<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999
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. [_]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]
Amendment No. 5
(Check appropriate box or boxes)
---------------
Merrill Lynch Index Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (609) 282-2800
TERRY K. GLENN
800 Scudders Mill Road,
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Approximate Date of Proposed Offering: As soon as practicable after the
effective date of the Registration Statement.
---------------
Copies to:
Counsel for the Fund:
Michael J. Hennewinkel, Esq.
Joel H. Goldberg, Esq. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP P.O. Box 9011
919 Third Avenue, New York, New York Princeton, New Jersey 08543-9011
10022
---------------
It is proposed that this filing will become effective:
[_] immediately upon filing pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a)(i), or
[X] on (April 30, 1999) pursuant to paragraph (b), or
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------
Merrill Lynch Index Trust has also executed this Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Index Funds, Inc.
April 30, 1999
This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.
The Securities and Exchange Commission has not
approved or disapproved these Securities or passed
upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[LOGO]
KEY FACTS
- -------------------------------------------------------------------------------
The Merrill Lynch Index Funds at a Glance.................................... 3
Risk/Return Bar Chart........................................................ 8
Fees and Expenses........................................................... 12
[LOGO]
DETAILS ABOUT THE FUNDS
- -------------------------------------------------------------------------------
How the Funds Invest........................................................ 15
Investment Risks............................................................ 20
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
How to Buy, Sell, Transfer and Exchange Shares.............................. 29
Participation in Merrill Lynch Fee-Based Programs........................... 33
[LOGO]
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
Merrill Lynch Asset Management.............................................. 36
Financial Highlights........................................................ 39
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
<PAGE>
[LOGO] Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
Common Stock -- shares of ownership of a corporation.
Bonds -- debt obligations issued by corporations, governments and other
issuers.
THE MERRILL LYNCH INDEX FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
What is each Fund's stated investment objective?
S&P 500 Index Fund
The investment objective of the S&P 500 Index Fund is to match the performance
of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500") as
closely as possible before the deduction of Fund expenses. The S&P 500 is a
market-weighted index composed of 500 common stocks issued by large-
capitalization U.S. companies in a wide range of businesses. The stocks
included in the index collectively represent a substantial portion of all
common stocks publicly traded in the U.S.
Small Cap Index Fund
The investment objective of the Small Cap Index Fund is to match the
performance of the Russell 2000 Index (the "Russell 2000") as closely as
possible before the deduction of Fund expenses. The Russell 2000 is a market-
weighted index composed of approximately 2,000 common stocks issued by smaller-
capitalization U.S. companies in a wide range of businesses.
Aggregate Bond Index Fund
The investment objective of the Aggregate Bond Index Fund is to match the
performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond
Index") as closely as possible before the deduction of Fund expenses. The
Aggregate Bond Index is composed primarily of dollar-denominated investment
grade bonds of different types.
International Index Fund
The investment objective of the International Index Fund is to match the
performance of the Morgan Stanley Capital International EAFE GDP Weighted Index
(the "EAFE Index") as closely as possible before the deduction of Fund
expenses. The EAFE Index is composed of equity securities of companies from
various industrial sectors whose primary trading markets are located outside
the U.S. Companies included in the EAFE Index are selected from among the
larger capitalization companies in these markets.
The weighting of the EAFE Index is based on the gross domestic product ("GDP")
of each of the countries in the index.
MERRILL LYNCH INDEX FUNDS, INC.
3
<PAGE>
[LOGO] Key Facts
What are each Fund's main investment strategies?
All Funds
Each Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of that Fund's index. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments in, or correlated with, the
applicable index. A Fund may change its target index if Fund management
believes a different index would better enable the Fund to match the
performance of the market segment represented by the current index.
Each Fund invests all of its assets in a Series of Merrill Lynch Index Trust
that has the same goals as the Fund. All investments will be made at the level
of the Series. This structure is sometimes called a "master/feeder" structure.
Each Fund's investment results will correspond directly to the investment
results of the underlying Series it invests in. For simplicity, this Prospectus
uses the term "Fund" to include the underlying Series a Fund invests in. We
cannot guarantee that the Funds will achieve their objectives.
S&P 500 Index Fund
The S&P 500 Index Fund invests in the common stocks represented in the S&P 500
in roughly the same proportions as their weightings in the S&P 500. The Fund
may also invest in derivative instruments linked to the S&P 500. At times the
Fund may not invest in all of the common stocks in the S&P 500 or, in the same
weightings as in the S&P 500. At those times, the Fund chooses investments so
that the market capitalizations, industry weighting and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the S&P 500 as a whole. The Fund may also engage in securities lending.
Small Cap Index Fund
The Small Cap Index Fund invests in a statistically selected sample of stocks
included in the Russell 2000 and in derivative instruments linked to the
Russell 2000. The Fund may not invest in all of the common stocks in the
Russell 2000, or in the same weightings as in the Russell 2000. The Fund
chooses investments so that the market capitalizations, industry weightings and
other fundamental characteristics of the stocks and derivative instruments
chosen are similar to the Russell 2000 as a whole. The Fund may also engage in
securities lending.
MERRILL LYNCH INDEX FUNDS, INC.
4
<PAGE>
Maturity -- the time at which the principal amount of a bond is scheduled to be
repaid.
Duration -- the sensitivity of a bond or bond portfolio to changes in interest
rates.
Aggregate Bond Index Fund
The Aggregate Bond Index Fund invests in a statistically selected sample of
bonds which are included in or correlated with the Aggregate Bond Index, and in
derivative instruments linked to the Aggregate Bond Index. The Fund may not
invest in all of the bonds in the Aggregate Bond Index, or in the same
weightings as in the Aggregate Bond Index. The Fund may invest in bonds not
included in the index, but which are selected to reflect characteristics such as
maturity, duration, or credit quality similar to bonds in the index. This may
result in different levels of interest rate, credit or prepayment risks from the
levels of risks on the Aggregate Bond Index. The Aggregate Bond Index is
composed of a variety of dollar-denominated investment grade bonds, including
bonds issued by the U.S. government and foreign governments and their agencies,
and bonds issued by U.S. or foreign companies, among others. The Fund may also
engage in securities lending.
International Index Fund
The International Index Fund invests in a statistically selected sample of
equity securities included in the EAFE Index and in derivative instruments
linked to the EAFE Index. The Fund may not invest in all of the countries, or
all of the companies within a country, represented in the EAFE Index, or in the
same weightings as in the EAFE Index. The Fund will choose investments so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the EAFE Index as a whole. The Fund may also engage in securities lending.
What are the main risks of investing in the Funds?
As with any mutual fund, the value of each Fund's investments -- and therefore
the value of a Fund's shares -- may go up or down. If the value of a Fund's
investments goes down, you may lose money. Changes in the value of the S&P 500
Index Fund's, Small Cap Index Fund's and International Fund's equity
investments may occur because a stock market is rising or falling or as the
result of specific factors that affect particular investments.
The Aggregate Bond Index Fund's bond investments are subject to interest rate
and credit risk. Interest rate risk is the risk that when interest rates go up,
the value of debt instruments generally goes down. In general, the market price
of debt securities with longer maturities will go up or down more in response
to changes in interest rates than shorter term securities. Credit risk is the
risk that the issuer will be unable to pay the interest or principal when due.
The degree of credit risk depends on both the financial condition of the issuer
and the terms of the obligation.
MERRILL LYNCH INDEX FUNDS, INC.
5
<PAGE>
[LOGO] Key Facts
Each Fund may invest in foreign securities to the extent foreign securities are
represented in the index tracked by that Fund. Currently, the International
Index Fund will invest primarily in foreign securities and the Aggregate Bond
Index Fund will invest a portion of its assets in foreign securities. The
Aggregate Bond Index Fund will invest only in dollar-denominated foreign
securities, while the International Index Fund will invest principally in
securities denominated in foreign currencies. The International Index Fund's
and Aggregate Bond Index Fund's investments in foreign securities involve
special risks, including the possibility of substantial volatility due to
adverse political, economic or other developments. Foreign securities may also
be less liquid and harder to value than U.S. securities. In addition, the
foreign securities in which the International Index Fund will invest are
subject to significant changes in value due to exchange rate fluctuations.
The Funds are also subject to selection risk, which is the risk that a Fund's
investments, which may not fully replicate the index, may perform differently
from the securities in the index. Each Fund will attempt to be fully invested
at all times, and will not hold a significant portion of its assets in cash.
The Funds will generally not attempt to hedge against adverse market movements.
Therefore, a Fund might go down in value more than other mutual funds in the
event of a general market decline. In addition, an index fund has operating and
other expenses while an index does not. As a result, while a Fund will attempt
to track its target index as closely as possible, it will tend to underperform
the index to some degree over time.
Each Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, a Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps a Fund's
performance when its investments are successful, but also hurts a Fund's
performance when its investments are unsuccessful.
Who should invest?
The S&P 500 Index Fund may be an appropriate investment for you if you:
. Want to invest in large U.S.
companies
. Are investing with long term
goals, such as retirement or
funding a child's education
MERRILL LYNCH INDEX FUNDS, INC.
6
<PAGE>
. In seeking to match the
performance of the S&P 500, are
willing to accept the risk that
the value of your investment may
decline
. Are not looking for a
significant amount of current
income
The Small Cap Index Fund may be an appropriate investment for you if you:
. Want to invest in smaller
capitalization U.S. companies
and can accept the additional
risk and volatility associated
with stocks of these companies
. Are investing with long term
goals, such as retirement or
funding a child's education
. In seeking to match the
performance of the Russell
2000, are willing to accept the
risk that the value of your
investment may decline
. Are not looking for a
significant amount of current
income
The Aggregate Bond Index Fund may be an appropriate investment for you if you:
. In seeking to match the
performance of the Aggregate
Bond Index, are willing to
accept a lower potential for
capital appreciation
. Are looking for an investment
that provides income
The International Index Fund may be an appropriate investment for you if you:
. Are looking for exposure to a
variety of foreign markets and
can accept the additional risk
and volatility associated with
foreign investing
. Are investing with long term
goals, such as retirement or
funding a child's education
. In seeking to match the
performance of the EAFE Index,
are willing to accept the risk
that the value of your
investment may decline
. Are not looking for a
significant amount of current
income
MERRILL LYNCH INDEX FUNDS, INC.
7
<PAGE>
[LOGO] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class A shares for each complete calendar year since the Fund's inception.
The table compares the average annual total returns for each class of the
Fund's shares for the periods shown with those of the S&P 500 Index. How the
Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
Merrill Lynch
S&P 500 Index Fund - Class A
Annual Total Returns
[GRAPHIC]
1998 28.24%
During the period shown in the bar chart, the highest return for a quarter was
21.37% (quarter ended December 31, 1998) and the lowest return for a quarter
was -10.04% (quarter ended September 30, 1998). The year-to-date return as of
March 31, 1999 was 4.77%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the
calendar year ended) Past
December 31, 1998 One Year Since Inception
- ------------------------------------------------------
<S> <C> <C>
S&P 500 Index FundClass A 28.24% 34.50%+
- ------------------------------------------------------
Class D 27.95% 34.17%+
- ------------------------------------------------------
S&P 500* 28.58% 34.84%
- ------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
+ Inception date is April 3, 1997.
MERRILL LYNCH INDEX FUNDS, INC.
8
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class A shares for each complete calendar year since the Fund's inception.
The table compares the average annual total returns for each class of the
Fund's shares for the periods shown with those of the Russell 2000 Index. How
the Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
Merrill Lynch
Small Cap Index Fund - Class A
Annual Total Returns
[GRAPHIC]
1998 -3.14%
During the period shown in the bar chart, the highest return for a quarter was
16.04% (quarter ended December 31, 1998) and the lowest return for a quarter
was -20.05% (quarter ended September 30, 1998). The year-to-date return as of
March 31, 1999 was -5.74%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the
calendar year ended) Past
December 31, 1998 One Year Since Inception
- -------------------------------------------------------
<S> <C> <C>
Small Cap Index FundClass A -3.14% 12.74%+
- -------------------------------------------------------
Class D -3.41% 12.47%+
- -------------------------------------------------------
Russell 2000 Index* -2.55% 13.35%
- -------------------------------------------------------
</TABLE>
* This unmanaged index is comprised of approximately 2,000 smaller-
capitalization common stocks from various industrial sectors. Past
performance is not predictive of future performance.
+ Inception date is April 9, 1997.
MERRILL LYNCH INDEX FUNDS, INC.
9
<PAGE>
[LOGO] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class A shares for each complete calendar year since the Fund's inception.
The table compares the average annual total returns for each class of the
Fund's shares for the periods shown with those of the Lehman Brothers Aggregate
Bond Index. How the Fund performed in the past is not necessarily an indication
of how the Fund will perform in the future.
Merrill Lynch
Aggregate Bond Index - Class A
Annual Total Returns
[GRAPHIC]
1998 8.56%
During the period shown in the bar chart, the highest return for a quarter was
4.21% (quarter ended September 30, 1998) and the lowest return for a quarter
was 0.33% (quarter ended December 31, 1998). The year-to-date return as of
March 31, 1999 was -0.70%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the
calendar year ended) Past
December 31, 1998 One Year Since Inception
- -----------------------------------------------------------------
<S> <C> <C>
Aggregate Bond IndexClass A 8.56% 10.41%+
- -----------------------------------------------------------------
Class D 8.29% 10.14%+
- -----------------------------------------------------------------
Lehman Brothers Aggregate Bond Index* 8.69% 10.72%
- -----------------------------------------------------------------
</TABLE>
* This unmanaged market-weighted index is comprised of US Government and agency
securities, mortgage-backed securities issued by the Government National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Federal National Mortgage Association and Investment-grade (rated BBB or
better) corporate bonds. Past performance is not predictive of future
performance.
+ Inception date is April 3, 1997.
MERRILL LYNCH INDEX FUNDS, INC.
10
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class A shares for each complete calendar year since the Fund's inception.
The table compares the average annual total returns for each class of the
Fund's shares for the periods shown with those of the MSCI EAFE GDP Weighted
Index. How the Fund performed in the past is not necessarily an indication of
how the Fund will perform in the future.
Merrill Lynch
International Index Fund - Class A
Annual Total Returns
[GRAPHIC]
1998 25.65%
During the period shown in the bar chart, the highest return for a quarter was
20.84% (quarter ended December 31, 1998) and the lowest return for a quarter
was -14.69% (quarter ended September 30, 1998). The year-to-date return as of
March 31, 1999 was 2.33%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the
calendar year ended) Past
December 31, 1998 One Year Since Inception
- -----------------------------------------------------------
<S> <C> <C>
International Index FundClass A 25.65% 19.60%+
- -----------------------------------------------------------
Class D 25.40% 19.32%+
- -----------------------------------------------------------
MSCI EAFE GDP Weighted Index* 26.71% 17.72%++
- -----------------------------------------------------------
</TABLE>
* This unmanaged gross domestic product-weighted index is comprised 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.
Past performance is not predictive of future performance.
+ Inception date is April 9, 1997.
++ Since March 31, 1997.
MERRILL LYNCH INDEX FUNDS, INC.
11
<PAGE>
[LOGO] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing the Fund.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers for account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers two different classes of shares, Class A and Class D shares.
Although your money will be invested the same way no matter which class of
shares you buy, Class D shares pay an ongoing account maintenance fee while
Class A shares do not. Not everyone is eligible to buy Class A shares. Your
Merrill Lynch Financial Consultant can help you determine whether you are
eligible to buy Class A shares. See "How to Buy, Sell, Transfer and Exchange
Shares," below.
The tables show the different fees and expenses that you may pay if you buy and
hold each class of shares of each Fund. Future expenses may be greater or less
than those indicated below.
Class A Shares
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid
directly from Aggregate
your S&P 500 Small Cap Bond International
investment): Index Fund Index Fund Index Fund Index Fund
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load)
imposed on
purchases (as a
percentage of
offering price) None None None None
- ------------------------------------------------------------------
Maximum Deferred
Sales Charge
(Load) (as a
percentage of
original
purchase price
or redemption
proceeds,
whichever is
lower) None None None None
- ------------------------------------------------------------------
Maximum Sales
Charge (Load)
imposed on
Dividend
Reinvestments None None None None
- ------------------------------------------------------------------
Redemption Fee None None None None
- ------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------
Maximum Account
Fee None None None None
- ------------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(a):
- ------------------------------------------------------------------
Management
Fee(b)(f) 0.05% 0.08% 0.06% 0.11%
- ------------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(c) None None None None
- ------------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(d) 0.15% 0.54% 0.20% 0.41%
- ------------------------------------------------------------------
Administrative
Fees(e)(f) 0.20% 0.22% 0.14% 0.24%
- ------------------------------------------------------------------
Total Annual
Fund Operating
Expenses(f) 0.40% 0.84% 0.40% 0.76%
- ------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
12
<PAGE>
[LOGO] Key Facts
Class D Shares
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid
directly from Aggregate
your S&P 500 Small Cap Bond International
investment): Index Fund Index Fund Index Fund Index Fund
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load)
imposed on
purchases (as a
percentage of
offering price) None None None None
- ------------------------------------------------------------------------
Maximum Deferred
Sales Charge
(Load) (as a
percentage of
original
purchase price
or redemption
proceeds,
whichever is
lower) None None None None
- ------------------------------------------------------------------------
Maximum Sales
Charge (Load)
imposed on
Dividend Reinvestments None None None None
- ------------------------------------------------------------------------
Redemption Fee None None None None
- ------------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------------
Maximum Account
Fee None None None None
- ------------------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(a):
- ------------------------------------------------------------------------
Management
Fee(b)(f) 0.05% 0.08% 0.06% 0.11%
- ------------------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(c) 0.25% 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(d) 0.15% 0.54% 0.20% 0.42%
- ------------------------------------------------------------------------
Administrative
Fees(e)(f) 0.20% 0.22% 0.14% 0.24%
- ------------------------------------------------------------------------
Total Annual
Fund Operating
Expenses(f) 0.65% 1.09% 0.65% 1.02%
- ------------------------------------------------------------------------
</TABLE>
(a) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(b) Paid by the Series.
(c) The Funds call the Service Fee an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund Materials.
(d) Each Fund pays the Transfer Agent an annual fee at the annual rate of
0.05% of the Fund's average daily net assets for its services and is
entitled to reimbursement for out-of-pocket expenses incurred by it under
the Transfer Agency Agreement. For the fiscal year ended December 31,
1998, the S&P 500 Index Fund, the Small Cap Index Fund, the Aggregate Bond
Index Fund and the International Index Fund paid the Transfer Agent fees
totaling $555,448, $55,487, $276,277, and $90,656, respectively. The
Investment Adviser provides accounting services to each Series at its
cost. For the fiscal year ended December 31, 1998, the S&P 500 Index
Series, the Small Cap Index Series, the Aggregate Bond Index Series and
the International Index Series reimbursed the Investment Adviser $285,864,
$38,573, $119,726 and $50,646, respectively, for accounting services. The
Administrator provides account services to each Fund at its cost. For the
fiscal year ended December 31, 1998, the S&P 500 Index Fund, the Small Cap
Index Fund, the Aggregate Bond Index Fund and the International Index Fund
reimbursed the Administrator $400, $1,200, $1,222 and $1,200,
respectively, for accounting services.
(e) Paid by the Funds.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. During the fiscal year ended
December 31, 1998, the Investment Adviser waived management fees and
MERRILL LYNCH INDEX FUNDS, INC.
13
<PAGE>
[LOGO] Key Facts
(Footnotes continued from previous page)
reimbursed expenses totaling $85,841 for the Small Cap Index Series. During
the fiscal year ended December 31, 1998, the Investment Adviser waived
management fees totaling $2,537 and $87,182 for the Aggregate Bond Index
Series and the International Index Series, respectively. During the fiscal
year ended December 31, 1998, the Administrator waived administration fees
totaling $62,952 and $57,566, for the S&P 500 Index Fund and the International
Index Fund, respectively. For the fiscal year ended December 31, 1998, the
Administrator waived administration fees and reimbursed expenses totaling
$104,100 and $184,245 for the Small Cap Index Fund and Aggregate Bond Index
Fund, respectively. Total Fund Operating Expenses in the fee table have been
restated to assume the absence of any such reimbursement of expenses and/or
waiver of fees because it may be discontinued or reduced by the Investment
Adviser/Administrator at any time without notice. After such waivers and
reimbursements, the total expense ratio was 0.39% for Class A shares and 0.64%
for Class D shares of the S&P 500 Index Fund; 0.50% for Class A shares and
0.75% for Class D shares of the Small Cap Index Fund; 0.35% for Class A shares
and 0.60% for Class D shares of the Aggregate Bond Index Fund; and 0.64% for
Class A shares and 0.89% for Class D shares of the International Index Fund.
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in a Fund for the time periods
indicated, that your investment has a 5% return each year, and that each Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
CLASS A SHARES
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index Fund $ 41 $128 $224 $ 505
- -------------------------------------------------------
Small Cap Index Fund $ 86 $268 $466 $1,037
- -------------------------------------------------------
Aggregate Bond
Index Fund $ 41 $128 $224 $ 505
- -------------------------------------------------------
International
Index Fund $ 78 $243 $422 $ 942
- -------------------------------------------------------
CLASS D SHARES
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index Fund $ 66 $208 $362 $ 810
- -------------------------------------------------------
Small Cap Index Fund $111 $347 $601 $1,329
- -------------------------------------------------------
Aggregate Bond
Index Fund $ 66 $208 $362 $ 810
- -------------------------------------------------------
International
Index Fund $104 $325 $563 $1,248
- -------------------------------------------------------
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
ABOUT THE INVESTMENT ADVISER
The Funds are managed by Merrill Lynch Asset Management.
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
All Funds
The Funds will not attempt to buy or sell securities based on Fund management's
economic, financial or market analysis, but will instead employ a "passive"
investment approach. This means that Fund management will attempt to invest in
a portfolio of assets whose performance is expected to match approximately the
performance of the respective index before deduction of Fund expenses. A Fund
will only buy or sell securities when Fund management believes it is necessary
to do so in order to match the performance of the respective index.
Accordingly, it is anticipated that a Fund's portfolio turnover and trading
costs will be lower than "actively" managed funds. However, the Funds have
operating and other expenses, while an index does not. Therefore, each Fund
will tend to underperform its target index to some degree over time.
Each Fund will be substantially invested in securities in the applicable index,
and will invest at least 80% of its assets in securities or other financial
instruments which are contained in or correlated with securities in the
applicable index. A Fund may change its target index if Fund management
believes a different index would better enable the Fund to match the
performance of the market segment represented by the current index and,
accordingly, the investment objective of a Fund may be changed without
shareholder approval. In addition to the investment strategies described below,
each Fund may also invest in illiquid securities and repurchase agreements, and
may engage in securities lending.
Each Fund will also invest in short term money market instruments as cash
reserves to maintain liquidity. These instruments may include obligations of
the U.S. Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and repurchase
agreements. To the extent a Fund invests in short term money market
instruments, it will generally also invest in options, futures or other
derivatives in order to maintain full exposure to the index. The Funds will not
invest in options, futures, other derivative instruments or short term money
market instruments in order to lessen the Funds' exposure to common stocks as a
defensive strategy, but will instead attempt to remain fully invested at all
times.
S&P 500 Index Fund
The S&P 500 is composed of 500 common stocks issued by large-capitalization
U.S. companies in a wide range of businesses. The stocks included in the index
collectively represent a substantial portion of all
MERRILL LYNCH INDEX FUNDS, INC.
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[LOGO] Details About the Fund
Market-Weighted Index -- an index in which the weighting of each security
is based on its market capitalization. In a market-weighted index, changes
in the price of a company with a large capitalization affect the level of
the index more than changes in the price of a company with smaller market
capitalization.
Market Capitalization -- the number of a company's outstanding shares
multiplied by a share's current market value. Market capitalization is a
measure of a company's size.
common stocks publicly traded in the U.S. The S&P 500 is generally considered
broadly representative of the performance of publicly traded U.S. large
capitalization stocks. The S&P 500 is a market-weighted index, which means that
the largest stocks represented in the index have the most effect on the index's
performance. Currently, the largest stocks in the S&P 500 have an effect on the
performance of the index that is many times greater than the effect of the
other stocks in the index. The stocks in the S&P 500 are chosen by the Standard
& Poor's Rating Group ("S&P"), a division of the McGraw-Hill Companies, Inc.
S&P chooses stocks for inclusion in the S&P 500 based on market capitalization,
trading activity and the overall mix of industries represented in the index,
among other factors. S&P's selection of a stock for the S&P 500 does not mean
that S&P believes the stock to be an attractive investment.
The Fund will normally invest in all 500 stocks in the S&P 500 in roughly the
same proportions as their weightings in the S&P 500. For example, if 5% of the
S&P 500 is made up of the stock of a particular company, the Fund will normally
invest approximately 5% of its assets in that company. This strategy is known
as "full replication." However, when Fund management believes it would be cost
efficient, Fund management is authorized to deviate from full replication and
to instead invest in a statistically selected sample of the 500 stocks in the
S&P 500 which has aggregate investment characteristics, such as average market
capitalization and industry weightings, similar to the S&P 500 as a whole. Fund
management may also purchase stocks not included in the S&P 500 when it
believes that it would be a cost efficient way of approximating the S&P 500's
performance to do so. If Fund management uses these techniques, the Fund may
not track the S&P 500 as closely as it would if it were fully replicating the
S&P 500.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the S&P 500. Derivatives allow the Fund to increase or
decrease its exposure to the S&P 500 quickly and at less cost than buying or
selling stocks. The Fund will invest in options, futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
Small Cap Index Fund
The Russell 2000 is composed of the common stocks of the 1,001st through the
3000th largest U.S. companies by market capitalization, as determined by the
Frank Russell Company. The stocks represented in the index are issued by small-
capitalization (generally less than $1.5 billion) U.S. companies in a wide
range of businesses. The Russell 2000 is a market-weighted index, which means
that the largest stocks represented in the index have the most effect on the
index's performance. The Russell 2000 is generally considered broadly
representative of the performance of publicly traded U.S. smaller-
capitalization stocks. Frank Russell Company's selection of a stock for the
Russell 2000 does not mean that Frank Russell Company believes the stock to be
an attractive investment.
The Frank Russell Company updates the Russell 2000 once each year, at which
time there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Fund). Stocks of companies that
merge, are acquired or otherwise cease to exist during the year are not
replaced in the index.
The Fund may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. Instead, the Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000. The
Fund will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments in its portfolio are similar to the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the Russell 2000. Derivatives allow the Fund to increase or
decrease its exposure to the Russell 2000 quickly and at less cost than buying
or selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
MERRILL LYNCH INDEX FUNDS, INC.
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[LOGO] Details About the Fund
Mortgage Backed
Securities --
securities that
give their
holder the
right to
receive a
portion of
principal
and/or interest
payments made
on a pool of
residential or
commercial
mortgage loans.
Aggregate Bond Index Fund
The Aggregate Bond Index is a market-weighted index comprised of 6,500 dollar-
denominated investment grade bonds with maturities greater than one year. The
Aggregate Bond Index includes:
. U.S. government and government
agency securities
. securities issued by
supranational entities, such as
the World Bank
. securities issued by foreign
governments and U.S. and foreign
corporations
. mortgage backed securities
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Fund may not invest in all of the bonds in the Aggregate Bond Index, or in
the same weightings as in the Aggregate Bond Index. Instead, the Fund may
invest in a statistically selected sample of bonds included in the Aggregate
Bond Index, or in a statistically selected sample of bonds not included in the
index but correlated with bonds that are in the index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund may invest in bonds
not included in the index, but which are selected to reflect characteristics
such as maturity, duration, or credit quality similar to bonds in the index.
This may result in different levels of interest rate, credit or other risks
from the levels of risks on the securities included in the Aggregate Bond
Index. The Aggregate Bond Index Fund may trade securities to the extent
necessary to maintain the duration of certain segments of the portfolio close
to the duration of corresponding segments of the index, and, accordingly, the
Aggregate Bond Index Fund may have a higher portfolio turnover rate than the
other Funds.
Because the Aggregate Bond Index is composed of investment grade bonds, the
Fund will invest in corporate bonds rated investment grade (rated at least Baa3
by Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings Group),
or if unrated, of comparable quality. The Fund may continue to hold a security
that is downgraded below investment grade.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
Pass through securities --securities that represent a right to receive
principal and interest payments collected on a pool of mortgages, which are
passed through to security holders (less servicing costs).
Collateralized Mortgage Obligations --mortgage backed securities that divide
the principal and interest payments collected on a pool of mortgages into
several revenue streams with different priority rights to various portions of
the underlying mortgage payments.
The Fund will usually invest a substantial portion of its assets in mortgage
backed securities. Mortgage backed securities may be either pass through
securities or collateralized mortgage obligations.
The Fund may also purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. This is when the Fund buys or
sells securities with payment and delivery taking place in the future so that
the Fund can lock in a favorable yield and price at the time of entering into
the transaction. The Fund may also enter into dollar rolls in which the Fund
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar securities on a future date from the same
party. During the period between the Fund's sale of one security and purchase
of a similar security, the Fund does not receive principal and interest on the
securities sold. The Fund may also enter into standby commitment agreements in
which the Fund is committed, for a stated period of time, to buy a stated
amount of a fixed income security which may be issued and sold to the Fund at
the option of the issuer. The price of the security is fixed at the time of the
commitment, and the Fund is paid a commitment fee whether the security is
issued or not.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with the performance of the Aggregate Bond Index. Derivatives may allow the
Fund to increase or decrease its exposure to the Aggregate Bond Index quickly
and at less cost than buying or selling bonds. The Fund may invest in options
and futures and other derivative instruments in order to gain market exposure
quickly in the event of subscriptions, to maintain liquidity in the event of
redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
International Index Fund
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the U.S.
Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The countries currently included in
the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Kingdom. The weighting of the EAFE Index among these countries is based upon
each country's gross domestic product, and not relative market capitalizations.
The stocks in the EAFE Index are chosen by Morgan Stanley & Co. Incorporated
("Morgan Stanley"). Morgan Stanley chooses stocks for inclusion in the EAFE
Index based on market capitalization, trading activity and the overall mix of
industries represented in the index, among other factors. The EAFE Index is
generally considered broadly representative of the performance of stocks traded
in the international markets. Morgan Stanley's selection of a stock for the
EAFE Index does not mean that Morgan Stanley believes the stock to be an
attractive investment.
The Fund may not invest in all of the countries, or all of the companies within
a country, represented in the EAFE Index, or in the same weightings as the EAFE
Index. Instead, the International Index Fund may invest in a statistically
selected sample of equity securities included in the EAFE Index and in
derivative instruments correlated with countries within the EAFE Index.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Fund to increase or
decrease its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will
meet its goals or that a Fund's performance will be positive for any period of
time.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
S&P 500 Index Fund, Small Cap Index Fund and International Index Fund
Stock Market Risk -- Stock market risk is the risk that the stock markets will
go down in value, including the possibility that the markets will go down
sharply and unpredictably.
Aggregate Bond Index Fund
Interest Rate Risk -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities.
Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
Event Risk -- Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
Mortgage Backed Securities -- When interest rates fall, borrowers may refinance
or otherwise repay principal on their mortgages earlier than scheduled. When
this happens, certain types of mortgage backed securities will be paid off more
quickly than originally anticipated and owners of these securities have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, however, fewer borrowers refinance
and certain types of mortgage backed securities are paid off more slowly than
originally anticipated, which causes the value of these securities to fall.
This risk is known as "extension risk". Because of prepayment risk and
extension risk, small movements in interest rates (both increases and
decreases) may significantly reduce the value of certain mortgage backed
securities.
Dollar Rolls -- Dollar Rolls involve the risk that the market value of the
securities that the Fund is committed to buy may decline below the price of the
securities the Fund has sold. These transactions may involve leverage. The Fund
will engage in dollar rolls to enhance return and not for the purpose of
borrowing.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Standby Commitment Agreements -- Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less than its
purchase price.
When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve
the risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs the Fund loses both the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
Foreign Government Debt -- The Aggregate Bond Index Fund may invest in debt
securities issued or guaranteed by foreign governments or their agencies.
Investments in these securities subject the Fund to the risk that a government
entity may delay or refuse to pay interest or repayment of principal on its
debt for various reasons, including cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of its debt
position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There is no bankruptcy proceeding by which all or part of debt
securities that a government entity has not repaid may be collected.
International Index Fund and Aggregate Bond Index Fund
Foreign Market Risk -- Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that a Fund will lose
money. In particular, a Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of securities
traded each day, it may make it difficult for a Fund to buy and sell certain
securities. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the U.S.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the U.S. with respect to such issues as growth
of gross national product, reinvestment of capital, resources, and balance of
payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade
MERRILL LYNCH INDEX FUNDS, INC.
22
<PAGE>
barriers, and other protectionist or retaliatory measures. Investments in
foreign markets may also be adversely affected by governmental actions such as
the imposition of capital controls, nationalization of companies or industries,
expropriation of assets, or the imposition of punitive taxes. In addition, the
governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices, impair
a Fund's ability to purchase or sell foreign securities or transfer a Fund's
assets or income back into the U.S., or otherwise adversely affect a Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the U.S. or other foreign countries.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. does. Other countries may not have laws to
protect investors the way that the U.S.' securities laws do. For example, some
foreign countries may have no laws or rules against insider trading (this is
when a person buys or sells a company's securities based on "inside" non-public
information about that company). Accounting standards in other countries are
not necessarily the same as in the U.S. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may be
harder for a Fund's portfolio manager to completely and accurately determine a
company's financial condition. Also, brokerage commissions and other costs of
buying or selling securities often are higher in foreign countries than they
are in the United States. This reduces the amount the fund can earn on its
investments.
International Fund
Currency Risk and Exchange Risk -- Securities in which the International Index
Fund invests are usually denominated or quoted in currencies other than the
U.S. dollar. Changes in foreign currency exchange rates will affect the value
of the securities of the Fund. Generally, when the U.S. dollar rises in value
against a foreign currency, your investment in a security denominated in that
currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
foreign currency, your investment in a security denominated in that currency
gains value because the currency is worth more U.S. dollars. This risk is
generally known as "currency risk" which is the possibility that a stronger
U.S. dollar will reduce returns for U.S. investors investing overseas and a
weak U.S. dollar will increase returns for U.S. investors investing overseas.
Certain Risks of Holding Fund Assets Outside the U.S. -- The International
Index Fund generally holds the foreign securities and cash in which it invests
outside the U.S. in foreign banks and securities depositories. Certain of such
foreign banks and securities depositories may be recently organized or new to
the foreign custody business and/or may have operations subject to limited or
no regulatory oversight. Also, the laws of certain countries may put limits on
the Fund's ability to recover its assets if a foreign bank or depository or
issuer of a security or any of their agents goes bankrupt. In addition, it can
be expected that it will be more expensive for the Fund to buy, sell, and hold
securities in certain foreign markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other costs. The increased expense to
invest in foreign markets reduces the amount the Fund can earn on its
investments and typically results in a higher operating expense ratio for the
Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the U.S. and emerging market countries may
be unreliable, increasing the risk of delayed settlements or losses of security
certificates. Settlements in certain foreign countries at times have not kept
pace with the number of securities transactions; these problems may make it
difficult for the Fund to carry out transactions. If a Fund cannot settle or is
delayed in settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned
thereon for some period. If a Fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then
declines or, if it has contracted to sell the security to another party, the
Fund could be liable to that party for any losses incurred.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.
European Economic and Monetary Union ("EMU") -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like other investment companies
and business organizations, including the companies in which the Funds invest,
the Funds could be adversely affected:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned.
. If a participating country
withdraws from EMU.
. If the computing, accounting and
trading systems used by a Fund's
service providers, or by other
entities with which the Fund or
its service providers do
business, are not capable of
recognizing the euro as a
distinct currency.
Small Cap Index Fund
Small Cap -- Small cap companies may have limited product lines or markets.
They may be less financially secure than larger, more established companies.
They may depend on a small number of key personnel. If a product fails, or if
management changes, or there are other adverse developments, the Fund's
investment in a small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger cap securities or the
stock market as a whole. Investing in small caps securities requires a long-
term view.
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[LOGO]Details About the Fund
Futures -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Forwards -- private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Options -- exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price within a specified time period.
Swaps -- private contracts involving the obligation of each party to exchange
specified payments, which may be based on the value of an index or asset, with
the other party at specified times.
Indexed Securities -- debt obligations that return a variable amount of
principal or interest based on the value of an index at a specified time.
All Funds
Selection Risk -- Selection risk is the risk that a Fund's investments, which
may not fully replicate the index, may perform differently from the securities
in the index.
Derivatives -- Derivatives allow a Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments. The Fund
may use the following types of derivative instruments including: futures,
forwards and options, options on futures, swaps and indexed securities.
Derivatives are volatile and involve significant risks, which may include:
Leverage risk -- the risk associ-
ated with certain types of in-
vestments or trading strategies
(such as borrowing money to in-
crease the amount of investments)
that relatively small market
movements may result in large
changes in the value of an in-
vestment. Certain investments or
trading strategies that involve
leverage can result in losses
that greatly exceed the amount
originally invested.
Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction) on
a derivative transaction will be
unable to honor its financial ob-
ligation to a Fund.
Currency risk -- the risk that
changes in the exchange rate be-
tween currencies will adversely
affect the value (in U.S. dollar
terms) of an investment.
Liquidity risk -- the risk that
certain securities may be diffi-
cult or impossible to sell at the
time that the seller would like
or at the price that the seller
believes the security is cur-
rently worth.
The Funds may use derivatives for anticipatory hedging. Anticipatory hedging is
a strategy in which a Fund uses a derivative to offset the risk that securities
in which the Fund intends to invest will increase in value before the Fund has
an opportunity to purchase the securities. The Funds will use derivatives for
anticipatory hedging in order to gain exposure efficiently to their underlying
indexes in the event the Funds receive cash inflows.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
Borrowing and Leverage -- The Funds may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on a Fund's portfolio. Borrowing
will cost a Fund interest expense and other fees. The cost of borrowing may
reduce a Fund's return.
Certain securities that a Fund buys may create leverage, including, for
example, when issued securities, forward commitments and options.
Illiquid Securities -- Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. A Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so may be less able to
predict a loss. In addition, if Fund management receives material adverse non
public information about the issuer, a Fund will not be able to sell the
security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market but carry the risk that the
active trading market may not continue.
Securities Lending -- Each Fund may lend securities to financial institutions
that provide cash or government securities as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, a Fund may lose money and there may be a
delay in recovering the loaned securities. A Fund could also lose money if it
does not recover the securities and the value of the collateral falls. These
events could trigger adverse tax consequences to a Fund.
MERRILL LYNCH INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Short Sales -- A Fund may borrow the security sold short to make delivery to
the buyer. The Fund must then replace the security it has borrowed. If the
price of a security sold short goes up between the time of the short sale and
the time the Fund must deliver the security to the lender, the Fund will incur
a loss. The Fund must also pay the lender any interest accrued during the
period of the loan.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Funds, including how they
invest, please see the Statement of Additional Information.
MERRILL LYNCH INDEX FUNDS, INC.
28
<PAGE>
[LOGO] Your
Account
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
Each Fund offers two share classes, Class A shares and Class D shares. Each
share class of a Fund represents an ownership interest in the same investment
portfolio. Shares of each class of a Fund are offered without a sales charge or
an ongoing distribution fee. Class D shares of each Fund pay an ongoing account
maintenance fee of 0.25%.
Class A shares are offered only to certain investors including:
. Participants in certain Merrill
Lynch sponsored programs,
including the Merrill Lynch
Mutual Fund Adviser Program.
. Certain employer sponsored
retirement plans or savings plans.
. Certain investors, including
directors of Merrill Lynch mutual
funds and Merrill Lynch
employees.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment
or central asset accounts may be
eligible to purchase Class A
shares.
. Purchases using proceeds from
sale of certain Merrill Lynch
closed-end funds under certain
circumstances.
Your Merrill Lynch Financial Consultant can help you determine whether you are
eligible to buy Class A shares or to participate in any of these programs. If
you are eligible to buy Class A shares, you should buy Class A since Class D
shares are subject to an account maintenance fee, while Class A shares are not.
Each Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc.
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH INDEX FUNDS, INC.
29
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares Determine the amount of The minimum initial investment for a
your investment Fund is $1,000 for all accounts
except:
. $250 for certain Merrill Lynch
fee-based programs
. $100 for retirement plans
(The minimums for initial
investments may be waived under
certain circumstances.)
--------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on
Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your purchase order Any purchase orders placed within
fifteen minutes after the close of
business on the New York Stock
Exchange will be priced at the net
asset value determined that day.
Purchase orders placed after that
time will be priced at the net asset
value determined on the next
business day. A Fund may reject any
order to buy shares and may suspend
the sale of shares at any time.
Merrill Lynch may charge a
processing fee to confirm a
purchase. This fee is currently
$5.35.
--------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call
Agent the Transfer Agent at 1-800-MER-FUND
and request a purchase application.
Mail the completed purchase
application to the Transfer Agent at
the address on the inside back cover
of this prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases is $50 for all
accounts except that retirement
plans have a minimum additional
purchase of $1.
(The minimums for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount on
automatic investment a periodic basis through certain
plan Merrill Lynch investment or central
asset accounts.
- -------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares
to Another participating securities only to another securities dealer
Securities dealer that has entered into an agreement
Dealer with Merrill Lynch. All shareholder
services will be available for the
transferred shares. You may only
purchase additional shares of Funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
Transfer to a You must either:
non-participating .Transfer your shares to an account
securities with the Transfer Agent; or
dealer .Sell your shares.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
30
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next
Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. For your redemption request to be priced at the
your sales order net asset value on the day of your request, you must
submit your request to your dealer within fifteen
minutes after that day's close of business on the New
York Stock Exchange (the New York Stock Exchange
generally closes at 4:00 p.m. Eastern time). Any
redemption request placed after that time will be priced
at the net asset value at the close of business on the
next business day. Dealers must submit redemption
requests to the Fund not more than thirty minutes after
the close of business on the New York Stock Exchange on
the day the request was received.
Securities dealers, including Merrill Lynch, may charge
a fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell shares under
certain circumstances.
- -----------------------------------------------------------------------------------------------------
Sell through the You may sell shares held at the Transfer Agent by
Transfer Agent writing to the Transfer Agent at the address on the
inside back cover of this prospectus. All shareholders
on the account must sign the letter and signatures must
be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent
will normally mail redemption proceeds within seven days
following receipt of a properly completed request. If
you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund
or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered
to the Transfer Agent before they can be converted.
Check with the Transfer Agent or your Merrill Lynch
Financial Consultant for details.
- -----------------------------------------------------------------------------------------------------
Sell Shares Participate in a Fund's You can choose to receive systematic payments from your
Systematically Systematic Withdrawal Fund account either by check or through direct deposit
Plan to your bank account on a monthly or quarterly basis. If
you have a Merrill Lynch CMA(R), CBA(R) or Retirement
Account you can arrange for systematic redemptions of a
fixed dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain
conditions. Under either method you must have dividends
and other distributions automatically reinvested. Ask
your Merrill Lynch Financial Consultant for details.
- -----------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
31
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchange Your Select the fund into If you are a participant of certain Merrill Lynch fee-
Shares which you want to based programs or certain retirement plans, you can
exchange. Be sure to exchange your shares of a Fund for shares of many other
read that fund's Merrill Lynch mutual funds.
prospectus
- ---------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INDEX FUNDS, INC.
32
<PAGE>
Net Asset Value -- the market value of a Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value. This is the offering price.
Shares are also redeemed at their net asset value. Each Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed. Foreign securities owned by a Fund may trade on
weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares. If an event occurs after the close of a
foreign exchange that is likely to significantly affect the Fund's net asset
value, "fair value" pricing may be used. This means that the Fund may value its
foreign holdings at prices other than their last closing prices, and the Fund's
net asset value will reflect this.
Generally, Class A shares will have a higher net asset value than Class D
shares because Class A has lower expenses. Also dividends paid on Class A
shares will generally be higher than dividends paid on Class D shares because
Class A shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares or exchange other share classes for Class A
shares of a Fund.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into Class D shares of a Fund or into a money market
fund. Any redemption or exchange will be at net asset value.
MERRILL LYNCH INDEX FUNDS, INC.
33
<PAGE>
[LOGO] Your Account
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The S&P 500 Index Fund, Small Cap Index Fund and International Index Fund will
distribute net investment income at least annually. The Aggregate Bond Index
Fund will distribute net investment income on a monthly basis. The Funds will
distribute any net realized long or short-term capital gains annually. The
Funds may also pay a special distribution at the end of the calendar year to
comply with federal tax requirements. If your account is with Merrill Lynch and
you would like to receive dividends in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the Transfer Agent and you would
like to receive dividends and distributions in cash, contact the Transfer
Agent.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Funds
intend to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends received by individuals are generally
taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
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. The International Index Fund expects
to make an election that will generally require shareholders to
include in income their share of foreign withholding taxes paid by the Fund.
MERRILL LYNCH INDEX FUNDS, INC.
34
<PAGE>
BUYING A DIVIDEND
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
Shareholders may be entitled to treat these taxes as taxes paid by them, and
therefore, deduct such taxes in computing their taxable income or, in some
cases, to use them as foreign tax credits against the U.S. income taxes
otherwise owed.
By law, a Fund must withhold 31% of your distributions and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current Federal tax law
of an investment in a Fund. It is not a substitute for personal tax advice.
Consult your personal tax advisor about the potential tax consequences of an
investment in a Fund under all applicable tax laws.
MERRILL LYNCH INDEX FUNDS, INC.
35
<PAGE>
Management of the Fund [LOGO]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, manages the underlying Series' investments and
their business operations under the overall supervision of the Board of
Trustees of Merrill Lynch Index Trust. The Investment Adviser has the
responsibility for making all investment decisions for the Series.
The table below shows the fee earned by the Investment Adviser:
<TABLE>
<CAPTION>
Fee Rate for the fiscal year
ended December 31, 1998
Contractual (reflects voluntary waiver,
Series Fee Rate where applicable)
- ------ ----------- ----------------------------
<S> <C> <C>
S&P 500 Index Series .05% .05%
Small Cap Index Series .08% 0%
Aggregate Bond Index Series .06% .06%
International Index Series .11% .04%
</TABLE>
The Funds do not have an investment adviser since each Fund's assets are
invested in its corresponding Series. The Funds have hired Merrill Lynch Asset
Management as administrator of the Funds to provide administrative
services.
The table below shows the fee earned by the Administrator:
<TABLE>
<CAPTION>
Fee Rate for the fiscal year
ended December 31, 1998
Contractual (reflects voluntary waiver,
Fund Fee Rate where applicable)
- ---- ----------- ----------------------------
<S> <C> <C>
S&P 500 Index Fund .20% .19%
Small Cap Index Fund .22% 0%
Aggregate Bond Index Fund .14% .10%
International Index Fund .24% .19%
</TABLE>
Merrill Lynch Asset Management is part of the Asset Management Group, which had
approximately $515 billion in investment company and other portfolio assets
under management as of March 1999. This amount includes assets managed for
Merrill Lynch affiliates.
MERRILL LYNCH INDEX FUNDS, INC.
36
<PAGE>
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Funds could be adversely
affected if the computer systems used by the Funds' management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Funds' management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Funds' other service providers have told the Funds' management that they
also expect to resolve the Year 2000 Problem, and the Funds' management will
continue to monitor the situation as the year 2000 approaches. However, if the
problem has not been fully addressed, the Funds could be negatively affected.
The Year 2000 Problem could also have a negative impact on the companies in
which the Funds invest. This negative impact may be greater for companies in
foreign markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Funds invest have
Year 2000 Problems, the Funds' returns could be adversely affected.
MERRILL LYNCH INDEX FUNDS, INC.
37
<PAGE>
[LOGO] Management of the Fund
MASTER/FEEDER STRUCTURE
- --------------------------------------------------------------------------------
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their investment objectives by
investing all their assets in the corresponding Series of the Merrill Lynch
Index Trust. Investors in each Fund will acquire an indirect interest in the
underlying Series.
Other "feeder" funds may also invest in the "master" Series. This structure may
enable the Funds to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders
may offset each other and produce a lower net cash flow.
A Fund may withdraw from the Series at any time and may invest all of its
assets in another pooled investment vehicle or retain an investment adviser to
manage the Fund's assets directly.
Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than a Fund over the
operations of the Series.
Whenever the Series holds a vote of its feeder funds, a Fund will pass the vote
through to its own shareholders.
MERRILL LYNCH INDEX FUNDS, INC.
38
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Funds'
financial performance for the period April 3, 1997 to December 31, 1998, with
respect to the S&P 500 Index Fund and the Aggregate Bond Index Fund and for the
period April 9, 1997 to December 31, 1998, with respect to the Small Cap Index
Fund and the International Index Fund. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned on an investment in a Fund (assuming
reinvestment of all dividends and distributions.) This information has been au-
dited by Deloitte & Touche LLP, whose reports, along with the Funds' financial
statements, are included in the Funds' annual reports to shareholders, which is
available upon request.
S&P 500 Index Fund
<TABLE>
<CAPTION>
Class A Class D
--------------------------- ---------------------------
For the Period For the Period
For the April 3, 1997+ For the April 3, 1997+
Year Ended to Year Ended to
Increase (Decrease) in December 31, December 31, December 31, December 31,
Net Asset Value 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 12.55 $ 10.00 $ 12.54 $ 10.00
- ------------------------------------------------------------------------------------
Investment income--net .18 .11 .11 .11
- ------------------------------------------------------------------------------------
Realized and unrealized
gain on
investments from the
Series--net 3.33 2.97 3.37 2.95
- ------------------------------------------------------------------------------------
Total from investment
operations 3.51 3.08 3.48 3.06
- ------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.16) (.11) (.14) (.10)
Realized gain on
investments from the
Series--net (.60) (.42) (.60) (.42)
- ------------------------------------------------------------------------------------
Total dividends and
distributions (.76) (.53) (.74) (.52)
- ------------------------------------------------------------------------------------
Net asset value, end of
period $ 15.30 $ 12.55 $ 15.28 $ 12.54
- ------------------------------------------------------------------------------------
Total Investment Return:
- ------------------------------------------------------------------------------------
Based on net asset value
per share 28.24% 30.80%++ 27.95% 30.53%++
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------
Expenses, net of
reimbursement# .39% .40%* .64% .65%*
- ------------------------------------------------------------------------------------
Expenses# .40% .57%* .65% .82%*
- ------------------------------------------------------------------------------------
Investment income--net 1.27% 1.71%* 1.00% 1.47%*
- ------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $682,669 $445,016 $435,256 $157,567
- ------------------------------------------------------------------------------------
Portfolio turnover of
the Series 25.97% 24.31% 25.97% 24.31%
- ------------------------------------------------------------------------------------
</TABLE>
* Annualized
+ Commencement of operations.
++ Aggregate total investment return
# Includes the Fund's share of the Series' allocated expenses.
MERRILL LYNCH INDEX FUNDS, INC.
39
<PAGE>
[LOGO] Management of the Fund
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
Small Cap Index Fund
<TABLE>
<CAPTION>
Class A Class D
--------------------------- ---------------------------
For the Period For the Period
For the April 9, For the April 9,
Year Ended 1997+ to Year Ended 1997+ to
Increase (Decrease) in December 31, December 31, December 31, December 31,
Net Asset Value 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 12.28 $ 10.00 $ 12.28 $ 10.00
- ------------------------------------------------------------------------------------
Investment income--net .13 .10 .11 .09
- ------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments from the
Series--net (.59) 2.60 (.60) 2.60
- ------------------------------------------------------------------------------------
Total from investment
operations (.46) 2.70 (.49) 2.69
- ------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.13) (.10) (.11) (.09)
In excess of investment
income--net (.01) --++ --++ --++
Realized gain on
investments from the
Series--net (1.41) (.32) (1.41) (.32)
- ------------------------------------------------------------------------------------
Total dividends and
distributions (1.55) (.42) (1.52) (.41)
- ------------------------------------------------------------------------------------
Net asset value, end of
period $ 10.27 $ 12.28 $ 10.27 $ 12.28
- ------------------------------------------------------------------------------------
Total Investment Return:
- ------------------------------------------------------------------------------------
Based on net asset value
per share (3.14%) 27.04%+++ (3.41%) 26.87%+++
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------
Expenses, net of
reimbursement# .50% .52%* .75% .77%*
- ------------------------------------------------------------------------------------
Expenses# .84% 1.00%* 1.09% 1.25%*
- ------------------------------------------------------------------------------------
Investment income--net 1.14% 1.45%* .88% 1.20%*
- ------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $18,122 $26,478 $30,941 $38,778
- ------------------------------------------------------------------------------------
Portfolio turnover of
the Series 48.16% 16.45% 48.16% 16.45%
- ------------------------------------------------------------------------------------
</TABLE>
*Annualized
+Commencement of operations.
++Amount is less than $.01 per share.
+++Aggregate total investment return
#Includes the Fund's share of the Series' allocated expenses.
MERRILL LYNCH INDEX FUNDS, INC.
40
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
Aggregate Bond Index Fund
<TABLE>
<CAPTION>
Class A Class D
------------------------------ ------------------------------
For the For the Period For the For the Period
Year Ended April 3, 1997+ to Year Ended April 3, 1997+ to
Increase (Decrease) in December 31, December 31, December 31, December 31,
Net Asset Value 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
- ----------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 10.42 $ 10.00 $ 10.42 $ 10.00
- ----------------------------------------------------------------------------------------
Investment income--net .64 .48 .61 .46
- ----------------------------------------------------------------------------------------
Realized and unrealized
gain on
investments from the
Series--net .23 .45 .23 .45
- ----------------------------------------------------------------------------------------
Total from investment
operations .87 .93 .84 .91
- ----------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.64) (.48) (.61) (.46)
Realized gain on
investments from the
Series--net (.04) (.03) (.04) (.03)
In excess of realized
gain on investments
from the Series--net -- --++ -- --++
- ----------------------------------------------------------------------------------------
Total dividends and
distributions (.68) (.51) (.65) (.49)
- ----------------------------------------------------------------------------------------
Net asset value, end of
period $ 10.61 $ 10.42 $ 10.61 $ 10.42
- ----------------------------------------------------------------------------------------
Total Investment Return:
- ----------------------------------------------------------------------------------------
Based on net asset
value per share 8.56% 9.49%+++ 8.29% 9.29%+++
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------
Expenses, net of
reimbursement# .35% .35%* .60% .60%*
- ----------------------------------------------------------------------------------------
Expenses# .40% .52%* .65% .77%*
- ----------------------------------------------------------------------------------------
Investment income--net 5.99% 6.22%* 5.75% 5.98%*
- ----------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $351,786 $251,140 $81,603 $56,134
- ----------------------------------------------------------------------------------------
Portfolio turnover of
the Series 27.89% 86.58% 27.89% 86.58%
- ----------------------------------------------------------------------------------------
</TABLE>
*Annualized
+Commencement of operations.
++Amount is less than $.01 per share.
+++Aggregate total investment return
#Includes the Fund's share of the Series' allocated expenses.
MERRILL LYNCH INDEX FUNDS, INC.
41
<PAGE>
[LOGO] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
International Index Fund
<TABLE>
<CAPTION>
Class A Class D
------------------------------ ------------------------------
For the For the Period For the For the Period
Year Ended April 9, 1997+ to Year Ended April 9, 1997+ to
Increase (Decrease) in December 31, December 31, December 31, December 31,
Net Asset Value 1998## 1997 1998## 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 10.56 $ 10.00 $ 10.56 $ 10.00
- -----------------------------------------------------------------------------------------
Investment income--net .15 .10 .13 .15
- -----------------------------------------------------------------------------------------
Realized and unrealized
gain on
investments from the
Series--net 2.52 .75 2.51 .67
- -----------------------------------------------------------------------------------------
Total from investment
operations 2.67 .85 2.64 .82
- -----------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.12) (.12) (.09) (.10)
In excess of investment
income--net (.04) (.02) (.03) (.01)
Realized gain on
investments from the
Series--net (1.03) (.15) (1.03) (.15)
- -----------------------------------------------------------------------------------------
Total dividends and
distributions (1.19) (.29) (1.15) (.26)
- -----------------------------------------------------------------------------------------
Net asset value, end of
period $ 12.04 $ 10.56 $ 12.05 $ 10.56
- -----------------------------------------------------------------------------------------
Total Investment Return:
- -----------------------------------------------------------------------------------------
Based on net asset value
per share 25.65% 8.45%++ 25.40% 8.22%++
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------
Expenses, net of
reimbursement# .64% .86%* .89% 1.11%*
- -----------------------------------------------------------------------------------------
Expenses# .76% 1.10%* 1.02% 1.35%*
- -----------------------------------------------------------------------------------------
Investment income--net 1.26% 1.64%* 1.14% 1.67%*
- -----------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $118,692 $115,190 $14,802 $20,536
- -----------------------------------------------------------------------------------------
Portfolio turnover of
the Series 34.63% 14.79% 34.63% 14.79%
- -----------------------------------------------------------------------------------------
</TABLE>
*Annualized
+Commencement of operations.
++Aggregate total investment return
#Includes the Fund's share of the Series' allocated expenses.
##Based on average shares outstanding.
MERRILL LYNCH INDEX FUNDS, INC.
42
<PAGE>
[FLOW CHART APPEARS HERE]
------------------------------
POTENTIAL
_____________ INVESTORS ____________
| Open an account (two options) |
| ------------------------------ |
1 2
| |
- ----------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
OR SECURITIES DEALER P.O. Box 45289
Advises shareholders on Jacksonville, Florida 32232-5289
their Fund investments. Performs recordkeeping and
- ----------------------- reporting services.
| --------------------------------
| |
|_______________________________________________________|
|
|
----------------------------------------------
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
----------------------------------------------
|
|
- ----------------------- | -----------------------------
COUNSEL --------------------- CUSTODIAN
SWIDLER BERLIN ___ THE FUNDS ___ FOR INTERNATIONAL
SHEREIFF FRIEDMAN,LLP The Board of Directors INDEX FUND
919 Third Avenue oversees the Fund. STATE STREET BANK AND TRUST
New York, New York --------------------- COMPANY
10022 | | One Heritage Drive P2N
Provides legal advice | | North Quincy, Massachusetts
to the Funds. | --------------- | 02171
- ----------------------- | MERRILL LYNCH | Holds the Fund's assets
| INDEX TRUST | for safekeeping.
- ----------------------- | Each Fund | -----------------------------
INDEPENDENT AUDITORS | invests all its |
DELOITTE & TOUCHE, LLP | assets in a | -----------------------------
117 Campus Drive | corresponding | CUSTODIAN FOR S&P 500 INDEX
Princeton, New Jersey | series |____ FUND, SMALL CAP INDEX FUND
08540-6400 ____| --------------- | AND AGGREGATE BOND INDEX
Audits the financial | | FUND
statements of the Funds | | MERRILL LYNCH TRUST COMPANY
on behalf of the | | 800 Scudders Mill Road
shareholders. | | Plainsboro, New Jersey 08536
- ----------------------- | | -----------------------------
| |
- ----------------------- | | -----------------------------
ADMINISTRATOR | | INVESTMENT ADVISER
MERRILL LYNCH | | MERRILL LYNCH
ASSET MANAGEMENT, L.P. | |___ ASSET MANAGEMENT, L.P.
ADMINISTRATIVE OFFICES___ ADMINISTRATIVE OFFICES
800 Scudders Mill Road 800 Scudders Mill Road
Plainsboro, New Jersey Plainsboro, New Jersey 08536
08536 MAILING ADDRESS
MAILING ADDRESS P.O. Box 9011
P.O. Box 9011 Princeton, New Jersey
Princeton, New Jersey 08543-9011
08543-9011 Manages the Series'
Provides administrative day-to-day activities.
services to the Fund's. ------------------------------
- -----------------------
MERRILL LYNCH INDEX FUNDS, INC.
<PAGE>
[LOGO] For More Information
[LOGO] Merrill Lynch
Shareholder Reports
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Funds' annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
A Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at 1-800-MER-
FUND.
Statement of Additional Information
The Funds' Statement of Additional Information contains further information
about the Funds and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Funds at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Funds at the telephone
number or address indicated above, if you have any questions.
Information about the Funds (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-7071
Code #19003-0499
(C)Merrill Lynch Asset Management, L.P.
Prospectus
Merrill Lynch
Index Funds, Inc.
April 30, 1999
<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. The
Funds' distributor is Merrill Lynch Funds Distributors, a division of
Princeton Funds Distributor, Inc.
----------------
This Statement of Additional Information of the Funds is not a prospectus
and should be read in conjunction with the Prospectus of the Funds, dated
April 30, 1999 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without
charge, by calling (800) 637-3863 or by writing the Funds at the above
address. The Prospectus is incorporated by reference into this Statement of
Additional Information, and this Statement of Additional Information has been
incorporated by reference into the Prospectus. The Funds' and Series' audited
financial statements are incorporated in this Statement of Additional
Information by reference to their 1998 annual reports to shareholders. You may
request a copy of the annual reports at no charge by calling (800) 456-4587
ext. 789 between 8:00 a.m. and 8:00 p.m. on any business day.
----------------
Merrill Lynch Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is April 30, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies........................................ 2
S&P Index Fund........................................................... 2
Small Cap Index Fund..................................................... 2
Aggregate Bond Index Fund................................................ 3
International Index Fund................................................. 4
About Indexing and Management of the Funds............................... 4
Other Investment Policies, Practices, and Risk Factors................... 5
Portfolio Strategies Involving Options, Futures, Swaps, Indexed
Instruments and Foreign Exchange Transactions........................... 13
Risk Factors in Derivatives.............................................. 15
Additional Information Concerning the Indices............................ 16
Investment Restrictions.................................................. 17
Portfolio Turnover....................................................... 19
Management of the Funds................................................... 19
Directors and Officers................................................... 19
Compensation of Directors/Trustees....................................... 20
Administration Arrangements.............................................. 21
Management and Advisory Arrangements..................................... 22
Code of Ethics........................................................... 23
Purchase of Shares........................................................ 24
Account Maintenance Plan................................................. 24
Redemption of Shares...................................................... 25
Redemption............................................................... 25
Repurchase............................................................... 26
Pricing of Shares......................................................... 26
Determination of Net Asset Value......................................... 26
Computation of Offering Price Per Share.................................. 28
Portfolio Transactions and Brokerage...................................... 28
Transactions in Portfolio Securities..................................... 28
Shareholder Services...................................................... 30
Investment Account....................................................... 30
Exchange Privilege....................................................... 31
Retirement Plans......................................................... 31
Automatic Investment Plans............................................... 31
Automatic Dividend Reinvestment Plan..................................... 31
Systematic Withdrawal Plan............................................... 32
Dividends and Taxes....................................................... 33
Dividends................................................................ 33
Taxes.................................................................... 33
Tax Treatment of Options and Futures Transactions........................ 34
Special Rules for Certain Foreign Currency Transactions.................. 35
The Series............................................................... 35
Performance Data.......................................................... 36
General Information....................................................... 38
Description of Shares.................................................... 38
Independent Auditors..................................................... 39
Custodian................................................................ 39
Transfer Agent........................................................... 39
Legal Counsel............................................................ 39
Reports to Shareholders.................................................. 40
Shareholder Inquiries.................................................... 40
Additional Information................................................... 40
Financial Statements...................................................... 40
Appendix.................................................................. A-1
</TABLE>
<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 and results will
correspond directly to the investment experience of the respective Series in
which it invests. Thus, all investments will be made at the level of the
Series. For simplicity, however, with respect to investment objective,
policies and restrictions, this Statement of Additional Information, like the
Prospectus, uses the term "Fund" to include the underlying Series in which the
Fund invests. Reference is made to the discussion under "How the Funds Invest"
in the Prospectus for information, with respect to each Fund's and each
Series' investment objectives and policies. There can be no assurance that the
investment objectives of the Funds will be achieved.
The Funds' investment objectives are not fundamental policies and may be
changed by the Board of Directors of the Corporation (the "Directors"),
without shareholder approval. The Directors may also change the target index
of any respective Fund if they consider that a different index would
facilitate the management of the Fund in a manner which better enables the
Fund to seek to replicate the total return of the market segment represented
by the current index.
S&P 500 Index Fund
The investment objective of the S&P 500 Index Fund is to match the
performance of the Standard & Poor's(R) 500 Composite Stock Price Index (the
"S&P 500") as closely as possible before the deduction of Fund expenses. 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 Fund.
In seeking to replicate the total return of the S&P 500, the Investment
Adviser generally will allocate the S&P 500 Index Fund's investments among
common stocks in approximately the same weightings as the S&P 500. In
addition, Merrill Lynch Asset Management, L.P. (the "Investment Adviser") may
use options and futures contracts and other types of financial instruments
relating to all or a portion of the S&P 500. At times the Fund may not invest
in all of the common stocks in the S&P 500, or in the same weightings as in
the S&P 500. At those times, the Fund chooses investments so that the market
capitalizations, industry weighting and other fundamental characteristics of
the stocks and derivative instruments chosen are similar to the S&P 500 as a
whole. The S&P 500 Index Fund may also engage in securities lending. See
"Other Types of Investments and Investment Techniques."
The S&P 500 is composed of the common stocks of 500 large capitalization
companies from various industrial sectors, most of which are listed on the New
York Stock Exchange Inc. A company's stock market capitalization is the total
market value of its outstanding shares. The S&P 500 represents a significant
portion of the market value of all common stocks publicly traded in the United
States.
Small Cap Index Fund
The investment objective of the Small Cap Index Fund is to match the
performance of the Russell 2000(R) Index (the "Russell 2000") as closely as
possible before the deduction of Fund expenses. 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
Fund.
2
<PAGE>
In seeking to replicate the total return of the Russell 2000, the Investment
Adviser may not allocate the Small Cap Index Fund's 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 Fund may invest in a statistically
selected sample of the stocks included in the Russell 2000 and other types of
financial instruments. The Investment Adviser may use options and futures
contracts and other types of financial instruments relating to all or a
portion of the Russell 2000. The investments to be included in the Small Cap
Index Fund 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 Fund may also engage in securities lending. See "Other Types
of Investments and Investment Techniques."
The Russell 2000 is composed of approximately 2,000 smaller-capitalization
common stocks from various industrial sectors. A company's stock market
capitalization is the total market value of its outstanding shares.
Aggregate Bond Index Fund
The investment objective of the Aggregate Bond Index Fund is to match the
performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond
Index") as closely as possible before the deduction of Fund expenses. 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 Fund.
In seeking to replicate the total return of the Aggregate Bond Index, the
Investment Adviser may not allocate the Aggregate Bond Index Fund's
investments among all of the bonds in the Aggregate Bond Index, or in the same
weightings as the Aggregate Bond Index. Instead, the Aggregate Bond Index Fund
may invest in a statistically selected sample of bonds included in the
Aggregate Bond Index, or in a statistically selected sample of bonds not
included in the index but correlated with bonds that are in the index, and in
derivative instruments limited to the Aggregate Bond Index. The Investment
Adviser may use options and futures contracts and other types of financial
instruments relating to all or a portion of the Aggregate Bond Index. The Fund
may invest in bonds not included in the index, but which are selected to
reflect characteristics such as maturity, duration or credit quality similar
to bonds in the index. The investments to be included in the Aggregate Bond
Index Fund will be selected with the objective of reducing the selected
investment portfolio's deviation from the performance of the Aggregate Bond
Index (tracking error). Selection of bonds other than those included in the
Aggregate Bond Index, or in different weightings from the Index, may result in
levels of interest rate, credit or prepayment risks that differ from the
levels of risks on the securities composing the Aggregate Bond Index. See
"Risk Factors--Investments in Fixed-Income Securities." The Aggregate Bond
Index Fund may also engage in securities lending. See "Other Types of
Investments and Investment Techniques."
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by
entities, such as the World Bank, constituted by the governments of several
countries to promote economic development) and mortgage-backed securities with
maturities greater than one year. Corporate bonds contained in the Aggregate
Bond Index represent issuers from various industrial sectors.
The Aggregate Bond Index Fund 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 Fund 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.
3
<PAGE>
Because the Aggregate Bond Index is composed of investment grade bonds, the
Aggregate Bond Index Fund will invest in corporate bonds rated investment
grade--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 the Investment Adviser.
Corporate bonds ranked in the fourth highest rating category, while considered
"investment grade", have more speculative characteristics and are more likely
to be downgraded than securities rated in the three highest ratings
categories. In the event that the rating of a security in the Aggregate Bond
Index Fund is lowered below Baa or BBB, the Aggregate Bond Index Fund may
continue to hold the security. Such securities rated below investment grade
are considered to be speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Descriptions of the ratings of bonds are contained in the Appendix.
The Aggregate Bond Index Fund 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 match the
performance of the Morgan Stanley Capital International EAFE(R) GDP Weighted
Index (the "EAFE Index") as closely as possible before the deduction of Fund
expenses. 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 Fund.
In seeking to replicate the total return of the EAFE Index, the Investment
Adviser may not allocate the International Index Fund's 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 Fund may invest in a statistically selected sample of the
equity securities included in the EAFE Index and other types of financial
instruments. In addition, the Investment Adviser may use options and futures
contracts and other types of financial instruments relating to all or a
portion of the EAFE Index. The investments to be included in the International
Index Fund 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 Fund may also
engage in securities lending. See "Other Types of Investments and Investment
Techniques."
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the
United States and which are selected from among the larger capitalization
companies in such markets. A company's stock market capitalization is the
total market value of its outstanding shares. The countries currently included
in the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United Kingdom.
The weighting of the EAFE Index among these countries is based upon gross
domestic product (GDP). (Market capitalization is the basis for country
weightings in another version of the EAFE Index. Using the GDP weighting tends
to decrease the relative weighting of Japan and the United Kingdom while
increasing the weighting of certain European countries, generally resulting in
a more diversified EAFE Index.)
About Indexing and Management of the Funds
About Indexing. The Funds 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 Fund, utilizing essentially a "passive" or "indexing"
investment approach, seeks to replicate, before each Fund's expenses (which
can be expected to reduce the total return of the Fund), the total return of
its respective index.
4
<PAGE>
Indexing and Managing the Funds. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments which are contained in or
correlated with securities in the applicable index (equity securities, in the
case of the S&P 500 Index Fund, Small Cap Index Fund and International Index
Fund (the "Equity Funds"), and fixed-income securities in the case of the
Aggregate Bond Index Fund (the "Fixed-Income Fund")).
Because each Fund seeks to replicate the total return of its respective
index, generally the Investment Adviser will not attempt to judge the merits
of any particular security as an investment but will seek only to replicate
the total return of the securities in the relevant index. However, the
Investment Adviser may omit or remove a security which is included in an index
from the portfolio of a Fund if, following objective criteria, the Investment
Adviser judges the security to be insufficiently liquid or believes the merit
of the investment has been substantially impaired by extraordinary events or
financial conditions.
The Investment Adviser may acquire certain financial instruments based upon
individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets. Others may provide for the payment to a Fund or by a Fund of amounts
based upon the performance (positive, negative or both) of a particular
security or basket. The Investment Adviser will select such instruments when
it believes that the use of the instrument will correlate substantially with
the expected total return of a target security or index. In connection with
the use of such instruments, the Investment Adviser may enter into short sales
in an effort to adjust the weightings of particular securities represented in
the basket to more accurately reflect such securities' weightings in the
target index.
Each Fund's 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 Fund, taxes (including foreign withholding
taxes, which will affect the International Index Fund and the Aggregate Bond
Index Fund due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Fund, 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 Fund's total return over periods of
one year and longer will, on a gross basis and before taking into account
expenses (incurred at either the Series or the Fund level) be within 10 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 50 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. Information regarding correlation of a Fund's performance to that of a
target index may be found in the Funds' annual report.
Other Investment Policies, Practices and Risk Factors
Cash Management. Generally, the Investment Adviser will employ futures and
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the Investment Adviser, a portion of a Fund's
assets may be invested in certain types of instruments with remaining
maturities of 397 days or less for liquidity purposes. Such instruments would
consist of: (i) obligations of the U.S. Government, its agencies,
instrumentalities, authorities or political subdivisions ("U.S. Government
Securities"); (ii) other fixed-income securities rated Aa or higher by Moody's
or AA or higher by S&P or, if unrated, of comparable quality in the opinion of
the Investment Adviser; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer or the
issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA
or higher by S&P or outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of the Investment Adviser.
5
<PAGE>
Dollar Rolls. The Aggregate Bond Index Fund may enter into dollar rolls, in
which the Aggregate Bond Index Fund 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 Fund forgoes principal
and interest paid on the securities sold. The Aggregate Bond Index Fund 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 Fund's forward purchase commitment may
decline below the price of the securities the Aggregate Bond Index Fund has
sold. In the event the buyer of the securities files for bankruptcy or becomes
insolvent, the Aggregate Bond Index Fund's use of the proceeds of the current
sale portion of the transaction may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Aggregate
Bond Index Fund's 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 Fund 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 Fund will engage in dollar roll transactions to enhance return and
not for the purpose of borrowing. Each dollar roll transaction is accounted
for as a sale of a portfolio security and a subsequent purchase of a
substantially similar security in the forward market.
Short Sales. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the Investment Adviser may
sell a security a Fund does not own, or in an amount greater than the Fund
owns (i.e., make short sales). Such transactions will be used only in an
effort to adjust the weightings of particular securities represented in the
basket to reflect such securities' weightings in the target index. The
Investment Adviser will not employ short sales in reflection of the Investment
Adviser's outlook for the securities markets or for the performance of the
securities sold short. Generally, to complete a short sale transaction, a Fund
will borrow the security to make delivery to the buyer. The Fund 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 Fund. Until the security is replaced, the Fund is required to pay to
the lender any interest which accrues during the period of the loan. To borrow
the security, the Fund 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 Fund replaces the borrowed security,
it will (a) maintain in a segregated account with its custodian cash or liquid
securities at such a level that the amount deposited in the account plus the
amount deposited with the broker as collateral will equal the current market
value of the security sold short or (b) otherwise cover its short position.
Cash Flows; Expenses. The ability of each Fund to satisfy its investment
objective depends to some extent on the Investment Adviser's ability to manage
cash flow (primarily from purchases and redemptions and distributions from the
Fund's investments). The Investment Adviser will make investment changes to a
Fund's 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, and any incremental
operating costs (e.g., transfer agency, accounting) that will be borne by the
Funds. Finally, since each Fund seeks to replicate the total return of its
target index, the Investment Adviser generally will not attempt to judge the
merits of any particular security as an investment.
Investment in Fixed-Income Securities. Because the Aggregate Bond Index Fund
will invest in fixed-income securities, it will be subject to the general
risks inherent in such securities, primarily interest rate risk, credit risk
and prepayment risk.
Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. As a rule bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline; if interest
rates fall, bond prices generally rise. In addition, for a given change in
interest rates, longer-maturity bonds generally
6
<PAGE>
fluctuate more in price than shorter-maturity bonds. To compensate investors
for these larger fluctuations, longer-maturity bonds usually offer higher
yields than shorter-maturity bonds, other factors, including credit quality,
being equal. These basic principles of bond prices also apply to U.S.
Government Securities. A security backed by the "full faith and credit" of the
U.S. Government is guaranteed only as to its stated interest rate and face
value at maturity, not its current market price. Just like other fixed-income
securities, government-guaranteed securities will fluctuate in value when
interest rates change.
Credit risk is the possibility that an issuer of securities held by the
Aggregate Bond Index Fund 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 Fund is a
function of the diversification and credit quality of its underlying
securities.
The Aggregate Bond Index Fund may also be exposed to event risk, which
includes the possibility that fixed-income securities held by the Aggregate
Bond Index Fund 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 Fund 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 Fund may exhibit price characteristics of longer-term debt securities.
The corporate substitution strategy used by the Aggregate Bond Index Fund
(discussed above) may increase or decrease the Aggregate Bond Index Fund's
exposure to the foregoing risks relative to those of the Aggregate Bond Index.
Foreign Investment Risks
Foreign Market Risk. Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that the Funds will
lose money. In particular, the Funds are subject to the risk that because
there are generally fewer investors on foreign exchanges and a smaller number
of shares traded each day, it may be difficult for the Funds to buy and sell
securities on those exchanges. In addition, prices of foreign securities may
fluctuate more than prices of securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers, and other protectionist or retaliatory measures. Investments in
foreign markets may also be adversely affected by governmental actions such as
the imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition of punitive taxes. In
addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security
prices, impair a Fund's ability to purchase or sell foreign securities or
transfer a Fund's assets or income back into the United States, or otherwise
adversely affect a Fund's operations. Other foreign market risks
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include foreign exchange controls, difficulties in pricing securities,
defaults on foreign government securities, difficulties in enforcing favorable
legal judgments in foreign courts, and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk. Securities in which the International Index
Fund invests may be denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value of
the securities of the Fund. Generally, when the U.S. dollar rises in value
against a foreign currency, your investment in a security denominated in that
currency loses value because the currency is worth fewer U.S. dollars.
Similarly when the U.S. dollar decreases in value against a foreign currency,
your investment in a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk is generally known as
"currency risk" which is the possibility that a stronger U.S. dollar will
reduce returns for U.S. investors investing overseas and a weak U.S. dollar
will increase returns for U.S. investors investing overseas.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Also, brokerage
commissions and other costs of buying or selling securities often are higher
in foreign countries than they are in the United States. This reduces the
amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States. The Funds
generally hold the foreign securities and cash in which they invest outside
the United States in foreign banks and securities depositories. Certain of
such foreign banks and securities depositories may be recently organized or
new to the foreign custody business and/or may have operations subject to
limited or no regulatory oversight. Also, the laws of certain countries may
put limits on a Fund's ability to recover its assets if a foreign bank or
depository or issuer of a security or any or their agents goes bankrupt. In
addition, it can be expected that it will be more expensive for a Fund to buy,
sell, and hold securities in certain foreign markets than in the U.S. market
due to higher brokerage, transaction, custody and/or other costs. The
increased expense to invest in foreign market reduces the amount a Fund can
earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures
and trade regulations also may involve certain risks (such as delays in
payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Fund to carry out
transactions. If a Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
European Economic and Monetary Union ("EMU"). For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national
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currencies of all EMU participants by July 1, 2002. EMU took effect for the
initial EMU participants as of January 1, 1999, and was implemented over the
weekend January 1, 1999 through January 3, 1999 ("conversion weekend"). Upon
implementation of EMU, certain securities issued in participating EU countries
(beginning with government and corporate bonds) were redenominated in the
euro, and thereafter, were listed, traded, and made dividend and other
payments only in euros.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating
and non-participating countries, including sharp appreciation or depreciation
of the participants' national currencies and a significant increase in
exchange rate volatility, a resurgence in economic protectionism, an
undermining of confidence in the European markets, an undermining of European
economic stability, the collapse or slowdown of the drive toward European
economic unity, and/or reversion of the attempts to lower government debt and
inflation rates that were introduced in anticipation of EMU. Also, withdrawal
from EMU by an initial participant could cause disruption of the financial
markets as securities that have been redenominated in euros are transferred
back into that country's national currency, particularly if the withdrawing
country is a major economic power. Such developments could have an adverse
impact on the Fund's investments in Europe generally or in specific countries
participating in EMU. Gains or losses resulting from the euro conversion may
be taxable to Fund shareholders under foreign or, in certain limited
circumstances, U.S. tax laws.
When-issued Securities and Forward Commitments. The Aggregate Bond Index
Fund may purchase or sell securities that it is entitled to receive on a when-
issued basis. The Aggregate Bond Index Fund may also purchase or sell
securities through a forward commitment. These transactions involve the
purchase or sale of securities by the Fund at an established price with
payment and delivery taking place in the future. The Aggregate Bond Index Fund
enters into these transactions to obtain what is considered an advantageous
price to the Fund at the time of entering into the transaction. The Aggregate
Bond Index Fund has not established any limit on the percentage of its assets
that may be committed in connection with these transactions. When the
Aggregate Bond Index Fund is purchasing securities in these transactions, the
Fund maintains a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities in an
amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the
delivery date may be more or less than the Fund's purchase price. The
Aggregate Bond Index Fund may bear the risk of a decline in the value of the
security in these transactions and may not benefit from an appreciation in the
value of the security during the commitment period.
Illiquid or Restricted Securities. Each Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of a Fund's assets in
illiquid securities may restrict the ability of a Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where a Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
Each Fund may invest in securities that are not registered ("restricted
securities.") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by a Fund or less than
their fair market value.
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In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately
placed securities held by a Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. Certain of a Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve
greater risks. These issuers may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
In making investments in such securities, a Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct
portfolio transactions in such securities.
144A Securities. Each Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities that the Fund's
management determines are as liquid as publicly registered non-investment
grade debt securities. The Board of Directors has adopted guidelines and
delegated to the Fund's management the daily function of determining and
monitoring liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance exactly
how this market for restricted securities sold and offered under Rule 144A
will continue to develop, the Board of Directors will carefully monitor the
Fund's investments in these securities. This investment practice could have
the effect of increasing the level of illiquidity in the Fund to the extent
that qualified institutional buyers become for a time uninterested in
purchasing these securities.
Standby Commitment Agreements. The Aggregate Bond Index Fund may enter into
standby commitment agreements. These agreements commit the Aggregate Bond
Index Fund, for a stated period of time, to purchase a stated amount of fixed-
income securities that may be issued and sold to the Fund 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 Fund is paid a commitment fee, regardless of whether or not the security
is ultimately issued. The Aggregate Bond Index Fund will enter into such
agreements for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund.
The Aggregate Bond Index Fund will not enter into a standby commitment with a
remaining term in excess of 90 days and will limit its investment in such
commitments so that the aggregate purchase price of securities subject to such
commitments, together with the value of all other illiquid securities, will
not exceed 15% of its net assets taken at the time of the commitment. The
Aggregate Bond Index Fund will maintain a segregated account with its
custodian of cash, cash equivalents, U.S. Government securities or other
liquid securities in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Aggregate Bond Index Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Aggregate Bond Index Fund's
net asset value. The cost basis of the security will be adjusted by the amount
of the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements. Each Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the
Investment Adviser otherwise deems to be credit worthy. Under such agreements,
the counterparty agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the
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agreement. This insulates the Fund from fluctuations in the market value of
the underlying security during such period. A Fund may not invest more than
15% of its net assets in repurchase agreements maturing in more than seven
days (together with other illiquid securities). Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. A Fund will require the seller to
provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, a Fund may suffer time delays and incur costs
or possible losses in connection with the disposition of the collateral. In
the event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.
Securities Lending. Each Fund may lend securities with a value not exceeding
33 1/3% of its total assets. In return, a Fund receives collateral in an
amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
If cash collateral is received by a Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to a Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on a Fund's portfolio is increased by loans
of its portfolio securities. The Fund may receive a flat fee for its loans.
The loans are terminable at any time and the borrower, after notice, is
required to return borrowed securities within five business days. A Fund may
pay reasonable finder's, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, a Fund
could experience delays and costs in gaining access to the collateral and
could suffer a loss to the extent the value of the collateral falls below the
market value of the borrowed securities.
Borrowing and Leverage. The use of leverage by a Fund creates an opportunity
for greater total return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset value of Fund
shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, a Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest a Fund will have
to pay on the borrowings, the Fund's return will be greater than if leverage
had not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to a Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may determine to maintain
a Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by a Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
a Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require a Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
A Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
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Small Cap
An investment in the Small Cap Index Fund involves greater risk than is
customarily associated with funds that invest in more established companies.
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies or the market average
in general. These companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
Because of these factors, the Small Cap Index Fund believes that its shares
may be suitable for investment by persons who can invest without concern for
current income and who are in a financial position to assume above-average
investment risk in search of above-average long-term reward. It is not
intended as a complete investment program but is designed for those long-term
investors who are prepared to experience above-average fluctuations in net
asset value.
While the issuers in which the Small Cap Index Fund will primarily invest
may offer greater opportunities for capital appreciation than large cap
issuers, investments in smaller companies may involve greater risks and thus
may be considered speculative. Full development of these companies and trends
frequently takes time and, for this reason, the Small Cap Index Fund should be
considered as a long-term investment and not as a vehicle for seeking short-
term profits.
The securities in which the Small Cap Index Fund invests will often be
traded only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume typical of trading
on a national securities exchange. As a result, the disposition by the Small
Cap Index Fund of portfolio securities to meet redemptions or otherwise may
require the Small Cap Index Fund to sell these securities at a discount from
market prices.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of
their business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may
be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Mortgage-Backed Securities. The Aggregate Bond Index Fund may invest in
mortgage-backed securities. The value of mortgage-backed securities, like that
of traditional fixed-income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage-backed
securities differ from traditional fixed-income securities because of their
potential for prepayment without penalty. The price paid by the Aggregate Bond
Index Fund for its mortgage-backed securities, the yield the Aggregate Bond
Index Fund expects to receive from such securities and the average life of the
securities are based on a number of factors, including the anticipated rate of
prepayment of the underlying mortgages. In a period of declining interest
rates, borrowers may prepay the underlying mortgages more quickly than
anticipated, thereby reducing the yield to maturity and the average life of
the mortgage-backed securities. Moreover, when the Aggregate Bond Index Fund
reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that
was prepaid. To the extent that the Aggregate Bond Index Fund purchases
mortgage-backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If the
Aggregate Bond Index Fund buys such securities at a discount, both scheduled
payments of principal and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income. In a period
of rising interest rates, prepayments of the underlying mortgages may occur at
a slower than expected rate, creating maturity extension risk. This particular
risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Aggregate Bond Index Fund. See
"Investments in Fixed-Income Securities" and "Illiquid Securities" above.
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Portfolio Strategies Involving Options, Futures, Swaps, Indexed Instruments
and Foreign Exchange Transactions
Each Fund will also utilize options, futures, options on futures, swaps and
other indexed instruments. Futures and options on futures may be employed to
provide liquidity. Futures, options on futures, swaps and other indexed
instruments may be employed as a proxy for a direct investment in securities
underlying the Fund's index. In addition, the International Index Fund may
engage in futures contracts on foreign currencies in connection with certain
foreign securities transactions.
The Investment Adviser will choose among the foregoing instruments based on
its judgment of how best to meet each Fund's goal. In connection therewith,
the Investment Adviser will assess such factors as current and anticipated
securities prices, relative liquidity and price levels in the options, futures
and swap markets compared to the securities markets, and the Funds' cash flow
and cash management needs.
Indexed Securities
The Funds 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 Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities. If a Series invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index.
Options on Securities and Securities Indices
Purchasing Options. Each Fund 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 Fund purchases a put option, in consideration for an upfront payment (the
"option premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund 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 Fund's 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
Fund 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 Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices. When a Fund purchases a call
option, in consideration for the option premium the Fund 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 Fund 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 Fund is contemplating its purchase, in the case of an option
on a security, or attempting to maintain exposure to an index prior to
purchasing the underlying securities, in the case of an option on an index (an
"anticipatory hedge"). In the event a Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire
option premium.
Each Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. Each Fund 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
Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
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securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. In the event
the party to which a Fund 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 Fund 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 Fund 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 Fund may also write put options on securities or securities indices.
When a Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund 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 Fund 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 Fund will profit by the amount of the option
premium. By writing a put option, however, a Fund 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 Fund 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 Fund for writing the put option. A Fund will write a
put option on a security or a securities index only if the Fund 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 Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Fund will only write call
or put options that are "covered." A put option will be considered covered if
a Fund has segregated assets with respect to such option in the manner
described in "Risk Factors in Derivatives" below. A call option will be
considered covered if a Fund 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 Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and seller, but generally do not require the parties to post margin
and are subject to greater risk of counterparty default. See "Additional Risk
Factors of OTC Transactions" below.
Futures
Each Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity
at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund 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 Fund will pay additional
margin representing any loss experienced as a result of the futures position
the prior day or be entitled to a payment representing any profit experienced
as a result of the futures position the prior day. A Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under
regulations of the Commodity Futures Trading Commission.
14
<PAGE>
Foreign Exchange Transactions. The International Index Fund 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 Fund may
purchase or sell a currency to settle a security transaction or sell a
currency in which the Fund has received or anticipates receiving a dividend or
distribution.
Swaps
Each Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of securities or equity index. Swap agreements may also be
used to obtain exposure to a security or market without owning or taking
physical custody of securities in circumstances in which direct investment is
restricted by local law or is otherwise impractical.
Risk Factors in Derivatives
The Funds intend to enter into transactions involving derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a derivative or a Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a derivative without
incurring substantial losses, if at all.
Certain transactions in derivatives (e.g., futures transactions, sales of
put options) may expose a Fund to potential losses which exceed the amount
originally invested by the Fund in such instruments. When a Fund engages in
such a transaction, the Fund will deposit in a segregated account at its
custodian liquid securities with a value at least equal to the Fund's
exposure, on a market-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options may be substantially less liquid than other instruments
in which a Fund may invest. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for a Fund to
ascertain a market value for such instruments. A Fund 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 Fund 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 Funds have therefore adopted an investment policy
pursuant to which they will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by a
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by a Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to
be illiquid or are otherwise not readily marketable. However, if an OTC option
is sold by a Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's exercise price).
15
<PAGE>
Because derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that a Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty, the Fund is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party
guaranty or other credit enhancement.
Additional Limitations on the Use of Derivatives
The Funds may not use any derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
Additional Information Concerning the Indices
S&P 500. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by the Corporation and the Trust. The S&P 500 Index 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 or
the S&P 500 Index or any data included therein, and Standard & Poor's shall
have no liability for any errors, omissions, or interruptions therein.
Standard & Poor's makes no warranty, express or implied, as to results to be
obtained by the 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, not 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.
16
<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, or any kind, including,
without means of limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the Russell 2000 or any data or any
security (or combination thereof) included therein.
EAFE Index. The EAFE Index is the exclusive property of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"). The EAFE Index is a service mark of Morgan
Stanley Group Inc. and has been licensed for use by the Investment Adviser and
its affiliates.
The International Index 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 Morgan Stanley have any liability for any
direct, indirect, special, punitive, consequential or any other damages
(including lost profits) even if notified of the possibility of such damages.
Investment Restrictions
The 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 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
17
<PAGE>
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 total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities); provided, that in
replicating the weighting of a particular industry in its target index, a
Series or Fund may invest more than 25% of its total assets in securities
of issuers in that industry.
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
law, a 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, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) 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 its Prospectus and Statement
of Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when issued and forward
commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a 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.
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 that 5% of the market
value of its total assets are invested in 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
18
<PAGE>
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 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 the Investment Adviser or its affiliates or
any of their directors, officers or employees, acting as principal, unless
pursuant to a rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund and
Series are prohibited from engaging in certain transactions involving Merrill
Lynch, or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order,
the Fund and Series are prohibited from engaging in portfolio transactions
with Merrill Lynch or its affiliates acting as principal.
Portfolio Turnover
Although each Fund will use a passive, indexing approach to investing, each
Fund may engage in a substantial number of portfolio transactions. The rate of
portfolio turnover will be a limiting factor when the Investment Adviser
considers whether to purchase or sell securities for a Fund only to the extent
that the Investment Adviser will consider the impact of transaction costs on a
Fund's tracking error. Changes in the securities comprising a Fund's index
will tend to increase that Fund's portfolio turnover rate, as the Investment
Adviser restructures the Fund's holdings to reflect the changes in the index.
The portfolio turnover rate is, in summary, the percentage computed by
dividing the lesser of a Fund's purchases or sales of securities by the
average net asset value of the Fund. High portfolio turnover involves
correspondingly greater brokerage commissions for a Fund investing in equity
securities and other transaction costs which are borne directly by a Fund. 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.
MANAGEMENT OF THE FUNDS
Directors and Officers
Information about the Directors, executive officers and portfolio managers
of the Corporation and their principal occupations for at least the last five
years are set forth below. Unless otherwise noted, the address of the
portfolio's managers of each executive officer and Director is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
Terry K. Glenn (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of Princeton Funds Distributor, Inc. ("PFD")
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Jack B. Sunderland (70) -- 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.
19
<PAGE>
Stephen B. Swensrud (65) -- 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 (59) -- 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).
Joseph T. Monagle, Jr. (50) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1990; Department Head of the
Global Fixed Income Division of the Investment Adviser and FAM since 1997;
Senior Vice President of Princeton Services since 1993.
Gregory Mark Maunz (45) -- Senior Vice President and Co-Portfolio Manager of
the Aggregate Bond Index Fund(1)(2) -- First Vice President of the Investment
Adviser since 1997; Vice President of the Investment Adviser from 1985 to
1997; Portfolio Manager of the Investment Adviser since 1984.
Jeff Hewson (47) -- Vice President and Co-Portolio Manager of the Aggregate
Bond Index Fund(1)(2) -- Director (Global Fixed Income) since 1998; Vice
President of the Investment Adviser from 1989 to 1998; Portfolio Manager of
the Investment Adviser since 1985.
Eric S. Mitofsky (43) -- Senior Vice President and Portfolio Manager of the
S&P 500 Index Fund, Small Cap Index Fund and the International Index
Fund(1)(2) -- First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser from 1992 to 1997.
Christopher G. Ayoub (43) -- Senior Vice President and Co-Portfolio Manager
of the Aggregate Bond Index Fund(1)(2) -- First Vice President of the
Investment Adviser since 1998; Vice President of the Investment Adviser from
1985 to 1998.
Donald C. Burke (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Director of Taxation of the Investment Adviser since 1990; Vice
President of the Investment Adviser from 1990 to 1997.
Ira P. Shapiro (35) -- Secretary(1)(2) -- First Vice President of the
Investment Adviser since 1998; Director (Legal Advisory) of the Investment
Adviser from 1997 to 1998; Vice President of the Investment Adviser from 1996
to 1997; Attorney with the Investment Adviser and FAM from 1993 to 1997.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the
Corporation.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or FAM acts as
investment adviser.
As of April 1, 1999, the officers and 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.
Compensation of Directors/Trustees
The Corporation and the Trust pay each individual who serves as a
Director/Trustee not affiliated with the Investment Adviser (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.
The following table sets forth the aggregate compensation earned by the non-
affiliated Directors/Trustees from the Corporation and Trust for the fiscal
year ended December 31, 1998 and the total compensation paid to non-affiliated
Directors/Trustees from all registered investment companies advised by the
Investment Adviser and its affiliate, FAM ("MLAM/FAM-Advised Funds") for the
calendar year ended December 31, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
From Corporation/Trust and
Aggregate Pension or Retirement MLAM/FAM
Compensation From Benefits Accrued as Advised Funds Paid
Name of Director/Trustee Corporation/Trust Part of Corporation/Trust Expenses to Directors/Trustees(1)
- ------------------------ ----------------- ---------------------------------- --------------------------
<S> <C> <C> <C>
Jack B. Sunderland...... $4,500 None 133,600
Stephen B. Swensrud..... $4,500 None 195,583
J. Thomas Touchton...... $4,500 None 133,600
</TABLE>
- ----------
(1) The Directors/Trustees serve on the boards of MLAM/FAM Advised Funds as
follows: Mr. Sunderland (18 registered investment companies consisting of
30 portfolios); Mr. Swensrud (23 registered investment companies
consisting of 56 portfolios); Mr. Touchton (18 registered investment
companies consisting of 30 portfolios).
Administration Arrangements
The Corporation has entered into an administration agreement with Merrill
Lynch Asset Management, L.P. (the "Administrator") (the "Administration
Agreement"). As discussed in the Prospectus, the Administrator 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>
The table below sets forth information about the total administrative fees
paid by each Fund to the Administrator for the periods indicated.
<TABLE>
<CAPTION>
Small Aggregate
Cap Bond
S&P 500 Index Index International
Period Ending Index Fund Fund Fund Index Fund
- ------------- ---------- ------- --------- -------------
<S> <C> <C> <C> <C>
December 31, 1997*
Contractual amount................. $ 594,524 $77,969 $204,163 $211,373
Amount waived (if applicable)...... $ 338,405 $77,969 $139,532 $175,510
December 31, 1998
Contractual amount................. $1,815,951 $99,667 $553,925 $275,261
Amount waived (if applicable)...... $ 62,952 $99,667 $178,361 $ 57,566
</TABLE>
- ----------
* Period is from commencement of operations (April 3, 1997 for the S&P 500
Index Fund and the Aggregate Bond Index Fund, and April 9, 1997 for the
Small Cap Index Fund and the International Index Fund).
The Administration Agreement obligates the Administrator 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
the Administrator 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 portfolio
transactions, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under federal, state or
foreign laws, fees and actual out-of-pocket 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, a division of
Princeton Funds Distributor Inc. (the "Distributor") will pay certain of the
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 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
21
<PAGE>
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
Management Services. 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 the Investment Adviser (the
"Management Agreement"). The Investment Adviser provides the Trust with
investment advisory and management services. Subject to the supervision of the
Board of Trustees, the Investment Adviser is responsible for the actual
management of each Series' portfolio and constantly reviews the Series'
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Series.
Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Series or
other funds for which it acts as investment adviser or for its advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold there may be an adverse
effect on price.
As discussed in the Prospectus, the Investment Adviser receives for its
services to the Series monthly compensation at the annual rates of the average
daily net assets of each Series as follows
<TABLE>
<CAPTION>
Management
Name of Series Fee
-------------- ----------
<S> <C>
Merrill Lynch S&P 500 Index Series............................... 0.05%
Merrill Lynch Small Cap Index Series............................. 0.08%
Merrill Lynch Aggregate Bond Index Series........................ 0.06%
Merrill Lynch International Index Series......................... 0.11%
</TABLE>
The table below sets forth information about the total investment advisory
fees paid by the Series to the Investment Adviser, and any amount voluntarily
waived by the Investment Adviser.
<TABLE>
<CAPTION>
Small Aggregate
S&P 500 Cap Bond
Index Index Index International
Period Ending Series Series Series Index Series
- ------------- -------- ------- --------- -------------
<S> <C> <C> <C> <C>
December 31, 1997*
Contractual amount................... $148,645 $36,425 $ 88,609 $100,102
Amount waived (if applicable)........ $148,645 $36,425 $ 37,562 $ 35,546
December 31, 1998
Contractual amount................... $454,138 $61,476 $238,378 $142,489
Amount waived (if applicable)........ $ 0 $61,476 $ 2,537 $ 87,182
</TABLE>
- ----------
* Period is from commencement of operations (April 3, 1997 for the S&P 500
Index Series and the Aggregate Bond Index Series, and April 9, 1997 for the
Small Cap Index Series and the International Index Series).
Payment of Series Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Trust connected with investment and economic research, trading and investment
management of the Trust, as well as the fees of all Trustees who are
affiliated persons of the Investment Adviser or any of their affiliates.
22
<PAGE>
Each Series pays all other expenses incurred in the operation of the Series,
(except to the extent paid by the Distributor), including, among other things,
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports, copies of the Registration
Statements, charges of the Custodian, any Sub-custodian and Transfer Agent,
expenses of portfolio transactions, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering the shares
under federal, state or foreign laws, fees and out-of-pocket expenses of
unaffiliated Trustees, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Trust or the Series. The Distributor will pay
certain of the expenses of the Trust incurred in connection with the offering
of its shares of beneficial interest of each of the Series.
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co. and Princeton Services. ML &
Co. and Princeton Services are "controlling persons" of the Investment Adviser
as defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year with respect to
each Series if approved annually (a) by the Board of Trustees or by a majority
of the outstanding shares of the Series and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Series.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), 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 at the annual rate of 0.05% of the average daily
value of the net assets of a Fund for its services and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For purposes of the Transfer Agency Agreement, the term
"account" includes a shareholder account maintained directly by the Transfer
Agent and any other account representing the beneficial interest of a person
in the relevant share class on a record keeping system, provided the record
keeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Funds have entered into a distribution agreement
with the Distributor in connection with the continuous offering of shares of
the Funds (the "Distribution Agreements"). The Distribution Agreement
obligates the Distributor to pay certain expenses in connection with the
offering of 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.
Code of Ethics
The Board of Directors of the Corporation have adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act which incorporates the Code of
Ethics of the Corporation and of the Investment Adviser (together, the
"Codes"). The Codes significantly restrict the personal investing activities
of all employees of the Investment Adviser and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any
23
<PAGE>
securities in a "hot" initial public offering and a prohibition from profiting
on short-term trading in securities. In addition, no employee may purchase or
sell any security that at the time is being purchased or sold (as the case may
be), or to the knowledge of the employee is being considered for purchase or
sale, by any fund advised by the Investment Adviser. Furthermore, the Codes
provide for trading "blackout periods" which prohibit trading by investment
personnel of the Corporation within periods of trading by the Funds in the
same (or equivalent) security (15 or 30 days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus for certain information as to the purchase of Fund shares.
The Fund 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 assets advised by the Investment Adviser or any of its affiliates.
In addition, plans maintained by a labor union for the benefit of union
members may purchase Class A shares if the plans maintained by such union
commit to purchase Class A shares of any Fund having a value of at least $7.5
million at the time of purchase. For more information about these programs,
contact the Transfer Agent at 1-800-MER-FUND.
Each Fund or the Distributor may suspend the continuous offering of a Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to
time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to confirm a sale of
shares to such customers. Purchases made directly through the Transfer Agent
are not subject to the processing fee.
Account Maintenance Plan
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the account maintenance plan for Class D shares
pursuant to Rule 12b-1 under the Investment Company Act (the "Account
Maintenance Plan") with respect to the account maintenance fees paid by each
Fund to the Distributor with respect to Class D shares of each Fund.
Pursuant to the Account Maintenance Plan, the Class D shares of each Fund
pay the Distributor an ongoing account maintenance fee, accrued daily and paid
monthly, at the annual rate of 0.25% on 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. Class D shares have exclusive voting rights with
respect to the Account Maintenance Plan pursuant to which account maintenance
fees are paid.
The Funds' Account Maintenance Plan is subject to the provisions of Rule
12b-1 under the Investment Company Act. In their consideration of the Account
Maintenance Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Account Maintenance Plan to
the Funds and their Class D shareholders. The Account Maintenance Plan further
provides that, so long as the Account
24
<PAGE>
Maintenance Plan remains in effect, the selection and nomination of
Independent Directors shall be committed to the discretion of the Independent
Directors then in office. In approving the Account Maintenance Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that the Account Maintenance Plan will benefit the Fund,
and their Class D shareholders. The Account Maintenance 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 Account
Maintenance 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 Independent Directors who have no direct or
indirect financial interest in the Account Maintenance Plan, cast in person at
a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Account Maintenance Plan and any report made pursuant
to such plan for a period of not less than six years from the date of the
Account Maintenance Plan or such report, the first two years in an easily
accessible place.
Among other things, the Account Maintenance 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. For
the fiscal year ended December 31, 1998, the S&P 500 Index Fund, Small Cap
Index Fund, Aggregate Bond Index Fund and the International Index Fund paid
the Distributor $699,584, $72,545, $188,135 and $41,326, respectively,
pursuant to the Account Maintenance Plan (based on average daily net assets
subject to such Class D Account Maintenance Plan of approximately $279.8
million, $29.0 million, $74.8 million and $16.5 million, respectively), all of
which was paid to Merrill Lynch for providing account maintenance activities
in connection with Class D shares.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus for certain information as to the redemption and repurchase of Fund
shares.
Each Fund is required to redeem all shares of the Fund upon receipt of a
written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. There will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through the
date of redemption. The Corporation will generally pay redemptions in cash;
however, if requested by a shareholder, at the discretion of the Investment
Adviser, 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
the Investment Adviser from time to time) with portfolio securities.
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 periods during
which trading on the NYSE is restricted as determined by the Commission or
during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Commission as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the net asset value of such shares at such
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 that would cause the Corporation or a Fund to be deemed a personal
holding company within the meaning of the Code. Merrill Lynch reserves the
right to terminate any account engaging in market-timing mutual funds. For the
purposes of this policy, "market-timing" involves the purchase and sale of
shares of mutual funds within short periods of time with the intention of
capturing short-term profits resulting from market volatility.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
25
<PAGE>
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc. 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the shares to be
redeemed. Redemption requests should not be sent to the Corporation. The
redemption request in either event requires the signature(s) of all persons in
whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
requests must be guaranteed by an "eligible guarantor institution" as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. 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, payments 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 (e.g., cash, Federal funds or certified check
drawn on a United States bank). 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, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
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 the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) on the day received, and such request is received by
the Fund from such dealer not later than 30 minutes after the close of
business on the NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE, in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by 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 Transfer Agent on accounts held at the
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. However, a shareholder whose order for repurchase is rejected by a
Fund may redeem shares as set forth above.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
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
on each day the NYSE is open for trading (a "Pricing Day"). The NYSE generally
closes at 4:00 p.m., Eastern time. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The NYSE is not open for trading on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day.
26
<PAGE>
Net asset value per share 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,
rounded to the nearest cent. Expenses, including the fees payable to the
Administrator and Distributor and the fees payable indirectly by the Series of
the Trust to the Investment Adviser, 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. Portfolio
securities that are traded on stock exchanges are valued at the last sale
price (regular way) on the exchange on which such securities are traded as of
the close of business on the day the securities are being valued or, lacking
any sales, at the last available bid price for long positions and at the last
available ask price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market.
Long positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Series writes an option, the amount of the premium received is recorded on the
books of the Series as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Series are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the
Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust. Such valuations and procedures will be reviewed
periodically by the Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of a Fund's shares are
determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that will not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
as determined in good faith by the Trustees.
Each investor in the Trust may add to or reduce its investment in any Series
on each Pricing Day. The value of each investor's (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 the aggregate
beneficial interests in a Series will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Series as of the time or determination on such
day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investor's investment in the Series effected on such day,
and (ii) the denominator of which is the aggregate net asset value of the
Series as of such time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments
in the Series by all investors in the Series. The percentage so determined
will then be applied to determine the value of the investor's interest in such
Series as of 15 minutes after the close of business of the NYSE on the next
Pricing Day of the Series.
27
<PAGE>
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, 1998, is calculated
as follows:
S&P 500 Index Fund
<TABLE>
<CAPTION>
Class A Class D
------------ ------------
<S> <C> <C>
Net Assets.......................................... $682,669,335 $435,255,678
============ ============
Number of Shares Outstanding........................ 44,631,697 28,488,310
============ ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) and Offering Price... $ 15.30 $ 15.28
============ ============
</TABLE>
Small Cap Index Fund
<TABLE>
<CAPTION>
Class A Class D
----------- -----------
<S> <C> <C>
Net Assets............................................ $18,122,030 $30,940,829
=========== ===========
Number of Shares Outstanding.......................... 1,764,068 3,012,784
=========== ===========
Net Asset Value Per Share (net assets divided by
number of shares outstanding) and Offering Price..... $ 10.27 $ 10.27
=========== ===========
</TABLE>
Aggregate Bond Index Fund
<TABLE>
<CAPTION>
Class A Class D
------------ -----------
<S> <C> <C>
Net Assets........................................... $351,785,913 $81,603,135
============ ===========
Number of Shares Outstanding......................... 33,165,113 7,690,405
============ ===========
Net Asset Value Per Share (net assets divided by
number of shares outstanding) and Offering Price.... $ 10.61 $ 10.61
============ ===========
</TABLE>
International Index Fund
<TABLE>
<CAPTION>
Class A Class D
------------ -----------
<S> <C> <C>
Net Assets........................................... $118,692,068 $14,802,051
============ ===========
Number of Shares Outstanding......................... 9,858,144 1,228,751
============ ===========
Net Asset Value Per Share (net assets divided by
number of shares outstanding) and Offering Price.... $ 12.04 $ 12.05
============ ===========
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
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. Subject to policies established by the Board of
Trustees, the Investment Adviser is primarily responsible for the execution of
the Series' portfolio transactions and the allocation of brokerage. The Trust
has no obligation to deal with any dealer or group of dealers in the execution
of transactions in portfolio securities of the Series. Where possible, the
Trust deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. It is the policy of the Trust to obtain the best results
in conducting portfolio transactions for the Series, taking into account such
factors as price (including the applicable dealer spread or
28
<PAGE>
commission), the size, type and difficulty of the transaction involved, the
firm's general execution and operations facilities and the firm's risk in
positioning the securities involved. The portfolio securities of the Series
generally are traded on a principal basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Series primarily consists of dealer or underwriter
spreads. While reasonable competitive spreads or commissions are sought, the
Trust will not necessarily be paying the lowest spread or commission
available. Transactions with respect to the securities of small and emerging
growth companies in which the Series may invest may involve specialized
services on the part of the broker or dealer and thereby entail higher
commissions or spreads than would be the case with transactions involving more
widely trading securities.
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a
company, industry or economic sector) to the Investment Adviser may receive
orders for transactions by the Trust. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under its Management Agreement and the expense of the
Investment Adviser will not necessarily be reduced as a result of the receipt
of such supplemental information. If in the judgment of the Investment Adviser
the Trust will be benefitted by supplemental research services, the Investment
Adviser is authorized to pay brokerage commissions to a broker-dealer
furnishing such services which are in excess of commissions which another
broker-dealer may have charged for effecting the same transaction.
Supplemental investment research obtained from such broker-dealers might be
used by the Investment Adviser in servicing all of its accounts and all such
research might not be used by the Investment Adviser in connection with the
Fund. Consistent with the Conduct Rules of the NASD and policies established
by the Trustees, the Investment Adviser may consider sales of shares of the
Funds as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust.
For the fiscal period April 3, 1997 (commencement of operations) to December
31, 1997, the Series paid brokerage commissions of $118,903 and $0 for the S&P
500 Index Series and the Aggregate Bond Index Series, respectively. For the
fiscal period April 9, 1997 (commencement of operations) to December 31, 1997,
the Series paid brokerage commissions of $60,361 and $146,336 for the Small
Cap Index Series and the International Index Series, respectively. The Series
paid no commissions to Merrill Lynch. For the fiscal year ended December 31,
1998, the following table shows the amount of brokerage commissions paid by
each Fund to Merrill Lynch, the percentage of each Fund's brokerage
commissions paid to Merrill Lynch, the percentage of each Fund's aggregate
dollar amount of transactions involving the payment of commissions effected
through Merrill Lynch and aggregate brokerage commissions paid by each Fund:
<TABLE>
<CAPTION>
S&P 500 Index Small Cap Aggregate Bond International
Series Index Series Index Series Index Series
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Aggregate brokerage
commissions paid to
Merrill Lynch.......... $ 0 $ 0 $ 0 $ 1,299
% of Fund's aggregate
brokerage commissions
paid to Merrill Lynch.. 0.00% 0.00% 0.00% 1.75%
% of Fund's aggregate
dollar amount of
transactions effected
through the broker..... 0.00% 0.00% 0.00% 0.20%
Aggregate brokerage
commissions paid....... $105,046 $50,264 $ 0 $74,373
</TABLE>
Under the Investment Company Act, persons affiliated with the Trust and
persons who are affiliated with such persons are prohibited from dealing with
the Trust as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Trust,
including Merrill Lynch and any of its affiliates, will not serve as the
Trust's dealer in such transactions. However, affiliated persons of the Trust
may serve as its broker in listed or OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by
such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Trust may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which
29
<PAGE>
Merrill Lynch serves as placement agent except pursuant to procedures adopted
by the Board of Trustees of the Trust that either comply with rules adopted by
the Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act
in order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Trustees have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Trustees
will reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Trust in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Trust and annual statements as to aggregate compensation will be provided
to the Trust. Securities may be held by, or be appropriate investments for,
the Series as well as other funds or investment advisory clients of the
Investment Adviser or FAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Trust or other clients or
funds for which the Investment Adviser or an affiliate acts as manager,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or an affiliate during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services and investment plans
described below that are designed to facilitate investment in their shares.
Full details as to each of such services and copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Funds, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to 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 capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and capital gains distributions. A shareholder with an account held
at the Transfer Agent may make additions to his or her Investment Account at
any time by mailing a check directly to the Transfer Agent. A shareholder may
also maintain an account through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name may be opened automatically at the Transfer
Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with
Merrill Lynch. All shareholder services will be available for the transferred
30
<PAGE>
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or
her shares, paying any applicable CDSC or (ii) continue to maintain an
Investment Account at the Transfer Agent for those shares. The shareholder may
also request the new securities dealer to maintain the shares in an account at
the Transfer Agent registered in the name of the securities dealer for the
benefit of the shareholder whether the securities dealer has entered into a
selected dealer agreement with Merrill Lynch or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer would be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
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.
Retirement Plans
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.
Shareholders considering transferring a tax-deferred retirement account such
as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that if the firm to which the
retirement account is being transferred will not take delivery of shares of a
Fund, the shareholder must either redeem the shares so that the cash proceeds
can be transferred to the account at the new firm, or continue to maintain a
retirement account at Merrill Lynch for those shares.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class D shares at the applicable public offering price. These purchases may be
made either through the shareholder's securities dealer, or by mail directly
to the Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Fund's Automatic
Investment Plan. Each Fund would be authorized, on a regular basis, to provide
systematic additions to the Investment Account of such shareholder through
charges of $50 or more to the regular bank account of the shareholder by
either pre-authorized checks or automated clearing house debits. An investor
that maintains a CMA(R) or CBA(R) account may arrange to have periodic
investments of amounts of $100 or more ($1 or more for retirement accounts),
made in a Fund through the CMA(R) or CBA(R) Automatic Investment Program from
his or her CMA(R) or CBA(R) account or from certain related accounts.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested in additional full and fractional
shares of the Funds. Such reinvestment will be at the net asset value of
shares of a Fund as of the close of business on the NYSE on the monthly
payment date for such dividends.
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<PAGE>
Shareholders may, at any time, by written notification to Merrill Lynch if
the shareholder's account is maintained with Merrill Lynch, or by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends 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 be automatically reinvested in additional shares). Cash
payments can also be directly deposited to the shareholder's bank account.
Commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. A Fund is not responsible for any failure
of delivery to the shareholder's address of record and no interest will accrue
on amounts represented by uncashed dividend or redemption checks.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account of Class A or Class D shares by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders that have acquired shares of a Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. With respect to shareholders
who hold accounts directly at the Transfer Agent, redemptions will be made at
net asset value as determined 15 minutes after the close of business on the
NYSE (generally, 4:00 p.m., Eastern time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are reinvested automatically in shares of
the Funds. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, a Fund, the Transfer
Agent or the Distributor.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. A Fund will not knowingly accept purchase orders for shares
of the Fund from investors that maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
Account or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third, or fourth Monday of the month. If the Monday
selected is not a business day, the redemption will be processed at net asset
value on the next business day. The CMA(R) or CBA(R) Systematic Redemption
Program is not available if Fund shares are being purchased within the account
pursuant to the Automated Investment Program. For more information on the
CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should
contact their Merill Lynch Financial Consultant.
Capital gains and ordinary income received in each of the retirement 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.
32
<PAGE>
DIVIDENDS AND TAXES
Dividends
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 or its ordinary income and capital gains be
distributed during the taxable year. See "Shareholder Services--Automatic
Dividend Reinvestment Plan" 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 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 or from an excess of net
realized short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from a Fund's net realized
capital gains (including long-term gains from certain transactions in futures
and options) ("capital gain dividends") are taxable to shareholders as capital
gains, regardless of the length of time the shareholder has owned Fund shares.
The maximum capital gains rate for individuals is 20%. 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. 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 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 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. Dividends 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.
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<PAGE>
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.
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.
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<PAGE>
In general, unless such contract is a forward foreign exchange contract, or is
a non-equity or a regulated futures contract for a non-U.S. currency for which
the Fund elects to have gain or loss treated as ordinary gain or loss under
Code Section 988 (as described below), gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
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.
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 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."
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<PAGE>
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 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 average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield
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 separately for Class A and Class D shares of each Fund in
accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than
those noted below. 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. A Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
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.
A Fund's total return and yield will vary depending on market conditions,
the securities comprising the Fund's portfolio, the Fund's operating expenses
and the amount of realized and unrealized net capital gains or losses during
the period. The value of an investment in the Fund will fluctuate and
investor's shares, when redeemed, may be worth more or less than their
original cost.
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 or other industry publications. When comparing its
performance to a market index, a Fund may refer to various statistical
measures derived from the historic performances of the Fund and the index,
such as standard deviation and beta. 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 indicative of a Fund's relative
performance for any future period.
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<PAGE>
Set forth below is total return and yield information for Class A and Class D
shares of the Funds for the periods indicated.
<TABLE>
<CAPTION>
S&P 500 Index Fund
Class A Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
<S> <C> <C> <C> <C>
One Year Ended December
31, 1998............... 28.24% $1,282.40 27.95% $1,279.50
Inception (April 3,
1997) to December 31,
1998................... 34.50% $1,677.40 34.17% $1,670.20
<CAPTION>
Annual Total Return
<S> <C> <C> <C> <C>
Year Ended December 31,
1998................... 28.24% $1,282.40 27.95% $1,279.50
Inception (April 3,
1997) to December 31,
1997................... 30.80% $1,308.00 30.53% $1,305.30
<CAPTION>
Aggregate Total Return
<S> <C> <C> <C> <C>
Inception (April 3,
1997) to December 31,
1998................... 67.74% $1,677.40 67.02% $1,670.20
<CAPTION>
Small Cap Index Fund
Class A Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
<S> <C> <C> <C> <C>
One Year ended December
31, 1998............... (3.14)% $ 968.60 (3.41)% $ 965.90
Inception (April 9,
1997) to December 31,
1998................... 12.74 % $1,230.40 12.47 % $1,225.30
<CAPTION>
Annual Total Return
<S> <C> <C> <C> <C>
Year Ended December 31,
1998................... (3.14)% $ 968.60 (3.14)% $ 965.90
Inception (April 9,
1997) to December 31,
1997................... 27.04 % $1,270.40 26.87 % $1,268.70
<CAPTION>
Aggregate Total Return
<S> <C> <C> <C> <C>
Inception (April 9,
1997) to December 31,
1998................... 23.04 % $1,230.40 22.53 % $1,225.30
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Aggregate Bond Index Fund
Class A Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
One Year Ended December
31, 1998............... 8.56% $1,085.60 8.29% $1,082.90
Inception (April 3,
1997) to December 31,
1998................... 10.41% $1,188.70 10.14% $1,183.50
<CAPTION>
Annual Total Return
<S> <C> <C> <C> <C>
Year Ended December 31,
1998................... 8.56% $1,085.60 8.29% $1,082.90
Inception (April 3,
1997) to December 31,
1997................... 9.49% $1,094.90 9.29% $1,092.90
<CAPTION>
Aggregate Total Return
<S> <C> <C> <C> <C>
Inception (April 3,
1997) to
December 31, 1998...... 18.87% $1,188.70 18.35% $1,183.50
<CAPTION>
Yield
<S> <C> <C> <C> <C>
30 days ending December
31, 1998............... 5.29% -- 5.05% --
International Index Fund
<CAPTION>
Class A Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
One Year Ended December
31, 1998............... 25.65% $1,256.50 25.40% $1,254.00
Inception (April 9,
1997) to
December 31, 1998 ..... 19.60% $1,362.70 19.32% $1,357.10
Annual Total Return
Year Ended December 31,
1998................... 25.65% $1,256.50 25.40% $1,254.00
Inception (April 9,
1997) to
December 31, 1997 ..... 8.45% $1,084.50 8.22% $1,082.20
Aggregate Total Return
Inception (April 9,
1997) to
December 31, 1998 ..... 36.27% $1,362.70 35.71% $1,357.10
</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.
38
<PAGE>
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.
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.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
been selected as the independent auditors of the Corporation and the Trust.
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 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"), One Heritage Drive P2N, North Quincy, Massachusetts
02171, acts as the custodian of the assets of International Index Series.
Under its contract with the Trust, State Street is authorized to establish
separate accounts in foreign currencies and to cause foreign securities owned
by the International Index Series to be held in its offices outside the United
States and with certain foreign banks and securities 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
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Transfer Agent of the Corporation. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Corporation and the Trust.
39
<PAGE>
Reports to Shareholders
The fiscal year of the Funds 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.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Funds at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 of 1940, to which reference is hereby made.
To the knowledge of the Corporation, the following persons or entities owned
beneficially 5% or more of any class of a Fund's shares as of April 1, 1999:
<TABLE>
<CAPTION>
Fund Name/Address
---- -------------------------
<S> <C>
Merrill Lynch International Index Ronald I. Shaw
Class D PO Box 455
5.1% of Class Richmond, MA 01254
Merrill Lynch Aggregate Bond Index Piedmont Liability Trust
Class D 2568 Ivy #3
12.1% of Class Charlottesville, VA 22903
</TABLE>
FINANCIAL STATEMENTS
The Funds' and Series' audited financial statements are incorporated in this
Statement of Additional Information by reference to their 1998 annual reports
to shareholders. You may request a copy of the annual reports at no charge by
calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
40
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note. Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier I indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific
A-1
<PAGE>
note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath
the name of the issuer, or there is a footnote referring the reader to another
page for the name or names of the supporting entity or entities. In assigning
ratings to such issuers, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
A-2
<PAGE>
baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great
length of time.
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
A-3
<PAGE>
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
A-4
<PAGE>
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-l This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment -- capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
A-5
<PAGE>
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B, predominantly B, speculative with respect to the issuer's capacity to
CCC pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protection characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A-6
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
Code # 19004-0499
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant.(1)
1(b) --Articles of Amendment.(2)
2 --By-Laws of Registrant.(1)
3 --Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.(3)
4 --Not Applicable.
5 --Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(3)
6 --None.
7(a) --Form of Custody Agreement between Registrant and Merrill Lynch Trust
Company.(3)
7(b) --Form of Custody Agreement between Registrant and State Street Bank
and Trust Company.(3)
8(a) --Form of Administration Agreement between Registrant and Merrill
Lynch Asset Management, L.P.(3)
(b) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc.(3)
(c) --License Agreement relating to Use of Name between Merrill Lynch &
Co., Inc. and Registrant.(3)
9 --Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP,
counsel for Registrant.(3)
10(a) --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
10(b) --Consent of Swidler Berlin Shereff Friedman, LLP, counsel for
Registrant.
11 --None.
12 --Certificate of Merrill Lynch Asset Management.(3)
13 --Account Maintenance Plan of the Registrant and Plan Sub-
Agreement.(3)
14(a) --Financial Data Schedule for Class A shares of S&P 500 Index Fund.
14(b) --Financial Data Schedule for Class D shares of S&P 500 Index Fund.
14(c) --Financial Data Schedule for Class A shares of Small Cap Index Fund.
14(d) --Financial Data Schedule for Class D shares of Small Cap Index Fund.
14(e) --Financial Data Schedule for Class A shares of Aggregate Bond Index
Fund.
14(f) --Financial Data Schedule for Class D shares of Aggregate Bond Index
Fund.
14(g) --Financial Data Schedule for Class A shares of International Index
Fund.
14(h) --Financial Data Schedule for Class D shares of International Index
Fund.
14(i) --Financial Data Schedule for S&P 500 Index Series.
14(j) --Financial Data Schedule for Small Cap Index Series.
14(k) --Financial Data Schedule for Aggregate Bond Index Series.
14(l) --Financial Data Schedule for International Index Series.
15(a) --Rule 18f-3 Plan.
15(b) --Power of Attorneys for Officers, Directors and Trustees.(3)
15(c) --Power of Attorneys for Donald C. Burke.(4)
</TABLE>
- ----------
(1) Incorporated by reference to identically numbered Exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 333-15265).
(2) 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).
(3) Incorporated by reference to the corresponding exhibit number in Pre-
Effective Amendment No. 1 to Registrant's Registration Statement on Form N-
1A (File No. 333-15265) as set forth below:
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference to
Number Exhibit Number
------- ---------------
<C> <S>
3 4
5 6
7(a) 8(a)
7(b) 8(b)
</TABLE>
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference to
Number Exhibit Number
------- ---------------
<C> <S>
8(a) 9(a)
8(b) 9(b)
8(c) 9(c)
9 10
</TABLE>
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference to
Number Exhibit Number
------- ---------------
<C> <S>
12 13
13 15
15(b) 17(b)
</TABLE>
(4) Incorporated by reference to the corresponding exhibit number in Post-
Effective Amendment No. 3 to the Registrant's Registration Statement on
Form N-1A (File No. 333-15265).
C-1
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
Registrant is not controlled by or under common control with any person.
Item 25. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws (the "By-Laws"), Section
9 of the Distribution Agreement and Section 2-418 of the Maryland General
Corporation Law.
Article VI of the By-Laws provides that each 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 within
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 purchase insurance on behalf of an officer or Director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
Director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or Director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or Director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The 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 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 Merrill
Lynch Asset Management, Inc. (now called Merrill Lynch Asset Management, L.P.)
("MLAM") (Exhibit 8(a) to Registrant's Registration Statement on Form N-1A)
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
C-2
<PAGE>
the Securities Act of 1933, as amended (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 26. Business and Other Connections of Investment Adviser.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
also acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond
Fund, Inc., and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as a sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Funds,
Inc., MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings
C-3
<PAGE>
California Insured Fund IV, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Fund III, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings
New York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
MuniHoldings Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured
Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch Funds Distributor ("MLFD"), a division of Princeton Funds Distributor,
Inc. is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281-1201. The
address of the Fund's transfer agent Financial Data Services, Inc. ("FDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and Director of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since December 31, 1996 for his or her or its own account or in the capacity
of director, officer, employee, partner or trustee. In addition, Mr. Burke is
Vice President and Treasurer and Mr. Glenn is President of all or
substantially all of the investment companies advised by the Manager or FAM
and Mr. Glenn is a director of substantially all of such companies. Messrs.
Giordano and Monagle are directors or officers of one or more of such
companies.
Officers and partners of MLAM are set forth as follows:
<TABLE>
<CAPTION>
Position with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Merrill Lynch
Investment............. Limited Partner Investment Advisory Management, Inc.
Princeton Services...... General Partner General Partner of FAM
Jeffrey M. Peek......... President President of FAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.
Terry K. Glenn.......... Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of Princeton Funds
Distributor, Inc.; Director of FDS;
President of Princeton Administrators
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
Donald C. Burke......... Senior Vice President, Senior Vice President and Treasurer of
Treasurer and Director FAM; Senior Vice President and
of Taxation Treasurer of Princeton Services; Vice
President of Princeton Funds
Distributor, Inc.; First Vice
President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to
1997
Michael G. Clark........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Director and Treasurer of Princeton
Funds Distributor, Inc.; First Vice
President of MLAM from 1997 to 1999;
Vice President of MLAM from 1996 to
1997
Mark A. Desario......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Linda L. Federeci....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President, Senior Vice President of FAM, General
General Counsel and Secretary Counsel and Secretary of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President Senior Vice President of FAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services.
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Vice President of Princeton Funds
Distributor, Inc.
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Brian A. Murdock........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
Item 27. Principal Underwriters.
(a) MLFD, a division of Princeton Funds Distributor, Inc., 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 registered
investment companies referred to in the first two paragraphs of Item 26 except
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and The Municipal Fund Accumulation
Program, Inc. MLFD also acts as principal underwriter for the following
closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. A separate division of Princeton
Funds Distributor, Inc. acts as the principal underwriter of a number of other
investment companies.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) Positions and Offices Positions and Offices
Name with the Distributor with Registrant
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn............. President and Director President and Director
Michael G. Clark........... Director and Treasurer None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Donald C. Burke............ Vice President Treasurer and Vice President
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary None
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund--Merrill
Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" 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 30. Undertakings.
None.
C-6
<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 under 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 28th day of April,
1999.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director April 28, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
* Treasurer (Principal
______________________________________ Financial Accounting
(Donald C. Burke) Officer) and Director
* Director
______________________________________
(Jack B. Sunderland)
* Director
______________________________________
(Stephen B. Swensrud)
* Director
______________________________________
(J. Thomas Touchton)
*This amendment has been signed by
each of the persons so indicated by
the undersigned as Attorney-in-
Fact.
/s/ Terry K. Glenn April 28, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-7
<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 28th day of April, 1999.
Merrill Lynch Index Trust
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
The 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>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Trustee April 28, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
* Treasurer (Principal
______________________________________ Financial Accounting
(Donald C. Burke) Officer) and Trustee
* Trustee
______________________________________
(Jack B. Sunderland)
* Trustee
______________________________________
(Stephen B. Swensrud)
* Trustee
______________________________________
(J. Thomas Touchton)
*This amendment has been signed by
each of the persons so indicated by
the undersigned as Attorney-in-Fact.
/s/ Terry K. Glenn April 28, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<C> <S>
10(a) --Consent of Deloitte & Touche, LLP, independent auditors for the
Registrant
10(b) --Consent of Swidler Berlin Shereff Friedman LLP, counsel for
Registrant
14(a) --Financial Data Schedule for Class A shares of S&P 500 Index Fund
14(b) --Financial Data Schedule for Class D shares of S&P 500 Index Fund
14(c) --Financial Data Schedule for Class A shares of Small Cap Index Fund
14(d) --Financial Data Schedule for Class D shares of Small Cap Index Fund
14(e) --Financial Data Schedule for Class A shares of Aggregate Bond Index
Fund
14(f) --Financial Data Schedule for Class D shares of Aggregate Bond Index
Fund
14(g) --Financial Data Schedule for Class A shares of International Index
Fund
14(h) --Financial Data Schedule for Class D shares of International Index
Fund
14(i) --Financial Data Schedule for S&P 500 Index Series
14(j) --Financial Data Schedule for Small Cap Index Series
14(k) --Financial Data Schedule for Aggregate Bond Index Series
14(l) --Financial Data Schedule for International Index Series
15(a) --Rule 18f-3 Plan
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> MERRILL LYNCH S&P 500 INDEX FUND - CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 926954745
<INVESTMENTS-AT-VALUE> 1118220298
<RECEIVABLES> 0
<ASSETS-OTHER> 65827
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1118286125
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 361112
<TOTAL-LIABILITIES> 361112
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925854988
<SHARES-COMMON-STOCK> 44631697
<SHARES-COMMON-PRIOR> 35473242
<ACCUMULATED-NII-CURRENT> 539232
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 265240
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191265553
<NET-ASSETS> 682669335
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 14156367
<EXPENSES-NET> (3402473)
<NET-INVESTMENT-INCOME> 10753894
<REALIZED-GAINS-CURRENT> 38594938
<APPREC-INCREASE-CURRENT> 145214701
<NET-CHANGE-FROM-OPS> 194563533
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6818554)
<DISTRIBUTIONS-OF-GAINS> (25172753)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37535322
<NUMBER-OF-SHARES-REDEEMED> (30483660)
<SHARES-REINVESTED> 2106793
<NET-CHANGE-IN-ASSETS> 515342327
<ACCUMULATED-NII-PRIOR> 19451
<ACCUMULATED-GAINS-PRIOR> 2020453
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3465425
<AVERAGE-NET-ASSETS> 628142116
<PER-SHARE-NAV-BEGIN> 12.55
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> 3.33
<PER-SHARE-DIVIDEND> (.16)
<PER-SHARE-DISTRIBUTIONS> (.60)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.30
<EXPENSE-RATIO> .40
<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 SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 926954745
<INVESTMENTS-AT-VALUE> 1118220298
<RECEIVABLES> 0
<ASSETS-OTHER> 65827
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1118286125
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 361112
<TOTAL-LIABILITIES> 361112
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 925854988
<SHARES-COMMON-STOCK> 28488310
<SHARES-COMMON-PRIOR> 12565103
<ACCUMULATED-NII-CURRENT> 539232
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 265240
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191265553
<NET-ASSETS> 435255678
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 14156367
<EXPENSES-NET> (3402473)
<NET-INVESTMENT-INCOME> 10753894
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<NAME> MERRILL LYNCH SMALL CAP INDEX FUND - CLASS A SHARES
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<NAME> MERRILL LYNCH SMALL CAP INDEX FUND - CLASS D SHARES
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<NAME> MERRILL LYNCH AGGREGATE BOND INDEX FUND - CLASS A SHARES
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<NAME> MERRILL LYNCH AGGREGATE BOND INDEX FUND - CLASS D SHARES
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<NAME> MERRILL LYNCH INTERNATIONAL INDEX FUND - CLASS A SHARES
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<NAME> MERRILL LYNCH INTERNATIONAL INDEX FUND - CLASS D SHARES
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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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<ACCUM-APPREC-OR-DEPREC> 14512439
<NET-ASSETS> 434934794
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25075382
<OTHER-INCOME> 37022
<EXPENSES-NET> (496561)
<NET-INVESTMENT-INCOME> 24615843
<REALIZED-GAINS-CURRENT> 1822916
<APPREC-INCREASE-CURRENT> 7171047
<NET-CHANGE-FROM-OPS> 33609806
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 127194397
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 238378
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<GROSS-EXPENSE> 499098
<AVERAGE-NET-ASSETS> 395131319
<PER-SHARE-NAV-BEGIN> 0
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<EXPENSE-RATIO> .13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MERRILL LYNCH INTERNATIONAL INDEX SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 128724987
<INVESTMENTS-AT-VALUE> 150816858
<RECEIVABLES> 913018
<ASSETS-OTHER> 157689
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 151887565
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367330
<TOTAL-LIABILITIES> 367330
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129166792
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22353443
<NET-ASSETS> 151520235
<DIVIDEND-INCOME> 1955714
<INTEREST-INCOME> 531070
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<EXPENSES-NET> (335746)
<NET-INVESTMENT-INCOME> 2151038
<REALIZED-GAINS-CURRENT> 11405413
<APPREC-INCREASE-CURRENT> 21936836
<NET-CHANGE-FROM-OPS> 35493287
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<NET-CHANGE-IN-ASSETS> 8102435
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 422928
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<EXPENSE-RATIO> .33
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<PAGE>
Exhibit 10(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Index Funds, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 4 to Registration Statement No. 333-15265 of our reports dated as follows:
February 16, 1999 S&P 500 Index Fund S&P 500 Index Series
February 17, 1999 Aggregate Bond Index Fund Aggregate Bond Index Series
February 18, 1999 Small Cap Index Fund Small Cap Index Series
February 18, 1999 International Index Fund International Index Series
appearing in the annual reports to shareholders for the year ended December 31,
1998, and to the reference to us under the caption "Financial Highlights" in the
Prospectus, which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 23, 1999
<PAGE>
Exhibit 10(b)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to reference to our firm included in the prospectus
and statement of additional information of Merrill Lynch Index Funds, filed as
part of Registration Statement No. 333-15265 and to the use of our opinion of
counsel, incorporated by reference to Exhibit 10 to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A (File No. 333-15265).
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP
New York, New York
April 26, 1999
<PAGE>
Exhibit 15(a)
MERRILL LYNCH INDEX FUNDS, INC.
PLAN PURSUANT TO RULE 18f-3 UNDER THE INVESTMENT COMPANY ACT
Each series of Merrill Lynch Index Funds, Inc. (individually a "Fund" and,
collectively, the "Funds") offers Class A Shares and Class D Shares as follows:
Account Maintenance Fees
- ------------------------
Class D Shares bear the expenses of the ongoing account maintenance fees
applicable to the Class D Shares.
Transfer Agency Expenses
- ------------------------
Each Class shall bear any incremental transfer agency cost applicable to the
particular class.
Voting Rights
- -------------
Class D Shares have exclusive voting rights on any matter submitted to
shareholders that relates solely to its account maintenance fees. Each Class
shall have separate voting rights on any matter submitted to shareholders in
which the interests of one Class differ from the interests of the other Class.
Dividends
- ---------
Dividends paid on each Class will be calculated in the same manner at the
same time and will differ to the extent that any account maintenance fee and any
incremental transfer agency cost relates to a particular Class.
Exchange Privileges
- -------------------
Holders of Class A Shares and Class D Shares shall have such exchange
privileges as set forth in the Funds' current prospectus. Exchange privileges
may vary between Classes and among holders of a Class.
Other Rights and Obligations
- ----------------------------
Except as otherwise described above, in all respects, each Class shall have
the same rights and obligations as the other Class.
