................................................................... 279,760
------------
Total liabilities ................................................................... 314,076
------------
===================================================================================================================================
Net Assets: Net assets........................................................................... $602,582,686
============
===================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized..... $ 3,547
Consist of: Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized..... 1,257
Paid-in capital in excess of par..................................................... 554,487,126
Undistributed investment income--net................................................. 19,451
Undistributed realized capital gains on investments from the Series--net............. 2,020,453
Unrealized appreciation on investments from the Series--net.......................... 46,050,852
------------
Net assets........................................................................... $602,582,686
============
===================================================================================================================================
Net Asset Class A--Based on net assets of $445,015,646 and 35,473,242 shares outstanding....... $ 12.55
Value: ============
Class D--Based on net assets of $157,567,040 and 12,565,103 shares outstanding....... $ 12.54
============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
S&P 500
INDEX FUND For the Period April 3, 1997+ to December 31, 1997
===================================================================================================================================
<S> <C>
Investment Income Investment income allocated from the Series.......................................... $ 6,268,736
(Note 1b): Expenses allocated from the Series................................................... (345,174)
------------
Net investment income from the Series................................................ 5,923,562
------------
===================================================================================================================================
Expenses: Administration fee (Note 2).......................................................... $ 594,524
Registration fees (Note 1d).......................................................... 346,960
Account maintenance fee--Class D (Note 2)............................................ 202,649
Transfer agent fees (Note 2)......................................................... 171,551
Printing and shareholder reports..................................................... 47,114
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH
S&P 500
INDEX FUND For the Period April 3, 1997+ to December 31, 1997
===================================================================================================================================
<S> <C> <C>
Professional fees.................................................................... 20,000
Amortization of organization expenses (Note 1d)...................................... 15,063
Accounting services (Note 2)......................................................... 1,500
Directors' fees and expenses......................................................... 200
Other................................................................................ 1,117
----------
Total expenses before reimbursement.................................................. 1,400,678
Reimbursement of expenses (Note 2)................................................... (355,750)
----------
Total expenses after reimbursement................................................... 1,044,928
------------
Investment income--net............................................................... 4,878,634
------------
===================================================================================================================================
Realized & Realized gain on investments from the Series--net.................................... 20,857,038
Unrealized Unrealized appreciation on investments from the Series--net.......................... 46,050,852
Gain from the ------------
Series--Net: Net Increase in Net Assets Resulting from Operations................................. $ 71,786,524
============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
S&P 500 April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: December 31, 1997
===================================================================================================================================
<S> <C>
Operations: Investment income--net.......................................................................... $ 4,878,634
Realized gain on investments from the Series--net............................................... 20,857,038
Unrealized appreciation on investments from the Series--net..................................... 46,050,852
------------
Net increase in net assets resulting from operations............................................ 71,786,524
------------
===================================================================================================================================
Dividends & Investment income--net
Distributions to Class A....................................................................................... (3,734,820)
Shareholders Class D....................................................................................... (1,124,363)
(Note 1e): Realized gain on investments from the Series--net
Class A....................................................................................... (13,898,161)
Class D....................................................................................... (4,938,424)
------------
Net decrease in net assets resulting from dividends and distributions to shareholders........... (23,695,768)
------------
===================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions.............................. 554,466,930
Transactions ------------
(Note 4):
===================================================================================================================================
Net Assets: Total increase in net assets.................................................................... 602,557,686
Beginning of period............................................................................. 25,000
------------
End of period*.................................................................................. $602,582,686
============
===================================================================================================================================
*Undistributed investment income--net............................................................ $ 19,451
============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
27
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
MERRILL LYNCH from information provided in the financial statements. April 3, 1997+ to
S&P 500 December 31, 1997
INDEX FUND Increase (Decrease) in Net Asset Value: Class A Class D
==================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ........................... $ 10.00 $ 10.00
Operating -------- --------
Performance: Investment income--net ......................................... .11 .11
Realized and unrealized gain on investments from the Series--net 2.97 2.95
-------- --------
Total from investment operations ............................... 3.08 3.06
-------- --------
Less dividends and distributions:
Investment income--net ....................................... (.11) (.10)
Realized gain on investments from the Series--net ............ (.42) (.42)
-------- --------
Total dividends and distributions .............................. (.53) (.52)
-------- --------
Net asset value, end of period ................................. $ 12.55 $ 12.54
======== ========
==================================================================================================================
Total Investment Based on net asset value per share ............................. 30.80%++ 30.53%++
Return: ======== ========
==================================================================================================================
Ratios to Average Expenses, net of reimbursement++ ............................... .40%* .65%*
Net Assets: ======== ========
Expenses++ ..................................................... .57%* .82%*
======== ========
Investment income--net ......................................... 1.71%* 1.47%*
======== ========
==================================================================================================================
Supplemental Data: Net assets, end of period (in thousands) ....................... $445,016 $157,567
======== ========
==================================================================================================================
</TABLE>
+ Commencement of operations.
++ Includes the Fund's share of the Series' allocated expenses.
* Annualized.
++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
S&P 500
INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch S&P 500 Index Fund (the "Fund") is part of Merrill Lynch Index
Funds, Inc. The Fund is registered under the Investment Company Act of 1940 as a
non-diversified mutual fund. The Fund seeks to achieve its investment objective
by investing all of its assets in the Merrill Lynch S&P 500 Index Series (the
"Series") of the Merrill Lynch Index Trust, which has the same investment
objective as the Fund. The value of the Fund's investment in the Series reflects
the Fund's proportionate interest in the net assets of the Series. The
performance of the Fund is directly affected by the performance of the Series.
The financial statements of the Series, including the Schedule of Investments,
are included elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The Fund offers two classes of shares, Class A
Shares and Class D Shares. Shares of Class A and Class D are sold without the
imposition of a front-end or deferred sales charge. Both classes
28
<PAGE>
of shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class D Shares bear certain expenses
related to the account maintenance of such shares. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments - Valuation of securities is discussed in Note 1a
of the Series' Notes to Financial Statements which is included elsewhere in this
report.
(b) Income - The Fund's net investment income consists of the Fund's pro
rata share of the net investment income of the Series, less all actual and
accrued expenses of the Fund determined in accordance with generally accepted
accounting principles.
(c) Income taxes - It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no Federal
income tax provision is required.
(d) Prepaid registration fees and deferred organization expenses - Prepaid
registration fees are charged to expense as the related shares are issued.
Deferred organization expenses are charged to expense on a straight-line basis
over a five-year period.
(e) Dividends and distributions - Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Investment transactions - Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plan
adopted by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance fees. The
fees are accrued daily and paid monthly at the annual rate of 0.25% based upon
the average daily net assets of Class D shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
also provides account maintenance services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class D shareholders.
The Fund has also entered into an Administrative Services Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of ML & Co., which is the
limited partner.
The Fund pays a monthly fee at an annual rate of 0.20% of the Fund's average
daily net assets for the performance of administrative services (other than
investment advice and related portfolio activities) necessary for the operation
of the Fund. For the period April 3, 1997 to December 31, 1997, MLAM earned fees
of $594,524, of which $338,405 was voluntarily waived. MLAM also reimbursed the
Fund for additional expenses of $17,345.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investments in the Series for the period
April 3, 1997 to December 31, 1997 were $541,453,952 and $11,485,034,
respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$554,466,930 for the period April 3, 1997 to December 31, 1997.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Period Dollar
April 3, 1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 37,854,298 $438,112,086
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................... 1,361,172 17,164,377
---------- ------------
Total issued ................................ 39,215,470 455,276,463
Shares redeemed ............................. (3,743,478) (45,298,859)
---------- ------------
Net increase ................................ 35,471,992 $409,977,604
========== ============
- --------------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
- --------------------------------------------------------------------------------
Class D Shares for the Period Dollar
April 3, 1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 16,128,798 $187,590,003
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................... 366,327 4,615,723
---------- ------------
Total issued ................................ 16,495,125 192,205,726
Shares redeemed ............................. (3,931,272) (47,716,400)
---------- ------------
Net increase ................................ 12,563,853 $144,489,326
========== ============
- --------------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Investors ofMerrill Lynch Index Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch S&P 500 Index Series (one of the
series constituting Merrill Lynch Index Trust) as of December 31, 1997, the
related statements of operations and changes in net assets, and the financial
highlights for the period April 3, 1997 (commencement of operations) to
December 31, 1997. These financial statements and the financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch S&P
500 Index Series of the Merrill Lynch Index Trust as of December 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the period April 3, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
30
<PAGE>
SCHEDULE OF INVESTMENTS
Common
Stocks
Merrill Lynch S&P 500 Index Series
------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
================================================================================
+ 3Com Corporation.............................. 26,738 $ 934,159
ALLTEL Corporation............................ 14,325 588,220
+ ALZA Corporation.............................. 6,600 209,963
AMP Inc....................................... 17,005 714,210
+ AMR Corporation............................... 7,046 905,411
ASARCO Inc.................................... 3,119 69,983
AT&T Corp..................................... 125,542 7,689,448
Abbott Laboratories........................... 59,119 3,875,989
Adobe Systems Inc............................. 5,629 231,493
+ Advanced Micro Devices, Inc................... 10,958 196,559
Aeroquip-Vickers Inc.......................... 2,161 106,024
Aetna, Inc.................................... 11,485 810,410
Ahmanson (H.F.) & Company..................... 7,297 488,443
Air Products and Chemicals, Inc............... 8,475 697,069
+ AirTouch Communications, Inc.................. 39,014 1,621,519
Alberto-Culver Company (Class B).............. 4,321 138,542
Albertson's, Inc.............................. 18,979 899,130
Alcan Aluminium Ltd........................... 17,539 484,515
Allegheny Teledyne, Inc....................... 13,469 348,510
Allergan, Inc................................. 5,044 169,289
AlliedSignal, Inc............................. 43,601 1,697,714
Allstate Corporation.......................... 33,143 3,011,870
Aluminum Company of America................... 13,330 938,099
Amerada Hess Corporation...................... 7,085 388,789
American Electric Power Company, Inc.......... 14,655 756,564
American Express Company...................... 35,923 3,206,128
American General Corporation.................. 18,826 1,017,781
American Greetings Corporation
(Class A)................................... 5,691 222,660
American Home Products Corp................... 50,213 3,841,295
American International Group, Inc............. 54,220 5,896,425
American Stores Company....................... 21,102 433,910
Ameritech Corporation......................... 42,298 3,404,989
Amgen Inc..................................... 20,343 1,101,065
Amoco Corporation............................. 37,636 3,203,765
Anadarko Petroleum Corporation................ 4,604 279,405
+ Andrew Corporation............................ 7,008 168,192
Anheuser-Busch Companies, Inc................. 37,869 1,666,236
Aon Corporation............................... 12,962 759,897
Apache Corporation............................ 6,969 244,351
+ Apple Computer, Inc........................... 9,834 129,071
+ Applied Materials, Inc........................ 28,158 848,260
Archer-Daniels-Midland Company................ 43,093 934,579
+ Armco Inc..................................... 8,345 $ 41,203
Armstrong World Industries, Inc............... 3,162 236,360
Ashland Inc................................... 5,798 311,280
Atlantic Richfield Company.................... 24,776 1,985,177
Autodesk, Inc................................. 3,736 138,232
Automatic Data Processing, Inc................ 22,628 1,388,794
+ AutoZone, Inc................................. 11,663 338,227
Avery Dennison Corporation.................... 7,932 354,957
Avon Products, Inc............................ 10,222 627,375
BB&T Corporation.............................. 10,590 678,422
Baker Hughes, Inc............................. 13,032 568,521
Ball Corporation.............................. 2,344 82,773
Baltimore Gas and Electric Company............ 11,388 387,904
Banc One Corporation.......................... 45,367 2,463,995
Bank of New York Co., Inc. (The).............. 29,113 1,683,095
BankAmerica Corporation....................... 53,599 3,912,727
BankBoston Corporation........................ 11,251 1,056,891
Bankers Trust NY Corporation.................. 7,571 851,264
Bard (C.R.), Inc.............................. 4,405 137,932
Barnett Banks, Inc............................ 14,907 1,071,441
Barrick Gold Corporation...................... 28,803 536,456
Battle Mountain Gold Company.................. 17,749 104,275
Bausch & Lomb Inc............................. 4,279 169,555
Baxter International, Inc..................... 21,645 1,091,720
+ Bay Networks, Inc............................. 16,354 418,049
Becton, Dickinson & Company................... 9,453 472,650
Bell Atlantic Corporation..................... 60,028 5,462,548
BellSouth Corporation......................... 76,643 4,315,959
Bemis Company, Inc............................ 4,066 179,158
Beneficial Corporation........................ 4,101 340,896
+ Bethlehem Steel Corporation................... 8,696 75,003
Biomet, Inc................................... 8,598 220,324
Black & Decker Corporation (The).............. 7,328 286,250
Block (H & R), Inc............................ 8,023 359,531
Boeing Company (The).......................... 77,261 3,780,960
Boise Cascade Corporation..................... 4,345 131,436
+ Boston Scientific Corporation................. 15,042 690,052
Briggs & Stratton Corporation................. 1,953 94,843
Bristol-Myers Squibb Co....................... 76,850 7,271,931
Brown-Forman Corporation (Class B)............ 5,321 293,985
Browning-Ferris Industries, Inc............... 15,263 564,731
Brunswick Corporation......................... 7,670 232,497
Burlington Northern Santa Fe Corp............. 12,072 1,121,942
31
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Common
Stocks
(continued)
Merrill Lynch S&P 500 Index Series (continued)
------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
================================================================================
Burlington Resources Inc...................... 13,645 $ 611,467
CBS Corporation............................... 54,414 1,601,812
CIGNA Corporation............................. 5,752 995,456
CINergy Corporation........................... 12,165 466,072
CPC International Inc......................... 11,080 1,193,870
CSX Corporation............................... 16,864 910,656
CVS Corporation............................... 13,283 850,942
+ Cabletron Systems, Inc........................ 12,177 182,655
Caliber System, Inc........................... 3,013 146,695
Campbell Soup Company......................... 35,363 2,055,474
Cardinal Health, Inc.......................... 8,451 634,881
Carolina Power & Light Company................ 11,620 493,124
Case Corporation.............................. 5,804 350,779
Caterpillar, Inc.............................. 28,774 1,397,337
+ Cendant Corporation........................... 61,144 2,101,825
Centex Corporation............................ 2,291 144,190
Central and South West Corporation............ 16,403 443,906
+ Ceridian Corporation.......................... 5,867 268,782
Champion International Corp................... 7,430 336,672
+ Charming Shoppes, Inc......................... 8,190 38,391
Chase Manhattan Corp. (The)................... 32,575 3,566,963
Chevron Corporation........................... 50,761 3,908,597
Chrysler Corporation.......................... 51,205 1,801,776
Chubb Corporation............................. 13,152 994,620
Cincinnati Financial Corporation.............. 4,213 592,980
Cincinnati Milacron Inc....................... 3,072 79,680
Circuit City Stores--Circuit City Group....... 7,629 271,306
+ Cisco Systems, Inc............................ 77,770 4,335,650
Citicorp...................................... 35,310 4,464,508
+ Clear Channel Communications, Inc............. 7,573 601,580
Clorox Company................................ 7,981 630,998
Coastal Corporation (The)..................... 8,186 507,020
Coca-Cola Company............................. 191,161 12,736,102
Cognizant Corporation......................... 12,533 558,502
Colgate-Palmolive Company..................... 22,863 1,680,431
Columbia Gas System, Inc. (The)............... 4,266 335,148
Columbia/HCA Healthcare Corp.................. 50,051 1,482,761
Comcast Corporation (Class A)................. 26,942 850,357
Comerica, Inc................................. 8,120 732,830
Compaq Computer Corporation................... 58,510 3,302,158
Computer Associates International, Inc........ 42,254 2,234,180
+ Computer Sciences Corporation................. 6,001 501,084
ConAgra, Inc.................................. 36,480 1,197,000
Conseco, Inc.................................. 14,562 661,661
Consolidated Edison Company of
New York, Inc................................ 18,130 743,330
Consolidated Natural Gas Company.............. 7,379 446,430
Cooper Industries, Inc........................ 9,353 458,297
Cooper Tire & Rubber Company.................. 6,092 148,493
Coors (Adolph) Company (Class B).............. 2,898 96,359
CoreStates Financial Corp..................... 15,289 1,224,076
Corning, Inc.................................. 17,867 663,312
+ Costco Companies, Inc......................... 16,413 732,430
Countrywide Credit Industries, Inc............ 8,342 357,663
Crane Co...................................... 3,538 153,461
Crown Cork & Seal Company, Inc................ 9,906 496,538
Cummins Engine Co., Inc....................... 2,952 174,353
Cyprus Amax Minerals Co....................... 7,203 110,746
+ DSC Communications Corporation................ 9,116 218,784
DTE Energy Company............................ 11,195 388,327
Dana Corporation.............................. 8,117 385,558
Darden Restaurants, Inc....................... 11,820 147,750
+ Data General Corporation...................... 3,695 64,432
Dayton Hudson Corp............................ 16,854 1,137,645
Deere & Company............................... 19,470 1,135,344
+ Dell Computer Corporation..................... 25,230 2,119,320
Delta Air Lines, Inc.......................... 5,720 680,680
Deluxe Corporation............................ 6,287 216,902
+ Digital Equipment Corporation................. 11,423 422,651
Dillard's Inc. (Class A)...................... 8,549 301,352
Disney (Walt) Company (The)................... 52,169 5,167,992
Dominion Resources, Inc....................... 14,448 614,943
Donnelley (R.R.) & Sons Co.................... 11,308 421,223
Dover Corporation............................. 17,175 620,447
Dow Chemical Company (The).................... 17,526 1,778,889
Dow Jones & Company, Inc...................... 7,419 398,308
Dresser Industries, Inc....................... 13,565 568,882
Duke Energy Corporation....................... 27,776 1,538,096
Dun & Bradstreet Corp. (The).................. 13,159 407,107
duPont (E.I.) de Nemours & Company............ 87,462 5,253,186
EG & G, Inc................................... 3,532 73,510
+ EMC Corporation............................... 38,332 1,051,734
Eastern Enterprises........................... 1,567 70,515
Eastman Chemical Company...................... 6,060 360,949
Eastman Kodak Company......................... 25,112 1,527,124
Eaton Corporation............................. 5,954 531,395
Echlin Inc.................................... 4,868 176,161
+ Echo Bay Mines Ltd............................ 10,750 26,203
Ecolab Inc.................................... 4,991 276,689
Edison International.......................... 29,483 801,569
Emerson Electric Co........................... 34,248 1,932,872
32
<PAGE>
Engelhard Corporation......................... 11,166 $ 194,009
Enron Corp.................................... 24,579 1,021,565
Entergy Corporation........................... 18,853 564,412
Equifax Inc................................... 11,607 411,323
Exxon Corporation++........................... 190,596 11,662,093
+ FMC Corporation............................... 2,870 193,187
FPL Group, Inc................................ 14,090 833,952
+ Federal Express Corporation................... 8,881 542,296
Federal Home Loan Mortgage
Corporation.................................. 53,708 2,252,379
Federal National Mortgage Association......... 81,986 4,678,326
+ Federated Department Stores, Inc.............. 16,196 697,440
Fifth Third BanCorp........................... 11,901 972,907
First Chicago NBD Corporation................. 22,486 1,877,581
First Data Corporation........................ 33,084 967,707
First Union Corporation....................... 48,495 2,485,369
+ FirstEnergy Corp.............................. 17,762 515,098
Fleet Financial Group, Inc.................... 19,308 1,446,893
Fleetwood Enterprises, Inc.................... 2,748 116,618
Fluor Corporation............................. 6,479 242,153
Ford Motor Company............................ 92,750 4,515,766
Fort James Corporation........................ 16,139 617,317
Fortune Brands Inc............................ 13,277 492,079
Foster Wheeler Corporation.................... 3,134 84,814
Freeport-McMoRan Copper &
Gold Co., Inc. (Class B)..................... 14,948 235,431
Frontier Corporation.......................... 12,688 305,305
+ Fruit of the Loom, Inc. (Class A)............. 5,658 144,986
GPU, Inc...................................... 9,299 391,720
GTE Corporation............................... 74,011 3,867,075
Gannett Co., Inc.............................. 21,891 1,353,137
Gap, Inc. (The)............................... 31,060 1,100,706
General Dynamics Corporation.................. 4,840 418,358
General Electric Company...................... 252,957 18,560,720
General Mills, Inc............................ 12,230 875,974
General Motors Corporation.................... 54,666 3,314,126
General Re Corporation........................ 6,062 1,285,144
General Signal Corporation.................... 3,861 162,886
Genuine Parts Company......................... 13,811 468,711
Georgia-Pacific Corporation................... 7,158 434,849
Giant Food Inc. (Class A)..................... 4,647 156,546
Gillette Company (The)........................ 43,289 4,347,839
Golden West Financial Corporation............. 4,415 431,842
Goodrich (B.F.) Company (The)................. 5,551 230,020
Goodyear Tire & Rubber Co. (The).............. 12,087 769,035
Grace (W.R.) & Co............................. 5,738 461,550
Grainger (W.W.), Inc.......................... 3,840 373,200
Great Atlantic & Pacific Tea Co., Inc......... 2,949 87,548
Great Lakes Chemical Corporation.............. 4,625 207,547
Green Tree Financial Corporation.............. 10,539 275,990
Guidant Corporation........................... 11,437 711,953
HBO & Company................................. 15,445 741,360
+ HEALTHSOUTH Corporation....................... 30,425 844,294
Halliburton Company........................... 20,248 1,051,631
Harcourt General, Inc......................... 5,471 299,537
Harland (John H.) Company (The)............... 2,382 50,022
Harnischfeger Industries, Inc................. 3,801 134,223
+ Harrah's Entertainment, Inc................... 7,795 147,131
Harris Corporation............................ 6,169 283,003
Hartford Financial Services
Group, Inc. (The)............................ 9,124 853,664
Hasbro, Inc................................... 9,805 308,858
Heinz (H.J.) Company.......................... 28,380 1,442,059
Helmerich & Payne, Inc........................ 1,925 130,659
Hercules Inc.................................. 7,466 373,767
Hershey Foods Corporation..................... 11,051 684,471
Hewlett-Packard Company....................... 80,398 5,024,875
Hilton Hotels Corporation..................... 19,347 575,573
Home Depot, Inc. (The)........................ 56,543 3,328,969
Homestake Mining Company...................... 11,323 100,492
Honeywell Inc................................. 9,847 674,520
Household International Inc................... 8,270 1,054,942
Houston Industries Inc........................ 22,030 587,926
+ Humana, Inc................................... 12,643 262,342
Huntington Bancshares Inc..................... 14,781 532,116
+ ITT Corporation............................... 8,981 744,300
ITT Industries, Inc........................... 9,127 286,360
Ikon Office Solutions, Inc.................... 10,242 288,056
Illinois Tool Works, Inc...................... 19,262 1,158,128
Inco Limited.................................. 12,917 219,589
Ingersoll-Rand Company........................ 12,814 518,967
Inland Steel Industries, Inc.................. 3,773 64,613
Intel Corporation............................. 126,450 8,883,113
International Business Machines Corp.......... 75,141 7,856,931
International Flavors & Fragrances Inc........ 8,464 435,896
International Paper Company................... 23,356 1,007,228
Interpublic Group of Companies, Inc........... 9,735 484,925
Jefferson-Pilot Corporation................... 5,458 425,042
Johnson & Johnson............................. 103,947 6,847,509
Johnson Controls, Inc......................... 6,439 307,462
Jostens, Inc.................................. 2,994 69,049
33
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Common
Stocks
(continued)
Merrill Lynch S&P 500 Index Series (continued)
------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
================================================================================
+ KLA-Tencor Corporation........................ 6,540 $ 252,607
Kaufman and Broad Home Corporation............ 2,997 67,245
Kellogg Company............................... 31,759 1,576,040
Kerr-McGee Corporation........................ 3,714 235,143
KeyCorp Limited............................... 16,980 1,202,396
Kimberly-Clark Corporation.................... 42,309 2,086,363
King World Productions, Inc................... 2,834 163,664
+ Kmart Corporation............................. 37,699 435,895
Knight-Ridder, Inc............................ 6,527 339,404
Kroger Co. (The).............................. 19,699 727,632
+ LSI Logic Corporation......................... 10,941 216,085
Laidlaw, Inc. (Class B)....................... 25,383 345,843
Lilly (Eli) & Company......................... 85,741 5,969,717
Limited, Inc. (The)........................... 21,016 535,908
Lincoln National Corporation.................. 7,873 615,078
Liz Claiborne, Inc............................ 5,165 215,962
Lockheed Martin Corporation................... 14,985 1,476,022
Loews Corporation............................. 8,874 941,753
Longs Drug Stores Corporation................. 3,009 96,664
Louisiana-Pacific Corporation................. 8,466 160,854
Lowe's Companies, Inc......................... 13,490 643,304
Lucent Technologies, Inc...................... 49,560 3,958,605
MBIA, Inc..................................... 6,892 460,472
MBNA Corporation.............................. 38,738 1,058,032
MCI Communications Corporation................ 53,833 2,304,725
MGIC Investment Corp.......................... 8,814 586,131
Mallinckrodt Inc.............................. 5,637 214,206
Manor Care, Inc............................... 4,913 171,955
Marriott International, Inc................... 9,828 680,589
Marsh & McLennan Companies, Inc............... 13,128 978,856
Masco Corporation............................. 12,741 648,198
Mattel, Inc................................... 22,432 835,592
May Department Stores Company (The)........... 17,876 941,842
Maytag Corporation............................ 7,340 273,874
McDermott International, Inc.................. 4,329 158,550
McDonald's Corporation........................ 53,179 2,539,297
McGraw-Hill Companies, Inc.................... 7,680 568,320
Mead Corporation (The)........................ 8,105 226,940
Medtronic, Inc................................ 36,251 1,896,380
Mellon Bank Corporation....................... 19,676 1,192,857
Mercantile Stores Company, Inc................ 2,838 172,763
Merck & Co., Inc.............................. 92,616 9,840,450
Meredith Corporation.......................... 4,127 147,282
Merrill Lynch & Co., Inc...................... 25,750 1,878,141
+ Micron Technology, Inc........................ 16,335 424,710
+ Microsoft Corporation++....................... 93,267 12,054,760
Millipore Corporation......................... 3,349 113,657
Minnesota Mining &
Manufacturing Company........................ 31,586 2,592,026
+ Mirage Resorts, Inc........................... 13,866 315,451
Mobil Corporation............................. 60,629 4,376,656
Monsanto Company.............................. 45,833 1,924,986
Moore Corporation Limited
(NY Registered Shares)....................... 6,852 103,636
Morgan (J.P.) & Co., Inc...................... 13,730 1,549,774
Morgan Stanley, Dean Witter,
Discover and Co. Inc......................... 45,789 2,707,275
Morton International, Inc..................... 10,285 353,547
Motorola, Inc................................. 46,140 2,632,864
NACCO Industries Inc. (Class A)............... 631 67,635
NICOR Inc..................................... 3,750 158,203
Nalco Chemical Company........................ 5,172 204,617
National City Corporation..................... 16,515 1,085,861
+ National Semiconductor Corporation............ 12,615 327,202
National Service Industries, Inc.............. 3,339 165,489
NationsBank Corporation....................... 54,984 3,343,714
+ Navistar International Corporation............ 5,817 144,334
New York Times Company
(Class A) (The).............................. 7,423 490,846
Newell Co..................................... 12,265 521,262
Newmont Mining Corporation.................... 12,094 355,261
+ NextLevel Systems, Inc........................ 11,432 204,347
+ Niagara Mohawk Power Corp..................... 11,138 116,949
Nike Inc. (Class B)........................... 22,448 881,084
Nordstrom, Inc................................ 5,963 360,016
Norfolk & Southern Corporation................ 29,143 897,969
Northern States Power Company................. 5,754 335,170
Northern Telecom Limited...................... 20,248 1,802,072
Northrop Grumman Corporation.................. 5,125 589,375
Norwest Corporation........................... 58,380 2,254,927
+ Novell, Inc................................... 27,019 202,642
Nucor Corporation............................. 6,773 327,221
ONEOK, Inc.................................... 2,373 95,810
Occidental Petroleum Corporation.............. 26,183 767,489
Omnicom Group, Inc............................ 12,520 530,535
+ Oracle Corporation............................ 75,785 1,690,953
+ Oryx Energy Company........................... 8,171 208,360
Owens-Corning Fiberglass Corp................. 4,116 140,458
+ Owens-Illinois, Inc........................... 10,838 411,167
PACAAR, Inc................................... 6,000 315,000
PECO Energy Company........................... 17,170 416,372
34
<PAGE>
PG & E Corporation............................ 33,867 $ 1,030,827
PNC Bank Corp................................. 23,576 1,345,305
PP&L Resources, Inc........................... 12,821 306,903
PPG Industries, Inc........................... 13,767 786,440
PacifiCorp.................................... 22,921 626,030
Pacific Enterprises, Inc...................... 6,438 242,230
Pall Corporation.............................. 9,826 203,275
+ Parametric Technology Corporation............. 9,836 465,980
Parker-Hannifin Corporation................... 8,614 395,167
Penney (J.C.) Company, Inc.................... 19,318 1,165,117
Pennzoil Co................................... 3,670 245,202
Peoples Energy Corporation.................... 2,699 106,273
Pep Boys-Manny, Moe & Jack (The).............. 4,881 116,534
PepsiCo, Inc.................................. 117,259 4,272,625
Perkin-Elmer Corporation (The)................ 3,372 239,623
Pfizer Inc.................................... 99,959 7,453,193
Pharmacia & Upjohn Inc........................ 39,219 1,436,396
Phelps Dodge Corporation...................... 4,542 282,739
Philip Morris Companies, Inc.................. 187,387 8,490,973
Phillips Petroleum Company.................... 20,319 988,011
Pioneer Hi-Bred International, Inc............ 5,081 544,937
Pitney Bowes Inc.............................. 11,193 1,006,670
Placer Dome, Inc.............................. 18,474 234,389
Polaroid Corporation.......................... 3,492 170,017
Potlatch Corporation.......................... 2,229 95,847
Praxair, Inc.................................. 12,190 548,550
Procter & Gamble Company (The)................ 103,880 8,290,922
Progressive Corporation....................... 5,568 667,464
Providian Financial Corporation............... 7,353 332,264
Public Service Enterprise Group, Inc.......... 17,924 567,967
Pulte Corporation............................. 1,638 68,489
Quaker Oats Company (The)..................... 10,703 564,583
Ralston Purina Company........................ 8,207 762,738
Raychem Corporation........................... 6,645 286,150
Raytheon Company (Class A).................... 12,913 636,772
Raytheon Company (Class B).................... 13,288 671,044
+ Reebok International Ltd...................... 4,314 124,297
Republic of New York Corp..................... 4,234 483,470
Reynolds Metals Company....................... 5,693 341,580
Rite Aid Corporation.......................... 9,639 565,689
Rockwell International Corporation............ 16,127 842,636
Rohm & Haas Company........................... 4,731 452,993
+ Rowan Companies, Inc.......................... 6,682 203,801
Royal Dutch Petroleum Co.
(NY Registered Shares)....................... 165,738 8,980,928
Rubbermaid Inc................................ 11,558 288,950
Russell Corporation........................... 2,816 74,800
Ryder System, Inc............................. 5,913 193,651
SAFECO Corporation............................ 10,909 530,450
SBC Communications Inc........................ 70,844 5,189,323
Safety-Kleen Corp............................. 4,494 123,304
Sara Lee Corporation.......................... 37,083 2,088,236
Schering-Plough Corporation................... 56,554 3,513,417
Schlumberger Ltd.............................. 38,233 3,077,756
Schwab (Charles) Corporation (The)............ 20,527 860,851
Scientific-Atlanta, Inc....................... 6,097 102,125
+ Seagate Technology, Inc....................... 18,887 363,575
Seagram Company Ltd. (The).................... 27,551 890,242
Sears, Roebuck and Co......................... 30,284 1,370,351
Service Corporation International............. 19,440 718,065
Shared Medical Systems Corporation............ 1,928 127,248
Sherwin-Williams Company (The)................ 13,334 370,018
Sigma-Aldrich Corporation..................... 7,724 307,029
+ Silicon Graphics, Inc......................... 14,471 179,983
Snap-on, Inc.................................. 4,701 205,081
Sonat Inc..................................... 6,641 303,826
Southern Company (The)........................ 53,341 1,380,198
Southwest Airlines Co......................... 16,914 416,507
Spring Industries, Inc........................ 1,555 80,860
Sprint Corporation............................ 33,220 1,947,522
+ St. Jude Medical, Inc......................... 7,101 216,580
St. Paul Companies, Inc....................... 6,476 531,437
Stanley Works (The)........................... 6,864 323,895
State Street Corporation...................... 12,403 721,700
+ Stone Container Corporation................... 7,656 79,909
Sun Company, Inc.............................. 5,529 232,564
+ Sun Microsystems, Inc......................... 28,956 1,154,620
SunAmerica, Inc............................... 15,064 643,986
SunTrust Banks, Inc........................... 16,298 1,163,270
SuperValu Stores Inc.......................... 4,679 195,933
Synovus Financial Corp........................ 13,492 441,863
Sysco Corporation............................. 13,219 602,291
TJX Companies, Inc............................ 12,609 433,434
TRW, Inc...................................... 9,518 508,023
Tandy Corporation............................. 7,990 308,114
Tektronix, Inc................................ 3,914 155,337
+ Tele-Communications, Inc. (Class A)........... 39,202 1,095,206
+ Tellabs, Inc.................................. 14,026 741,625
Temple-Inland Inc............................. 4,397 230,018
+ Tenet Healthcare Corporation.................. 23,592 781,485
Tenneco, Inc.................................. 13,181 520,649
35
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
Common
Stocks
(concluded)
Merrill Lynch S&P 500 Index Series (concluded)
------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
================================================================================
Texaco Inc.................................... 42,359 $ 2,303,271
Texas Instruments Inc......................... 30,163 1,357,335
Texas Utilities Company....................... 19,048 791,682
Textron Inc................................... 12,738 796,125
+ Thermo Electron Corporation................... 11,696 520,472
Thomas & Betts Corporation.................... 4,245 200,576
Time Warner Inc............................... 43,269 2,682,678
Times Mirror Company (The) (Class A).......... 7,392 454,608
Timken Company (The).......................... 4,868 167,337
Torchmark Corporation......................... 10,822 455,200
+ Toys `R' Us, Inc.............................. 22,074 693,951
Transamerica Corporation...................... 4,886 520,359
Travelers Group, Inc.......................... 88,633 4,775,103
Tribune Company............................... 9,484 590,379
+ Tricon Global Restaurants, Inc................ 11,730 340,903
Tupperware Corporation........................ 4,715 131,431
Tyco International Ltd........................ 41,155 1,854,547
U S West Communications Group, Inc............ 37,342 1,685,058
+ U S West Media Group Inc...................... 46,920 1,354,815
UNUM Corporation.............................. 10,724 583,117
US Bancorp.................................... 18,936 2,119,648
+ USAirways Group, Inc.......................... 7,055 440,937
USF & G Corporation........................... 8,708 192,120
UST Inc....................................... 14,242 526,064
USX-Marathon Group, Inc....................... 22,292 752,355
USX-US Steel Group, Inc....................... 6,619 206,844
Unicom Corp................................... 16,714 513,955
Unilever N.V. (NY Registered Shares).......... 49,479 3,089,345
Union Camp Corporation........................ 5,358 287,658
Union Carbide Corporation..................... 9,522 408,851
Union Electric Company........................ 10,588 $ 457,931
Union Pacific Corporation..................... 19,082 1,191,432
Union Pacific Resources Group Inc............. 19,611 475,567
+ Unisys Corporation............................ 13,588 188,533
United Healthcare Corporation................. 14,556 723,251
United States Surgical Corporation............ 5,851 171,507
United Technologies Corporation............... 18,007 1,311,135
Unocal Corp................................... 19,075 740,348
V.F. Corporation.............................. 9,442 433,742
+ Viacom, Inc. (Class B)........................ 27,300 1,131,244
Wachovia Corporation.......................... 15,774 1,279,666
Wal-Mart Stores, Inc.......................... 174,175 6,869,027
Walgreen Co................................... 38,021 1,192,909
Warner-Lambert Company........................ 21,047 2,609,828
Washington Mutual Savings Bank................ 19,889 1,269,167
Waste Management Inc.......................... 35,169 967,147
Wells Fargo & Company......................... 6,701 2,274,571
Wendy's International, Inc.................... 10,215 245,798
+ Western Atlas Inc............................. 4,212 311,688
Westvaco Corporation.......................... 7,865 247,256
Weyerhaeuser Company.......................... 15,399 755,513
Whirlpool Corporation......................... 5,797 318,835
Whitman Corporation........................... 7,848 204,538
Willamette Industries, Inc.................... 8,594 276,619
Williams Companies, Inc. (The)................ 24,704 700,976
Winn-Dixie Stores, Inc........................ 11,538 504,066
+ Woolworth Corporation......................... 10,420 212,307
+ WorldCom, Inc................................. 69,824 2,112,176
Worthington Industries, Inc................... 7,453 122,043
Wrigley (Wm.) Jr. Company (Class B)........... 8,961 712,960
Xerox Corporation............................. 25,188 1,859,189
- --------------------------------------------------------------------------------
Total Common Stocks (Cost - $537,951,365) - 96.9% 583,872,599
================================================================================
Commercial
Paper*
================================================================================
Face
Amount Short-Term Obligations
================================================================================
$16,349,000 General Motors Acceptance Corp., 6.75% due
1/02/1998 16,345,935
================================================================================
Total Short-Term Obligations (Cost--$16,345,935)--2.7% 16,345,935
================================================================================
Total Investments (Cost--$554,297,300)--99.6% 600,218,534
Variation Margin on Financial Futures Contracts**--0.0% (806)
36
<PAGE>
Other Assets Less Liabilities--0.4% 2,582,773
------------
Net Assets--100.0% $602,800,501
============
================================================================================
+ Non-income producing security.
++ Portion of securities held as collateral for open financial futures
contracts.
* Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
** Financial futures contracts purchased as of December 31, 1997 were
as follows:
- --------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
- --------------------------------------------------------------------------------
78 S&P 500 Stock Index March 1998 $19,092,450
- --------------------------------------------------------------------------------
Total Financial Futures Contracts
Purchased (Total Contract Price-- $18,962,809) $19,092,450
===========
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
S&P 500
INDEX SERIES As of December 31, 1997
=================================================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$554,297,300) (Note 1a).......................... $600,218,534
Cash..................................................................................... 50,750
Receivables:
Contributions.......................................................................... $2,639,531
Dividends.............................................................................. 844,810
Securities sold........................................................................ 174,405 3,658,746
----------
Deferred organization expenses (Note 1e)................................................. 13,247
------------
Total assets............................................................................. 603,941,277
------------
=================================================================================================================================
Liabilities: Payables:
Withdrawals............................................................................ 809,352
Securities purchased................................................................... 148,701
Variation margin (Note 1b)............................................................. 806 958,859
----------
Accrued expenses and other liabilities................................................... 181,917
------------
Total liabilities ....................................................................... 1,140,776
------------
=================================================================================================================================
Net Assets: Net assets............................................................................... $602,800,501
============
=================================================================================================================================
Net Assets Partners' capital........................................................................ $556,749,626
Consist of: Unrealized appreciation on investments--net.............................................. 46,050,875
------------
Net assets............................................................................... $602,800,501
============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
S&P 500
INDEX SERIES For the Period April 3, 1997+ to December 31, 1997
=========================================================================================================================
<S> <C> <C>
Investment Income Dividends (net of $32,040 foreign withholding tax)......................... $ 4,811,633
(Notes 1c & 1d): Interest and discount earned............................................... 1,457,105
-----------
Total income............................................................... 6,268,738
-----------
=========================================================================================================================
Expenses: Accounting services (Note 2)............................................... $ 192,752
Investment advisory fees (Note 2).......................................... 148,645
Custodian fees............................................................. 101,973
Professional fees.......................................................... 30,104
Pricing fees............................................................... 9,450
Trustees' fees and expenses................................................ 5,797
Amortization of organization expenses (Note 1e)............................ 2,338
Other...................................................................... 2,760
----------
Total expenses before reimbursement........................................ 493,819
Reimbursement of expenses (Note 2)......................................... (148,645)
----------
Total expenses after reimbursement......................................... 345,174
-----------
Investment income--net..................................................... 5,923,564
-----------
=========================================================================================================================
Realized & Realized gain from investments--net........................................ 20,857,044
Unrealized Gain on Unrealized appreciation on investments--net................................ 46,050,875
Investments--Net -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations....................... $72,831,483
===========
=========================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
38
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
S&P 500 April 3, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: December 31, 1997
=============================================================================================================================
<S> <C>
Operations: Investment income--net................................................................. $ 5,923,564
Realized gain on investments--net...................................................... 20,857,044
Unrealized appreciation on investments--net............................................ 46,050,875
------------
Net increase in net assets resulting from operations................................... 72,831,483
------------
=============================================================================================================================
Net Capital Increase in net assets derived from net capital contributions.......................... 529,969,018
Contributions: ------------
=============================================================================================================================
Net Assets: Total increase in net assets........................................................... 602,800,501
Beginning of period.................................................................... --
------------
End of period.......................................................................... $602,800,501
============
=============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
39
<PAGE>
Merrill Lynch S&P 500 Index Fund, December 31, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
S&P 500 The following ratios have been derived from April 3, 1997+ to
INDEX SERIES information provided in the financial statements. December 31, 1997
=================================================================================================================================
<S> <C>
Ratios to Average Expenses, net of reimbursement............................................................ .12%*
Net Assets: ========
Expenses.................................................................................. .17%*
========
Investment income--net.................................................................... 1.99%*
========
=================================================================================================================================
Supplemental Net assets, end of period (in thousands).................................................. $602,801
Data: ========
Portfolio turnover........................................................................ 24.31%
========
Average commission rate paid.............................................................. $ .0166
========
=================================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
S&P 500
INDEX SERIES
1. Significant Accounting Policies:
Merrill Lynch S&P 500 Index Series (the "Series") is part of Merrill Lynch Index
Trust (the "Trust"). The Trust is registered under the Investment Company Act of
1940 and is organized as a Delaware business trust. The following is a summary
of significant accounting policies followed by the Series.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Portfolio securities which are traded both on the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Other investments, including futures contracts and related options, are stated
at market value. Short-term securities are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair market value, as determined in good
faith by or under the direction of the Trust's Board of Trustees.
(b) Derivative financial instruments--The Series may engage in various portfolio
investment techniques to provide liquidity, or in connection with the Series'
arbitrage strategies. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts--The Series may purchase or sell stock index
futures contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the
40
<PAGE>
Series agrees to receive from or pay to the broker an amount of cash equal to
the daily fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Series as unrealized gains or
losses. When the contract is closed, the Series records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
o Options--The Series is authorized to purchase and write call and put options.
When the Series writes an option, an amount equal to the premium received by the
Series is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Series enters into
a closing transaction), the Series realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent that
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes - The Series is classified as a partnership for Federal income
tax purposes. As a partnership for Federal income tax purposes, the Series will
not incur Federal income tax liability. Items of partnership income, gain, loss
and deduction will pass through to investors as partners in the Series.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Series has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Series pays a monthly fee
at an annual rate of 0.05% of the average daily value of the Series' net assets.
For the period ended December 31, 1997, MLAM earned fees of $148,645, all of
which was voluntarily waived.
Accounting services are provided to the Series by MLAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
MLAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period April 3, 1997 to December 31, 1997 were $605,389,191 and $82,632,635,
respectively.
Net realized and unrealized gains as of December 31, 1997 were as follows:
- -----------------------------------------------------------------------
Realized Unrealized
Gains Gains
- -----------------------------------------------------------------------
Long-term investments ............... $15,194,809 $45,921,234
Financial futures contracts ......... 5,662,235 129,641
----------- -----------
Total ............................... $20,857,044 $46,050,875
=========== ===========
- -----------------------------------------------------------------------
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $45,650,104, of which $59,621,968 related to appreciated
securities and $13,971,864 related to depreciated securities. At December 31,
1997, the aggregate cost of investments for Federal income tax purposes was
$554,568,430.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
MERRILL LYNCH INDEX FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Small Cap Index Fund (one of the series constituting Merrill Lynch Index
Funds, Inc.) as of December 31, 1997, the related statements of operations and
changes in net assets, and the financial highlights for the period April 9,
1997 (commencement of operations) to December 31, 1997. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Small
Cap Index Fund of the Merrill Lynch Index Funds, Inc. as of December 31, 1997,
the results of its operations, the changes in its net assets, and the financial
highlights for the period April 9, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
42
<PAGE>
[This page is intentionally left blank]
43
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
SMALL CAP
INDEX FUND As of December 31, 1997
======================================================================================================================
<S> <C> <C>
Assets: Investment in Merrill Lynch Small Cap Index Series, at value (Note 1a) (identified
cost--$58,437,415) ................................................................ $ 65,219,678
Receivable from administrator (Note 2)............................................. 61,443
Deferred organization expenses (Note 1d)........................................... 13,019
Prepaid registration fees and other assets (Note 1d)............................... 17,213
------------
Total assets....................................................................... 65,311,353
------------
======================================================================================================================
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH
SMALL CAP
INDEX FUND As of December 31, 1997
======================================================================================================================
<S> <C> <C>
Liabilities: Distributor payable (Note 2)....................................................... 8,599
Accrued expenses and other liabilities............................................. 46,476
------------
Total liabilities ................................................................. 55,075
------------
======================================================================================================================
Net Assets: Net assets......................................................................... $ 65,256,278
============
======================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized... $ 216
Consist of: Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized... 316
Paid-in capital in excess of par................................................... 58,286,576
Accumulated distributions in excess of investment income--net (Note 1e)............ (832)
Undistributed realized capital gains on investments from the Series--net........... 187,739
Unrealized appreciation on investments from the Series--net........................ 6,782,263
------------
Net assets......................................................................... $ 65,256,278
============
======================================================================================================================
Net Asset Class A--Based on net assets of $26,477,750 and 2,155,745 shares outstanding....... $ 12.28
============
Value: Class D--Based on net assets of $38,778,528 and 3,158,238 shares outstanding....... $ 12.28
============
======================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
SMALL CAP
INDEX FUND For the Period April 9, 1997+ to December 31, 1997
======================================================================================================================
<S> <C> <C>
Investment Income Investment income allocated from the Series........................................ $ 695,026
(Note 1b): Expenses allocated from the Series................................................. (65,394)
------------
Net investment income from the Series.............................................. 629,632
------------
======================================================================================================================
Expenses: Registration fees (Note 1d)........................................... $ 94,105
Administration fee (Note 2)........................................... 77,969
Account maintenance fee--Class D (Note 2)............................. 52,860
Printing and shareholder reports...................................... 49,021
Transfer agent fees (Note 2).......................................... 22,309
Professional fees..................................................... 2,606
Amortization of organization expenses (Note 1d)....................... 2,297
Accounting services (Note 2).......................................... 900
Other................................................................. 1,214
Total expenses before reimbursement................................... 303,281
------------
Reimbursement of expenses (Note 2).................................... (133,130)
------------
Total expenses after reimbursement................................................. 170,151
------------
Investment income--net............................................................. 459,481
------------
======================================================================================================================
Realized & Realized gain on investments from the Series--net.................................. 1,806,858
Unrealized Unrealized appreciation on investments from the Series--net........................ 6,782,263
Gain from the ------------
Series--Net: Net Increase in Net Assets Resulting from Operations............................... $ 9,048,602
============
======================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
45
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
SMALL CAP April 9, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: December 31, 1997
=====================================================================================================================
<S> <C> <C>
Operations: Investment income--net............................................................. $ 459,481
Realized gain on investments from the Series--net.................................. 1,806,858
Unrealized appreciation on investments from the Series--net........................ 6,782,263
------------
Net increase in net assets resulting from operations............................... 9,048,602
=====================================================================================================================
Dividends & Investment income--net:
Distributions to Class A.......................................................................... (197,459)
Shareholders Class D.......................................................................... (262,022)
(Note 1e): In excess of investment income--net:
Class A.......................................................................... (358)
Class D.......................................................................... (474)
Realized gain on investments from the Series--net:
Class A.......................................................................... (624,160)
Class D.......................................................................... (994,959)
------------
Net decrease in net assets resulting from dividends and distributions to
shareholders..................................................................... (2,079,432)
------------
=====================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions................. 58,262,108
Transactions ------------
(Note 4):
=====================================================================================================================
Net Assets: Total increase in net assets....................................................... 65,231,278
Beginning of period................................................................ 25,000
------------
End of period...................................................................... $ 65,256,278
============
=====================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the Period
April 9, 1997+ to
MERRILL LYNCH The following per share data and ratios have been derived December 31, 1997
SMALL CAP from information provided in the financial statements. ---------------------
INDEX FUND Increase (Decrease) in Net Asset Value: Class A Class D
=====================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period...................................... $ 10.00 $ 10.00
-------- --------
Operating Investment income--net.................................................... .10 .09
Performance: Realized and unrealized gain on investments from the Series--net.......... 2.60 2.60
-------- --------
Total from investment operations.......................................... 2.70 2.69
-------- --------
Less dividends and distributions:
Investment income--net.................................................. (.10) (.09)
In excess of investment income--net..................................... --** --**
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C>
Realized gain on investments from the Series--net....................... (.32) (.32)
-------- --------
Total dividends and distributions......................................... (.42) (.41)
-------- --------
Net asset value, end of period............................................ $ 12.28 $ 12.28
======== ========
=====================================================================================================================
Total Investment Based on net asset value per share........................................ 27.04%+++ 26.87%+++
Return: ======== ========
=====================================================================================================================
Ratios to Average Expenses, net of reimbursement++.......................................... .52%* .77%*
======== ========
Net Assets: Expenses++................................................................ 1.00%* 1.25%*
======== ========
Investment income--net.................................................... 1.45%* 1.20%*
======== ========
=====================================================================================================================
Supplemental Net assets, end of period (in thousands).................................. $ 26,478 $ 38,778
Data: ======== ========
=====================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
++ Includes the Fund's share of the Series' allocated
expenses.
+++ Aggregate total investment return.
** Amount is less than $.01 per share.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
SMALL CAP
INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch Small Cap Index Fund (the "Fund") is part of Merrill Lynch Index
Funds, Inc. The Fund is registered under the Investment Company Act of 1940 as a
non-diversified mutual fund. The Fund seeks to achieve its investment objective
by investing all of its assets in the Merrill Lynch Small Cap Index Series (the
"Series") of the Merrill Lynch Index Trust, which has the same investment
objective as the Fund. The value of the Fund's investment in the Series reflects
the Fund's proportionate interest in the net assets of the Series. The
performance of the Fund is directly affected by the performance of the Series.
The financial statements of the Series, including the Schedule of Investments,
are included elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The Fund offers two classes of shares, Class A
Shares and Class D Shares. Shares of Class A and Class D are sold without the
imposition of a front-end or deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class D Shares bear certain expenses related to the
account maintenance of such shares. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Valuation of securities is discussed in Note 1a of
the Series' Notes to Financial Statements which is included elsewhere in this
report.
(b) Income--The Fund's net investment income consists of the Fund's pro rata
share of the net invesment income of the Series, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no Federal
income tax provision is required.
(d) Prepaid registration fees and deferred organization expenses--Prepaid
registration fees are charged to expense as the related shares are issued.
Deferred organization expenses are charged to expense on a straight-line basis
over a five-year period.
(e) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of net investment
income are due primarily to differing tax treatments for post-October losses.
47
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
SMALL CAP
INDEX FUND
(f) Investment transactions--Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plans
adopted by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance fees. The
fees are accrued daily and paid monthly at the annual rate of 0.25% based upon
the average daily net assets of Class D Shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
also provides account maintenance services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class D shareholders.
The Fund has also entered into an Administrative Services Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of ML & Co., which is the
limited partner. The Fund pays a monthly fee at an annual rate of 0.22% of the
Fund's average daily net assets for the performance of administrative services
(other than investment advice and related portfolio activities) necessary for
the operation of the Fund. For the period April 9, 1997 to December 31, 1997,
MLAM earned fees of $77,969, all of which were voluntarily waived. MLAM also
reimbursed the Fund of additional expenses of $55,161.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost. Certain officers
and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLFD,
MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the period
April 9, 1997 to December 31, 1997 were $63,007,061 and $7,006,150,
respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$58,262,108 for the period April 9, 1997 to December 31, 1997.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Period April 9, Dollar
1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................... 3,127,791 $ 34,673,781
Shares issued to shareholders in reinvest-
ment of dividends and distributions ............ 63,047 776,099
---------- ------------
Total issued ................................... 3,190,838 35,449,880
Shares redeemed ................................ (1,036,343) (12,153,441)
---------- ------------
Net increase ................................... 2,154,495 $ 23,296,439
========== ============
- --------------------------------------------------------------------------------
+ Prior to April 9, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
- --------------------------------------------------------------------------------
Class D Shares for the Period April 9, Dollar
1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................... 4,135,846 $ 46,521,104
Shares issued to shareholders in reinvest-
ment of dividends and distributions ............ 85,348 1,050,621
---------- ------------
Total issued ................................... 4,221,194 47,571,725
Shares redeemed ................................ (1,064,206) (12,606,056)
---------- ------------
Net increase ................................... 3,156,988 $ 34,965,669
========== ============
- --------------------------------------------------------------------------------
+ Prior to April 9, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Investors of
Merrill Lynch Index Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Small Cap Index Series (one of
the series constituting Merrill Lynch Index Trust) as of December 31, 1997, the
related statements of operations and changes in net assets, and the financial
highlights for the period April 9, 1997 (commencement of operations) to
December 31, 1997. These financial statements and the financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Small
Cap Index Series of the Merrill Lynch Index Trust as of December 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the period April 9, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
49
<PAGE>
[This page is intentionally left blank]
50
<PAGE>
SCHEDULE OF INVESTMENTS
Merrill Lynch Small Cap Index Series
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
AAR Corporation 2,100 $ 81,375
ABM Industries, Inc. 2,900 88,631
ABR Information Services, Inc. 2,500 59,688
+ ABT Building Products Corporation 1,800 32,400
ACC Corp. 1,500 75,750
ACNielsen Corporation 5,800 141,375
ADAC Laboratories 2,300 45,425
+ ADVO, Inc. 3,800 74,100
AGL Resources, Inc. 5,800 118,538
AK Steel Holding Corporation 4,400 77,825
ALBANK Financial Corporation 1,600 82,300
AMCOL International Corp. 4,350 69,056
AMCORE Financial Inc. 3,000 75,375
AMETEK, Inc. 3,100 83,700
+ AMRESCO, Inc. 4,100 124,025
+ ANADIGICS, Inc. 1,500 45,188
+ ANTEC Corporation 2,800 43,750
+ APAC Teleservices, Inc. 1,700 22,950
ASA Holdings, Inc. 2,300 65,406
+ ATL Ultrasound, Inc. 1,600 73,600
Aames Financial Corporation 2,100 27,169
+ Abacus Direct Corporation 1,400 57,400
+ Acceptance Insurance Holdings, Inc. 1,700 41,119
+ Access Health, Inc. 1,700 49,938
+ Acme Metals, Inc. 3,700 36,538
+ Actel Corp. 2,200 27,775
+ Action Performance Companies, Inc. 1,500 56,813
+ Acuson Corporation 2,300 38,094
Acxiom Corp. 5,100 98,175
+ Ade Corporation 700 12,250
+ Adtran, Inc. 3,000 82,500
+ Advanced Tissue Sciences, Inc. 3,300 40,425
+ Affiliated Computer Services, Inc. 4,000 105,250
+ Affymetrix, Inc. 2,500 77,813
+ Aftermarket Technology Corp. 2,000 36,250
+ Agouron Pharmaceuticals, Inc. 2,600 76,375
Air Express International Corporation 3,500 106,750
Airborne Freight Corporation 2,000 124,250
+ AirTran Holdings, Inc. 2,800 11,200
+ Alaska Air Group, Inc. 1,100 42,625
Albany International Corp. (Class A) 3,000 69,000
Albemarle Corporation 2,500 59,688
+ Alexander's, Inc. 400 36,325
+ Algos Pharmaceutical Corporation 1,500 45,000
Aliant Communications, Inc. 3,800 119,225
+ Alkermes, Inc. 2,000 39,750
+ Allen Telecom Inc. 3,500 64,531
+ Alliance Pharmaceutical Corporation 5,500 39,875
+ Alliance Semiconductor Corporation 2,500 11,406
+ Alliant Techsystems, Inc. 1,900 105,925
Allied Capital Commercial Corporation 1,920 42,720
Allied Group, Inc. 3,150 90,169
+ Allied Waste Industries, Inc. 7,700 179,506
Alpharma, Inc. (Class A) 1,634 35,540
+ Alternative Resources Corp. 1,700 39,206
+ Amati Communications Corporation 2,100 41,344
+ Amerco 1,400 35,875
+ America West Holdings Corp. (Class B) 3,800 70,775
+ American Business Information, Inc. (Class A) 1,500 14,625
+ American Business Information, Inc. (Class B) 1,500 15,375
51
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
American Health Properties, Inc. 1,800 $ 49,613
+ American Management Systems, Inc. 4,300 83,850
American Mobile 1,700 11,900
+ American Oncology Resources, Inc. 4,400 70,400
+ American Pad & Paper Company 3,400 32,725
+ American Radio Systems Corp. 1,900 101,294
+ American Residential Services, Inc. 1,800 28,125
+ AmeriCredit Corp. 2,700 74,756
+ Amerin Corporation 2,500 70,000
+ AmeriSource Health Corp. (Class A) 2,500 145,625
Ames Department Stores, Inc. 3,600 63,000
+ Amphenol Corp. (Class A) 1,700 94,669
+ Amylin Pharmaceuticals, Inc. 2,000 10,875
Analysts International Corp. 2,700 93,150
Anchor Bancorp, Inc. 1,900 69,113
+ Anchor Gaming 600 33,450
+ Andrx Corporation 1,000 34,250
+ Anixter International Inc. 4,900 80,850
+ AnnTaylor Stores Corporation 2,700 36,113
Apogee Enterprises, Inc. 3,800 45,125
Apple South, Inc. 3,100 40,688
Applebee's International, Inc. 3,200 57,800
Applied Industrial Technologies, Inc. 2,850 76,238
+ Applied Magnetics Corp. 3,500 38,938
Applied Power Inc. (Class A) 1,800 124,200
+ Apria Healthcare Group, Inc. 5,100 68,531
AptarGroup, Inc. 2,200 122,100
Aquarion Company 2,400 82,950
Arbor Drugs, Inc. 5,200 96,200
+ Arbor Software Corp. 1,200 48,600
+ Arcadia Financial Ltd. 3,000 22,313
Arctic Cat, Inc. 2,400 23,250
Arden Realty Group, Inc. 7,700 236,775
Argonaut Group, Inc. 1,900 64,363
+ Armco, Inc. 10,400 51,350
Arnold Industries, Inc. 2,600 44,850
Arrow International, Inc. 1,600 59,200
+ Arterial Vascular Engineering, Inc. 3,100 201,500
Arvin Industries, Inc. 2,300 76,619
+ Ascent Entertainment Group, Inc. 3,200 33,200
Aspect Development, Inc. 900 46,800
Aspect Telecommunications Corp. 6,900 144,038
Aspen Technologies, Inc. 2,200 75,350
Associated Banc-Corp 4,671 257,489
Associated Estates Realty Corp. 4,000 94,750
+ Associated Group, Inc. (Class A) 2,600 77,025
Astoria Financial Corp. 1,900 105,925
+ Asyst Technologies, Inc. 900 19,575
Atlantic Energy, Inc. 5,300 112,294
+ Atlas Air, Inc. 800 19,200
Atmos Energy Corporation 3,300 99,825
+ Atwood Oceanics, Inc. 1,400 66,325
+ Auspex Systems, Inc. 3,200 32,000
Authentic Fitness Corp. 3,100 57,156
+ Avant Corporation 2,300 38,525
+ Avid Technology, Inc. 2,500 66,875
+ Aztar Corporation 4,100 25,625
BB&T Corporation 1,588 101,731
+ BE Aerospace, Inc. 2,700 72,225
B.F. Goodrich Company (The) 1,680 69,615
+ BISYS Group, Inc. 3,300 109,725
+ BJ's Wholesale Club, Inc. 3,500 109,813
BMC Industries, Inc. 3,300 53,213
BREED Technologies, Inc. 2,700 49,275
+ BT Office Products International, Inc. 2,100 16,275
+ Baan Company, N.V. 640 20,960
Baldor Electric Company 4,267 92,533
Ball Corp. 3,100 109,469
Ballard Medical Products 3,500 84,875
BancorpSouth, Inc. 2,000 94,500
+ BancTec, Inc. 2,600 69,713
Bank of Granite Corp. 1,400 43,050
Bank United Corp. (Class A) 4,500 220,219
Banknorth Group, Inc. 1,000 64,250
Banta Corporation 3,200 86,400
+ Barnett Banks, Inc. 2,200 48,400
+ Barr Laboratories, Inc. 700 23,888
+ Barrett Resources Corp. 3,300 99,825
Bassett Furniture Industries, Inc. 1,500 45,000
Bay Apartment Communities, Inc. 2,100 81,900
Bay State Gas Company 2,400 89,100
Belden, Inc. 3,700 130,425
+ Bell & Howell Co. (Series B) 1,600 38,700
+ Benchmark Electronics, Inc. 1,700 37,931
+ Benton Oil & Gas Co. 4,500 58,219
Berkley (W.R.) Corporation 1,900 83,363
Berkshire Realty Company, Inc. 2,300 27,600
Berry Petroleum Co. (Class A) 3,900 68,006
+ Best Buy Co., Inc. 3,200 118,000
+ Big Flower Press Holdings, Inc. 2,300 55,488
+ Billing Information Concepts 2,300 110,400
+ Biomatrix, Inc. 1,100 33,000
+ Bio-Rad Laboratories, Inc. (Class A) 1,400 36,575
+ Bio Technology General Corp. 7,700 82,775
52
<PAGE>
Birmingham Steel Corp. 2,900 45,675
+ Black Box Corporation 1,800 63,675
Black Hills Corporation 2,700 95,175
Block Drug Company, Inc. (Class A) 927 39,398
Blount International, Inc. (Class A) 2,600 69,388
Bob Evans Farms, Inc. 5,000 110,625
Boole & Babbage, Inc. 2,300 68,713
+ Borland International, Inc. 3,100 22,669
+ Boston Beer Company, Inc. (Class A) 2,000 15,625
+ Boston Technology, Inc. 2,500 62,813
Bowne & Co., Inc. 1,800 71,775
+ Boyd Gaming Corporation 3,800 25,175
Brady (W.H.) Company (Class A) 2,800 86,800
Brightpoint, Inc. 4,600 63,825
+ Brinker International, Inc. 7,500 120,000
+ Bristol Hotel Company 3,100 90,094
+ Broderbund Software, Inc. 2,500 64,063
Brush Wellman, Inc. 2,300 56,350
Buckeye Technologies Inc. 2,400 111,000
+ Budget Group, Inc. 1,600 55,300
+ Buffets, Inc. 4,700 44,063
Burlington Coat Factory Warehouse Corp. 2,040 33,533
+ Burlington Industries, Inc. 6,600 91,163
Burnham Pacific Properties, Inc. 7,200 110,250
Burr-Brown Corp. 2,500 80,313
CBL & Associates Properties, Inc. 1,900 46,906
CCB Financial Corp. 800 86,000
+ CCC Information Services Group, Inc. 2,500 49,375
+ CDI Corporation 1,500 68,625
+ CDW Computer Centers, Inc. 1,100 57,338
+ CHS Electronics, Inc. 2,250 38,531
CILCORP, Inc. 2,300 112,413
CKE Restaurants, Inc. 4,600 193,775
CMAC Investment Corp. 2,800 169,050
CNB Bancshares, Inc. 1,965 94,688
+ CNET, Inc. 800 23,600
COMSAT Corporation 4,600 111,550
+ CONMED Corporation 1,700 44,625
+ COR Therapeutics, Inc. 3,400 76,500
CORESTAFF, Inc. 3,300 87,450
+ CORT Business Services Corp. 2,400 95,550
CPI Corporation 2,000 45,250
CRIIMI MAE, Inc. 3,000 45,000
+ CSG Systems International, Inc. 2,700 108,000
+ CSS Industries, Inc. 1,700 54,188
+ CUNO Incorporated 2,300 35,075
+ Cable Design Technologies 1,800 69,975
+ Cable Michigan, Inc. 300 6,825
+ Cablevision System Corp. 1,500 143,625
Cabot Oil & Gas Corp. 3,300 64,144
Calgon Carbon Corporation 5,500 59,125
+ California Microwave, Inc. 1,600 31,000
California Water Service Co. 1,000 59,063
CalMat Company 2,300 64,113
+ Calpine Corporation 2,800 41,650
Cambrex Corporation 1,600 73,600
Camden Property Trust 2,432 75,392
+ Canandaigua Brands, Inc. (Class A) 1,900 105,213
+ Canandaigua Wine Company, Inc. 1,100 62,700
Capital Bancorp/Miami, Florida 1,100 63,594
Capital Re Corporation 1,700 105,506
CapMAC Holdings Inc. 1,600 55,600
+ CapStar Hotel Company 3,600 123,525
Caraustar Industries, Inc. 3,100 106,175
+ Carbide/Graphite Group, Inc. (The) 1,300 43,875
+ Caribiner International, Inc. 1,200 53,400
Carlisle Companies, Inc. 2,600 111,150
+ Carmike Cinemas, Inc. (Class A) 2,500 71,719
Carpenter Technology Corporation 1,900 91,319
+ Carson Pirie Scott & Company 2,100 105,263
Carter-Wallace, Inc. 2,600 43,875
Casey's General Stores, Inc. 3,700 93,888
Cash America International, Inc. 5,600 72,450
Castle (A.M.) & Company 2,000 45,750
+ Castle & Cooke, Inc. 3,000 50,625
Catalina Marketing Corporation 2,900 134,125
+ C-Cube Microsystems, Inc. 3,700 60,356
+ CellNet Data Systems, Inc. 3,800 29,450
+ CellStar Corporation 1,300 25,838
+ Cellular Communications International, Inc. 1,100 50,875
+ Centennial Cellular Corporation (Class A) 1,800 36,900
CenterPoint Properties Corp. 1,200 42,150
+ Central Garden & Pet Company 1,900 49,875
Central Hudson Gas & Electric 2,600 114,075
Central Louisiana Electric 2,900 93,888
Central Maine Power Company 5,300 80,825
Central Parking Corporation 1,500 67,969
Century Aluminum Company 2,900 39,150
+ Cephalon, Inc. 3,100 35,263
+ Cerner Corporation 2,700 57,038
+ Champion Enterprises, Inc. 5,600 115,150
+ Chancellor Media Corp. 1,181 88,132
+ Charming Shoppes, Inc. 11,500 53,906
Charter One Financial, Inc. 1,051 66,344
53
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
+ CheckFree Holdings Corporation 4,500 $121,500
+ Checkpoint Systems, Inc. 3,800 66,500
+ Cheesecake Factory (The) 2,000 61,000
ChemFirst Inc. 2,700 76,275
Chesapeake Corporation 1,900 65,313
Chesapeake Energy Corp. 3,400 25,713
Chicago Miniature Lamp, Inc. 1,100 37,125
+ Chips & Technologies, Inc. 1,900 27,431
Chittenden Corporation 2,250 78,750
+ Choice Hotels International, Inc. 5,000 80,000
Church & Dwight Co., Inc. 2,200 61,738
+ Ciber, Inc. 900 52,200
+ Cidco, Inc. 1,600 31,200
Cincinnati Milacron, Inc. 3,400 88,188
+ Cirrus Logic, Inc. 5,500 58,438
CitFed Bancorp, Inc. 1,950 76,050
+ Citrix Systems, Inc. 2,800 212,800
+ Cityscape Financial Corp. 1,200 600
Claire's Stores, Inc. 4,500 87,469
Clarcor, Inc. 2,400 71,100
+ Claremont Technology Group, Inc. 1,100 20,350
+ Clarify Inc. 2,100 24,413
+ Cliffs Drilling Company 1,500 74,813
+ Closure Medical Corporation 1,100 28,463
+ Coach USA, Inc. 2,200 73,700
+ Coast Savings Financial, Inc. 2,200 150,838
+ Coeur D'Alene Mines Corporation 6,900 62,100
+ Cognex Corporation 4,100 111,725
+ Coherent, Inc. 1,300 45,663
Cohu, Inc. 1,000 30,625
+ Cole National Corporation 1,600 47,900
+ Collins & Aikman Corp. 7,600 65,550
Colonial BancGroup, Inc. 2,700 92,981
Colonial Properties Trust 2,400 72,300
+ Columbia Laboratories, Inc. 3,000 47,625
Commerce Bancorporation Inc. 2,000 102,000
Commerce Group, Inc. 2,200 71,775
Commercial Federal Corp. 3,000 106,688
Commercial Metals Co. 1,900 59,969
+ Commnet Cellular, Inc. 1,400 49,788
Commonwealth Bancorp, Inc. 2,200 43,725
+ Commonwealth Telephone Enterprises, Inc. 1,000 25,875
Community First Bankshares, Inc. 2,700 143,775
+ Compdent Corporation 900 18,253
+ Computer Horizons Corporation 2,750 123,750
+ Computer Products, Inc. 2,500 56,563
Computer Task Group, Inc. 1,800 64,013
+ Computervision Corporation 5,200 19,825
+ Comverse Technology, Inc. (New Shares) 2,600 101,400
+ Concentra Managed Care, Inc. 2,671 90,146
+ Consolidated Freightways Corporation 2,800 38,150
+ Consolidated Graphics, Inc. 800 37,300
+ Consolidated Products, Inc. 3,250 53,219
+ Converse, Inc. 2,100 12,600
+ Cooper Companies, Inc. 1,300 53,138
Coors (Adolph) Co. (Class B) 3,600 119,700
+ CopyTele, Inc. 4,100 14,350
Cornerstone Properties, Inc. 3,500 67,156
Cousins Properties, Inc. 2,100 61,556
+ Covance, Inc. 6,200 123,225
+ Coventry Ventures, Inc. 4,400 67,100
Crawford & Company (Class B) 5,800 118,538
+ Creative BioMolecules, Inc. 3,400 25,075
+ Credence Systems Corp. 2,200 65,175
+ Credit Acceptance Corp. 1,600 12,400
+ Crescent Operating, Inc. 570 13,965
Cross Timbers Oil Company 3,800 94,763
Cullen/Frost Bankers, Inc. 2,100 127,444
+ Culligan Water Technologies, Inc. 2,694 135,374
+ Curative Health Services, Inc. 1,300 39,488
+ Cygnus, Inc. 1,900 37,763
+ Cymer, Inc. 2,600 39,000
Cytogen Corp. 4,300 6,988
+ Cytyc Corporation 1,700 42,288
DII Group, Inc. 2,200 59,950
D.R. Horton, Inc. 1,200 20,850
DSP Communications, Inc. 4,500 54,000
+ Dal-Tile International Inc. 3,800 46,550
+ Dames & Moore Group 1,900 25,175
Daniel Industries 900 17,325
+ Data Dimensions, Inc. 1,100 18,975
Data General Corporation 3,600 62,775
Data Transmission Network Corp. 1,400 39,200
+ Datascope Corp. 1,900 49,163
Dekalb Genetics Corporation (Class B) 3,000 117,750
Delmarva Power & Light Company 6,000 138,375
+ Delphi Financial Group, Inc. (Class A) 2,500 112,500
Delta & Pine Land Company 4,710 143,655
Deltic Timber Corporation 1,600 43,800
Department 56, Inc. 2,800 80,500
Devon Energy Corporation 2,800 107,800
Devry, Inc. 3,800 121,125
Dexter Corporation (The) 2,300 99,331
+ Dialogic Corporation 1,200 52,500
54
<PAGE>
Diamond Multimedia Systems, Inc. 3,200 28,400
Digital Microwave Corp. 5,100 73,950
Dime Bancorp, Inc. 1,644 49,731
Dimon, Inc. 5,000 131,250
Dionex Corporation 1,800 90,450
+ Documentum, Inc. 1,000 42,125
+ Dominick's Supermarkets, Inc. 1,700 62,050
Donaldson Company, Inc. 2,200 99,138
Downey Financial Corp. 1,900 54,031
+ Dress Barn, Inc. (The) 2,500 70,938
Dreyers Grand Ice Cream, Inc. 2,800 67,550
Dynatech Corporation 1,700 79,688
Dynex Capital, Inc., 3,800 50,588
EG & G, Inc. 4,700 97,819
+ ENCAD, Inc. 1,300 35,750
ESS Technology, Inc. 1,600 12,150
E'Town Corporation 2,000 80,375
+ E* Trade Group, Inc. 3,200 73,600
+ EXCEL Communications, Inc. 1,063 15,414
Eagle Hardware & Garden, Inc. 3,000 58,125
Earthgrains Company (The) 2,100 98,700
Eastern Enterprises 2,200 99,000
Eastern Utilities Associates 4,100 107,625
Eaton Vance Corp. 1,700 64,175
Elcor Corp. 2,250 54,000
+ Electro Scientific Industries, Inc. 1,000 38,000
Electroglas, Inc. 3,200 49,400
Emmis Broadcasting Corp. (Class A) 1,000 45,625
Empire District Electric Company (The) 4,400 86,350
+ Encore Wire Corporation 900 27,619
Enhanced Financial Services Group, Inc. 1,700 101,150
Envoy Corporation 2,600 75,725
Enzo Biochem, Inc. 2,100 30,713
Equitable Resources, Inc. 3,700 130,888
Equity Inns Inc. 4,000 59,000
+ Essex International Inc. 1,800 53,550
Esterline Technologies Corporation 1,200 43,200
Etec Systems, Inc. 2,400 111,600
Ethan Allen Interiors, Inc. 3,200 123,400
Exabyte Corporation 2,700 17,381
Excel Realty Trust, Inc. 1,600 50,400
Executive Risk Inc. 1,800 125,663
Exide Corporation 1,900 49,163
Expeditors International of Washington, Inc. 2,800 107,800
Express Scripts, Inc. (Class A) 1,300 78,000
F & M National Corp. 2,600 89,213
FBL Financial Group, Inc. 1,900 76,238
+ FEI Company 1,800 22,388
F.N.B. Corporation 1,700 63,963
+ FPA Medical Management, Inc. 2,100 39,113
+ FSI International, Inc. 2,500 29,375
Fabri-Centers of America, Inc. (Class A) 1,900 42,394
Fair Isaac & Company, Inc. 1,200 39,975
+ Fairchild Corporation (The) (Class A) 1,500 37,313
+ Fairfield Communities, Inc. 1,600 70,600
Fedders Corporation 6,800 42,500
Federal Mogul Corp. 3,300 133,650
FelCor Suite Hotels, Inc. 1,900 67,450
Ferro Corporation 4,050 98,466
Fidelity National Financial, Inc. 4,840 150,645
+ Figgie International, Inc. 4,400 57,750
+ FileNet Corporation 2,400 72,300
Financial Security Assurance Holdings Ltd. 3,300 159,225
Fingerhut Companies, Inc. 4,800 102,600
+ First American Financial Corporation 1,400 103,425
First Brands Corporation 4,200 113,138
First Citizens Bancshares, Inc. 600 62,419
First Commonwealth Financial Corp. 3,000 105,188
First Federal Savings Bank of Colorado 2,900 68,875
First Financial Bancorp Ohio 1,490 71,893
First Industrial Realty Trust, Inc. 2,400 86,700
First Midwest Bancorp, Inc. 1,900 83,125
+ First Plus Financial Group Inc. 2,200 84,425
First Western Bancorp, Inc. 2,400 68,400
FirstBank Puerto Rico 2,200 74,938
Firstbank of Illinois Co. 2,400 88,350
Fisher Scientific International, Inc. 2,000 95,500
Fleetwood Enterprises, Inc. 2,800 118,825
Fleming Companies, Inc. 3,800 51,063
Florida Rock Industries, Inc. 1,400 31,850
Flowserve Corporation 4,132 115,438
+ Foodmaker, Inc. 5,600 84,350
+ Footstar, Inc. 3,400 91,375
+ Forcenergy Inc. 1,400 36,663
Foremost Corporation of America 1,000 69,750
Forest Oil Corporation 3,000 49,500
Fort Wayne National Corp. 2,600 119,600
+ Forte Software, Inc. 2,200 16,775
Franchise Finance Corporation of America 4,500 121,500
+ Franklin Covey Co. 3,000 66,000
+ Fred Meyer, Inc. 1,890 68,749
+ Freeport-McMoRan Sulphur Inc. 507 5,959
Fremont General Corporation 2,700 147,825
+ Friedman's, Inc. (Class A) 1,700 23,163
55
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
Frontier Insurance Group, Inc. 3,400 $ 77,775
Fuller (H.B.) Company 1,500 74,250
Fulton Financial Corporation 3,000 97,500
Fund American Enterprises Inc. 600 72,600
+ Furniture Brands International, Inc. 5,200 106,600
Furon Company 2,000 41,750
Fusion Systems Corporation
(Contingent Value Rights) (b) 600 413
G & K Services, Inc. (Class A) 2,200 92,400
+ GC Companies, Inc. 1,300 61,588
+ GT Interactive Software Corp. 2,700 17,213
+ Gadzooks Inc. Company 1,000 21,000
+ Galey & Lord, Inc. 3,000 53,625
Gallagher (Arthur J.) & Co. 2,400 82,650
+ Galoob Lewis Toys, Inc. 3,600 36,675
+ Garden Ridge Corp. 2,000 28,500
+ Gaylord Container Corp. 6,200 35,650
+ GelTex Pharmaceuticals, Inc. 1,500 39,750
GenCorp, Inc. 2,200 55,000
General Cable Corp. 1,600 57,900
General Chemical Group, Inc. (The) 1,700 45,475
+ Genesco Inc. 3,200 40,800
+ GenRad, Inc. 2,800 84,525
+ Gentex Corporation 3,800 102,125
Geon Company (The) 3,300 77,137
Georgia Gulf Corporation 3,700 113,313
+ Geotek Communications, Inc. 5,300 8,116
Gerber Scientific, Inc. 3,600 71,550
+ Getchell Gold Corp. 3,500 84,000
+ Gibson Greetings, Inc. 2,600 56,875
+ Gilead Sciences, Inc. 2,800 107,100
+ Glenayre Technologies, Inc. 5,500 54,313
Glimcher Realty Trust Inc. 2,000 45,125
+ Global DirectMail Corp. 1,500 25,969
+ Global Industrial Techologies, Inc. 2,800 47,425
+ Global Industries Ltd. 6,400 108,800
+ Golden Books Family Entertainment, Inc. 2,000 20,625
+ Graham-Field Health Products, Inc. 2,100 35,044
+ Grand Casinos, Inc. 5,000 68,125
Great Atlantic & Pacific
Tea Company, Inc. (The) 1,800 53,438
Great Financial Corp. 3,100 158,100
Greif Brothers Corporation (Class A) 2,100 70,350
+ Griffon Corporation 4,300 62,888
+ Grubb & Ellis Company 2,500 34,219
Guaranty Life Company 2,000 57,000
+ Guilford Pharmaceuticals, Inc. 1,700 34,213
+ Guitar Center Inc. 2,200 50,600
+ Gulf South Medical Supply, Inc. 2,200 81,950
+ Gymboree Corp. 2,700 73,913
+ HA-LO Industries, Inc. 1,500 39,000
HBO & Company 1,380 66,240
HCC Insurance Holdings, Inc. 3,000 63,750
+ HCIA Inc. 1,200 14,250
+ HEALTHSOUTH Corporation 4,132 114,663
+ HMT Technology Corporation 3,900 50,700
HNC Software Inc. 1,700 73,100
HSB Group Inc. 1,800 99,338
HUBCO, Inc. 1,957 76,568
+ Hadco Corporation 1,300 58,825
+ Haemonetics Corporation 2,700 37,800
+ Hambrecht & Quist Group 1,700 62,050
Hancock Fabrics, Inc. 8,600 124,700
Hancock Holding Co. 600 36,300
+ Handleman Company 4,300 29,831
Hanna (M.A.) Company 4,400 111,100
+ Harbinger Corp. 2,100 59,063
+ Harken Energy Corporation 6,900 48,300
+ Harland (John H.) Co. (The) 3,300 69,300
Harman International Industries, Inc. 1,800 76,388
Hartford Life, Inc. (Class A) 2,200 99,688
+ Hartmarx Corporation 1,900 14,488
Hawaiian Electric Industries, Inc. 3,000 122,625
+ Hayes Lemmerz International Inc. 3,400 95,200
Health Care Property Investors, Inc. 1,900 71,844
Healthcare Realty Trust Inc. 1,300 37,619
Healthplan Services Corporation 1,700 35,700
+ Heartport, Inc. 1,600 32,600
Hecla Mining Company 8,000 39,500
Heftel Broadcasting Corp. (Class A) 2,200 102,850
Heilig-Meyers Company 5,600 67,200
Helix Technology Corporation 2,600 50,700
Henry (Jack) & Associates 1,000 27,250
+ Henry Schein, Inc. 900 31,500
Herbalife International, Inc. (Class A) 367 7,700
+ Herbalife International, Inc. (Class B) 733 15,767
Hexcel Corporation 2,200 54,863
Highlands Insurance Group, Inc. 2,500 70,938
Highwaymaster Communications, Inc. 2,200 12,513
Highwoods Properties, Inc. 2,100 78,094
+ Hollywood Entertainment Corp. 2,800 29,750
Hologic, Inc. 1,500 31,031
+ Homebase, Inc. 3,500 27,563
+ Homeside, Inc. 2,300 63,394
56
<PAGE>
Horizon Group, Inc. 5,000 54,688
Hospitality Properties Trust 1,700 55,888
Host Marriott Corporation 4,100 60,988
Houghton Mifflin Company 2,900 111,288
Huffy Corporation 3,900 52,650
Hughes Supply, Inc. 1,950 68,128
Hugoton Energy Corp. 5,000 45,938
Human Genome Sciences, Inc. 2,200 87,450
Huntington Bancshares Inc. 3,222 115,992
Hutchinson Technology, Inc. 1,900 41,563
+ Hvide Marine, Inc. (Class A) 1,400 36,050
+ Hyperion Software Corp. 2,300 82,225
+ I2 Technologies, Inc. 400 21,100
+ I-Stat Corporation 1,500 23,719
ICN Pharmaceuticals, Inc. 4,400 214,775
ICOS Corporation 3,800 69,588
+ IDEC Pharmaceuticals Corporation 1,700 58,438
IDEX Corp. 3,100 108,113
+ IDEXX Laboratories, Inc. 4,100 65,344
IES Industries, Inc. 3,100 114,119
+ IHOP Corp. 2,000 65,000
IMC Global, Inc. 2,160 70,740
IMC Global, Inc. (Warrants) (a) 800 3,100
+ IMC Mortgage Company 2,600 30,875
+ IN Focus Systems, Inc. 1,400 42,525
INMC Mortgage Holdings, Inc. 3,100 72,656
+ INTERSOLV, Inc. 2,300 46,575
IRT Property Company 7,100 83,869
+ IXC Communications, Inc. 1,600 50,200
+ Imation Corp. 4,200 67,200
Imnet Systems, Inc. 1,100 17,875
Imperial Bancorp 2,100 103,556
Imperial Credit Industries, Inc. 2,000 41,000
+ Imperial Holly Corporation 735 7,997
+ Inacom Corp. 800 22,450
Incyte Pharmaceuticals, Inc. 2,000 90,000
+ Industri-Matematik International Corp. 2,800 82,600
+ Information Management Resources, Inc. 1,200 45,000
+ Information Resources, Inc. 3,100 41,463
+ Inhale Therapeutic Systems 1,600 41,600
Innovex, Inc. 1,500 34,406
+ Input/Output, Inc. 4,300 127,656
Insignia Financial Group, Inc. (Class A) 2,400 55,200
Inso Corporation 1,400 16,188
+ Integrated Circuit Systems, Inc. 1,800 51,300
+ Integrated Device Technology, Inc. 7,700 72,669
Integrated Health Services, Inc. 4,119 128,461
+ Integrated Process Equipment Corp. 1,600 25,200
+ Integrated Systems Inc. 1,700 23,375
Inter-Tel Inc. 2,000 38,750
InterDigital Communications Corp. 5,100 15,619
Interface, Inc. (Class A) 2,100 60,900
Intergraph Corporation 4,100 41,000
+ Interim Services, Inc. 7,200 186,300
Intermedia Communications, Inc. 1,400 85,050
International Dairy Queen, Inc. (Class A) 2,100 56,241
International Multifoods Corporation 1,900 53,794
+ International Network Services 2,500 57,813
+ International Rectifier Corporation 5,400 63,788
Interneuron Pharmaceuticals, Inc. 2,800 26,600
Interra Financial, Inc. 1,200 82,800
+ Interstate Hotels Company 2,700 94,669
Interstate Power Company 2,800 104,825
Invacare Corporation 3,300 71,775
Investors Financial Services Corporation 700 32,200
Ionics, Incorporated (Ordinary) 2,000 78,250
Irvine Apartment Communities, Inc. 1,700 54,081
Isis Pharmaceuticals, Inc. 2,100 25,856
Itron, Inc. 2,500 45,000
J&L Specialty Steel, Inc. 2,600 26,163
+ JDA Software Group, Inc. 1,100 38,500
JLG Industries, Inc. 4,400 62,150
JP Foodservice, Inc. 5,842 215,789
+ Jabil Circuit, Inc. 600 23,850
+ Jacobs Engineering Group, Inc. 2,100 53,288
+ Jacor Communications, Inc. 3,200 170,000
Jefferies Group, Inc. 2,000 81,875
John Alden Financial Corporation 2,400 57,600
Jones Medical Industries, Inc. 2,000 76,500
Jostens, Inc. 3,800 87,638
+ Journal Register Company 5,200 109,200
Juno Lighting, Inc. 3,100 54,250
Just For Feet, Inc. 3,000 39,375
K2, Inc. 2,600 59,150
KCS Energy, Inc. 2,400 49,800
Kaman Corporation (Class A) 4,500 73,688
Kaufman and Broad Home Corporation 3,900 87,506
Kaydon Corporation 3,600 117,450
Kellwood Company 2,500 75,000
Kelly Services, Inc. 1,700 51,000
Kemet Corporation 4,700 91,063
Kennametal Inc. 2,600 134,713
Kent Electronics Corporation 4,300 108,038
Keystone Financial, Inc. 6,000 241,500
57
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
Kilroy Realty Corporation 1,700 $ 48,875
Kimball International, Inc. 4,600 84,813
Kimberly-Clark Corp. 1,134 55,920
+ Kirby Corporation 3,600 69,525
+ Knoll, Inc. 1,200 38,550
Koger Equity Inc. 2,000 43,875
Kuhlman Corporation 2,100 82,163
Kulicke and Soffa Industries, Inc. 2,400 44,700
+ LCA-Vision Inc. (New Shares) 1,543 1,736
+ LHS Group Inc. 1,000 59,750
LNR Property Corp. 2,500 59,062
LTC Properties, Inc. 7,100 147,325
Laboratory Corp. of America Holdings 6,600 11,138
+ Lamar Advertising Co. 1,500 59,625
Landry's Seafood Restaurants, Inc. 3,000 72,000
Lands' End, Inc. 1,700 59,606
Landstar System, Inc. 2,200 58,025
+ Learning Company, Inc. (The) 3,500 56,219
+ Learning Tree International Inc. 1,100 31,763
Legato Systems, Inc. 1,800 79,200
Legg Mason, Inc. 4,066 227,442
Lennar Corporation 2,500 53,906
Level One Communications, Inc. 2,150 60,738
Libbey, Inc. 2,100 79,538
Liberty Property Trust 2,200 62,837
Life Re Corp. 1,000 65,187
Life Technologies, Inc. 1,100 36,575
+ Ligand Pharmaceuticals 2,900 37,337
Lilly Industries, Inc. (Class A) 4,300 88,687
Lincoln Electric Company 2,800 100,800
Lindsay Manufacturing Co. 1,500 65,062
+ Linens `N Things 1,500 65,437
Liposome Company, Inc. 3,000 13,875
+ Littelfuse, Inc. 3,000 74,625
+ Lo-jack Corp. 2,300 33,925
Lomak Petroleum, Inc. 2,300 37,375
+ Lone Star Industries, Inc. 1,700 90,312
+ Lone Star Steakhouse & Saloon, Inc. 3,400 59,500
+ Lone Star Technologies, Inc. 2,100 59,587
Long Island Bancorp, Inc. 2,500 124,062
Longs Drug Stores Corp. 3,100 99,587
Longview Fibre Company 5,200 78,975
Luby's Cafeterias, Inc. 3,300 57,956
Lukens Inc. 1,500 42,844
+ Lycos Inc. 1,400 57,925
+ Lydall, Inc. 3,100 60,450
MAF Bancorp, Inc. 2,050 72,519
+ MAXXAM Group, Inc. 500 21,812
MDU Resources Group, Inc. 3,600 113,850
MMI Companies Inc. 1,600 40,200
+ MRV Communications Inc. 2,000 47,750
Mac Frugals Bargains Close-Outs, Inc. 2,700 111,037
+ MacDermid, Inc. 700 59,412
Macerich Company (The) 1,900 54,150
+ Macromedia Inc. 3,100 25,769
Madison Gas & Electric Company 3,000 69,000
Magellan Health Services, Inc. 2,900 62,350
Magna Group, Inc. 4,100 187,575
Magnetek, Inc. 2,400 46,800
+ Mail-Well Holdings Inc. 1,500 60,750
Manitowoc Company, Inc. (The) 1,750 56,875
Manufactured Home Communities, Inc. 1,600 43,200
+ Manugistics Group, Inc. 1,700 75,862
Marcus Corporation (The) 5,250 96,797
Marine Drilling Companies, Inc. 5,100 105,825
+ Mariner Health Group, Inc. 3,200 52,000
+ Marquette Medical Systems, Inc. 2,000 53,250
+ Marshall Industries 2,700 81,000
+ Martek Biosciences Corporation 1,200 9,900
Mascotech, Inc. 2,700 49,612
Mastec, Inc. 800 18,300
Material Sciences Corporation 2,500 30,469
Matthews International Corporation 1,900 83,600
+ Maverick Tube Corp. 900 22,781
+ Maxicare Health Plans, Inc. 2,200 23,925
McClatchy Newspapers, Inc. (Class A) 2,400 65,250
McDonald's & Company Investments 2,400 68,100
+ McLeodUSA Inc. 4,300 137,600
+ Medaphis Corp. 6,400 41,600
Medical Assurance, Inc. 2,200 61,875
+ Medicis Pharmaceutical Corp. 1,300 66,462
Medimmune, Inc. 2,600 111,475
+ MedPartners, Inc. 1,062 23,762
Medusa Corporation 2,100 87,806
Men's Wearhouse, Inc. (The) 1,900 66,025
Mentor Corporation 2,800 102,200
+ Mentor Graphics Corporation 6,000 58,125
+ Mercury Interactive Corp. 1,800 48,150
Merrill Corporation 1,400 32,550
Methode Electronics, Inc. (Class A) 4,100 66,625
+ Metromail Corporation 1,600 28,600
Metromedia International Group, Inc. 3,900 37,050
+ Michaels Stores, Inc. 2,200 64,350
+ Micrel Inc. 1,300 36,400
58
<PAGE>
+ Micro Warehouse Inc. 3,300 45,994
+ Microage Inc. 1,900 28,619
Micros Systems, Inc. 1,100 49,500
Microtouch Systems Inc. 1,100 17,325
Mid Am, Inc. 3,970 102,227
Mid-America Apartment Communities, Inc. 900 25,706
Mid Atlantic Medical Services, Inc. 4,300 54,825
+ Midwest Express Holdings Inc. 1,400 54,337
+ Millennium Pharmaceuticals Inc. 2,900 55,100
+ Miller Industries Inc. 3,400 36,550
Mills Corp. 1,500 36,750
Minerals Technologies, Inc. 2,500 113,594
Minnesota Power & Light Company 3,300 143,756
+ Miravant Medical Technologies 600 24,000
Mississippi Chemical Corporation 4,200 76,650
Mobile Telecommunication Technologies Corp. 4,500 99,000
Modine Manufacturing Company 2,500 85,312
+ Mohawk Industries, Inc. 3,750 82,266
+ Moneygram Payment Systems Inc. 2,000 21,500
Morgan Keegan, Inc. 4,050 102,516
+ Motivepower Industries Inc. 2,100 48,825
+ Mueller Industries, Inc. 2,000 118,000
+ Mycogen Corp. 2,800 52,500
+ Myriad Genetics, Inc. 1,100 26,675
+ NABI, Inc. 3,100 10,559
NACCO Industries, Inc. (Class A) 700 75,031
NAC Re Corp. 1,500 73,219
+ NBTY, Inc. 2,400 80,100
+ NCS Healthcare, Inc. (Class A) 2,100 55,387
+ NFO Worldwide, Inc. 2,600 54,437
+ NL Industries, Inc. (New Shares) 2,500 34,062
+ NTL Inc. 2,900 80,837
Nash-Finch Company 3,900 74,100
National Computer System, Inc. 1,900 66,975
+ National Instruments Corp. 1,800 52,200
+ National Media Corp. 2,000 6,500
+ National Oil Well Inc. 4,000 136,750
+ National Semiconductor Corporation 1,567 40,644
+ National Steel Corp. 2,000 23,125
+ National Surgery Centers, Inc. 1,700 44,625
Nationwide Health Properties, Inc. 3,700 94,350
+ Natural Microsystems Corp. 1,200 55,800
Natures Sunshine Products, Inc. 2,100 54,600
+ Nautica Enterprises, Inc. 3,800 88,350
+ NeoPath, Inc. 1,400 18,200
+ Neoprobe Corp. 2,400 14,400
+ Network Appliance, Inc. 3,000 106,500
+ Network Equipment Technologies, Inc. 3,100 45,337
+ Networks Associates, Inc. 2,083 109,748
+ Neurex Corporation 1,900 26,362
+ Neurogen Corporation 1,300 17,550
+ Neuromedical Systems, Inc. 5,000 14,062
Nevada Power Company 4,900 130,156
New England Business Service, Inc. 2,100 70,875
New York Bancorp Inc. 1,666 66,119
Newfield Exploration Co. 4,100 95,581
+ Newpark Resources, Inc. 6,200 108,500
Newport News Shipbuilding Inc. 4,000 101,750
News Corporation Limited (The) (ADR)* 4,285 85,164
+ Nexstar Pharmaceuticals, Inc. 2,600 29,575
Nordson Corporation 1,600 72,400
Norrell Corp. 1,700 33,787
+ North Face Inc. 1,500 33,000
Northrop Grumman Corporation 677 77,855
Northwestern Public Service Company 4,200 96,600
Nova Corporation 2,200 55,000
+ NovaCare, Inc. 6,100 79,681
+ Nu Skin Asia Pacific Inc. (Class A) 1,600 29,200
+ Nuevo Energy Co. 1,900 77,425
OEA, Inc. 1,900 54,981
O M Group Inc. 3,600 131,850
+ OMI Corp. 5,300 48,694
ONBANCorp Inc. 2,100 148,050
ONEOK, Inc. 2,700 109,012
+ Oak Industries, Inc. 3,200 95,000
+ Oak Technology, Inc. 3,800 24,700
Oakwood Homes Corporation 5,000 165,937
Oasis Residential, Inc. 8,000 178,500
+ Object Design Inc. 2,400 20,100
+ Ocean Energy, Inc. 1,200 59,175
+ Oceaneering International, Inc. 3,100 61,225
Ocwen Asset Investment Corp. 1,200 24,600
+ Ocwen Financial Corporation 2,800 71,225
+ Offshore Logistics, Inc. 3,600 76,950
Ogden Corporation 4,600 129,662
Old National Bancorp 2,700 130,612
Omega Healthcare Investors, Inc. 1,600 61,800
Omnipoint Corporation 2,600 60,450
Omniquip International Inc. 1,900 37,881
One Valley Bancorp, Inc. 2,450 94,937
+ Orbital Sciences Corp. 3,800 113,050
+ Oregon Metallurgical Corporation 1,700 56,737
Oregon Steel Mills, Inc. 2,900 61,806
+ Organogenesis, Inc. 2,593 68,390
59
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
Oriental Financial Group Inc. 1,425 $ 42,127
Orion Capital Corporation 4,100 190,394
+ Orthodontic Center 4,800 79,800
Otter Tail Power Company 1,700 64,387
+ Outdoor Systems, Inc. 2,100 80,587
Overseas Shipholding Group, Inc. 3,600 78,525
Owens & Minor, Inc. 4,700 68,150
+ Oxigene Inc. 700 12,425
+ P-COM, Inc. 4,400 75,900
+ PFF Bancorp, Inc. 2,100 41,737
P.H. Glatfelter Company 2,400 44,700
+ PHP Healthcare Corp. 1,000 15,062
+ PMC-Sierra, Inc. 4,100 127,100
+ PMT Services, Inc. 4,200 58,275
+ PRI Automation, Inc. 1,200 34,650
+ PSINet, Inc. 2,800 14,350
+ Pacific Gateway Exchange Inc. 1,400 75,337
+ Pacific Sunwear of California 1,500 44,344
+ PageMart Wireless, Inc. (Class A) 2,900 22,837
+ Paging Network, Inc. 9,200 98,900
+ Palm Harbor Homes, Inc. 1,325 37,431
+ Panavision Inc. 2,500 64,531
+ Papa John's International, Inc. 2,100 73,237
+ Paragon Health Network, Inc. 3,048 59,626
+ Paragon Trade Brands, Inc. 2,100 27,037
+ Parexel International Corporation 2,100 77,700
Park Electrochemical Corporation 2,100 59,587
+ Parker Drilling Company 6,800 82,875
+ PathoGenesis Corp. 1,600 59,400
Patriot American Hospitality, Inc. 2,399 69,121
+ Patterson Dental Co. 2,000 90,500
+ Patterson Energy, Inc. 1,200 46,425
+ Paxar Corporation 4,625 68,508
+ Pediatrix Medical Group Inc. 1,800 76,950
Penncorp Financial Group, Inc. 2,600 92,787
Peoples Heritage Financial Group, Inc. 2,500 115,000
+ Perceptron, Inc. 900 19,462
+ Periphonics Corporation 1,900 16,625
+ Perrigo Co. 6,400 85,600
+ Personnel Group of America, Inc. 1,500 49,500
+ Petco Animal Supplies, Inc. 2,100 50,400
+ Pharmaceutical Product Development, Inc. 2,100 32,287
+ PharMerica, Inc. 2,000 20,750
+ Philip Services Corp. 4,004 57,557
Phillips-Van Heusen Corp. 4,200 59,850
Phoenix Duff & Phelps Corp. 6,300 50,400
Phoenix Technologies Ltd. 2,200 26,675
Photronics, Inc. 1,800 43,650
+ Physician Sales & Service 3,600 77,400
+ Physicians Resource Group, Inc. 3,400 14,875
+ Physio-Control International Corp. 2,100 33,337
+ Picturetel Corp. 4,500 29,250
Piedmont Natural Gas Company, Inc. 3,500 125,781
Pier 1 Imports, Inc. 7,700 174,212
Pioneer Group, Inc. 2,300 64,687
Pioneer Natural Resources Company 742 21,472
Pioneer Standard Electronics 3,900 59,475
Piper Jaffray Companies, Inc. 2,300 83,806
Pittston Minerals Group 3,100 81,375
+ Plantronics, Inc. 1,600 64,000
+ Platinum Technology, Inc. 6,100 172,325
+ Playboy Enterprises, Inc. (Class B) 2,600 40,787
+ Playtex Products, Inc. 3,300 33,825
+ Plexus Corporation 2,200 32,725
Polaris Industries, Inc. 2,600 79,462
+ Policy Management Systems Corporation 1,600 111,300
+ Polymer Group, Inc. 3,700 35,150
+ Pool Energy Services Co. 2,400 53,400
Post Properties, Inc. 615 24,984
+ Powertel, Inc. 1,300 21,775
+ Premier Parks Inc. 1,200 48,600
+ Premiere Technologies, Inc. 2,100 58,012
+ Premisys Communications, Inc. 2,400 62,700
+ Prepaid Legal Services, Inc. 2,400 82,050
Presidential Life Corporation 1,800 36,450
Price Enterprises, Inc. 8,000 146,000
+ PriceSmart, Inc. 275 4,709
+ Pride Petroleum Services, Inc. 4,400 111,100
+ Primark Corp. 4,000 162,750
+ Prime Hospitality Corp. 4,700 95,762
+ Proffitt Systems, Inc. 5,400 153,562
+ Progress Software Corporation 2,200 47,575
+ Protein Design Labs, Inc. 1,900 76,000
Provident Bankshares Corp. 1,130 72,179
+ Proxim, Inc. 1,200 13,575
Public Service Company of New Mexico 5,400 127,912
Pulitzer Publishing Company 1,300 81,656
Pulte Corp. 700 29,269
Quaker State Corporation 4,000 57,000
+ Quality Food Centers, Inc. 1,500 100,500
Quanex Corporation 2,000 56,250
Queens County Bancorp, Inc. 1,500 60,750
+ Quest Diagnostics Incorporated 3,100 52,312
Quick & Reilly Group, Inc. 1,800 77,400
60
<PAGE>
+ Quick Response Services, Inc. 1,000 37,000
+ RCN Corporation 1,200 41,100
+ REMEC, Inc. 1,400 31,500
RFS Hotel Investors, Inc. 2,200 43,862
+ RMI Titanium Co. 1,500 30,000
+ RadiSys Corporation 800 29,800
+ Rainforest Cafe, Inc. 1,500 49,500
+ Ralcorp Holdings Inc. 3,500 59,281
+ Rambus Inc. 1,300 59,475
+ Rational Software Corporation 7,500 85,312
Raymond James Financial, Inc. 3,400 134,937
+ Read-Rite Corp. 4,700 74,025
Realty Income, Corp. 2,300 58,506
+ Reckson Associates Realty Corp. 2,000 50,750
+ Red Roof Inns, Inc. 4,000 61,250
Redwood Trust, Inc. 1,000 20,375
Regal-Beloit Corp. 2,500 73,906
Regency Realty Corp. 1,300 35,994
+ Regeneron Pharmaceuticals, Inc. 2,100 17,981
Regis Corporation 1,900 47,737
+ Registry Resources, Inc. 900 41,287
Reinsurance Group of America 2,800 119,175
Reliance Steel & Aluminum Co. 1,450 43,137
ReliaStar Financial Corporation 1,326 54,615
+ Remedy Corp. 2,100 44,100
+ Renal Care Group, Inc. 3,200 102,400
+ Renal Treatment Centers, Inc. 3,200 115,600
+ Renters Choice, Inc. 1,800 36,900
+ Respironics, Inc. 2,500 55,937
+ Rexall Sundown, Inc. 3,000 90,562
Richfood Holdings Inc. (Class A) 5,000 141,250
Riggs National Corporation 7,000 188,125
+ Rio Hotel & Casino, Inc. 2,200 46,200
+ Risk Capital Holdings, Inc. 2,300 51,175
+ Robert Mondavi (Class A) 900 43,875
+ Roberts Pharmaceutical Corporation 4,300 41,119
+ Robotic Visions Systems, Inc. 2,100 24,150
Rochester Gas and Electric Corporation 3,900 132,600
Rock-Tenn Co. (Class A) 3,700 75,850
Rollins, Inc. 2,700 54,844
Rollins Truck Leasing Corp. 5,400 96,525
+ Romac International, Inc. 2,000 48,875
Roper Industries Inc. 3,300 93,225
Roslyn Bancorp, Inc. 4,500 104,625
+ Ruby Tuesday, Inc. 2,600 66,950
+ Rural/Metro Corp. 2,000 66,750
+ Ryan's Family Steak House, Inc. 8,100 69,356
Ryland Group, Inc. (The) 3,700 87,412
+ S3 Inc. 6,100 30,500
S&T Bancorp Inc. 1,700 73,525
SCPIE Holdings Inc. 1,600 46,300
+ SEACOR SMIT, Inc. 1,500 90,375
SEI Corporation 1,900 79,800
SEMCO Energy, Inc. 3,055 55,372
+ SFX Broadcasting, Inc. (Class A) 1,100 88,275
+ SMART Modular Technologies, Inc. 3,400 78,200
+ SPS Technologies, Inc. 1,700 74,162
SPX Corp. 1,700 117,300
+ Sabratek Corporation 1,000 28,750
+ Sabre Group Holdings Inc. 2,700 77,962
+ Safeguard Scientifics, Inc. 2,700 84,712
+ Safeskin Corp. 1,800 102,150
Safety-Kleen Corp. 5,200 142,675
+ Samsonite Corp. 1,800 56,925
+ SanDisk Corporation 2,600 52,812
+ SangStat Medical Corp. 1,600 64,800
+ Sanmina Corp. 1,700 115,175
Saul Centers, Inc. 7,500 136,406
+ Sawtek Inc. 800 21,100
+ Scholastic Corp. 1,200 45,000
Schulman (A.), Inc. 3,900 97,987
Schweitzer-Mauduit International, Inc. 2,700 100,575
+ Scientific Games Holdings Corp. 1,100 22,275
+ Scios Inc. 4,400 44,000
+ Scopus Technology, Inc. 2,100 25,200
Scotsman Industries, Inc. 2,300 56,206
+ Scotts Co. (The) 3,300 99,825
+ Seitel, Inc. 2,600 44,525
Selective Insurance Group, Inc. 3,400 91,800
+ Sepracor, Inc. 2,800 112,175
+ Sequa Corporation (Class A) 700 45,544
+ Sequent Computer Systems, Inc. 3,900 78,000
+ Sequus Pharmaceuticals, Inc. 5,500 40,906
+ Serologicals Corporation 1,800 46,800
+ Service Merchandise Company, Inc. 8,200 17,425
+ Shiva Corporation 2,600 22,262
+ Shoney's, Inc. 4,500 14,344
+ ShopKo Stores, Inc. 2,200 47,850
+ Showbiz Pizza Time, Inc. 2,900 66,700
Showboat, Inc. 2,500 73,437
+ Siebel Systems, Inc. 2,100 87,806
+ Sierra Health Services, Inc. 2,200 73,975
Sierra Pacific Resources 3,900 146,250
Sigcorp, Inc. 3,200 94,000
61
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
Silgan Holdings, Inc. 2,000 $ 65,000
+ Silicon Valley Bancshares 1,000 56,250
+ Silicon Valley Group, Inc. 2,900 65,612
+ Siliconix Inc. 1,300 55,900
+ Sinclair Broadcast Group, Inc. (Class A) 1,000 46,625
+ Sitel Corporation 4,700 42,887
Smith (A.O.) Corp. 1,800 76,050
Smith (Charles E) Residential Realty, Inc. 1,900 67,450
+ Smithfield Foods, Inc. 2,700 89,100
Smucker J.M. Company (The) (Class A) 3,100 73,237
+ Snyder Communications, Inc. 1,900 69,350
Snyder Oil Corp. 5,900 107,675
+ Sola International, Inc. 2,900 94,250
+ Sonic Corp. 1,600 45,000
Sothebys Holdings, Inc. 4,400 81,400
+ Source Services Corporation 2,400 51,900
Southdown, Inc. 2,000 118,000
Southwestern Energy Company 5,600 72,100
Sovereign Bancorp, Inc. 10,100 209,575
+ Spacelabs Medical, Inc. 2,400 45,600
+ Spectrian Corporation 1,000 19,250
+ SpeedFam International, Inc. 1,600 42,400
+ Spine-Tech, Inc. 1,000 51,437
+ Splash Technology Holdings, Inc. 1,400 31,500
+ Sports Authority, Inc. (The) 3,900 57,525
Springs Industries, Inc. (Class A) 1,400 72,800
St. John Knits, Inc. 2,400 96,000
St. Mary Land & Exploration Company 1,900 66,500
St. Paul Bancorp Inc. 3,200 84,000
+ StaffMark, Inc. 1,700 53,762
+ Stage Stores, Inc. 2,400 89,700
Standard Pacific Corp. 2,000 31,500
Standard Products Company (The) 2,200 56,375
+ Stanford Telecommunications, Inc. 1,100 18,631
Stanhome, Inc. 2,000 51,375
+ Steel Dynamics, Inc. 2,800 44,800
Stewart & Stevenson Services, Inc. 3,100 79,050
+ Stillwater Mining Co. 2,200 36,850
Stone & Webster, Inc. 800 37,500
Storage Realty Trust Inc. 4,000 105,250
Storage USA, Inc. 2,600 103,837
+ Stratus Computer, Inc. 2,700 102,094
Stride Rite Corp. (The) 5,900 70,800
+ Structural Dynamics Research Corp. 3,300 74,250
Sturm, Ruger & Company, Inc. 2,800 51,625
+ Suiza Foods Corp. 1,400 83,387
Summit Bancorp. 1,476 78,597
Summit Properties, Inc. 1,600 33,800
+ Summit Technology, Inc. 5,400 24,469
+ Sun Healthcare Group, Inc. 4,300 83,312
+ Sunburst Hospitality Corp. 1,600 15,800
+ Sunglass Hut International, Inc. 4,200 26,512
+ Sunrise Assisted Living, Inc. 800 34,500
+ Sunrise Medical, Inc. 2,000 30,875
Superior Industries International, Inc. 2,600 69,712
+ Superior Services, Inc. 2,300 66,412
Susquenhanna Bancshares, Inc. 2,600 99,450
+ Swift Energy Company 1,870 39,387
+ Swift Transportation Co., Inc. 1,900 61,512
+ Sykes Enterprises, Inc. 1,200 23,400
+ Sylvan Learning Systems, Inc. 1,900 74,100
+ Symantec Corp. 6,100 133,819
+ Synetic, Inc. 1,900 69,350
+ Synopsys, Inc. 1,369 48,942
+ System Software Associates, Inc. 4,300 37,625
+ Systems & Computer Technology Corp. 1,700 84,362
+ TBC Corporation 4,500 43,031
TCA Cable TV, Inc. 1,400 64,400
+ TCI Satellite Entertainment, Inc. (Class A) 4,800 33,000
TETRA Tech, Inc. 2,750 55,000
TETRA Technologies, Inc. 2,000 42,125
TJ International, Inc. 2,900 70,687
TNP Enterprises, Inc. 3,000 99,750
TR Financial Corporation 2,100 69,825
Talbots, Inc. 1,300 23,562
Technitrol, Inc. 1,700 51,000
+ Technology Solutions Co. 1,950 51,431
Tejas Gas Corp. 1,800 110,250
+ Tekelec 800 24,400
Tel-Save Holdings 4,400 87,450
Telxon Corporation 2,300 54,912
Tennant Co. 1,700 61,837
Terra Industries, Inc. 4,000 52,250
Tesoro Petroleum Corporation 3,800 58,900
Texaco Inc. 2,846 154,751
Texas Industries, Inc. 2,200 99,000
Texas Regional Bancshares, Inc. (Class A) 1,550 47,275
+ Theragenics Corporation 1,100 39,600
TheraTech, Inc. 5,200 41,600
+ Thermo Cardiosystems Inc. 1,800 48,150
+ ThermoLase Corporation 1,500 15,750
Thomas Industries, Inc. 3,600 71,100
Thornburg Mortgage Asset Corp. 1,400 23,100
+ Timberland Company (Class A) 600 34,837
62
<PAGE>
+ Titan Exploration, Inc. 3,100 29,450
+ Titanium Metals Corporation 1,800 51,975
+ Toll Brothers, Inc. 3,300 88,275
+ Tom Brown, Inc. 3,000 57,750
Toro Company (The) 1,900 80,987
+ Total Renal Care Holdings, Inc. 4,000 110,000
+ Tower Automotive, Inc. 1,600 67,300
+ Toy Biz, Inc. 1,500 11,625
+ Tracor, Inc. 2,000 60,750
Trans Financial, Inc. 2,100 81,637
+ Trans World Airlines, Inc. 5,200 52,650
+ Transition Systems, Inc. 2,200 48,675
+ Transkaryotic Therapies, Inc. 2,000 70,250
+ TransMontaigne Oil Company 2,900 43,500
Trenwick Group, Inc. 1,450 54,556
+ Triad Guaranty, Inc. 1,600 46,400
+ Triangle Pacific 2,500 84,687
+ Triangle Pharmaceuticals, Inc. 1,100 16,087
+ Triarc Companies, Inc. (Class A) 3,300 89,925
+ Trico Marine Services, Inc. 1,700 49,937
+ Trigon Healthcare, Inc. 4,400 114,950
+ Trimble Navigation Ltd. 2,800 61,075
Trinet Corporate Realty Trust, Inc. 1,100 42,556
+ TriQuint Semiconductor, Inc. 900 18,225
+ Triumph Group, Inc. 1,500 49,875
True North Communications, Inc. 3,100 76,725
+ Trump Hotels & Casino Resorts, Inc. 2,700 18,056
Trust Company of New Jersey (The) 2,900 72,500
TrustCo Bank Corp. N.Y. 3,680 100,280
Trustmark Corporation 3,100 143,375
+ Tuboscope Vetco International Corp. 5,700 137,156
+ Tucson Electric Power Co. 3,600 65,250
+ Twinlab Corporation 2,100 51,975
UGI Corp. (New Shares) 3,400 99,662
UMB Financial Corp. 1,365 74,392
USBancorp, Inc. 800 58,400
+ USCS International, Inc. 2,200 37,400
US Freightways Corp. 3,000 97,500
UST Corporation 2,600 72,150
+ U.S. Bioscience Inc. 2,600 23,562
+ U.S. Home Corporation 1,600 62,800
+ U.S. Office Products Co. 10,650 209,006
U.S. Trust Corporation 3,700 231,712
+ Ultratech Stepper, Inc. 1,900 37,762
Unifirst Corp. 2,700 75,769
Union Planters Corporation 723 49,119
+ Uniphase Corp. 3,400 140,675
+ United Auto Group, Inc. 2,800 50,750
United Bankshares, Inc. 1,700 81,175
United Companies Financial Corporation 2,200 34,100
United Illuminating Company (The) 2,600 119,437
+ United International Holdings Inc. (Class A) 3,700 42,550
United States Satellite Broadcasting
Company, Inc. 3,600 28,575
+ United Stationers, Inc. 1,000 48,125
+ United Video Satellite Group, Inc. (Class A) 1,300 37,375
+ Unitrode Corporation 3,000 64,500
Universal Foods Corporation 2,600 109,850
Universal Outdoor, Inc. 1,800 93,600
Urban Shopping Centers, Inc. 1,100 38,362
+ VWR Scientific Products Corporation 1,700 48,025
+ Vail Resorts, Inc. 3,100 80,406
+ Valence Technology, Inc. 5,000 25,312
Valmont Industries, Inc. 3,800 74,100
+ Vanguard Cellular Systems, Inc. (Class A) 2,600 33,150
+ Vanstar Corporation 5,400 61,087
+ Vantive Corporation 1,700 42,925
+ Varco International, Inc. 3,400 72,887
Veeco Instruments Inc. 800 17,600
+ Veritas DGC Inc. 2,200 86,900
+ Veritas Software Corp. 2,250 114,750
+ Veritex Pharmaceuticals, Inc. 3,200 105,600
Vesta Insurance Group, Inc. 1,400 83,125
+ Veterinary Centers of America, Inc. 2,100 28,219
+ Viasoft, Inc. 1,900 80,275
+ Vical, Inc. 1,800 21,600
+ Vicor Corporation 3,900 105,787
+ Videoserver, Inc. 1,600 25,400
Vintage Petroleum, Inc. 3,400 64,600
+ Visio Corp. 2,500 95,937
+ Vitalink Pharmacy Services, Inc. 1,500 36,187
+ Vivus, Inc. 3,200 34,000
+ Volt Information Sciences, Inc. 900 48,487
WD-40 Company 2,500 72,500
+ WMS Industries, Inc. 2,400 50,700
WPL Holdings, Inc. 3,300 109,312
WPS Resources Corporation 2,800 94,675
Wabash National Corporation 3,000 85,312
Wachovia Corporation 875 70,984
Wackenhut Corporation (Class A) 1,300 30,144
+ Wackenhut Corrections Corporation 1,200 32,250
Walden Residential Properties, Inc. 6,700 170,850
+ Wall Data Inc. 2,300 31,337
+ Walter Industries, Inc. 2,900 59,812
63
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Small Cap Index Series (continued)
- ------------------------------------------------------------------------------
Shares Value
Issue Held (Note 1a)
==============================================================================
COMMON STOCKS
(continued)
+ Wang Laboratories, Inc. 3,800 $ 84,075
Warnaco Group, Inc. (The) (Class A) 1,069 33,546
Washington Gas Light Company 4,500 139,219
Washington Real Estate Investment Trust 2,700 45,225
Washington Water Power Company (The) 5,600 136,150
+ Waters Corp. 2,800 105,350
Watsco, Inc. 1,800 44,437
Watts Industries Inc. (Class A) 2,400 67,950
Wausau-Mosinee Paper Corporation 3,200 64,400
Webb (Del E.) Corporation 1,600 41,600
Webster Financial Corporation 1,400 93,100
Weeks Corp. 2,300 73,600
Wellman, Inc. 2,800 54,600
Werner Enterprises, Inc. 3,200 65,600
Wesbanco, Inc. 2,200 66,000
West America Bancorp. 1,400 143,150
+ West Marine, Inc. 1,200 26,850
+ Westell Technologies, Inc. (Class A) 1,500 19,125
Western Investment Real Estate Trust 7,200 99,000
+ Western Wireless Corporation 8,700 151,162
Westinghouse Air Brake Company 2,100 53,812
+ Westwood One, Inc. 2,900 107,662
+ Wet Seal, Inc. (The) (Class A) 1,200 35,400
Whitney Holding Corp. 2,200 125,400
+ Whittman-Hart, Inc. 800 27,400
+ Whole Foods Market, Inc. 2,600 132,925
Wicor, Inc. 2,100 97,519
Wiley (John) & Sons, Inc. (Class A) 1,700 92,225
+ Williams-Sonoma, Inc. 2,200 92,125
+ Wilmar Industries Inc. 1,300 31,037
+ Wind River Systems, Inc. 2,200 87,312
Windmere-Durable Holdings Inc. 2,800 63,175
+ Winstar Communications, Inc. 2,800 69,825
+ Wolverine Tube, Inc. 2,200 68,200
+ Wonderware Corporation 1,600 22,600
+ World Access, Inc. 1,900 45,362
+ World Color Press, Inc. 4,500 119,531
+ Wyman-Gordon Company 2,100 41,212
Wynn's International, Inc. 2,600 82,875
X-Rite, Inc. 3,000 54,750
+ Xircom, Inc. 4,200 42,262
Xtra Corporation 1,700 99,662
+ Xylan Corp. 3,200 48,400
+ Yahoo! Inc. 1,650 114,262
+ Yellow Corporation 2,900 72,681
+ Young Broadcasting Inc. (Class A) 1,100 42,625
+ Zale Corporation 3,500 80,500
+ Zebra Technologies Corporation (Class A) 2,200 65,450
+ Zenith Electronics Corporation 2,700 14,681
Zenith National Insurance Corp. 1,600 41,200
Zila, Inc. 3,000 17,812
+ Zilog, Inc. 2,200 41,937
+ Zitel Corporation 1,700 16,150
+ Zoltek Companies, Inc. 1,100 30,662
Zurn Industries, Inc. 1,900 59,731
Zygo Corp. 1,200 22,500
---------------------------------------------------------------------------
Total Common Stocks (Cost--$75,752,189) -- 87.0% 83,317,890
================================================================================
SHORT-TERM Face
OBLIGATIONS Amount Issue
================================================================================
COMMERCIAL $4,500,000 CIT Group Holdings, Inc. (The),
PAPER** 6.75% due 1/02/1998 4,499,156
2,386,000 General Electric Capital Corp.,
6.75% due 1/02/1998 2,385,553
4,500,000 General Motors Acceptance Corp.,
6.75% due 1/02/1998 4,499,156
================================================================================
Total Short-Term Obligations (Cost--$11,383,865)
-- 11.9% 11,383,865
================================================================================
Total Investments (Cost--$87,136,054)
-- 98.9% 94,701,755
Variation Margin on Financial Futures Contracts++
-- 0.1% 70,200
Other Assets Less Liabilities -- 1.0% 973,154
Net Assets -- 100.0% $95,745,109
================================================================================
64
<PAGE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Series.
(a) Warrants entitle the Series to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(b) The rights may be exercised until 3/31/1999.
+ Non-income producing security.
++ Financial futures contracts purchased as of December 31, 1997 were as
follows:
-----------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
-----------------------------------------------------------------
54 Russell 2000 March 1998 $11,916,450
-----------------------------------------------------------------
(Total Contract Price -- $11,717,292) $11,916,450
===========
-----------------------------------------------------------------
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
SMALL CAP
INDEX SERIES As of December 31, 1997
==================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$87,136,054) (Note 1a).. $ 94,701,755
Cash on deposit for financial futures contracts (Note 1b)....... 351,000
Receivables:
Contributions................................................. $ 1,141,603
Securities sold............................................... 107,647
Dividends..................................................... 88,795
Variation margin (Note 1b).................................... 70,200
Investment adviser (Note 2)................................... 16,544 1,424,789
------------
Deferred organization expenses (Note 1e)........................ 5,540
------------
Total assets.................................................... 96,483,084
------------
==================================================================================================================
Liabilities: Payables:
Withdrawals................................................... 387,959
Securities purchased.......................................... 288,292 676,251
------------
Accrued expenses and other liabilities.......................... 61,724
------------
Total liabilities .............................................. 737,975
------------
==================================================================================================================
Net Assets: Net assets...................................................... $ 95,745,109
============
==================================================================================================================
Net Assets Partners' capital............................................... $ 87,980,250
Consist of: Unrealized appreciation on investments--net..................... 7,764,859
------------
Net assets...................................................... $ 95,745,109
============
==================================================================================================================
</TABLE>
See Notes to Financial Statements.
65
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
SMALL CAP
INDEX SERIES For the Period April 9, 1997+ to December 31, 1997
==================================================================================================================
<S> <C> <C> <C>
Investment Income Dividends....................................................... $ 571,104
(Note 1d): Interest and discount earned.................................... 321,624
------------
Total income.................................................... 892,728
------------
==================================================================================================================
Expenses: Custodian fees.................................................. $ 45,748
Investment advisory fees (Note 2)............................... 36,425
Accounting services (Note 2).................................... 31,090
Pricing fees.................................................... 9,445
Professional fees............................................... 5,081
Trustees' fees and expenses..................................... 2,203
Amortization of organization expenses (Note 1e)................. 968
------------
Total expenses before reimbursement............................. 130,960
------------
Reimbursement of expenses (Note 2).............................. (47,367)
------------
Total expenses after reimbursement.............................. 83,593
------------
Investment income--net.......................................... 809,135
------------
==================================================================================================================
Realized & Realized gain from investments--net............................. 1,553,214
Unrealized Gain Unrealized appreciation on investments--net..................... 7,764,859
On Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations............ $ 10,127,208
============
==================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
SMALL CAP April 9, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: December 31, 1997
==================================================================================================================
<S> <C> <C>
Operations: Investment income--net.......................................... $ 809,135
Realized gain on investments--net............................... 1,553,214
Unrealized appreciation on investments--net..................... 7,764,859
------------
Net increase in net assets resulting from operations............ 10,127,208
------------
==================================================================================================================
Net Capital Increase in net assets derived from net capital contributions... 85,617,901
Contributions: ------------
==================================================================================================================
Net Assets: Total increase in net assets.................................... 95,745,109
Beginning of period............................................. --
------------
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C>
End of period*.................................................. $ 95,745,109
============
==================================================================================================================
*Undistributed investment income--net............................ $ 809,135
============
==================================================================================================================
</TABLE>
+Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
SMALL CAP The following ratios have been derived from April 9, 1997+ to
INDEX SERIES information provided in the financial statements. December 31, 1997
==================================================================================================================
<S> <C> <C>
Ratios to Average Expenses, net of reimbursement.................................. .18%*
=========
Net Assets: Expenses........................................................ .29%*
=========
Investment income--net.......................................... 1.78%*
=========
==================================================================================================================
Supplemental Net assets, end of period (in thousands)........................ $ 95,745
Data: =========
Portfolio turnover.............................................. 16.45%
=========
Average commission rate paid.................................... $ .0237
=========
==================================================================================================================
</TABLE>
*Annualized.
+Commencement of operations.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
SMALL CAP
INDEX SERIES
1. Significant Accounting Policies:
Merrill Lynch Small Cap Index Series (the "Series") is part of Merrill Lynch
Index Trust (the "Trust"). The Trust is registered under the Investment Company
Act of 1940 and is organized as a Delaware business trust. The following is a
summary of significant accounting policies followed by the Series.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Portfolio securities which are traded both on the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options, or in
the case of options traded in the over-the-counter market, the last bid price.
Other investments, including futures contracts and related options, are stated
at market value. Short-term securities
67
<PAGE>
Merrill Lynch Small Cap Index Fund, December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
SMALL CAP
INDEX SERIES
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
market value, as determined in good faith by or under the direction of the
Trust's Board of Trustees.
(b) Derivative financial instruments--The Series may engage in various portfolio
investment techniques to provide liquidity, or in connection with the Series'
arbitrage strategies. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts--The Series may purchase or sell stock index
futures contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Series as
unrealized gains or losses. When the contract is closed, the Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options--The Series is authorized to purchase and write call and put options.
When the Series writes an option, an amount equal to the premium received by the
Series is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Series enters into
a closing transaction), the Series realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent that
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--The Series is classified as a partnership for Federal income
tax purposes. As a partnership for Federal income tax purposes, the Series will
not incur Federal income tax liability. Items of partnership income, gain, loss
and deduction will pass through to investors as partners in the Series.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Series has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of 0.08% of the average daily value of the Series' net
assets. For the period April 9, 1997 to December 31, 1997, MLAM earned fees of
$36,425, all of which were voluntarily waived. MLAM also reimbursed the Series
for additional expenses of $10,942.
Accounting services are provided to the Series by MLAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
MLAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period April 9, 1997 to December 31, 1997 were $83,077,981 and $8,333,748,
respectively. Net realized and unrealized gains (losses) as of December 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments.................. $ 1,005,756 $ 7,565,701
Options purchased...................... (6,669,500) --
Options written........................ 6,684,215 --
Financial futures contracts............ 532,743 199,158
------------- ------------
Total.................................. $ 1,553,214 $ 7,764,859
============= ============
- --------------------------------------------------------------------------------
68
<PAGE>
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $7,561,637, of which $12,291,868 related to appreciated
securities and $4,730,231 related to depreciated securities. At December 31,
1997, the aggregate cost of investments for Federal income tax purposes was
$87,140,118.
Transactions in options written for the period ended December 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
Nominal Value
Call Options Covered by Call Premiums
Written Options Written Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of period.................... -- --
Options written........................ 100,000 $ 4,949,585
Options closed......................... (100,000) (4,949,585)
------------- ------------
Outstanding call options written,
end of period.......................... -- $ --
============= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nominal Value
Put Options Covered by Call Premiums
Written Options Written Received
- --------------------------------------------------------------------------------
Outstanding put options written,
beginning of period.................... -- --
Options written........................ 100,000 $ 3,599,630
Options expired........................ (100,000) (3,599,630)
------------- ------------
Outstanding put options written,
end of period.......................... -- $ --
============= ============
- --------------------------------------------------------------------------------
69
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Merrill Lynch Index Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Aggregate Bond Index Fund (one of the series constituting Merrill Lynch
Index Funds, Inc.) as of December 31, 1997, the related statements of
operations and changes in net assets, and the financial highlights for the
period April 3, 1997 (commencement of operations) to December 31, 1997. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Aggregate Bond Index Fund of the Merrill Lynch Index Funds, Inc. as of December
31, 1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 3, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
70
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of December 31, 1997
====================================================================================================================================
<C> <S> <C> <C>
Assets: Investment in Merrill Lynch Aggregate Bond Index Series, at value
(identified cost--$300,221,269) (Note 1a) ....................................... $ 307,561,388
Receivable from administrator (Note 2) .............................................. 42,805
Deferred organization expenses (Note 1d) ............................................ 11,972
Prepaid registration fees (Note 1d) ................................................. 31,564
-------------
Total assets ........................................................................ 307,647,729
-------------
====================================================================================================================================
Liabilities: Payables:
Dividends and distributions to shareholders (Note 1e) ............................ $ 225,266
Distributor (Note 2) ............................................................. 12,276 237,542
-------------
Accrued expenses and other liabilities .............................................. 136,258
-------------
Total liabilities ................................................................... 373,800
-------------
====================================================================================================================================
Net Assets: Net assets .......................................................................... $ 307,273,929
=============
====================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized .... $ 2,411
Consist of: Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized .... 539
Paid-in capital in excess of par .................................................... 300,000,385
Accumulated distributions in excess of realized capital gains on investments from
the Series--net (Note 1e) ....................................................... (69,525)
Unrealized appreciation on investments from the Series--net ......................... 7,340,119
-------------
Net assets .......................................................................... $ 307,273,929
=============
====================================================================================================================================
Net Asset Class A--Based on net assets of $251,140,395 and 24,112,166 shares outstanding ...... $ 10.42
Value: =============
Class D--Based on net assets of $56,133,534 and 5,387,967 shares outstanding ........ $ 10.42
=============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
71
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Period April 3, 1997+ to December 31, 1997
===================================================================================================================================
<C> <S> <C> <C>
Investment Income Investment income allocated from the Series....................... $ 9,584,726
(Note 1b): Expenses allocated from the Series................................ (223,625)
------------
Net investment income from the Series............................. 9,361,101
------------
===================================================================================================================================
Expenses: Administration fee (Note 2)....................................... $ 204,163
Registration fees (Note 1d)....................................... 163,504
Transfer agent fees (Note 2)...................................... 72,915
Account maintenance fee--Class D (Note 2)......................... 71,476
Printing and shareholder reports.................................. 38,206
Professional fees................................................. 12,000
Amortization of organization expenses (Note 1d)................... 10,275
Accounting services (Note 2)...................................... 900
Directors' fees and expenses...................................... 750
Other ............................................................ 1,264
------------
Total expenses before reimbursement............................... 575,453
Reimbursement of expenses (Note 2)................................ (217,236)
------------
Total expenses after reimbursement................................ 358,217
------------
Investment income--net............................................ 9,002,884
------------
===================================================================================================================================
Realized &
Unrealized Realized gain on investments from the Series-- net................ 870,653
Gain from the Unrealized appreciation on investments from the Series--net....... 7,340,119
Series - Net: ------------
Net Increase in Net Assets Resulting from Operations.............. $ 17,213,656
============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: December 31, 1997
====================================================================================================================================
<C> <S> <C>
Operations: Investment income--net....................................................................... $ 9,002,884
Realized gain on investments from the Series--net............................................ 870,653
Unrealized appreciation on investments from the Series--net.................................. 7,340,119
------------
Net increase in net assets resulting from operations......................................... 17,213,656
------------
====================================================================================================================================
Dividends & Investment income--net:
Distributions to Class A................................................................................... (7,292,400)
Shareholders Class D................................................................................... (1,710,484)
(Note 1e): Realized gain on investments from the Series--net:
Class A................................................................................... (709,638)
</TABLE>
72
<PAGE>
<TABLE>
<S> <C>
Class D................................................................................... (161,015)
In excess of realized gain on investments from the Series -- net:
Class A................................................................................... (56,667)
Class D................................................................................... (12,858)
------------
Net decrease in net assets resulting from dividends and distributions to shareholders........ (9,943,062)
------------
====================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions........................... 299,978,335
Transactions ------------
(Note 4):
====================================================================================================================================
Net Assets: Total increase in net assets................................................................. 307,248,929
Beginning of period.......................................................................... 25,000
------------
End of period................................................................................ $307,273,929
============
====================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
The following per share data and ratios have been derived April 3, 1997+ to
MERRILL LYNCH from information provided in the financial statements. December 31, 1997
AGGREGATE BOND ------------------------------
INDEX FUND Increase (Decrease) in Net Asset Value: Class A Class D
==========================================================================================================================
<C> <S> <C> <C>
Per Share Net asset value, beginning of period ............................. $ 10.00 $ 10.00
Operating ----------- -----------
Performance: Investment income--net ........................................... .48 .46
Realized and unrealized gain on investments from the Series--net . .45 .45
----------- -----------
Total from investment operations ................................. .93 .91
----------- -----------
Less dividends and distributions:
Investment income-- net ....................................... (.48) (.46)
Realized gain on investments from the Series-- net ............ (.03) (.03)
In excess of realized gain on investments from the Series-- net --++ --++
----------- -----------
Total dividends and distributions ................................ (.51) (.49)
----------- -----------
Net asset value, end of period ................................... $ 10.42 $ 10.42
=========== ===========
==========================================================================================================================
Total Investment Based on net asset value per share ............................... 9.49%++ 9.29%++
Return: =========== ===========
==========================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ ................................ .35%* .60%*
Net Assets: =========== ===========
Expenses+++ ...................................................... .52%* .77%*
=========== ===========
Investment income--net ........................................... 6.22%* 5.98%*
=========== ===========
==========================================================================================================================
Supplemental Net assets, end of period (in thousands) ......................... $ 251,140 $ 56,134
Data: =========== ===========
==========================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
++ Amount is less than $.01 per share.
+++ Includes the Fund's share of the Series' allocated
expenses.
++ Aggregate total investment return.
See Notes to Financial Statements.
73
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch Aggregate Bond Index Fund (the "Fund") is part of Merrill Lynch
Index Funds, Inc. The Fund is registered under the Investment Company Act of
1940 as a non-diversified mutual fund. The Fund seeks to achieve its investment
objective by investing all of its assets in the Merrill Lynch Aggregate Bond
Index Series (the "Series") of the Merrill Lynch Index Trust, which has the same
investment objective as the Fund. The value of the Fund's investment in the
Series reflects the Fund's proportionate interest in the net assets of the
Series. The performance of the Fund is directly affected by the performance of
the Series. The financial statements of the Series, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. The Fund offers two classes of
shares, Class A Shares and Class D Shares. Shares of Class A and Class D are
sold without the imposition of a front-end or deferred sales charge. Both
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class D Shares bear certain
expenses related to the account maintenance of such shares. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Valuation of securities is discussed in Note 1a of
the Series' Notes to Financial Statements which is included elsewhere in this
report.
(b) Income--The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Series, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no Federal
income tax provision is required.
(d) Prepaid registration fees and deferred organization expenses--Prepaid
registration fees are charged to expense as the related shares are issued.
Deferred organization expenses are charged to expense on a straight-line basis
over a five-year period.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.
(f) Investment transactions--Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plan
adopted by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance fees. The
fees are accrued daily and paid monthly at the annual rate of 0.25% based upon
the average daily net assets of Class D Shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
also provides account maintenance services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class D shareholders.
The Fund has also entered into an Administrative Services Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of ML & Co., which is the
limited partner. The Fund pays a monthly fee at an annual rate of 0.14% of the
Fund's average daily net assets for the performance of administrative services
(other than investment advice and related portfolio activities) necessary for
the operation of the Fund. For the period April 3, 1997 to December 31, 1997,
MLAM earned fees of $204,163, of which $139,532 was voluntarily waived. MLAM
also reimbursed the Fund for additional expenses of $77,704.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the period
April 3, 1997 to December 31, 1997 were $297,366,838 and $7,375,841,
respectively.
74
<PAGE>
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$299,978,335 for the period April 3, 1997 to December 31, 1997.
Transactions in capital shares for each class were as follows:
- ---------------------------------------------------------------------------
Class A Shares for the Period April 3, Dollar
1997+ to December 31, 1997 Shares Amount
- ---------------------------------------------------------------------------
Shares sold ................. 25,730,300 $ 262,000,547
Shares issued to shareholders
in reinvestment of dividends
and distributions ........... 719,579 7,438,280
----------- -------------
Total issued ................ 26,449,879 269,438,827
Shares redeemed ............. (2,338,963) (24,009,006)
----------- -------------
Net increase ................ 24,110,916 $ 245,429,821
=========== =============
- ---------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
- ----------------------------------------------------------------------------
Class D Shares for the Period April 3, Dollar
1997+ to December 31, 1997 Shares Amount
- ----------------------------------------------------------------------------
Shares sold ................. 6,726,307 $ 68,244,160
Shares issued to shareholders
in reinvestment of dividends
and distributions ........... 145,936 1,506,072
---------- ------------
Total issued ................ 6,872,243 69,750,232
Shares redeemed ............. (1,485,526) (15,201,718)
---------- ------------
Net increase ................ 5,386,717 $ 54,548,514
========== ============
- ----------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Investors of
Merrill Lynch Index Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Aggregate Bond Index Series (one
of the series constituting Merrill Lynch Index Trust) as of December 31, 1997,
the related statements of operations and changes in net assets, and the
financial highlights for the period April 3, 1997 (commencement of operations)
to December 31, 1997. These financial statements and the financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Aggregate Bond Index Series of the Merrill Lynch Index Trust as of December 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 3, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
76
<PAGE>
[This page intentionally left blank]
77
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series
- ------------------------------------------------------------------------------------------------------------------------------------
Face Interest Maturity Value
Issue Amount Rate Date(s) Cost (Note 1a)
====================================================================================================================================
US Government
Obligations--48.83%
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States Treasury Bonds $18,810,000 8.75 % 5/15/2017 $ 22,890,325 $ 24,661,603
6,970,000 6.625 2/15/2027 6,771,640 7,566,771
3,100,000 6.375 8/15/2027 3,043,422 3,269,539
1,200,000 6.125 11/15/2027 1,210,875 1,233,192
====================================================================================================================================
United States Treasury Notes 7,020,000 6.25 6/30/1998 7,036,305 7,046,325
6,330,000 5.75 12/31/1998 6,327,625 6,338,925
10,000,000 6.25 5/31/1999 10,034,994 10,079,700
1,330,000 6.00 6/30/1999 1,336,792 1,336,650
9,950,000 5.875 8/31/1999 9,940,594 9,981,044
11,000,000 6.375 5/15/2000 11,065,830 11,165,000
16,840,000 6.00 8/15/2000 16,838,939 16,961,080
1,900,000 5.75 11/15/2000 1,901,586 1,903,553
16,300,000 6.50 5/31/2002 16,362,893 16,776,286
1,850,000 6.25 6/30/2002 1,852,833 1,886,704
2,100,000 6.00 7/31/2002 2,091,984 2,121,987
5,400,000 6.25 8/31/2002 5,413,547 5,510,538
3,500,000 5.875 9/30/2002 3,488,125 3,519,145
2,800,000 5.75 10/31/2002 2,796,719 2,802,632
1,500,000 5.75 11/30/2002 1,499,734 1,501,170
5,350,000 6.25 2/15/2007 5,158,501 5,520,505
4,200,000 6.625 5/15/2007 4,250,664 4,445,448
4,500,000 6.125 8/15/2007 4,481,047 4,624,470
====================================================================================================================================
Total Investments in US Government Obligations--48.83% 145,794,974 150,252,267
====================================================================================================================================
US Government Agency
Mortgage-Backed
Obligations*--29.24%
====================================================================================================================================
Federal Home Loan Mortgage 311,995 6.50(1) 9/01/2002 312,092 313,845
Corporation Participation 1,280,494 6.50 2/01/2011--5/01/2012 1,267,294 1,286,039
Certificates--Gold Program 7,035,000 6.50 TBA(3) 7,010,864 7,045,975
1,585,908 7.00(2) 7/01/2004--11/01/2004 1,599,394 1,609,189
7,384,978 7.00 5/01/2012--12/01/2027 7,379,925 7,470,397
700,000 7.00 TBA(3) 710,828 710,828
6,129,326 7.50 8/01/2012--12/01/2027 6,226,190 6,279,892
400,000 7.50 TBA(3) 409,375 409,375
6,357,719 8.00 5/01/2012--11/01/2027 6,538,407 6,587,340
900,000 8.00 TBA(3) 931,750 931,359
3,898,196 9.50 2/01/2019--10/01/2024 4,190,349 4,212,840
====================================================================================================================================
Federal National Mortgage Association 226,121 5.50 6/01/2011 211,000 219,125
Mortgage-Backed Securities 99,409 6.00(2) 11/01/2004 97,949 98,291
3,266,253 6.00 1/01/2026--11/01/2027 3,007,549 3,148,757
200,000 6.00 TBA(3) 192,563 192,563
1,880,817 6.50(2) 5/01/2004--10/01/2004 1,871,065 1,886,102
2,029,841 6.50 3/01/2027--11/01/2027 1,966,620 2,004,467
</TABLE>
78
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
500,000 6.50 TBA(3) 493,203 493,203
10,991,268 7.00 4/01/2027--12/01/2027 10,887,234 11,070,186
100,000 7.00 TBA(3) 100,797 100,718
9,419,811 7.50 8/01/2027--11/01/2027 9,513,456 9,629,832
891,222 9.50 12/01/2017--1/01/2025 958,516 958,979
====================================================================================================================================
Government National Mortgage Association 1,859,649 6.00 3/15/2011--2/15/2012 1,805,336 1,841,629
Mortgage-Backed Securities 870,975 6.50 4/15/2026 821,439 861,987
718,000 6.50 TBA(3) 706,613 710,590
2,610,892 7.00 11/15/2027--12/15/2027 2,625,081 2,632,093
300,000 7.00 TBA(3) 302,156 302,156
4,143,384 7.50 3/15/2027--12/15/2027 4,186,484 4,244,359
300,000 7.50 TBA(3) 307,172 307,311
5,957,759 8.00 1/01/2020--10/15/2027 6,088,872 6,175,574
4,632,159 8.50 7/15/2025--10/15/2027 4,831,853 4,865,510
775,423 9.00 4/15/2018--11/15/2019 832,805 842,654
493,538 9.50 2/15/2027 535,797 535,360
====================================================================================================================================
Total Investments in US Government Agency Mortgage-Backed Obligations--29.24% 88,920,028 89,978,525
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Asset-Backed AAA Aaa $1,000,000 Standard Credit Card Master Trust, 5.50%
Securities**--0.32% due 1/07/1999 990,000 993,430
=================================================================================================================================
Banking--2.60% A- A1 1,000,000 Chase Manhattan Corp., 9.75% due 11/01/2001 1,112,050 1,114,530
A A1 500,000 Citicorp, 9.50% due 2/01/2002 553,875 556,870
A A1 500,000 Citicorp, 7.625% due 5/01/2005 527,890 534,575
BBB+ A3 1,020,000 Fleet/Norstar Financial Group, Inc., 8.125%
due 7/01/2004 1,066,374 1,108,648
A A2 500,000 NationsBank Corp., 6.50% due 8/15/2003 500,435 504,810
AA- Aa3 1,835,000 Norwest Corporation, 5.75% due 2/01/2003 1,730,864 1,796,465
A+ A1 1,050,000 Republic New York Corp., 7.53% due 12/04/2026 1,047,322 1,069,110
AA Aa2 230,000 Swiss Bank Corp. N.Y., 7.50% due 7/15/2025 225,195 249,424
BBB+ A1 1,000,000 Wells Fargo Capital, 8.125% due 12/01/2026 (a) 967,500 1,076,170
---------- ----------
7,731,505 8,010,602
=================================================================================================================================
Financial Services-- BBB+ A2 200,000 Heller Financial, Inc., 7% due 5/15/2002 197,878 203,024
1.53% A+ A1 275,000 International Lease Finance Corp., 6.625%
due 4/01/1999 274,461 276,493
A Baa1 1,000,000 Lehman Brothers, Inc., 10% due 5/15/1999 1,055,900 1,048,320
BBB+ Baa1 1,000,000 Paine Webber Group, Inc., 7.74% due 1/30/2012 1,063,050 1,097,720
A A2 2,000,000 Salomon Smith Barney Holdings, Inc., 7.125%
due 10/01/2006 1,996,200 2,071,740
---------- ----------
4,587,489 4,697,297
=================================================================================================================================
</TABLE>
79
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series (continued)
---------------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes Cost (Note la)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Financial Services-- AA- Aa3 $ 500,000 Associates Corp. N.A., 7.46% due 3/28/2000 $ 513,070 $ 515,405
Consumer--1.47% AA- Aa3 500,000 Associates Corp. N.A., 7.125% due 5/15/2000 509,825 512,530
A+ Aa3 200,000 CIT Group Holdings, Inc., 5.875% due 10/15/2008 178,758 188,574
A+ A1 1,000,000 Commercial Credit Co., 6.125% due 3/01/2000 985,890 998,390
A- Baa1 500,000 Finova Capital Corp., 6.45% due 6/01/2000 502,715 501,780
A A2 1,250,000 Household Finance Corp., 7.75% due 6/01/1999 1,279,177 1,275,987
A+ Aa3 500,000 Travelers Capital II, 7.75% due 12/01/2036 507,205 518,515
------------ ------------
4,476,640 4,511,181
=================================================================================================================================
Foreign Government BBB+ A3 600,000 People's Republic of China, 6.625% due 1/15/2003 589,332 590,880
Obligations--1.40% AA Aa2 1,000,000 Province of British Columbia, 7.25% due 9/01/2036 1,019,840 1,101,540
AA- Aa3 500,000 Province of Ontario, 7.375% due 1/27/2003 524,060 524,330
AA- Aa3 500,000 Province of Ontario, 7.625% due 6/27/2004 531,870 537,070
A A3 400,000 Province of Saskatchewan, 9.125% due 2/15/2021 513,708 519,076
AA Aa3 1,000,000 Republic of Italy, 6.875% due 9/27/2023 967,770 1,049,510
------------ ------------
4,146,580 4,322,406
=================================================================================================================================
Industrial-- A+ A1 1,000,000 Anheuser-Busch Co., Inc., 6.75% due 11/01/2006 969,880 1,009,730
Consumer Goods-- A A2 500,000 Philip Morris Companies, Inc., 9% due 1/01/2001 534,935 534,220
0.73% A A2 365,000 Philip Morris Companies, Inc., 6.95% due 6/01/2006 367,606 378,016
BBB- Baa3 300,000 RJR Nabisco, Inc., 8.75% due 7/15/2007 319,341 325,329
------------ ------------
2,191,762 2,247,295
=================================================================================================================================
Industrial-- AA- A1 500,000 Consolidated Natural Gas Co., 6.625% due 12/01/2008 493,905 510,915
Energy--0.97% BBB+ Baa2 500,000 Enron Corp., 6.625% due 10/15/2003 499,400 503,110
AA Aa2 100,000 Mobil Corp., 7.25% due 3/15/1999 101,251 101,369
BBB Baa2 500,000 Occidental Petroleum Corp., 10.125% due 11/15/2001 562,455 564,120
A- A3 1,000,000 Phillips Petroleum Co., 8.86% due 5/15/2022 1,088,410 1,129,440
BBB- Baa3 150,000 USX Corp., 8.125% due 7/15/2023 165,882 167,502
------------ ------------
2,911,303 2,976,456
=================================================================================================================================
Industrial-- A A3 150,000 Chrysler Corp., 7.45% due 3/01/2027 157,253 160,359
Manufacturing-- AA- Aa3 1,000,000 E.I. du Pont de Nemours, 7.95% due 1/15/2023 1,009,260 1,053,260
3.05% A A1 500,000 Ford Motor Credit Co., 8% due 6/15/2002 531,655 532,615
A A1 1,000,000 Ford Motor Credit Co., 7.75% due 11/15/2002 1,025,760 1,060,990
A A1 500,000 Ford Motor Credit Co., 7.20% due 6/15/2007 522,220 527,140
AAA Aaa 300,000 General Electric Capital Corp., 8.375% due 3/01/2001 316,032 319,116
A- A3 1,600,000 General Motors Acceptance Corp., 5.45% due 3/01/1999 1,571,584 1,588,832
A- A3 100,000 General Motors Acceptance Corp., 9.375% due 4/01/2000 106,398 106,414
BBB- Baa2 500,000 Georgia-Pacific Corp., 7.375% due 12/01/2025 512,055 509,435
A A1 1,000,000 International Business Machines Corp., 7.125%
due 12/01/2096 948,080 1,034,560
BBB+ A3 500,000 Lockheed Martin Corp., 7.25% due 5/15/2006 522,245 524,045
A A2 900,000 Lucent Technologies, Inc., 6.90% due 7/15/2001 895,563 923,292
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BBB Baa3 500,000 Seagate Technology, Inc., 7.45% due 3/01/2037 505,315 513,510
A- A2 500,000 Xerox Capital Trust I, 8% due 2/01/2027 517,340 529,369
------------ ------------
9,140,760 9,382,937
=================================================================================================================================
Industrial-- BBB+ Baa1 1,500,000 Norfolk Southern Corp., 7.70% due 5/15/2017 1,538,160 1,652,520
Other--1.24% BBB Baa2 1,000,000 Union Pacific Corp., 9.625% due 12/15/2002 1,135,940 1,130,740
BB+ Baa3 650,000 United Air Lines, Inc., 9% due 12/15/2003 721,292 729,274
A A2 300,000 WMC Finance, USA, 7.25% due 11/15/2013 291,822 308,643
------------ ------------
3,687,214 3,821,177
=================================================================================================================================
Industrial-- BBB+ Baa2 1,000,000 American Stores Co., 9.125% due 4/01/2002 1,110,040 1,100,080
Services--2.50% BBB- Baa3 500,000 Circus Circus Enterprises, Inc., 7.625% due 7/15/2013 502,325 512,775
BBB- Baa3 450,000 Comcast Cable Communications, 8.375% due 5/01/2007 491,864 501,165
BBB+ Baa1 1,000,000 Dayton Hudson Co., 10% due 1/01/2011 1,227,430 1,276,770
A A2 360,000 May Department Stores Co., 7.60% due 6/01/2025 345,942 392,868
BBB Baa3 1,000,000 News America Holdings, Inc., 8.50% due 2/15/2005 1,073,535 1,096,610
A A2 200,000 Penney (J.C.) & Co., 7.95% due 4/01/2017 204,476 223,612
A- A2 500,000 Sears, Roebuck & Co., 6.25% due 1/15/2004 493,995 497,240
BBB- Ba1 500,000 TCI Communications, Inc., 6.875% due 2/15/2006 482,050 501,840
BBB- Ba1 100,000 Tele-Communications, Inc., 9.80% due 2/01/2012 110,548 124,321
BBB- Ba1 500,000 Time Warner, Inc., 7.95% due 2/01/2000 515,375 515,370
BBB- Ba1 400,000 Time Warner, Inc., 8.18% due 8/15/2007 410,104 435,384
A A2 500,000 Walt Disney Co., 6.75% due 3/30/2006 512,650 516,045
------------ ------------
7,480,334 7,694,080
=================================================================================================================================
Utilities-- BBB- Ba1 1,000,000 360 Communications Co., 7.125% due 3/01/2003 1,019,270 1,021,260
Communications-- AAA Aaa 900,000 BellSouth Telecommunications, Inc., 6.75% due 10/15/2033 796,973 873,216
1.24% A Baa1 750,000 GTE Corp., 7.83% due 5/01/2023 722,123 779,843
A A2 150,000 MCI Communications Corp., 7.50% due 8/20/2004 155,665 157,271
A Aa3 200,000 U S West Communications, Inc., 6.875% due 9/15/2033 178,850 191,516
BBB- Ba1 750,000 WorldCom, Inc., 7.75% due 4/01/2007 776,430 805,418
------------ ------------
3,649,311 3,828,524
=================================================================================================================================
Utilities-- AA- A1 1,470,000 Baltimore Gas & Electric Co., 8.375% due 8/15/2001 1,551,365 1,570,474
Gas & Electric-- BBB+ A3 100,000 Detroit Edison Co., 5.93% due 2/01/2001 96,905 99,275
2.29% BBB+ A3 500,000 Detroit Edison Co., 7.22% due 8/01/2002 518,860 518,905
A- A3 500,000 Houston Lighting & Power Co., 8.75% due 3/01/2022 538,705 561,515
A- A3 1,000,000 Pennsylvania Power & Light Resources, Inc., 8.50%
due 5/01/2022 1,056,750 1,067,710
A- A3 1,700,000 Public Service Electric & Gas Co., 6.50% due 6/01/2000 1,699,252 1,711,662
A A2 200,000 Virginia Electric and Power Co., 6.25% due 8/01/1998 200,378 200,378
AA+ A2 1,250,000 Wisconsin Electric Power Co., 7.25% due 8/01/2004 1,280,137 1,315,525
------------ ------------
6,942,352 7,045,444
=================================================================================================================================
Yankees-- AA- Aa3 425,000 Abbey National First Capital, 8.20% due 10/15/2004 450,003 464,920
Corporate--1.44% A A2 500,000 BHP Finance USA Ltd., 6.42% due 3/01/2026 497,170 501,355
A+ A2 550,000 Grand Metropolitan Investment PLC, 9% due 8/15/2011 617,518 662,084
</TABLE>
81
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series (concluded)
---------------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes Cost (Note la)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Yankees-- A+ A2 $1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,116,000 $ 1,242,780
Corporate BBB+ A3 500,000 Philips Electronics N.V., 7.75% due 5/15/2025 512,285 534,110
(concluded) A+ A1 1,000,000 Santander Finance Ltd., 7% due 4/01/2006 1,004,440 1,022,190
------------ ------------
4,197,416 4,427,439
=================================================================================================================================
Total Investments in Corporate Bonds & Notes--20.78% 62,132,666 63,958,268
=================================================================================================================================
Face Amount Short-Term Securities
=================================================================================================================================
Repurchase $11,793,000 Nikko Securities Co., purchased on 12/31/97 to yield
Agreements***-- 6.75% to 1/02/1998 11,793,000 11,793,000
3.83%
=================================================================================================================================
Total Investments in Short-Term Securities--3.83% 11,793,000 11,793,000
=================================================================================================================================
Total Investments--102.68% $308,640,668 315,982,060
============
Liabilities in Excess of Other Assets--(2.68%) (8,241,663)
------------
Net Assets--100.00% $307,740,397
============
=================================================================================================================================
</TABLE>
* Mortgage-Backed Obligations are subject to
principal paydowns as a result of prepayments or
refinancing of the underlying mortgage
instruments. As a result, the average life may be
substantially less than the original maturity.
** Subject to principal paydowns.
*** Repurchase Agreements are fully collateralized by
US Government Agency Obligations.
(a) The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the
Securities Act of 1933.
(1) Represents balloon mortgages that amortize on a
30-year schedule and have 5-year maturities.
(2) Represents balloon mortgages that amortize on a
30-year schedule and have 7-year maturities.
(3) Represents a "to-be-announced" (TBA) transaction.
The Series has committed to purchasing securities
for which final maturity information is not
available at this time.
Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES As of December 31, 1997
==============================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$308,640,668) (Note 1a) $315,982,060
Cash ....................................................... 98,056
Receivables:
Interest ................................................ $3,587,396
Contributions ........................................... 473,792 4,061,188
----------
Deferred organization expenses (Note 1e) ................... 15,842
</TABLE>
82
<PAGE>
<TABLE>
<S> <C> <C> <C>
Prepaid expenses ........................................... 714
------------
Total assets ............................................... 320,157,860
------------
==============================================================================================================
Liabilities: Payables:
Securities purchased .................................... 12,133,853
Withdrawals ............................................. 181,211
Investment adviser (Note 2) ............................. 1,471 12,316,535
----------
Accrued expenses and other liabilities ..................... 100,928
------------
Total liabilities .......................................... 12,417,463
------------
==============================================================================================================
Net Assets: Net assets ................................................. $307,740,397
============
==============================================================================================================
Net Assets Partners' capital .......................................... $300,399,005
Consist of: Unrealized appreciation on investments--net ................ 7,341,392
------------
Net assets ................................................. $307,740,397
============
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES For the Period April 3, 1997+ to December 31, 1997
==============================================================================================================
<C> <S> <C> <C>
Investment Income Interest and discount earned............................... $ 9,531,892
(Note 1d): Other ..................................................... 54,707
------------
Total income............................................... 9,586,599
------------
==============================================================================================================
Expenses: Accounting services (Note 2)............................... $ 113,606
Investment advisory fees (Note 2).......................... 88,609
Custodian fees............................................. 34,772
Professional fees.......................................... 16,098
Pricing fees............................................... 6,615
Trustees' fees and expenses................................ 3,065
Amortization of organization expenses (Note 1e)............ 2,775
Registration fees.......................................... 250
Other ..................................................... 879
Total expenses before reimbursement........................ 266,669
----------
Reimbursement of expenses (Note 2)......................... (42,985)
----------
Total expenses after reimbursement......................... 223,684
------------
Investment income--net..................................... 9,362,915
------------
==============================================================================================================
Realized & Realized gain from investments--net........................ 870,626
Unrealized Gain on Unrealized appreciation on investments--net................ 7,341,392
Investments - Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations....... $ 17,574,933
============
==============================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
83
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND April 3, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: December 31, 1997
===============================================================================================================
<C> <S> <C>
Operations: Investment income--net............................................... $ 9,362,915
Realized gain on investments--net.................................... 870,626
Unrealized appreciation on investments--net.......................... 7,341,392
------------
Net increase in net assets resulting from operations................. 17,574,933
------------
===============================================================================================================
Net Capital Increase in net assets derived from net capital contributions........ 290,165,464
Contributions: ------------
===============================================================================================================
Net Assets: Total increase in net assets......................................... 307,740,397
Beginning of period.................................................. --
------------
End of period........................................................ $307,740,397
============
===============================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND The following ratios have been derived from April 3, 1997+ to
INDEX SERIES information provided in the financial statements. December 31, 1997
===============================================================================================================
<C> <S> <C>
Ratios to Average Expenses, net of reimbursement ................................. .15%*
Net Assets: ===========
Expenses ....................................................... .18%*
===========
Investment income--net ......................................... 6.34%*
===========
===============================================================================================================
Supplemental Net assets, end of period (in thousands) ....................... $ 307,740
Data: ===========
Portfolio turnover ............................................. 86.58%
===========
===============================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
See Notes to Financial Statements.
84
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES
1. Significant Accounting Policies:
Merrill Lynch Aggregate Bond Index Series (the "Series") is part of Merrill
Lynch Index Trust (the "Trust"). The Trust is registered under the Investment
Company Act of 1940 and is organized as a Delaware business trust. The following
is a summary of significant accounting policies followed by the Series.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Portfolio securities which are traded both on the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Other investments, including futures contracts and related options, are stated
at market value. Short-term securities are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair market value, as determined in good
faith by or under the direction of the Trust's Board of Trustees.
(b) Derivative financial instruments--The Series may engage in various portfolio
investment techniques to provide liquidity, or in connection with the Series'
arbitrage strategies. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts--The Series may purchase or sell financial futures
contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Series as
unrealized gains or losses. When the contract is closed, the Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options--The Series is authorized to purchase and write call and put options.
When the Series writes an option, an amount equal to the premium received by the
Series is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Series enters into
a closing transaction), the Series realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent that
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--The Series is classified as a partnership for Federal income
tax purposes. As a partnership for Federal income tax purposes, the Series will
not incur Federal income tax liability. Items of partnership income, gain, loss
and deduction will pass through to investors as partners in the Series.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
(f) Dollar rolls--The Series may sell securities for delivery in the current
month and simultaneously contract to repurchase substantially similar (same
type, coupon and maturity) securities on a specific future date.
85
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES
2. Investment Advisory Agreement and Transactions with Affiliates:
The Series has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of 0.06% of the average daily value of the Series' net
assets. For the period April 3, 1997 to December 31, 1997, MLAM earned fees of
$88,609, of which $37,562 was voluntarily waived. MLAM also reimbursed the
Series for additional expenses of $5,423.
Accounting services are provided to the Series by MLAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
MLAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period April 3, 1997 to December 31, 1997 were $458,285,968 and $162,247,751,
respectively.
Net realized and unrealized gains as of December 31, 1997 were as follows:
- ------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------------
Long-term investments .............. $ 870,626 $ 7,341,392
----------- -----------
Total .............................. $ 870,626 $ 7,341,392
=========== ===========
- ------------------------------------------------------------------------
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $7,333,370, of which $7,369,835 related to appreciated
securities and $36,465 related to depreciated securities. At December 31, 1997,
the aggregate cost of investments for Federal income tax purposes was
$308,648,690.
86
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Merrill Lynch
Index Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch International Index Fund (one of the series constituting Merrill Lynch
Index Funds, Inc.) as of December 31, 1997, the related statements of
operations and changes in net assets, and the financial highlights for the
period April 9, 1997 (commencement of operations) to December 31, 1997. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
International Index Fund of the Merrill Lynch Index Funds, Inc. as of December
31, 1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 9, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
87
<PAGE>
[This page is intentionally left blank]
88
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
INTERNATIONAL
INDEX FUND As of December 31, 1997
===========================================================================================================================
<C> <S> <C>
Assets: Investment in Merrill Lynch International Index Series, at value
(identified cost--$135,337,487) (Note 1a)....................................... $135,710,532
Receivable from administrator (Note 2)........................................... 70,561
Deferred organization expenses (Note 1d)......................................... 17,590
Prepaid registration fees and other assets (Note 1d)............................. 38,718
------------
Total assets..................................................................... 135,837,401
------------
===========================================================================================================================
Liabilities: Payable to distributor (Note 2).................................................. 4,653
Accrued expenses and other liabilities........................................... 107,093
------------
Total liabilities ............................................................... 111,746
------------
===========================================================================================================================
Net Assets: Net assets....................................................................... $135,725,655
============
===========================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized. $ 1,091
Consist of: Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized. 194
Paid-in capital in excess of par................................................. 135,436,587
Accumulated distributions in excess of investment income--net..................... (210,669)
Undistributed realized capital gains on investments and foreign currency
transactions from the Series--net............................................... 125,407
Unrealized appreciation on investments and foreign currency transactions from
the Series--net................................................................. 373,045
------------
Net assets....................................................................... $135,725,655
============
===========================================================================================================================
Net Asset Class A--Based on net assets of $115,190,077 and 10,913,229 shares outstanding.... $ 10.56
Value: ============
Class D--Based on net assets of $20,535,578 and 1,944,655 shares outstanding...... $ 10.56
============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
89
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
INTERNATIONAL
INDEX FUND For the Period April 9, 1997+ to December 31, 1997
================================================================================================================================
<C> <S> <C> <C>
Investment Income Investment income allocated from the Series................................ $ 2,268,537
(Notes 1b & 1c): Expenses allocated from the Series......................................... (489,674)
-----------
Net investment income from the Series...................................... 1,778,863
-----------
================================================================================================================================
Expenses: Administration fee (Note 2)................................................ $ 211,373
Registration fees (Note 1d)................................................ 104,689
Transfer agent fees(Note 2)................................................ 60,383
Printing and shareholder reports........................................... 52,065
Account maintenance fee--Class D (Note 2)................................... 43,713
Professional fees.......................................................... 19,484
Amortization of organization expenses (Note 1d)............................ 9,202
Accounting services (Note 2)............................................... 3,832
Directors' fees and expenses............................................... 381
Other...................................................................... 3,097
----------
Total expenses before reimbursement........................................ 508,219
Reimbursement of expenses (Note 2)......................................... (175,510)
----------
Total expenses after reimbursement......................................... 332,709
-----------
Investment income--net...................................................... 1,446,154
-----------
================================================================================================================================
Realized & Realized gain (loss) from the Series on:
Unrealized Investments--net.......................................................... 2,221,644
Gain (Loss) from Foreign currency transactions--net........................................ (162,656) 2,058,988
the Series--Net: ----------
Unrealized appreciation on investments and foreign currency transactions
from the Series--net...................................................... 373,045
-----------
Net realized and unrealized gain on investments and foreign currency
transactions from the Series............................................. 2,432,033
-----------
Net Increase in Net Assets Resulting from Operations....................... $ 3,878,187
===========
================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
90
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
INTERNATIONAL April 9, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: December 31, 1997
================================================================================================================================
<C> <S> <C>
Operations: Investment income--net.......................................................... $ 1,446,154
Realized gain on investments and foreign currency transactions from the
Series--net................................................................... 2,058,988
Unrealized appreciation on investments and foreign currency transactions
from the Series--net.......................................................... 373,045
------------
Net increase in net assets resulting from operations........................... 3,878,187
------------
================================================================================================================================
Dividends & Investment income--net:
Distributions to Class A...................................................................... (1,258,141)
Shareholders Class D...................................................................... (188,013)
(Note 1e): In excess of investment income--net:
Class A...................................................................... (183,280)
Class D...................................................................... (27,389)
Realized gain on investments from the Series--net:
Class A...................................................................... (1,638,854)
Class D...................................................................... (294,727)
------------
Net decrease in net assets resulting from dividends and distributions
to shareholders.............................................................. (3,590,404)
------------
================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions............. 135,412,872
Transactions ------------
(Note 4):
================================================================================================================================
Net Assets: Total increase in net assets................................................... 135,700,655
Beginning of period............................................................ 25,000
------------
End of period.................................................................. $135,725,655
============
================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
91
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
The following per share data and ratios have been derived April 9, 1997+ to
MERRILL LYNCH from information provided in the financial statements. December 31, 1997
INTERNATIONAL -----------------------
INDEX FUND Increase (Decrease) in Net Asset Value: Class A Class D
============================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period....................................... $ 10.00 $ 10.00
Operating -------- --------
Performance: Investment income--net...................................................... .10 .15
Realized and unrealized gain on investments and foreign currency
transactions from the Series--net......................................... .75 .67
-------- --------
Total from investment operations........................................... .85 .82
-------- --------
Less dividends and distributions:
Investment income--net.................................................... (.12) (.10)
In excess of investment income--net....................................... (.02) (.01)
Realized gain on investments from the Series--net......................... (.15) (.15)
-------- --------
Total dividends and distributions.......................................... (.29) (.26)
-------- --------
Net asset value, end of period............................................. $ 10.56 $ 10.56
======== ========
============================================================================================================================
Total Investment Based on net asset value per share......................................... 8.45%+++ 8.22%+++
Return: ======== ========
============================================================================================================================
Ratios to Average Expenses, net of reimbursement++........................................... .86%* 1.11%*
Net Assets: ======== ========
Expenses++................................................................. 1.10%* 1.35%*
======== ========
Investment income--net...................................................... 1.64%* 1.67%*
======== ========
============================================================================================================================
Supplemental Net assets, end of period (in thousands)................................... $115,190 $ 20,536
Data: ======== ========
============================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
++ Includes the Fund's share of the Series' allocated expenses.
+++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH INTERNATIONAL INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch International Index Fund (the "Fund") is part of Merrill Lynch
Index Funds, Inc. The Fund is registered under the Investment Company Act of
1940 as a non-diversified mutual fund. The Fund seeks to achieve its investment
objective by investing all of its assets in the Merrill Lynch International
Index Series (the "Series") of the Merrill Lynch Index Trust, which has the same
investment objective as the Fund. The value of the Fund's investment in the
Series reflects the Fund's proportionate interest in the net assets of the
Series. The performance of the Fund is directly affected by the performance of
the Series. The financial statements of the Series, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. The Fund offers two classes of
shares, Class A Shares and Class D Shares. Shares of Class A and Class D are
sold without the imposition of a front-end or deferred sales charge. Both
classes of shares have identical voting, dividend, liquidation
92
<PAGE>
and other rights and the same terms and conditions, except that Class D Shares
bear certain expenses related to the account maintenance of such shares. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Valuation of securities is discussed in Note 1a of
the Series' Notes to Financial Statements which is included elsewhere in this
report.
(b) Income--The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Series, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no Federal
income tax provision is required.
(d) Prepaid registration fees and deferred organization expenses--Prepaid
registration fees are charged to expense as the related shares are issued.
Deferred organization expenses are charged to expense on a straight-line basis
over a five-year period.
(e) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of net investment
income are due primarily to differing tax treatments for post-October losses.
(f) Investment transactions--Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to a distribution plan (the
"Distribution Plan") adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor ongoing account
maintenance fees. The fees are accrued daily and paid monthly at the annual rate
of 0.25% based upon the average daily net assets of Class D Shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
also provides account maintenance services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class D shareholders.
The Fund has also entered into an Administrative Services Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM").
The general partner of MLAM is Princeton Services, Inc. ("PSI"), a wholly-owned
subsidiary of ML & Co., which is the limited partner. The Fund pays a monthly
fee at an annual rate of 0.24% of the Fund's average daily net assets for the
performance of administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund. For the period
April 9, 1997 to December 31, 1997, MLAM earned fees of $211,373, of which
$175,510 was voluntarily waived.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the period
April 9, 1997 to December 31, 1997 were $148,665,451 and $17,165,815,
respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$135,412,872 for the period April 9, 1997 to December 31, 1997.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Period Dollar
April 9, 1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 13,557,058 $ 146,212,922
Shares issued to shareholders in
reinvestment of dividends
and distributions ........................ 282,548 3,003,483
---------- -------------
Total issued ............................. 13,839,606 149,216,405
Shares redeemed .......................... (2,927,627) (32,681,148)
---------- -------------
Net increase ............................. 10,911,979 $ 116,535,257
========== =============
- --------------------------------------------------------------------------------
+ Prior to April 9, 1997 (commencement of operations) the Fund issued 1,250
shares to MLAM for $12,500.
- --------------------------------------------------------------------------------
Class D Shares for the Period Dollar
April 9, 1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,975,922 $30,254,277
Shares issued to shareholders in
reinvestment of dividends
and distributions ........................ 44,774 475,948
---------- -------------
Total issued ............................. 3,020,696 30,730,225
Shares redeemed .......................... (1,077,291) (11,852,610)
---------- -------------
Net increase ............................. 1,943,405 $18,877,615
========== =============
- --------------------------------------------------------------------------------
+ Prior to April 9, 1997 (commencement of operations) the Fund issued 1,250
shares to MLAM for $12,500.
93
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and
Investors of Merrill Lynch
Index Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch International Index Series (one
of the series constituting Merrill Lynch Index Trust) as of December 31, 1997,
the related statements of operations and changes in net assets, and the
financial highlights for the period April 9, 1997 (commencement of operations)
to December 31, 1997. These financial statements and the financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
International Index Series of the Merrill Lynch Index Trust as of December 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 9, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
94
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch International Index Series
-----------------------------------------------------------------------
Shares Value
COUNTRY Investments Held (Note 1a)
==============================================================================================
<S> <C> <C> <C>
Australia Australian Gas Light Company (The) 28,500 $ 198,522
Boral Limited 36,500 92,195
Broken Hill Proprietary Company Ltd. 32,500 301,494
CSR Limited 37,800 127,961
Coca-Cola Amatil, Ltd. 18,700 139,584
Coles Myer Ltd. 18,200 87,321
Foster's Brewing Group Ltd. 54,000 102,650
ICI Australia Ltd. 13,300 93,077
National Australia Bank Limited 26,500 369,700
The News Corporation Ltd. 49,600 273,493
The News Corporation Ltd. (Preferred) 42,500 210,107
Normandy Mining Ltd. 68,300 66,250
North Ltd. 37,800 99,465
Pacific Dunlop Ltd. 45,500 96,267
Pioneer International Ltd. 46,100 125,746
Rio Tinto Ltd. 12,000 139,858
Santos Ltd. 19,400 79,818
Schroders Property Fund 117,800 181,903
Smith (Howard) Ltd. 9,000 74,644
Sons of Gwalia Ltd. 20,800 47,393
Tabcorp Holdings Limited 30,400 142,491
WMC Limited 30,200 105,182
Westpac Banking Corporation 36,600 233,882
-----------------------------------------------------------------------
Total Investments in Australia
(Cost--$3,754,697)--2.4% 3,389,003
==============================================================================================
Austria Austria Mikro Systeme International AG 700 35,474
Bank Austria AG 4,467 221,052
Bank Austria AG (Class A) 5,600 283,791
Bank Austria AG (Preferred) 2,866 127,539
EA--Generali AG 800 210,246
Flughafen Wien AG 2,550 101,362
Mayr-Melnhof Karton AG 1,900 102,319
OMV AG (Class A) 2,500 346,425
Oesterreichische Elektrizitaetswirtschafts
AG (Verbund) 3,750 397,894
VA--Technologie AG (VA TECH) 1,500 227,809
Wienerberger Baustoffindustrie AG 1,150 220,821
-----------------------------------------------------------------------
Total Investments in Austria
(Cost--$2,240,917)--1.6% 2,274,732
==============================================================================================
Belgium Barco NV (Belgian American Radio Corp.) 800 146,924
Bekaert NV 200 119,105
Cimenteries CBR
Cementbedrijven SA 2,400 215,848
Electrabel SA 2,200 509,210
Etablissements Delhaize
Freres & Cie 'Le Lion' SA 2,600 132,015
Fortis AG 900 187,895
Generale de Banque SA 500 217,752
Glaverbel SA 500 78,323
Groupe Bruxelles Lambert SA 700 101,334
Petrofina SA 700 258,535
Royale Belge SA 600 170,961
Solvay SA 2,000 125,857
Union Miniere SA (b) 900 62,470
-----------------------------------------------------------------------
Total Investments in Belgium
(Cost--$2,212,407)--1.6% 2,326,229
==============================================================================================
Denmark D/S Norden A/S 9 415,146
D/S Svendborg A/S 6 394,126
Danisco A/S 2,400 133,127
Den Danske Bank A/S 1,500 199,909
FLS Industries A/S 3,000 71,556
Novo Nordisk A/S (Class B) 2,300 329,022
Tele Danmark A/S (Class B) 4,600 285,376
Unidanmark A/S 1,800 132,164
-----------------------------------------------------------------------
Total Investments in Denmark
(Cost--$1,460,487)--1.4% 1,960,426
==============================================================================================
Finland Kesko OY 9,700 150,464
Merita OY (Class A) 30,800 168,488
Nokia OY AB (Series A) 5,300 376,521
Nokia OY AB (Series K) 3,000 214,777
Outokumpu OY 6,750 79,922
Rauma OY 3,800 59,293
Sampro Insurance Company Ltd. 3,000 96,650
UPM-Kymmene OY 8,750 174,438
-----------------------------------------------------------------------
Total Investments in Finland
(Cost--$1,230,227)--0.9% 1,320,553
==============================================================================================
</TABLE>
95
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch International Index Series (continued)
-----------------------------------------------------------------------
Shares Value
COUNTRY Investments Held (Note 1a)
==============================================================================================
<S> <C> <C> <C>
France Accor SA 1,150 $ 213,798
Alcatel Alsthom Cie Generale
d'Electricite SA 5,450 692,682
Axa SA 10,800 835,614
Banque Nationale de Paris SA (BNP) 7,400 393,298
Bouygues SA 1,150 130,304
+Canal+ 1,150 213,798
Carrefour Supermarche SA 1,250 652,102
Compagnie de Saint-Gobain SA 3,250 461,663
Compagnie Financiere de Paribas SA 6,100 530,038
Compagnie Generale des Eaux SA 4,400 614,055
Compagnie Generale des Etablissements
Michelin SA (Class B) 4,800 241,635
Comptoirs Modernes SA 400 204,685
Elf Aquitaine SA 9,050 1,052,500
Eridania Beghin-Say SA 1,300 203,240
+France Telecom SA 26,315 954,405
Generale des Eaux SA (Warrants)(a) 1,500 1,019
Groupe Casino Guichard Perachon SA 2,600 144,708
Groupe Danone SA 2,650 473,293
Havas SA 3,150 226,607
Imetal SA 1,200 149,128
L'Air Liquide SA 2,150 336,484
L'Oreal SA 2,250 880,337
LVMH Moet-Hennessy Louis Vuitton SA 2,950 489,625
Lafarge SA 3,900 255,875
Lagardere SCA 4,700 155,391
Legrand SA 1,050 209,163
Lyonnaise des Eaux SA 4,100 453,663
Pathe SA 550 106,729
Pernod Ricard SA 3,100 182,323
Peugeot SA 2,150 271,116
Pinault-Printemps-Redoute SA (b) 750 400,108
Promodes SA 650 269,654
Rhone-Poulenc SA (Class A) 11,500 515,102
SAGEM SA 350 155,840
Sanofi SA 3,750 417,428
Schneider SA 4,950 268,759
Sidel SA 1,300 86,177
Societe Bic SA 2,200 160,568
Societe Generale de France SA 3,250 442,765
Societe Nationale d'Exploitation Industrielle
des Tabacs et Allumettes SA 3,400 122,014
Sodexho Alliance SA 300 160,641
Thomson-CSF SA 4,000 126,067
Total SA (Class B) 8,200 892,341
Usinor-Sacilor SA 9,450 136,435
Valeo SA 2,650 179,719
-----------------------------------------------------------------------
Total Investments in France
(Cost--$15,089,984)--11.2% 16,062,896
==============================================================================================
Germany AMB Aachener und Muenchener
Beteiligungs AG 2,000 218,479
Adidas AG 2,000 263,064
Allianz AG 9,250 2,396,320
BASF AG 27,150 962,204
Bayer AG 30,850 1,152,502
Bayerische Hypotheken-und
Wechsel-Bank AG 12,200 595,486
Bayerische Vereinsbank AG 12,100 791,733
Beiersdorf AG 4,450 192,962
Bugerus AG 250 112,019
CKAG Colonia Konzern AG 1,150 109,962
Continental AG 5,650 124,697
Daimler-Benz AG 21,900 1,536,458
Degussa AG 4,400 220,147
Deutsche Bank AG 20,050 1,415,583
Deutsche Telekom AG 95,000 1,787,720
Dresdner Bank AG 19,550 902,074
Friedrich Grohe AG (Preferred) 500 121,192
Heidelberger Zement AG 2,700 192,128
Hochtief AG 3,400 134,201
Karstadt AG 700 238,976
Linde AG 400 244,163
Lufthansa AG 16,450 315,502
MAN AG 550 159,301
METRO AG 9,520 341,361
Mannesmann AG 1,550 783,272
Merck KGaA 8,100 263,426
Muenchener Rueckversicherungs-
Gesellschaft AG 3,000 1,130,754
Preussag AG 700 213,642
RWE AG 14,150 759,103
RWE AG (Preferred) 9,000 380,253
SAP AG 2,650 805,106
</TABLE>
96
<PAGE>
<TABLE>
<S> <C> <C> <C>
SAP AG (Preferred) 1,850 605,251
SGL CARBON AG 1,050 135,424
Schering AG 3,050 294,182
Siemens AG 23,850 1,412,066
Thyssen AG 1,450 310,346
VEBA AG 21,400 1,457,360
Viag AG 1,150 619,496
Volkswagen AG 1,200 675,117
Volkswagen AG (Preferred) 400 171,670
-----------------------------------------------------------------------
Total Investments in Germany
(Cost--$22,402,898)--17.1% 24,544,702
==============================================================================================
Hong Kong Cheung Kong (Holdings) Limited 33,000 216,167
China Light & Power Company, Limited 22,000 122,104
Hang Seng Bank Limited 13,000 125,428
Hong Kong Telecommunications Ltd. 83,000 170,874
Hutchison Whampoa Ltd. 27,000 169,371
Sun Hung Kai Properties Limited 19,000 132,430
Swire Pacific Ltd. (Class A) 18,000 98,742
-----------------------------------------------------------------------
Total Investments in Hong Kong
(Cost--$1,261,299)--0.7% 1,035,116
==============================================================================================
Ireland Allied Irish Banks PLC 28,800 278,543
CRH PLC 21,300 249,025
Greencore Group PLC 41,300 193,845
Jefferson Smurfit Group PLC 46,200 130,106
-----------------------------------------------------------------------
Total Investments in Ireland
(Cost--$814,194)--0.6% 851,519
==============================================================================================
Italy Assicurazioni Generali SpA 47,100 1,156,735
Banca Commerciale Italiana SpA 115,300 400,800
Banca Popolare di Milano SpA (SCRL) 23,800 149,322
Banco Ambrosiano Veneto SpA 34,100 130,487
Benetton SpA 13,056 213,640
Bulgari SpA 18,400 93,602
Cartiere Burgo SpA 13,000 77,705
Credito Italiano SpA 138,500 427,039
Edison SpA 43,400 262,480
Ente Nazionale Idrocarburi (ENI) SpA 483,700 2,742,206
Fiat SpA 231,300 672,642
Fiat SpA (Preferred) 80,730 123,203
Fiat SpA (RNC) 67,300 111,266
Finanziario Montedison SpA 333,000 299,083
Istituto Bancario San Paolo di Torino SpA 49,400 471,886
Istituto Mobiliare Italiano SpA 37,400 443,929
Istituto Nazionale delle Assicurazioni
(INA) SpA 276,500 560,283
Italcementi SpA 13,900 96,873
Italgas SpA 50,200 207,133
Mediaset SpA 77,800 382,140
Mediobanca-Banca di Credito 29,300 230,034
+Olivetti Group SpA 181,344 109,573
Parmalat Finanziaria SpA 112,200 160,449
Pirelli SpA 94,100 251,579
Riunione Adriatica di Sicurta SpA 21,600 211,825
Sirti SpA 23,000 139,102
TIM SpA (RISP) 98,400 279,760
TIM SpA (RNC) 55,365 244,092
Telecom Italia Mobile SpA 252,000 1,163,000
Telecom Italia SpA 218,333 1,394,508
-----------------------------------------------------------------------
Total Investments in Italy
(Cost--$10,777,604)--9.2% 13,206,376
==============================================================================================
Japan Acom Co., Ltd. 5,000 276,392
Advantest Corporation 2,000 113,628
Ajinomoto Co., Inc. 12,000 117,006
Alps Electric Co. Ltd. 4,000 37,774
Aoyama Trading Co., Ltd. 2,000 35,777
Asahi Bank, Ltd. 50,000 203,455
Asahi Breweries, Ltd. 12,000 175,048
Asahi Chemical Industry Co., Ltd. 32,000 108,591
Asahi Glass Co., Ltd. 29,000 138,042
Autobacs Seven Co., Ltd. 1,000 28,791
Bank of Tokyo-Mitsubishi, Ltd. 101,000 1,395,777
Bank of Yokohama, Ltd. 30,000 79,232
Bridgestone Corporation 16,000 347,639
CSK Corporation 1,000 25,643
Canon Inc. 18,000 420,115
Casio Computer Co., Ltd. 2,000 14,372
Chiba Bank Ltd. 14,000 43,532
Chugai Pharmaceutical Co., Ltd. 40,000 205,758
Citizen Watch Co., Ltd. 2,000 13,436
Cosmo Oil Company, Ltd. 38,000 57,766
Credit Saison Co., Ltd. 3,000 74,165
Dai Nippon Printing Co., Ltd. 17,000 319,770
Daiei, Inc. (The) 21,000 87,063
Daimaru, Inc. 5,000 11,823
Dainippon Ink & Chemicals, Inc. 66,000 167,217
Dainippon Screen Manufacturing Co., Ltd. 4,000 18,426
Daito Trust Construction Co., Ltd. 1,000 6,119
Daiwa House Industry Co., Ltd. 24,000 127,140
Daiwa Securities Co., Ltd. 27,000 93,282
East Japan Railway Co. 76 343,678
==============================================================================================
</TABLE>
97
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch International Index Series (continued)
-----------------------------------------------------------------------
Shares Value
COUNTRY Investments Held (Note 1a)
==============================================================================================
<S> <C> <C> <C>
Japan Ebara Corporation 3,000 $ 31,785
(concluded) Eisai Co., Ltd. 3,000 45,835
Fanuc Ltd. 5,000 189,635
Fuji Bank, Ltd. 63,000 255,386
Fuji Photo Film Co., Ltd. 11,000 422,265
Fujikura Ltd. 6,000 39,800
Fujita Kanko Inc. 1,000 10,749
Fujitsu Limited 40,000 429,942
Furukawa Electric Co., Ltd. 17,000 72,960
Gunma Bank, Ltd. 8,000 52,207
Hankyu Department Stores, Inc. 2,000 11,132
Hirose Electric Co., Ltd. 1,000 51,209
Hitachi Ltd. 70,000 499,808
Honda Motor Co., Ltd. 21,000 772,284
Hoya Corporation 2,000 62,956
Industrial Bank of Japan Ltd. 55,000 392,706
Isetan Company Limited 6,000 25,106
Ito Yokado Co., Ltd. 9,000 459,501
Itochu Corporation 24,000 37,774
+Japan Airlines Company, Ltd. 38,000 103,570
Japan Energy Corp. 68,000 64,215
Joyo Bank, Ltd. 24,000 84,760
Jusco Co., Ltd. 7,000 98,887
Kajima Corporation 37,000 93,459
Kaneka Corporation 48,000 217,059
Kansai Electric Power Co., Inc. (The) 18,000 305,413
Kao Corporation 14,000 90,288
Kawasaki Heavy Industries Ltd. 19,000 29,466
Kawasaki Steel Corporation 67,000 91,562
Keihin Electric Express Railway Co., Ltd. 49,000 171,171
Kinden Corporation 8,000 85,374
Kirin Brewery Company Ltd. 20,000 145,873
Kokuyo Co., Ltd. 1,000 17,274
Komatsu Ltd. 26,000 130,749
Konami Co., Ltd. 1,000 24,645
Kubota Corporation 90,000 237,697
Kurita Water Industries Ltd. 2,000 20,422
Kyocera Corporation 4,000 181,804
Lion Corporation 111,000 328,952
Makita Electric Work Ltd. 1,000 9,597
Marubeni Corporation 18,000 31,647
Marui Co., Ltd. 9,000 140,269
Matsushita Electric Industrial Co., Ltd. 45,000 659,885
Minebea Co., Ltd. 13,000 139,731
Mitsubishi Chemical Corp. 59,000 84,706
Mitsubishi Corporation 32,000 253,052
Mitsubishi Electric Corporation 40,000 102,572
Mitsubishi Estate Co., Ltd. 28,000 305,259
Mitsubishi Heavy Industries, Ltd. 71,000 296,537
Mitsubishi Logistics Corporation 3,000 31,324
Mitsubishi Materials Corporation 8,000 12,898
Mitsubishi Oil Company, Ltd. 38,000 56,307
+Mitsubishi Trust and Banking Corp. 28,000 281,612
Mitsui & Co., Ltd. 38,000 225,228
Mitsui Chemicals Inc. 600 1,106
Mitsui Fudosan Co., Ltd. 17,000 164,453
Mitsui Marine & Fire Insurance Co., Ltd. 19,000 97,152
Mitsui Mining & Smelting Co., Ltd. 10,000 40,230
Mitsui O.S.K. Lines, Ltd. 7,000 9,727
Mitsui Trust & Banking Company, Ltd. 28,000 54,388
Mitsukoshi, Ltd. 9,000 23,977
Murata Manufacturing Company, Ltd. 5,000 125,912
Mycal Corporation 4,000 33,474
NEC Corporation 34,000 362,841
NGK Spark Plug Co., Ltd. 1,000 5,681
NKK Corporation 90,000 71,862
NSK Ltd. 4,000 9,981
NTN Corporation 57,000 132,161
Namco Limited 1,000 29,098
Nankai Electric Railway Co., Ltd. 40,000 175,048
Nichido Fire & Marine Insurance Co., Ltd. 4,000 20,883
Nikon Corporation 8,000 79,232
Nippon Comsys Corporation 1,000 12,361
Nippon Express Co., Ltd. 24,000 119,770
Nippon Fire & Marine Insurance Co., Ltd. 11,000 41,297
Nippon Light Metal Company Ltd. 5,000 7,294
Nippon Oil Co., Ltd. 43,000 111,255
Nippon Paper Industries Co., Ltd. 26,000 102,203
Nippon Steel Corp. 144,000 213,374
Nippon Telegraph & Telephone Corp. 276 2,373,282
Nippon Yusen Kabushiki Kaisha Chiyoda 18,000 49,474
Nippondenso Finance NV 18,000 324,760
Nissan Food Products 1,000 18,196
Nissan Motor Co., Ltd. 51,000 211,440
</TABLE>
98
<PAGE>
<TABLE>
<S> <C> <C> <C>
Nitto Denko Corp. 12,000 207,294
Nomura Securities Co., Ltd. 43,000 574,434
Noritake Co., Ltd. 2,000 9,551
OJI Paper Co., Ltd. 16,000 63,754
Obayashi Corporation 35,000 119,309
Omron Corporation 7,000 109,635
Orix Corporation 1,000 69,866
Osaka Gas Co., Ltd. 38,000 86,940
Pioneer Electronic Corp. 4,000 61,727
Rohm Company, Limited 2,000 204,223
SMC Corporation 2,000 176,583
Sakura Bank Ltd. 74,000 211,916
Sankyo Company Limited 9,000 203,839
Sanyo Electric Co., Ltd. 54,000 140,960
Secom Co., Ltd. 4,000 256,123
Sega Enterprises, Ltd. 3,000 54,357
Seino Transportation Co., Ltd. 22,000 109,958
Sekisui Chemical Co., Ltd. 16,000 81,443
Sekisui House, Ltd. 21,000 135,271
Seventy-Seven Bank Ltd. 4,000 28,560
Sharp Corporation 22,000 151,678
Shimano Inc. 6,000 110,557
Shimizu Corporation 24,000 55,647
Shin-Etsu Chemical Co., Ltd. 7,000 133,820
Shiseido Company, Ltd. 13,000 177,658
Shizuoka Bank, Ltd. (The) 17,000 182,726
Sony Corporation 8,000 712,476
Sumitomo Bank, Ltd. 68,000 777,889
Sumitomo Chemical Co., Ltd. 33,000 76,008
Sumitomo Corporation 24,000 134,511
Sumitomo Electric Industries Ltd. 14,000 191,324
Sumitomo Heavy Industries, Ltd. 3,000 9,190
Sumitomo Marine & Fire
Insurance Co., Ltd. 18,000 95,355
Sumitomo Metal & Mining Co., Ltd. 25,000 82,534
Sumitomo Metal Industries, Ltd. 70,000 89,750
Taisho Pharmaceutical Co., Ltd. 5,000 127,831
Taiyo Yuden Co., Ltd. 2,000 13,896
Takara Shuzo Co., Ltd. 2,000 7,447
Takashimaya Co. 9,000 54,587
Takeda Chemical Industries, Ltd. 18,000 514,088
Teikoku Oil Co., Ltd. 57,000 148,791
Toho Co., Ltd. 1,100 117,390
Tohoku Electric Power Company, Inc. 11,000 167,217
Tokai Bank, Limited 44,000 205,390
Tokio Marine & Fire Insurance Co., Ltd. 33,000 374,971
Tokyo Broadcasting System, Inc. 4,000 50,672
Tokyo Dome Corporation 3,000 19,992
Tokyo Electric Power Co., Inc. (The) 28,000 511,631
Tokyo Electron Limited 4,000 128,369
Tokyo Gas Co., Ltd. 48,000 109,083
Tokyu Corporation 27,000 104,476
Toppan Printing Co., Ltd. 20,000 261,036
Toray Industries, Inc. 23,000 103,301
Tostem Corporation 7,000 75,240
Toto Ltd. 3,000 19,209
Toyo Seikan Kaisha, Ltd. 8,000 114,242
Toyobo Co., Ltd. 118,000 143,140
Toyoda Automatic Loom Works, Ltd. 17,000 313,244
Toyota Motor Corporation 82,000 2,354,549
UNI-CHARM Corporation 1,000 35,470
UNY Co., Ltd. 5,000 68,714
Wacoal Corp. 15,000 149,712
Yamaguchi Bank Ltd. 3,000 36,852
Yamaha Corporation 6,000 68,177
Yamaichi Securities Company Ltd. 23,000 177
Yamanouchi Pharmaceutical Co., Ltd. 4,000 85,988
Yamato Transport Co., Ltd. 23,000 309,021
Yamazaki Baking Co., Ltd. 2,000 19,501
+Yasuda Trust & Banking Co., Ltd. 29,000 28,944
Yokogawa Electric Corporation 3,000 18,564
-----------------------------------------------------------------------
Total Investments in Japan
(Cost--$39,971,369)--22.2% 31,872,451
==============================================================================================
Malaysia Commerce Asset Holding BHD 59,000 28,247
Rashid Hassain BHD 99,000 47,907
Resorts World BHD 60,000 101,158
Telekom Malaysia BHD 44,000 130,245
-----------------------------------------------------------------------
Total Investments in Malaysia
(Cost--$722,564)--0.2% 307,557
==============================================================================================
Netherlands ABN AMRO Holding N.V. 17,800 346,765
Akzo N.V. 800 137,936
Elsevier N.V. 10,800 174,709
Heineken N.V. 800 139,278
Internationale Nederlanden Groep N.V. 10,312 434,329
Koninklijke Ahold N.V. 10,800 281,772
Philips Electronics N.V. 4,000 239,890
Royal Dutch Petroleum N.V. 19,600 1,075,893
Royal PTT Nederland N.V. 6,900 287,897
Unilever N.V. 8,000 493,194
Wolters Kluwer N.V. 1,200 155,001
-----------------------------------------------------------------------
Total Investments in the Netherlands
(Cost--$3,282,921)--2.6% 3,766,664
==============================================================================================
</TABLE>
99
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch International Index Series (continued)
-----------------------------------------------------------------------
Shares Value
COUNTRY Investments Held (Note 1a)
==============================================================================================
<S> <C> <C> <C>
New Zealand Brierley Investments Limited 193,600 $ 138,186
Fletcher Challenge Building 34,900 71,289
Fletcher Challenge Forests Division 44,900 37,259
Fletcher Challenge Paper 63,000 82,258
Telecom Corporation of New Zealand 45,100 218,532
-----------------------------------------------------------------------
Total Investments in New Zealand
(Cost--$682,894)--0.4% 547,524
==============================================================================================
Norway Aker RGI ASA (Class A) 3,700 66,870
Aker RGI ASA (Class B) 1,900 30,982
Christiania Bank og Kreditkasse 42,000 170,077
Dyno Industriere ASA 6,400 123,495
Elkem ASA 4,200 55,932
Kvaerner ASA 2,100 107,297
Norsk Hydro ASA 11,000 537,369
+Nycomed Amersham PLC 2,667 100,388
Orkla ASA (A Shares) 2,100 181,207
+Petroleum Geo-Services ASA 1,600 101,101
+Storebrand ASA 13,700 96,807
-----------------------------------------------------------------------
Total Investments in Norway
(Cost--$1,609,177)--1.1% 1,571,525
==============================================================================================
Singapore City Development Ltd. 11,000 51,011
+Creative Technology Ltd. 1,000 20,333
DBS Land Ltd. 58,000 88,966
Keppel Corporation Ltd. 62,000 178,407
Singapore Airlines Ltd. 37,000 241,974
-----------------------------------------------------------------------
Total Investments in Singapore
(Cost--$907,701)--0.4% 580,691
==============================================================================================
Spain Acerinox S.A. 600 88,461
Autopista Concesionaria Espanola S.A.
(ACESA) 11,500 154,102
Banco Bilbao Vizcaya S.A. 24,600 794,692
Banco Central Hispanoamericano S.A. 14,400 350,069
Banco Santander S.A. 18,000 600,354
Corporacion Bancaria de Espana S.A.
(Argentaria) 4,400 267,270
Corporacion Financiera Alba S.A. 1,100 115,687
Endesa S.A. 38,400 680,637
Fomento de Construcciones y
Contratas S.A. 3,200 121,617
Gas Natural SDG S.A. 6,000 310,596
Iberdrola S.A. 34,200 449,322
Repsol S.A. (ADR) (d) 11,100 472,774
Tabacalera S.A. (Class A) 1,900 153,758
Telefonica de Espana S.A. 33,700 960,586
Union Electrica-Fenosa S.A. 15,000 143,503
-----------------------------------------------------------------------
Total Investments in Spain
(Cost--$4,759,549)--4.0% 5,663,428
==============================================================================================
Sweden ABB AB (A Shares) 13,500 159,834
Astra AB 'A' Fria 23,133 400,628
Electrolux AB 1,800 124,920
H & M Hennes & Mauritz AB 3,200 141,067
Forsakrings AB Skandia 2,200 103,772
Skandinaviska Enskilda Banken AB 9,100 115,190
Skanska Banken AB (B Shares) 2,900 118,893
Svenska Cellulosa AB (SCA) (B Shares) 6,500 146,136
Svenska Handelsbanken AB 4,000 138,296
Telefonaktiebolaget LM
Ericsson (B Shares) 15,400 578,991
Volvo AB (B Shares) 6,600 177,064
-----------------------------------------------------------------------
Total Investments in Sweden
(Cost--$2,020,099)--1.5% 2,204,791
==============================================================================================
Switzerland ABB AG (Bearer) 100 125,728
Credit Suisse Group AG (Registered Shares) 1,350 209,044
Nestle SA 300 449,949
Novartis AG 400 649,538
Roche Holding AG 50 496,917
Schweizerische Bankgesellschaft AG 200 289,414
Schweizerische Rueckversicherungs-
Gesellschaft AG 100 187,187
Schweizerischer Bankverein AG 600 186,639
Zuerich Versicherungs-Gesellschaft 550 262,282
-----------------------------------------------------------------------
Total Investments in Switzerland
(Cost--$2,212,854)--2.0% 2,856,698
==============================================================================================
</TABLE>
100
<PAGE>
<TABLE>
<S> <C> <C> <C>
United Kingdom Abbey National PLC 16,300 292,091
B.A.T. Industries PLC 36,400 331,220
BG PLC 50,117 225,549
BTR PLC 53,100 160,479
Barclays PLC 15,100 401,292
Bass PLC 10,700 165,994
Boots Company PLC (The) 20,000 287,930
British Aerospace PLC 4,700 133,938
British Airways PLC 11,700 107,617
British Petroleum Co. PLC (The) 56,392 740,991
British Sky Broadcasting Group PLC 20,800 155,788
British Telecommunications PLC 67,700 532,079
Burmah Castrol PLC 15,900 276,827
Cable & Wireless PLC 26,400 231,987
Cadbury Schweppes PLC 15,800 159,212
Carlton Communications PLC 30,500 235,452
Diageo PLC 51,700 475,112
EMI Group PLC 26,300 219,445
General Electric Company PLC 41,300 267,610
Glaxo Wellcome PLC 37,800 894,046
Granada Group PLC 10,100 154,280
Great Universal Stores PLC 11,300 142,357
HSBC Holdings PLC 18,600 458,869
HSBC Holdings PLC 8,900 228,045
Imperial Chemical Industries PLC 14,800 231,179
Kingfisher PLC 15,500 215,890
Lloyds/TSB PLC 55,300 714,834
LucasVarity PLC 27,900 98,525
Marks and Spencer PLC 29,200 287,286
National Grid Group PLC 22,500 106,804
National Power PLC 15,900 156,694
Pearson PLC 9,200 119,528
Peninsular & Oriental Steam Navigation
Co. (The) 21,200 241,135
Prudential Corporation PLC 20,900 251,969
Railtrack Group PLC 6,700 106,416
Rank Group PLC 17,600 97,998
Reed International PLC 16,900 169,325
Reuters Holdings PLC 19,900 217,360
Rio Tinto PLC 13,000 159,930
Royal & Sun Alliance Insurance Group PLC 20,800 209,425
Royal Bank of Scotland Group PLC (The) 15,100 191,718
Sainsbury (J.) PLC 19,300 161,354
Scottish & Newcastle PLC 18,200 222,856
Scottish Power PLC 17,800 157,292
SmithKline Beecham PLC 50,800 519,825
Tesco PLC 21,372 173,762
Unilever PLC 36,400 311,490
Vodafone Group PLC 38,800 279,770
Zeneca Group PLC 10,000 351,002
-----------------------------------------------------------------------
Total Investments in the United Kingdom
(Cost--$11,550,770)--9.1% 13,031,577
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
==============================================================================================
<S> <C> <C> <C>
Commercial $2,000,000 Eureka Securitization, Inc., 5.80%
Paper*--7.3% due 2/09/1998 $1,987,433
3,444,000 General Motors Acceptance Corp., 6.75%
due 1/02/1998 3,443,354
5,000,000 Lexington Parker Capital Corp., 5.93%
due 1/20/1998 4,984,351
==============================================================================================
</TABLE>
101
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Merrill Lynch International Index Series (concluded)
---------------------------------------------------------------------------
Face Value
Amount Issue (Note la)
==================================================================================================
<S> <C> <C> <C>
US Government $2,000,000 Federal Home Loan Banks, 5.57% due 3/04/1998 (c) $ 1,980,815
Agency Obligations*--
1.4%
---------------------------------------------------------------------------
Total Investments in Short-Term Investments
(Cost--$12,395,953)--8.7% 12,395,953
==================================================================================================
Total Investments (Cost--$141,360,565)--98.9% 141,770,411
Unrealized Depreciation on Forward Foreign Exchange
Contracts**--(0.1%) (88,722)
Variation Margin on Financial Futures Contracts***--0.0% 27,457
Other Assets Less Liabilities--1.2% 1,708,654
------------
Net Assets--100.0% $143,417,800
============
==================================================================================================
</TABLE>
(a) Warrants entitle the Series to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustments under certain conditions until the expiration date.
(b) Security may be offered and sold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933.
(c) Security held as collateral in connection with open financial futures
contracts.
(d) American Depositary Receipts (ADR).
* Commercial Paper and certain US Government Agency Obligations are traded on
a discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Series.
** Forward foreign exchange contracts as of December 31, 1997 were as follows:
- -------------------------------------------------------------
Unrealized
Foreign Appreciation
Currency Expiration (Depreciation)
Purchased Date (Note 1b)
- -------------------------------------------------------------
A$ 386,342 March 1998 $ (2,861)
DM 3,085,130 March 1998 (30,540)
Frf 6,324,145 March 1998 (16,751)
HK$ 1,160,640 March 1998 140
(pound) 702,908 March 1998 (2,356)
Lit 1,270,490,000 March 1998 (13,609)
Pta 57,849,200 March 1998 (7,661)
Skr 1,921,815 March 1998 (6,922)
(yen) 238,459,200 March 1998 (8,162)
- -------------------------------------------------------------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts -- Net
(US$ Commitment -- $7,608,087) $ (88,722)
==========
- -------------------------------------------------------------
*** Financial futures contracts purchased as of December 31, 1997 were
as follows:
- -----------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Note 1a)
- -----------------------------------------------------------------------
3 Hang Seng HKFE January 1998 $ 207,551
20 IBEX 35 MEFF January 1998 952,297
14 OMX OMLX January 1998 424,502
18 DTB DAX March 1998 4,281,354
21 CAC MATIF March 1998 2,111,165
11 FTSE LIFFE March 1998 2,341,096
113 Nikkei 300 OSAKA March 1998 2,058,726
13 MIB 30 MSE March 1998 1,858,591
9 All Ordinaries SFE March 1998 386,108
- -----------------------------------------------------------------------
Total Financial Futures Contracts Purchased
(Total Contract Price--$14,496,807) $14,621,390
===========
- -----------------------------------------------------------------------
+ Non-income producing security.
See Notes to Financial Statements.
102
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
INTERNATIONAL
INDEX SERIES As of December 31, 1997
============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$141,360,565) (Note 1a)............. $141,770,411
Cash ....................................................................... 7,584
Foreign cash (Note 1c) ..................................................... 1,410,507
Receivables:
Securities sold.......................................................... $ 737,586
Dividends................................................................ 221,955
Contributions............................................................ 135,211
Variation margin (Note 1b)............................................... 27,457 1,122,209
---------
Deferred organization expenses (Note 1f)................................... 11,163
Other assets............................................................... 2,304
------------
Total assets............................................................... 144,324,178
------------
============================================================================================================================
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1b).... 88,722
Payables:
Withdrawals.............................................................. 733,235
Investment adviser (Note 2).............................................. 3,142 736,377
---------
Accrued expenses and other liabilities..................................... 81,279
------------
Total liabilities ......................................................... 906,378
------------
============================================================================================================================
Net Assets: Net assets................................................................. $143,417,800
============
============================================================================================================================
Net Assets Partners' capital.......................................................... $143,001,193
Consist of: Unrealized appreciation on investments and foreign currency
transactions--net.......................................................... 416,607
------------
Net assets................................................................. $143,417,800
============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
103
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
INTERNATIONAL
INDEX SERIES For the Period April 9, 1997+ to December 31, 1997
============================================================================================================================
<S> <C> <C> <C>
Investment Income Dividends (net of $208,452 foreign withholding tax)........................ $ 1,490,569
(Notes 1d & 1e): Interest and discount earned............................................... 613,295
Other...................................................................... 1,306
-----------
Total income............................................................... 2,105,170
-----------
============================================================================================================================
Expenses: Custodian fees............................................................. $ 127,762
Investment advisory fees (Note 2).......................................... 100,102
Accounting services (Note 2)............................................... 68,823
Pricing fees............................................................... 22,330
Professional fees.......................................................... 8,155
Trustees' fees and expenses................................................ 3,361
Other...................................................................... 1,295
----------
Total expenses before reimbursement........................................ 331,828
Reimbursement of expenses (Note 2)......................................... (35,546)
----------
Total expenses after reimbursement......................................... 296,282
-----------
Investment income--net...................................................... 1,808,888
-----------
============================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net.......................................................... 1,983,095
(Loss) on Foreign currency transactions--net........................................ (292,940) 1,690,155
Investments & ----------
Foreign Currency Unrealized appreciation (depreciation) from:
Transactions - Net Investments--net.......................................................... 534,429
(Notes 1b, 1c, 1e Foreign currency transactions--net........................................ (117,822) 416,607
& 3): ---------- -----------
Net realized and unrealized gain on investments and foreign currency
transactions............................................................. 2,106,762
-----------
Net Increase in Net Assets Resulting from Operations....................... $ 3,915,650
===========
============================================================================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
INTERNATIONAL April 9, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: December 31, 1997
============================================================================================================================
<S> <C> <C>
Operations: Investment income--net..................................................... $ 1,808,888
Realized gain on investments and foreign currency transactions--net........ 1,690,155
Unrealized appreciation on investments and foreign currency
transactions--net.......................................................... 416,607
------------
Net increase in net assets resulting from operations....................... 3,915,650
------------
============================================================================================================================
</TABLE>
104
<PAGE>
<TABLE>
<S> <C> <C>
Net Capital Increase in net assets derived from net capital contributions.............. 139,502,150
Contributions: ------------
============================================================================================================================
Net Assets: Total increase in net assets............................................... 143,417,800
Beginning of period........................................................ --
------------
End of period.............................................................. $143,417,800
============
============================================================================================================================
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
INTERNATIONAL The following ratios have been derived from April 9, 1997+ to
INDEX SERIES information provided in the financial statements. December 31, 1997
============================================================================================================================
<S> <C> <C>
Ratios to Average Expenses, net of reimbursement............................................. .33%*
Net Assets: =========
Expenses................................................................... .36%*
=========
Investment income--net...................................................... 1.99%*
=========
============================================================================================================================
Supplemental Net assets, end of period (in thousands)................................... $ 143,418
Data: =========
Portfolio turnover......................................................... 14.79%
=========
Average commission rate paid++.............................................. $ .0118
=========
============================================================================================================================
</TABLE>
* Annualized.
++ Includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
+ Commencement of operations.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH INTERNATIONAL INDEX SERIES
1. Significant Accounting Policies:
Merrill Lynch International Index Series (the "Series") is part of Merrill Lynch
Index Trust (the "Trust"). The Trust is registered under the Investment Company
Act of 1940 and is organized as a Delaware business trust. The following is a
summary of significant accounting policies followed by the Series.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Portfolio securities which are traded both on the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Short-term securities are valued at amortized cost, which approximates market
value. Other investments, including futures contracts
105
<PAGE>
Merrill Lynch International Index Fund, December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH INTERNATIONAL INDEX SERIES
and related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair market value, as
determined in good faith by or under the direction of the Trust's Board of
Trustees.
(b) Derivative financial instruments--The Series may engage in various portfolio
investment techniques to provide liquidity, or in connection with the Series'
arbitrage strategies. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts--The Series may purchase or sell stock index
futures contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Series as
unrealized gains or losses. When the contract is closed, the Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options--The Series is authorized to purchase and write call and put options.
When the Series writes an option, an amount equal to the premium received by the
Series is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Series enters into
a closing transaction), the Series realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent that
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward foreign exchange contracts--The Series is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Series' records. However, the effect on operations is recorded from the date the
Series enters into such contracts. Premium or discount is amortized over the
life of the contracts.
o Foreign currency options and futures--The Series may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Series, sold by the Series but not yet delivered, or committed or anticipated to
be purchased by the Series.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--The Series is classified as a partnership for Federal income
tax purposes. As a partnership for Federal income tax purposes, the Series will
not incur Federal income tax liability. Items of partnership income, gain, loss
and deduction will pass through to investors as partners in the Series.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Dividends from
foreign securities where the ex-dividend date may have passed are subsequently
recorded when the Series has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
106
<PAGE>
2. Investment Advisory Agreement and Transactions with Affiliates:
The Series has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co.") which is the limited partner.
MLAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of 0.11% of the average daily value of the Series' net
assets. For the period April 9, 1997 to December 31, 1997, MLAM earned fees of
$100,102, of which $35,546 was voluntarily waived.
Accounting services are provided to the Series by MLAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
MLAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period April 9, 1997 to December 31, 1997 were $142,020,773 and $14,703,706,
respectively.
Net realized and unrealized gains (losses) as of December 31, 1997 were as
follows:
- ---------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------------
Investments:
Long-term........................... $ 1,667,804 $ 409,846
Financial futures contracts......... 315,291 124,583
------------ -----------
Total investments.................... 1,983,095 534,429
------------ -----------
Currency transactions:
Foreign currency transactions....... 74,950 (29,100)
Forward foreign exchange contracts.. (367,890) (88,722)
------------ -----------
Total currency transactions.......... (292,940) (117,822)
------------ -----------
Total................................ $ 1,690,155 $ 416,607
============ ===========
- ---------------------------------------------------------------------------
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $156,303, of which $13,170,848 related to appreciated
securities and $13,014,545 related to depreciated securities. At December 31,
1997, the aggregate cost of investments for Federal income tax purposes was
$141,614,108.
107
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
IN THIS
STATEMENT
---------
<S> <C>
Investment Objectives and Policies.................................. 2
Investment Restrictions............................................ 2
Management of the Funds............................................. 4
Directors and Officers............................................. 4
Compensation of Directors/Trustees................................. 5
Administration Arrangements........................................ 5
Management and Advisory Arrangements............................... 6
Purchase of Shares.................................................. 8
Redemption of Shares................................................ 9
Portfolio Transactions and Brokerage................................ 9
Determination of Net Asset Value.................................... 11
Shareholder Services................................................ 12
Investment Account................................................. 12
Automatic Reinvestment of Dividends and Capital Gains
Distributions..................................................... 13
Systematic Withdrawal Plans........................................ 13
Automatic Investment Plans......................................... 13
Retirement Plans................................................... 13
Dividends, Distributions and Taxes.................................. 14
Dividends and Distributions........................................ 14
Taxes.............................................................. 14
Tax Treatment of Options and Futures Transactions.................. 16
Special Rules for Certain Foreign Currency Transactions............ 16
The Series......................................................... 17
Performance Data.................................................... 17
General Information................................................. 20
Description of Shares.............................................. 20
Computation of Offering Price per Share............................ 21
Independent Auditors............................................... 22
Custodian.......................................................... 22
Transfer Agent..................................................... 22
Legal Counsel...................................................... 23
Reports to Shareholders............................................ 23
Additional Information............................................. 23
Independent Auditors' Reports and Financial Statements of S&P 500
Index Fund and S&P 500 Index Series................................ 24
Independent Auditors' Reports and Financial Statements of Small Cap
Index Fund and Small Cap Index Series.............................. 42
Independent Auditors' Reports and Financial Statements of Aggregate
Bond Index Fund and Aggregate Bond Index Series.................... 70
Independent Auditors' Reports and Financial Statements of
International Index Fund and International Index Series............ 87
</TABLE>
Code 19004-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Index Funds, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
March 31, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS
Contained in Part A, the Prospectus:
Financial Highlights for the period April 3, 1997 (commencement of
operations) to December 31, 1997 for S&P 500 Index Fund and Aggregate
Bond Index Fund, and the period April 9, 1997 (commencement of
operations) to December 31, 1997 for Small Cap Index Fund and
International Index Fund.
Contained in Part B, the Statement of Additional Information:
Statement of assets and liabilities as of December 31, 1997, the
related statements of operations and changes in net assets, and the
financial highlights for the period April 3, 1997 (commencement of
operations) to December 31, 1997 of S&P 500 Index Fund.
Schedule of investments and statement of assets and liabilities as of
December 31, 1997, the related statements of operations and changes
in net assets, and the financial highlights for the period April 3,
1997 (commencement of operations) to December 31, 1997 of S&P 500
Index Series.
Statement of assets and liabilities as of December 31, 1997, the
related statements of operations and changes in net assets, and the
financial highlights for the period April 9, 1997 (commencement of
operations) to December 31, 1997 of Small Cap Index Fund.
Schedule of investments and statement of assets and liabilities as of
December 31, 1997, the related statements of operations and changes
in net assets, and the financial highlights for the period April 9,
1997 (commencement of operations) to December 31, 1997 of Small Cap
Index Series.
Statement of assets and liabilities as of December 31, 1997, the
related statements of operations and changes in net assets, and the
financial highlights for the period April 3, 1997 (commencement of
operations) to December 31, 1997 of Aggregate Bond Index Fund.
Schedule of investments and statement of assets and liabilities as of
December 31, 1997, the related statements of operations and changes
in net assets, and the financial highlights for the period April 3,
1997 (commencement of operations) to December 31, 1997 of Aggregate
Bond Index Series.
Statement of assets and liabilities as of December 31, 1997, the
related statements of operations and changes in net assets, and the
financial highlights for the period April 9, 1997 (commencement of
operations) to December 31, 1997 of International Index Fund.
Schedule of investments and statement of assets and liabilities as of
December 31, 1997, the related statements of operations and changes
in net assets, and the financial highlights for the period April 9,
1997 (commencement of operations) to December 31, 1997 of
International Index Series.
(b)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant.*
1(b) --Articles of Amendment.**
2 --By-Laws of Registrant.*
3 --None.
4 --Instrument Defining Rights of Shareholders. Incorporated by refer-
ence to Exhibits 1 and 2 above.**
5 --Not Applicable.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
6 --Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.**
7 --None.
8(a) --Form of Custody Agreement between Registrant and Merrill Lynch Trust
Company.**
8(b) --Form of Custody Agreement between Registrant and State Street Bank
and Trust Company.**
9(a) --Form of Administration Agreement between Registrant and Merrill
Lynch Asset Management, L.P.**
(b) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch Fi-
nancial Data Services, Inc.**
(c) --License Agreement relating to Use of Name between Merrill Lynch &
Co., Inc. and Registrant.**
10 --Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP,
counsel for Registrant.**
11(a) --Consent of Deloitte & Touche LLP, independent auditors for the Reg-
istrant.
11(b) --Consent of Deloitte & Touche LLP, independent auditors for Merrill
Lynch Index Trust.
12 --None.
13 --Certificate of Merrill Lynch Asset Management.**
14 --Not applicable.
15 --Account Maintenance Plan of the Registrant and Plan Sub-Agreement.**
16(a) --Schedule for computation of each performance quotation relating to
Class A shares of S&P 500 Index Fund provided in the Registration
Statement in response to Item 22.***
16(b) --Schedule for computation of each performance quotation relating to
Class D shares of S&P 500 Index Fund provided in the Registration
Statement in response to Item 22.***
16(c) --Schedule for computation of each performance quotation relating to
Class A shares of Small Cap Index Fund provided in the Registration
Statement in response to Item 22.***
16(d) --Schedule for computation of each performance quotation relating to
Class D shares of Small Cap Index Fund provided in the Registration
Statement in response to Item 22.***
16(e) --Schedule for computation of each performance quotation relating to
Class A shares of Aggregate Bond Index Fund provided in the Registra-
tion Statement in response to Item 22.***
16(f) --Schedule for computation of each performance quotation relating to
Class D shares of Aggregate Bond Index Fund provided in the Registra-
tion Statement in response to Item 22.***
16(g) --Schedule for computation of each performance quotation relating to
Class A shares of International Index Fund provided in the Registra-
tion Statement in response to Item 22.***
16(h) --Schedule for computation of each performance quotation relating to
Class D shares of International Index Fund provided in the Registra-
tion Statement in response to Item 22.***
17(a) --Financial Data Schedule for Class A shares of S&P 500 Index Fund.
17(b) --Financial Data Schedule for Class D shares of S&P 500 Index Fund.
17(c) --Financial Data Schedule for Class A shares of Small Cap Index Fund.
17(d) --Financial Data Schedule for Class D shares of Small Cap Index Fund.
17(e) --Financial Data Schedule for Class A shares of Aggregate Bond Index
Fund.
17(f) --Financial Data Schedule for Class D shares of Aggregate Bond Index
Fund.
17(g) --Financial Data Schedule for Class A shares of International Index
Fund.
17(h) --Financial Data Schedule for Class D shares of International Index
Fund.
17(i) --Financial Data Schedule for S&P 500 Index Series.
17(j) --Financial Data Schedule for Small Cap Index Series.
17(k) --Financial Data Schedule for Aggregate Bond Index Series.
17(l) --Financial Data Schedule for International Index Series.
17(m) --Powers of Attorney.**
18 --Rule 18f-3 Plan.**
</TABLE>
- --------
* Incorporated by reference to identically numbered Exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 333-15265).
** Incorporated by reference to identically numbered Exhibit to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A
(File No. 333-15265).
*** Incorporated by reference to identically numbered Exhibit to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A
(File No. 333-15265).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
FEBRUARY 28,
FUND TITLE OF CLASS 1998
- ---- -------------- ------------
<S> <C> <C>
S&P 500 Index Fund...... Class A Common Stock, par value $.0001 per share 76,854
Class D Common Stock, par value $.0001 per share 12,948
Small Cap Index Fund.... Class A Common Stock, par value $.0001 per share 2,100
Class D Common Stock, par value $.0001 per share 2,654
Aggregate Bond Index
Fund................... Class A Common Stock, par value $.0001 per share 37,185
Class D Common Stock, par value $.0001 per share 5,210
International Index
Fund................... Class A Common Stock, par value $.0001 per share 15,571
Class D Common Stock, par value $.0001 per share 1,807
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws and Section 2-418 of the Maryland General
Corporation Law.
Article VI of the By-Laws provides that each current and former officer and
Director of the Registrant shall be indemnified by the Registrant to the full
extent permitted under the General Laws of the State of Maryland, except that
such indemnity shall not protect any such person against any liability to the
Registrant or any stockholder thereof to which such person 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. Absent
a court determination that an officer or director seeking indemnification was
not liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Each officer and Director of the Registrant claiming indemnification with the
scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at
the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or Director of the Registrant.
The Registrant has purchased an insurance policy insuring its officers and
Directors against liabilities, and certain costs of defending claims against
such officers and Directors, to the extent such officers and
C-3
<PAGE>
Directors are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties.
Article IV of the Administration Agreement between Registrant and MLAM
(Exhibit 9(a) hereof) limits the liability of MLAM to liabilities arising from
willful misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), the
investment adviser of Merrill Lynch Index Trust, 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 Fund For Tomorrow,
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 Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government 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 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. MLAM also acts as 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
C-4
<PAGE>
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond 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 for 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. Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc.; MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York
Insured 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 Insured Fund II, 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 New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund II, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York
Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings New Jersey Insured Fund, Inc., Senior High Income
Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these 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, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is
North Tower, World Financial Center, 250 Vesey Street, New York, New York
10281-1201. The address of Merrill Lynch Financial Data Services ("MLFDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 1, 1995, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President
director and trustee, Mr. Glenn is Executive Vice President, and Mr. Richard is
Treasurer of substantially all of the investment companies listed in the first
two paragraphs of this Item 28, and Messrs. Giordano, Harvey, Kirstein and
Monagle are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- -------------- ----------------------------------
<C> <S> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... Chairman Chairman of FAM; President of MLAM and FAM
from 1977 to 1997; Chairman and Director
of Princeton Services; President of
Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- -------------------------- ----------------------------------
<C> <C> <S>
Jeffrey M. Peek......... President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators L.P.
Linda L. Federici....... 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
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey........ 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; Senior Vice
President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel and
General Counsel, Secretary of FAM; Senior Vice President,
Secretary and General Counsel, Director and Secretary of
Director Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros. Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice President
of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Quinn........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of
Merrill Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director
of MLFD
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
C-6
<PAGE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as a sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
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 Basic Value Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Consults International Portfolio, Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow, 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, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these registered
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-90011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each person has been engaged since October 31, 1995, for his or
her own account or in the capacity of director, officer, partner or trustee. In
addition, Messrs. Zeikel, Albert, and Richard are officers of one or more of
the registered investment companies listed in the first two paragraphs of this
Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------------ -----------------------------------
<C> <S> <C>
Arthur Zeikel...... Director and Chairman Chairman of the Manager and FAM;
President of the Manager and FAM from
1977 to 1997; Chairman and Director of
Princeton Services; President of
Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.
Alan J. Albert..... Senior Managing Director Vice President of the Manager
Nicholas C.D. Hall. Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group.
Gerald M. Richard.. Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD
Carol Ann Langham.. Company Secretary None
Debra Anne Searle.. Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant, placement
agent for Merrill Lynch Index Trust and as principal underwriter for each of
the open-end investment companies referred to in the first two
C-7
<PAGE>
paragraphs of Item 28 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. and MLFD also acts as principal
underwriter for the following closed-end funds: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
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 THE DISTRIBUTOR WITH REGISTRANT
---- --------------------- ---------------------
<C> <S> <C>
Terry K. Glenn........................ President and Director President
Richard L. Reller..................... Director None
Thomas J. Verage...................... Director None
William E. Aldrich.................... Senior Vice President None
Robert W. Crook....................... Senior Vice President None
Michael G. Clark...................... 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
Gerald M. Richard..................... Vice President and Treasurer
Treasurer
Salvatore Venezia..................... Vice President None
William Wasel......................... Vice President None
Robert Harris......................... Secretary Secretary
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act, 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, MLFDS, 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Funds" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Funds" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not party
to any Management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant will furnish each person to whom a Prospectus is delivered
with a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective 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 31st day of March,
1998.
Merrill Lynch Index Funds, Inc.
(Registrant)
/s/ Terry K. Glenn
By: _________________________________
(TERRY K. GLENN, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Terry K. Glenn President and Director
(Principal Executive Officer)
- ------------------------------------- March 31, 1998
(TERRY K. GLENN)
* Treasurer (Principal Financial
Accounting Officer)
and Director
- ------------------------------------- March 31, 1998
(GERALD M. RICHARD)
* Director
- ------------------------------------- March 31, 1998
(JACK B. SUNDERLAND)
* Director
- ------------------------------------- March 31, 1998
(STEPHEN B. SWENSRUD)
* Director
- ------------------------------------- March 31, 1998
(J. THOMAS TOUCHTON)
/s/ Terry K. Glenn
*By: ________________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-9
<PAGE>
SIGNATURES
Merrill Lynch Index Trust has duly caused this Post-Effective Amendment to
the Registration Statement of Merrill Lynch Index Funds, Inc. to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 31st day of March, 1998.
Merrill Lynch Index Trust
/s/ Terry K. Glenn
By: _________________________________
(TERRY K. GLENN, PRESIDENT)
This Post-Effective Amendment to the Registration Statement of Merrill Lynch
Index Funds, Inc. has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn
- -------------------------------------------
(TERRY K. GLENN) President and Trustee March 31, 1998
(Principal Executive
Officer)
*
- -------------------------------------------
(GERALD M. RICHARD) Treasurer (Principal March 31, 1998
Financial Accounting
Officer) and Trustee
*
- -------------------------------------------
(JACK B. SUNDERLAND) Trustee March 31, 1998
*
- -------------------------------------------
(STEPHEN B. SWENSRUD) Trustee March 31, 1998
*
- -------------------------------------------
(J. THOMAS TOUCHTON) Trustee March 31, 1998
</TABLE>
/s/ Terry K. Glenn
By: _________________________________
(TERRY K. GLENN, ATTORNEY-IN-
FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
11(a) --Consent of Deloitte & Touche, LLP, Independent Auditors for the
Registrant
11(b) --Consent of Deloitte & Touche, LLP, Independent Auditors for Merrill
Lynch Index Trust
17(a) --Financial Data Schedule for Class A shares of S&P 500 Index Fund
17(b) --Financial Data Schedule for Class D shares of S&P 500 Index Fund
17(c) --Financial Data Schedule for Class A shares of Small Cap Index Fund
17(d) --Financial Data Schedule for Class D shares of Small Cap Index Fund
17(e) --Financial Data Schedule for Class A shares of Aggregate Bond Index
Fund
17(f) --Financial Data Schedule for Class D shares of Aggregate Bond Index
Fund
17(g) --Financial Data Schedule for Class A shares of International Index
Fund
17(h) --Financial Data Schedule for Class D shares of International Index
Fund
17(i) --Financial Data Schedule for S&P 500 Index Series
17(j) --Financial Data Schedule for Small Cap Index Series
17(k) --Financial Data Schedule for Aggregate Bond Index Series
17(l) --Financial Data Schedule for International Index Series
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> MERRILL LYNCH S&P 500 INDEX FUND - CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-03-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 556749518
<INVESTMENTS-AT-VALUE> 602800370
<RECEIVABLES> 22452
<ASSETS-OTHER> 73940
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 602896762
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 314706
<TOTAL-LIABILITIES> 314706
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 554491930
<SHARES-COMMON-STOCK> 35473242
<SHARES-COMMON-PRIOR> 1250
<ACCUMULATED-NII-CURRENT> 19451
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2020453
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46050852
<NET-ASSETS> 445015646
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 5923562
<EXPENSES-NET> (1044928)
<NET-INVESTMENT-INCOME> 4878634
<REALIZED-GAINS-CURRENT> 20857038
<APPREC-INCREASE-CURRENT> 46050852
<NET-CHANGE-FROM-OPS> 71786524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3734820)
<DISTRIBUTIONS-OF-GAINS> (13898161)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37854298
<NUMBER-OF-SHARES-REDEEMED> (3743478)
<SHARES-REINVESTED> 1361172
<NET-CHANGE-IN-ASSETS> 602557686
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1400678
<AVERAGE-NET-ASSETS> 290124716
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 2.97
<PER-SHARE-DIVIDEND> (.11)
<PER-SHARE-DISTRIBUTIONS> (.42)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.55
<EXPENSE-RATIO> .57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> MERRILL LYNCH S&P 500 INDEX FUND - CLASS D
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-03-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 556749518
<INVESTMENTS-AT-VALUE> 602800370
<RECEIVABLES> 22452
<ASSETS-OTHER> 73940
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 602896762
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 314706
<TOTAL-LIABILITIES> 314706
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 554491930
<SHARES-COMMON-STOCK> 12565103
<SHARES-COMMON-PRIOR> 1250
<ACCUMULATED-NII-CURRENT> 19451
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2020453
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46050852
<NET-ASSETS> 157567040
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 5923562
<EXPENSES-NET> (1044928)
<NET-INVESTMENT-INCOME> 4878634
<REALIZED-GAINS-CURRENT> 20857038
<APPREC-INCREASE-CURRENT> 46050852
<NET-CHANGE-FROM-OPS> 71786524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1124363)
<DISTRIBUTIONS-OF-GAINS> (4938424)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16128798
<NUMBER-OF-SHARES-REDEEMED> (3931272)
<SHARES-REINVESTED> 366327
<NET-CHANGE-IN-ASSETS> 602557686
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1400678
<AVERAGE-NET-ASSETS> 108774525
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 2.95
<PER-SHARE-DIVIDEND> (.10)
<PER-SHARE-DISTRIBUTIONS> (.42)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.54
<EXPENSE-RATIO> .82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> MERRILL LYNCH SMALL CAP INDEX FUND - CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
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<NAME> MERRILL LYNCH SMALL CAP INDEX FUND - CLASS D
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<NAME> MERRILL LYNCH AGGREGATE BOND INDEX FUND - CLASS A
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<NAME> MERRILL LYNCH AGGREGATE BOND INDEX FUND - CLASS D
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<NAME> MERRILL LYNCH INTERNATIONAL INDEX FUND - CLASS A
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<NAME> MERRILL LYNCH INTERNATIONAL INDEX FUND - CLASS D
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<NAME> MERRILL LYNCH S&P 500 INDEX SERIES
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<NAME> MERRILL LYNCH SMALL CAP INDEX SERIES
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<NAME> MERRILL LYNCH AGGREGATE BOND INDEX SERIES
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<NAME> MERRILL LYNCH INTERNATIONAL INDEX SERIES
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<PAGE>
EXHIBIT 99.11(A)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Index Funds, Inc.:
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 333-15265 of our reports dated February 10, 1998 and February 18,
1998 appearing in the Statement of Additional Information, which is a part of
such Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 31, 1998
<PAGE>
EXHIBIT 99.11(B)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Index Trust:
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 333-15265 of our reports dated February 10, 1998 and February 18,
1998 appearing in the Statement of Additional Information, which is a part of
such Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 31, 1998
