UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-7899
811-7885
Name of Fund: Merrill Lynch S&P 500 Index Fund
Master S&P 500 Index Series
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
S&P 500 Index Fund and Master S&P 500 Index Series, 800 Scudders Mill
Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton,
NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 12/31/03
Date of reporting period: 01/01/03 - 12/31/03
Item 1 - Report to Shareholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
S&P 500 Index Fund
Merrill Lynch Index Funds, Inc.
Annual Report
December 31, 2003
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch S&P 500 Index Fund
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid by Merrill Lynch S&P 500 Index Fund during the fiscal year
ended December 31, 2003:
================================================================================
Record Date/ July 16, 2003/ December 17, 2003/
Payable Date July 22, 2003 December 23, 2003
================================================================================
Qualified Dividend
Income for Individuals -- 100%
- --------------------------------------------------------------------------------
Dividends Qualifying for the
Dividends Received Deduction
for Corporations 100% 100%
- --------------------------------------------------------------------------------
Please retain this information for your records.
2 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the more
memorable. The year, which opened with unrelenting economic uncertainty and a
dismal continuation of a three-year equity market slump, vigorously reversed
course in the months that followed. To be sure, 2003 came in like a lamb and
went out like a lion. Or, some might suggest, the year started as a bear and
ended as a bull.
Most notably, the U.S. stock market exceeded the expectations of even the
optimistic investor, with the S&P 500 Index and the Nasdaq posting respective
12-month returns of +28.68% and +50.01% as of December 31, 2003. Gross domestic
product (GDP) growth, which started the year at 1.4% in the first quarter, grew
a remarkable 8.2% in the third quarter -- the fastest rate of growth in 20
years. GDP growth is expected to come in above 3% for the year.
Modest inflation and record low interest rates in 2003 also encouraged the
American consumer who, after carrying the economy on its own for some time,
finally was supported by a $350 billion tax cut, Federal spending on the war
effort and long-awaited capital expenditures by businesses. In addition,
corporate earnings for 2003 finished the year up 16.9%. As we begin a new year,
the events and efforts of 2003 leave us with a much stronger economy for 2004.
In closing, I wish to share one final note regarding the look of our shareholder
communications. Our portfolio manager commentaries have been trimmed and
organized in such a way that you can get the information you need at a glance,
in plain language. Today's markets can be confusing. We want to help you put it
all in perspective. The report's new size also allows us certain mailing
efficiencies. Any cost savings in production or postage are passed on to the
Fund and, ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the New Year and beyond.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director/Trustee
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund was able to meet its objective of closely replicating the returns
of the S&P 500 Index during the year, while equity markets in general enjoyed a
dramatic rebound.
How did the Fund perform during the fiscal year?
For the 12-month period ended December 31, 2003, Merrill Lynch S&P 500 Index
Fund's Class A and Class I Shares had total returns of +28.02% and +28.35%,
respectively. For the same period, the Fund's unmanaged benchmark, the Standard
& Poor's 500 (S&P 500) Index, returned +28.68%. (Complete performance
information can be found on pages 6 and 7 of this report to shareholders.)
As the returns indicate, the Fund met its objective of closely tracking the
performance of its benchmark, the S&P 500 Index, a market-weighted index
composed of 500 common stocks issued by large-capitalization U.S. companies in a
wide range of businesses. As U.S. stocks and the S&P 500 Index rallied during
this particular 12-month reporting period, the Fund benefited in kind.
Over the course of the year, as changes were made to the composition of the S&P
500 Index, we purchased and sold securities to maintain our objective of
replicating the risks and return of the benchmark.
As an index fund, the portfolio mirrors the composition of the S&P 500 Index, a
common measure of U.S. market performance for large cap stocks. What
developments affected the market for large cap stocks during the period?
The year 2003 marked the end of the longest and deepest equity bear market since
the Great Depression. Punctuated by better-than-expected corporate earnings due
to dramatic productivity increases and modest revenue growth, the equity market
recorded returns greater than most had anticipated. Despite an initial setback
related to the start of war in Iraq, the stock market quickly gained steam and
never had more than a 5% pullback through December 31, 2003. As is common after
a major bear market, the best performers during the upturn were low-quality,
high-beta and small-capitalization issues as well as those with earnings losses
and low prices.
For the 12 months ended December 31, 2003, the S&P 500 Index closed at 1,111.92,
its high for the year, representing an increase of 232.10 points and a price
return of +26.38%. The Dow Jones Industrial Average also closed the year at a
12-month high of 10,453.92, up 2,112.29 points for a price return of +25.32%. As
technology stocks outperformed the broader market, the Nasdaq closed the year at
2,003.37, up 667.86 points for a price return of +50.01%.
The value style of investing outperformed growth for the year, with the S&P 500
Barra Value Index having a total return of +31.79% versus the S&P 500 Barra
Growth Index, which posted a total return of +25.66%. In terms of sectors, all
ten S&P 500 sectors posted positive price returns for the year. The top
performer was information technology, up 46.55%, followed by consumer
discretionary and materials, with respective returns of +36.08% and +34.77%.
Worst performers for the year were telecommunications services, consumer staples
and health care, which returned +3.28%, +9.23% and +13.31%, respectively.
4 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
How would you characterize market conditions at the close of the period?
Favorable liquidity conditions, stimulative fiscal policy and rising earnings
expectations spurred the equity bull market that we witnessed during the past
fiscal year. As we ended the period, the momentum from falling interest rates
and excess liquidity was beginning to pass. Higher confidence regarding the
sustainability of economic growth, along with waning deflation fears and a
declining dollar, are likely to cause interest rates to rise.
At the same time, economic growth, which long had been carried by the U.S.
consumer, was broadening to the rest of the U.S. economy and the world. Capital
spending has decisively turned from modest to more robust, job growth has begun
and export markets are awakening. We believe corporate earnings growth is key
for the equity bull market to continue and the benchmark S&P 500 Index to
maintain its positive bent. With all of this in mind, we expect the portfolio to
continue to meet its objective of tracking the performance of the Index.
Richard Vella
Vice President and Senior Portfolio Manager
January 8, 2004
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. Investors are able to purchase
shares of the Fund, which offers two pricing alternatives:
o Class A Shares do not incur an initial sales charge or deferred sales
charge and bear no ongoing distribution fee. In addition, Class A Shares
are subject to an ongoing account maintenance fee of 0.25%.
o Class I Shares do not incur an initial sales charge (front-end load) or
deferred sales charge and bear no ongoing distribution or account
maintenance fees. Class I Shares are available only to eligible investors.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain more current performance
information. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following tables assume reinvestment of all
dividends and capital gains distributions at net asset value on the ex-dividend
date. Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the different levels
of account maintenance, distribution and transfer agency fees applicable to each
class, which are deducted from the income available to be paid to shareholders.
Recent Performance Results
6-Month 12-Month Since Inception
As of December 31, 2003 Total Return Total Return Total Return
========================================================================================
ML S&P 500 Index Fund Class A Shares* +14.87% +28.02% +57.23%
- ----------------------------------------------------------------------------------------
ML S&P 500 Index Fund Class I Shares* +14.99 +28.35 +59.81
- ----------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +15.14 +28.68 +63.73
- ----------------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset value for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. The Fund's
inception date is 4/03/97.
** This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues. Since
inception total return is from 4/03/97.
6 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Performance Data (concluded)
Total Return Based on a $10,000 Investment--Class A & Class I Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class I Shares compared to growth of an investment in the Standard & Poor's
500 Index. Values are from April 3, 1997 to December 2003.
4/03/97** 12/97 12/98 12/99 12/00 12/01 12/02 12/03
ML S&P 500 Index
Fund+--Class A Shares* $10,000 $13,053 $16,702 $20,069 $18,138 $15,873 $12,282 $15,723
ML S&P 500 Index
Fund+--Class I Shares* $10,000 $13,080 $16,774 $20,204 $18,229 $16,069 $12,451 $15,981
4/30/97** 12/97 12/98 12/99 12/00 12/01 12/02 12/03
Standard & Poor's 500 Index++ $10,000 $13,103 $16,848 $20,393 $18,537 $16,333 $12,724 $16,373
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Master S&P 500 Index Series of
Quantitative Master Series Trust. The Trust's investments are allocated
among common stocks in approximately the same weightings as the S&P 500
Index.
++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Average Annual Total Return
Class A Shares % Return
================================================================================
One Year Ended 12/31/03 +28.02%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/03 - 1.20
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/03 + 6.94
- --------------------------------------------------------------------------------
Class I Shares % Return
================================================================================
One Year Ended 12/31/03 +28.35%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/03 - 0.96
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/03 + 7.20
- --------------------------------------------------------------------------------
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities Merrill Lynch S&P 500 Index Fund
As of December 31, 2003
=================================================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Investment in Master S&P 500 Index Series, at value
(identified cost--$2,137,225,129) ............................... $ 2,310,191,863
Prepaid registration fees ......................................... 14,306
---------------
Total assets ...................................................... 2,310,206,169
---------------
=================================================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------------
Payables:
Distributor .................................................... $ 196,013
Administrative fees ............................................ 77,234 273,247
---------------
Accrued expenses and other liabilities ............................ 765,630
---------------
Total liabilities ................................................. 1,038,877
---------------
=================================================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets ........................................................ $ 2,309,167,292
===============
=================================================================================================================================
Net Assets Consist of
- ---------------------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.0001 par value,
250,000,000 shares authorized ................................... $ 6,469
Class I Shares of Common Stock, $.0001 par value,
250,000,000 shares authorized ................................... 10,468
Paid-in capital in excess of par .................................. 2,318,552,714
Undistributed investment income--net .............................. $ 364,873
Accumulated realized capital losses on investments
allocated from the Series--net .................................. (182,733,966)
Unrealized appreciation on investments allocated
from the Series--net ............................................ 172,966,734
---------------
Total accumulated losses--net ..................................... (9,402,359)
---------------
Net Assets ........................................................ $ 2,309,167,292
===============
=================================================================================================================================
Net Asset Value
- ---------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $880,875,022 and
64,689,415 shares outstanding ................................... $ 13.62
===============
Class I--Based on net assets of $1,428,292,270 and
104,682,756 shares outstanding .................................. $ 13.64
===============
See Notes to Financial Statements.
8 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Statement of Operations Merrill Lynch S&P 500 Index Fund
For the Year Ended December 31, 2003
=================================================================================================================================
Investment Income Allocated from the Series--Net
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income allocated from the Series:
Dividends ...................................................... $ 33,823,361
Interest ....................................................... 536,380
Securities lending--net ........................................ 289,873
Expenses ....................................................... (773,675)
---------------
Net investment income allocated from the Series ................... 33,875,939
---------------
=================================================================================================================================
Expenses
- ---------------------------------------------------------------------------------------------------------------------------------
Administration fees ............................................... $ 4,714,411
Account maintenance fees--Class A ................................. 1,857,016
Transfer agent fees ............................................... 1,071,311
Printing and shareholder reports .................................. 94,909
Registration fees ................................................. 90,157
Professional fees ................................................. 57,216
Directors' fees and expenses ...................................... 26,247
Other ............................................................. 99,690
---------------
Total expenses .................................................... 8,010,957
---------------
Investment income--net ............................................ 25,864,982
---------------
=================================================================================================================================
Realized & Unrealized Gain Allocated from the Series--Net
- ---------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments allocated from
the Series--net ................................................. 2,266,529
Change in unrealized appreciation/depreciation
on investments allocated from the Series--net ................... 468,520,739
---------------
Total realized and unrealized gain on investments
allocated from the Series--net .................................. 470,787,268
---------------
Net Increase in Net Assets Resulting from Operations .............. $ 496,652,250
===============
See Notes to Financial Statements.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets Merrill Lynch S&P 500 Index Fund
For the Year Ended
December 31,
-----------------------------------
Increase (Decrease) in Net Assets: 2003 2002
=================================================================================================================================
Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 25,864,982 $ 20,576,419
Realized gain (loss) on investments allocated
from the Series--net ............................................ 2,266,529 (75,631,678)
Change in unrealized appreciation/depreciation on investments
allocated from the Series--net .................................. 468,520,739 (403,025,960)
-----------------------------------
Net increase (decrease) in net assets resulting from operations ... 496,652,250 (458,081,219)
-----------------------------------
=================================================================================================================================
Dividends to Shareholders
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ........................................................ (9,012,142) (7,425,881)
Class I ........................................................ (17,162,253) (13,196,193)
-----------------------------------
Net decrease in net assets resulting from dividends to shareholders (26,174,395) (20,622,074)
-----------------------------------
=================================================================================================================================
Capital Share Transactions
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets derived from capital share transactions 258,203,138 177,607,344
-----------------------------------
=================================================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ........................... 728,680,993 (301,095,949)
Beginning of year ................................................. 1,580,486,299 1,881,582,248
-----------------------------------
End of year* ...................................................... $ 2,309,167,292 $ 1,580,486,299
===================================
* Undistributed investment income--net ......................... $ 364,873 $ 674,286
===================================
See Notes to Financial Statements.
10 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Financial Highlights Merrill Lynch S&P 500 Index Fund
Class A@
The following per share data and ratios have been derived ------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended December 31,
------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.75 $ 14.05 $ 16.16 $ 18.00 $ 15.28
------------------------------------------------------------------
Investment income--net ............... .14* .13* .10 .04 .13
Realized and unrealized gain (loss)
on investments and foreign currency
transactions from the Series--net .. 2.87 (3.31) (2.12) (1.77) 2.94
------------------------------------------------------------------
Total from investment operations ..... 3.01 (3.18) (2.02) (1.73) 3.07
------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ (.14) (.12) (.09) (.10) (.14)
In excess of investment income--net -- -- -- --+ --
In excess of realized gain on
investments from the Series--net -- -- -- (.01) (.21)
------------------------------------------------------------------
Total dividends and distributions .... (.14) (.12) (.09) (.11) (.35)
------------------------------------------------------------------
Net asset value, end of year ......... $ 13.62 $ 10.75 $ 14.05 $ 16.16 $ 18.00
==================================================================
==================================================================================================================================
Total Investment Return
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 28.02% (22.62%) (12.49%) (9.62%) 20.16%
==================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement** ..... .61% .61% .62% .63% .63%
==================================================================
Expenses** ........................... .61% .61% .63% .65% .63%
==================================================================
Investment income--net ............... 1.19% 1.03% .71% .60% .77%
==================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 880,875 $ 648,569 $ 772,750 $ 817,423 $ 840,918
==================================================================
Portfolio turnover from the Series ... 3.60% 4.59% 3.21% 9.71% 29.91%
==================================================================
* Based on average shares outstanding.
** Includes the Fund's share of the Series' allocated expenses.
+ Amount is less than $(.01) per share.
@ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
See Notes to Financial Statements.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (concluded) Merrill Lynch S&P 500 Index Fund
Class I@
The following per share data and ratios have been derived ------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended December 31,
------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.76 $ 14.08 $ 16.18 $ 18.02 $ 15.30
------------------------------------------------------------------
Investment income--net ............... .17* .16* .13 .13 .18
Realized and unrealized gain (loss)
on investments and foreign currency
transactions from the Series--net .. 2.88 (3.33) (2.10) (1.82) 2.92
------------------------------------------------------------------
Total from investment operations ..... 3.05 (3.17) (1.97) (1.69) 3.10
------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ (.17) (.15) (.13) (.14) (.17)
In excess of investment income--net -- -- -- --+ --
In excess of realized gain on
investments from the Series--net -- -- -- (.01) (.21)
------------------------------------------------------------------
Total dividends and distributions .... (.17) (.15) (.13) (.15) (.38)
------------------------------------------------------------------
Net asset value, end of year ......... $ 13.64 $ 10.76 $ 14.08 $ 16.18 $ 18.02
==================================================================
==================================================================================================================================
Total Investment Return
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 28.35% (22.51%) (12.19%) (9.43%) 20.45%
==================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement** ..... .36% .36% .37% .38% .38%
==================================================================
Expenses** ........................... .36% .36% .38% .40% .38%
==================================================================
Investment income--net ............... 1.44% 1.27% .97% .85% 1.03%
==================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,428,292 $ 931,917 $1,108,832 $ 896,356 $ 848,591
==================================================================
Portfolio turnover from the Series ... 3.60% 4.59% 3.21% 9.71% 29.91%
==================================================================
* Based on average shares outstanding.
** Includes the Fund's share of the Series' allocated expenses.
+ Amount is less than $(.01) per share.
@ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
See Notes to Financial Statements.
12 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Notes to Financial Statements Merrill Lynch S&P 500 Index Fund
1. Significant Accounting Policies:
Merrill Lynch S&P 500 Index Fund (the "Fund") is part of Merrill Lynch Index
Funds, Inc. (the "Corporation"). The Fund is registered under the Investment
Company Act of 1940, as amended, as a non-diversified mutual fund. The Fund's
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America, which may require the use of
management accruals and estimates. The Fund seeks to achieve its investment
objective by investing all of its assets in Master S&P 500 Index Series (the
"Series") of Quantitative Master Series Trust, which has the same investment
objective as the Fund. The value of the Fund's investment in the Series reflects
the Fund's proportionate interest in the net assets of the Series. The
performance of the Fund is directly affected by the performance of the Series.
The financial statements of the Series, including the Schedule of Investments,
are included elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The percentage of the Series owned by the Fund at
December 31, 2003 was 93.4%. The Fund offers multiple classes of shares.
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. The Fund's financial statements
and financial highlights contained within this report reflect the new share
class redesignation. Shares of Class A and Class I are sold without the
imposition of a front-end or deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class A Shares bear certain expenses related to the
account maintenance of such shares and have exclusive voting rights with respect
to matters relating to there account maintenance expenditures. Income, expenses
(other than expenses attributable to a specific class) and realized and
unrealized gains and losses on investments are allocated daily to each class
based on its relative net assets. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- The Fund records its investment in the Series at
fair value. Valuation of securities held by the Series is discussed in Note 1a
of the Series' Notes to Financial Statements, which are included elsewhere in
this report.
(b) Investment income and expenses -- The Fund records daily its proportionate
share of the Series' income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no Federal income tax provision is required.
(d) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Investment transactions -- Investment transactions in the Series are
accounted for on a trade date basis.
(g) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax difference of $17,411,293 has been
reclassified between accumulated net realized capital losses and paid-in capital
in excess of par. Additionally, $139,138 has been reclassified between
unrealized appreciation on investments allocated from the Series and paid-in
capital in excess of par to reflect the liquidation of certain partners'
investments in the Series. These reclassifications have no effect on net assets
or net asset values per share.
2. Transactions with Affiliates:
The Corporation has entered into an Administrative Services Agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co.), which is the limited partner. The Fund
pays a monthly fee at an annual rate of .245% of the Fund's average daily net
assets for the performance of administrative services (other than investment
advice and related portfolio activities) necessary for the operation of the
Fund.
The Corporation has also entered into a Distribution Agreement and Distribution
Plan with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a
wholly-owned subsidiary of Merrill Lynch Group, Inc. Pursuant to the
Distribution Plan adopted by the Corporation in accordance with Rule 12b-1 under
the Investment Company Act of 1940, the Fund pays the Distributor an ongoing
account maintenance fee. The fee is accrued daily and paid monthly at the annual
rate of .25% based upon the average daily net assets of Class A shares.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded) Merrill Lynch S&P 500 Index Fund
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance services to the Fund. The ongoing account maintenance fee
compensates the Distributor and MLPF&S for providing account maintenance
services to Class A shareholders.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, FAMD, FDS, and/or ML & Co.
3. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$258,203,138 and $177,607,344 for the years ended December 31, 2003 and December
31, 2002, respectively.
Transactions in capital shares for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 2003+ Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 21,676,776 $ 259,407,002
Shares issued to shareholders in
reinvestment of dividends ............ 613,120 8,148,224
--------------------------------
Total issued ........................... 22,289,896 267,555,226
Shares redeemed ........................ (17,956,428) (215,576,494)
--------------------------------
Net increase ........................... 4,333,468 $ 51,978,732
================================
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 2002+ Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 22,596,862 $ 272,284,151
Shares issued to shareholders in
reinvestment of dividends ............ 607,598 6,669,539
--------------------------------
Total issued ........................... 23,204,460 278,953,690
Shares redeemed ........................ (17,841,183) (213,168,879)
--------------------------------
Net increase ........................... 5,363,277 $ 65,784,811
================================
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended December 31, 2003+ Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 46,212,278 $ 538,202,424
Shares issued to shareholders in
reinvestment of dividends ............ 1,237,260 16,488,003
--------------------------------
Total issued ........................... 47,449,538 554,690,427
Shares redeemed ........................ (29,356,179) (348,466,021)
--------------------------------
Net increase ........................... 18,093,359 $ 206,224,406
================================
+ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended December 31, 2002+ Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 41,888,936 $ 525,329,539
Shares issued to shareholders in
reinvestment of dividends ............ 1,168,621 12,824,616
--------------------------------
Total issued ........................... 43,057,557 538,154,155
Shares redeemed ........................ (35,244,780) (426,331,622)
--------------------------------
Net increase ........................... 7,812,777 $ 111,822,533
================================
+ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
4. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended December
31, 2003 and December 31, 2002 was as follows:
- -------------------------------------------------------------------------------
12/31/2003 12/31/2002
- -------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ...................... $ 26,174,395 $ 20,622,074
Net long-term capital gains .......... -- --
---------------------------------
Total taxable distributions ............ $ 26,174,395 $ 20,622,074
=================================
As of December 31, 2003, the components of accumulated losses on a tax basis
were as follows:
- -----------------------------------------------------------------------------
Undistributed ordinary income--net ..................... $ 364,873
Undistributed long-term capital gains--net ............. --
-------------
Total undistributed earnings--net ...................... 364,873
Capital loss carryforward .............................. (100,424,825)*
Unrealized gains--net .................................. 90,657,593**
-------------
Total accumulated losses--net .......................... $ (9,402,359)
=============
* On December 31, 2003, the Fund had a net capital loss carryforward of
$100,424,825, of which $4,944,930 expires in 2008, $14,600,496 expires in
2009, $73,055,477 expires in 2010 and $7,823,922 expires in 2011. This
amount will be available to offset like amounts of any future taxable
gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales and the
realization for tax purposes of unrealized gains on certain futures
contracts.
14 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Independent Auditors' Report
To the Shareholders and Board of Directors of
Merrill Lynch Index Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch S&P 500 Index Fund, one of the series constituting Merrill Lynch Index
Funds, Inc. (the "Fund"), as of December 31, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch S&P 500 Index Fund of Merrill Lynch Index Funds, Inc. as of
December 31, 2003, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 2004
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Aerospace & Defense--1.8% 22,687 The B.F. Goodrich Company $ 673,577
192,720 The Boeing Company 8,121,221
46,348 General Dynamics Corporation 4,189,396
196,577 Honeywell International Inc. 6,571,569
102,970 Lockheed Martin Corporation 5,292,658
41,376 Northrop Grumman Corporation 3,955,546
94,074 Raytheon Company 2,825,983
39,615 Rockwell Collins, Inc. 1,189,638
112,148 United Technologies Corporation 10,628,266
------------
43,447,854
--------------------------------------------------------------------------------------------------------------------------
Air Freight & Logistics--1.0% 79,108 FedEx Corp. 5,339,790
13,674 Ryder System, Inc. 466,967
265,800 United Parcel Service, Inc. (Class B) 19,815,390
------------
25,622,147
--------------------------------------------------------------------------------------------------------------------------
Airlines--0.1% 52,676 Delta Air Lines, Inc. 622,104
175,895 Southwest Airlines Co. 2,838,945
------------
3,461,049
--------------------------------------------------------------------------------------------------------------------------
Auto Components--0.2% 15,230 Cooper Tire & Rubber Company 325,617
34,045 Dana Corporation 624,726
128,425 Delphi Automotive Systems Corporation 1,311,219
39,593 + The Goodyear Tire & Rubber Company 311,201
20,610 Johnson Controls, Inc. 2,393,233
27,226 Visteon Corporation 283,423
------------
5,249,419
--------------------------------------------------------------------------------------------------------------------------
Automobiles--0.7% 419,499 Ford Motor Company 6,711,984
136,239 General Motors Corporation 7,275,163
74,359 Harley-Davidson, Inc. 3,534,283
------------
17,521,430
--------------------------------------------------------------------------------------------------------------------------
Beverages--2.6% 10,583 Adolph Coors Company (Class B) 593,706
194,285 Anheuser-Busch Companies, Inc. 10,234,934
13,444 Brown-Forman Corporation (Class B) 1,256,342
579,028 The Coca-Cola Company 29,385,671
98,487 Coca-Cola Enterprises Inc. 2,153,911
61,822 The Pepsi Bottling Group, Inc. 1,494,856
405,488 PepsiCo, Inc. 18,903,851
------------
64,023,271
--------------------------------------------------------------------------------------------------------------------------
Biotechnology--1.1% 303,547 + Amgen Inc. 18,759,205
80,440 + Biogen Idec Inc. 2,958,583
43,834 + Chiron Corporation 2,498,100
49,580 + Genzyme Corporation 2,446,277
57,252 + MedImmune, Inc. 1,454,201
------------
28,116,366
--------------------------------------------------------------------------------------------------------------------------
Building Products--0.2% 15,300 + American Standard Companies, Inc. 1,540,710
109,179 Masco Corporation 2,992,596
------------
4,533,306
16 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Capital Markets--3.6% 176,695 The Bank of New York Company, Inc. $ 5,852,138
22,411 The Bear Stearns Companies Inc. 1,791,759
305,068 The Charles Schwab Corporation 3,612,005
24,600 Federated Investors, Inc. (Class B) 722,256
56,986 Franklin Resources, Inc. 2,966,691
111,400 The Goldman Sachs Group, Inc. 10,998,522
478,955 J.P. Morgan Chase & Co. 17,592,017
47,805 Janus Capital Group Inc. 784,480
68,178 Lehman Brothers Holdings, Inc. 5,264,705
101,216 Mellon Financial Corporation 3,250,046
210,067 Merrill Lynch & Co., Inc. (a) 12,320,430
265,298 Morgan Stanley 15,352,795
51,127 Northern Trust Corporation 2,373,315
76,223 State Street Corporation 3,969,694
27,924 T. Rowe Price Group Inc. 1,323,877
------------
88,174,730
--------------------------------------------------------------------------------------------------------------------------
Chemicals--1.5% 52,147 Air Products and Chemicals, Inc. 2,754,926
209,876 The Dow Chemical Company 8,724,545
248,873 E.I. du Pont de Nemours and Company 11,420,782
23,650 Eastman Chemical Company 934,885
59,314 Ecolab Inc. 1,623,424
27,997 Engelhard Corporation 838,510
9,835 Great Lakes Chemical Corporation 267,414
22,759 + Hercules Incorporated 277,660
21,496 International Flavors & Fragrances Inc. 750,640
53,377 Monsanto Company 1,536,190
38,887 PPG Industries, Inc. 2,489,546
76,646 Praxair, Inc. 2,927,877
43,903 Rohm and Haas Company 1,875,097
19,323 Sigma-Aldrich Corporation 1,104,889
------------
37,526,385
--------------------------------------------------------------------------------------------------------------------------
Commercial Banks--6.1% 80,503 AmSouth Bancorporation 1,972,324
127,800 BB&T Corporation 4,938,192
351,213 Bank of America Corporation 28,248,062
265,689 Bank One Corporation 12,112,762
50,795 Charter One Financial, Inc. 1,754,967
42,191 Comerica Incorporated 2,365,228
131,644 Fifth Third Bancorp 7,780,160
37,700 First Tennessee National Corporation 1,662,570
237,547 FleetBoston Financial Corporation 10,368,927
52,429 Huntington Bancshares Incorporated 1,179,653
96,910 KeyCorp 2,841,401
52,000 Marshall & Ilsley Corporation 1,989,000
140,202 National City Corporation 4,758,456
35,900 North Fork Bancorporation 1,452,873
65,768 PNC Bank Corp. 3,599,483
50,958 Regions Financial Corporation 1,895,638
78,044 SouthTrust Corporation 2,554,380
64,199 SunTrust Banks, Inc. 4,590,229
58,951 Synovus Financial Corp. 1,704,863
452,665 U.S. Bancorp 13,480,364
45,481 Union Planters Corporation 1,432,197
313,076 Wachovia Corporation 14,586,211
394,622 Wells Fargo & Company 23,239,290
23,702 Zions Bancorporation 1,453,644
------------
151,960,874
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Commercial Services & 42,678 + Allied Waste Industries, Inc. $ 592,371
Supplies--1.0% 43,900 + Apollo Group, Inc. (Class A) 2,985,200
23,458 Avery Dennison Corporation 1,314,117
233,425 + Cendant Corporation 5,198,375
39,002 Cintas Corporation 1,955,170
13,336 Deluxe Corporation 551,177
28,902 Equifax Inc. 708,099
53,785 H&R Block, Inc. 2,978,075
31,139 + Monster Worldwide Inc. 683,812
53,682 Pitney Bowes Inc. 2,180,563
24,425 R.R. Donnelley & Sons Company 736,414
33,011 + Robert Half International Inc. 770,477
132,814 Waste Management, Inc. 3,931,294
------------
24,585,144
--------------------------------------------------------------------------------------------------------------------------
Communications Equipment--2.9% 181,555 + ADC Telecommunications, Inc. 539,218
60,839 + Andrew Corporation 700,257
83,082 + Avaya Inc. 1,075,081
164,095 + CIENA Corporation 1,089,591
1,638,671 + Cisco Systems, Inc. 39,803,319
57,643 + Comverse Technology, Inc. 1,013,940
279,475 + Corning Incorporated 2,914,924
338,787 + JDS Uniphase Corporation 1,236,573
948,158 + Lucent Technologies Inc. 2,692,769
517,869 Motorola, Inc. 7,286,417
186,280 QUALCOMM Incorporated 10,046,080
28,708 + QLogic Corporation 1,481,333
38,394 Scientific-Atlanta, Inc. 1,048,156
94,487 + Tellabs, Inc. 796,525
------------
71,724,183
--------------------------------------------------------------------------------------------------------------------------
Computers & Peripherals--3.8% 89,017 + Apple Computer, Inc. 1,902,293
603,616 + Dell Inc. 20,498,799
546,454 + EMC Corporation 7,060,186
59,898 + Gateway Inc. 275,531
733,517 Hewlett-Packard Company 16,848,885
412,967 International Business Machines Corporation 38,273,782
29,239 + Lexmark International Group, Inc. (Class A) 2,299,355
20,318 + NCR Corporation 788,338
77,121 + Network Appliance, Inc. 1,583,294
740,156 + Sun Microsystems, Inc. 3,323,300
------------
92,853,763
--------------------------------------------------------------------------------------------------------------------------
Construction & Engineering--0.0% 18,361 Fluor Corporation 727,830
--------------------------------------------------------------------------------------------------------------------------
Construction Materials--0.0% 22,747 Vulcan Materials Company 1,082,075
--------------------------------------------------------------------------------------------------------------------------
Consumer Finance--1.2% 310,184 American Express Company 14,960,174
53,567 Capital One Financial Corporation 3,283,121
286,672 MBNA Corporation 7,123,799
59,873 + Providian Financial Corporation 696,922
105,330 SLM Corporation 3,968,834
------------
30,032,850
18 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Containers & Packaging--0.2% 12,980 Ball Corporation $ 773,219
12,168 Bemis Company, Inc. 608,400
36,525 + Pactiv Corporation 872,948
19,069 + Sealed Air Corporation 1,032,396
12,453 Temple-Inland, Inc. 780,430
------------
4,067,393
--------------------------------------------------------------------------------------------------------------------------
Distributors--0.1% 39,814 Genuine Parts Company 1,321,825
--------------------------------------------------------------------------------------------------------------------------
Diversified Financial 1,222,836 Citigroup Inc. 59,356,459
Services--2.6% 35,140 Moody's Corporation 2,127,727
68,600 The Principal Financial Group, Inc. 2,268,602
------------
63,752,788
--------------------------------------------------------------------------------------------------------------------------
Diversified Telecommunication 71,337 ALLTEL Corporation 3,322,877
Services--2.8% 180,192 AT&T Corporation 3,657,898
434,034 BellSouth Corporation 12,283,162
32,877 CenturyTel, Inc. 1,072,448
53,518 + Citizens Communications Company 664,694
388,545 + Qwest Communications International Inc. 1,678,514
795,005 SBC Communications Inc. 20,725,780
193,381 Sprint Corporation 3,175,316
647,728 Verizon Communications 22,722,298
------------
69,302,987
--------------------------------------------------------------------------------------------------------------------------
Electric Utilities--1.9% 28,320 + Allegheny Energy, Inc. 361,363
36,981 Ameren Corporation 1,701,126
90,520 American Electric Power Company, Inc. 2,761,765
32,614 + CMS Energy Corporation 277,871
81,670 CenterPoint Energy, Inc. 791,382
40,328 Cinergy Corp. 1,565,130
51,225 Consolidated Edison, Inc. 2,203,187
38,438 DTE Energy Company 1,514,457
71,257 Dominion Resources, Inc. 4,548,334
73,599 Edison International 1,614,026
60,555 Entergy Corporation 3,459,507
74,264 Exelon Corporation 4,928,159
42,007 FPL Group, Inc. 2,748,098
91,716 FirstEnergy Corp. 3,228,403
93,777 + PG&E Corporation 2,604,187
33,632 PPL Corporation 1,471,400
20,932 Pinnacle West Capital Corporation 837,699
54,326 Progress Energy, Inc. 2,458,795
900 + Progress Energy, Inc. 198
165,423 The Southern Company 5,004,046
51,896 TECO Energy, Inc. 747,821
76,422 TXU Corporation 1,812,730
91,402 Xcel Energy, Inc. 1,552,006
------------
48,191,690
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Electrical Equipment--0.4% 45,044 American Power Conversion Corporation $ 1,101,326
21,052 Cooper Industries, Ltd. (Class A) 1,219,542
96,448 Emerson Electric Co. 6,245,008
13,668 + Power-One, Inc. 148,024
42,415 Rockwell International Corporation 1,509,974
13,167 Thomas & Betts Corporation 301,393
------------
10,525,267
--------------------------------------------------------------------------------------------------------------------------
Electronic Equipment & 103,410 + Agilent Technologies, Inc. 3,023,708
Instruments--0.5% 39,864 + Jabil Circuit, Inc. 1,128,151
42,862 Molex Incorporated 1,495,455
26,784 PerkinElmer, Inc. 457,203
133,063 + Sanmina--SCI Corporation 1,677,924
158,312 + Solectron Corporation 935,624
48,111 Symbol Technologies, Inc. 812,595
19,436 Tektronix, Inc. 614,178
37,057 + Thermo Electron Corporation 933,836
28,020 + Waters Corporation 929,143
------------
12,007,817
--------------------------------------------------------------------------------------------------------------------------
Energy Equipment & Services--0.8% 52,000 + BJ Services Company 1,866,800
75,544 Baker Hughes Incorporated 2,429,495
102,704 Halliburton Company 2,670,304
36,015 + Nabors Industries, Ltd. 1,494,623
33,979 + Noble Corporation 1,215,769
31,172 + Rowan Companies, Inc. 722,255
141,054 Schlumberger Limited 7,718,475
64,341 + Transocean Inc. 1,544,827
------------
19,662,548
--------------------------------------------------------------------------------------------------------------------------
Food & Staples Retailing--3.4% 83,766 Albertson's, Inc. 1,897,300
90,318 CVS Corporation 3,262,286
113,024 + Costco Wholesale Corporation 4,202,232
170,424 + The Kroger Co. 3,154,548
24,942 SUPERVALU Inc. 713,092
146,800 SYSCO Corporation 5,465,364
99,658 + Safeway Inc. 2,183,507
1,024,155 Wal-Mart Stores, Inc. 54,331,423
229,024 Walgreen Co. 8,331,893
30,880 Winn-Dixie Stores, Inc. 307,256
------------
83,848,901
--------------------------------------------------------------------------------------------------------------------------
Food Products--1.2% 145,534 Archer-Daniels-Midland Company 2,215,028
93,435 Campbell Soup Company 2,504,058
153,278 ConAgra, Inc. 4,045,006
83,560 General Mills, Inc. 3,785,268
80,536 H.J. Heinz Company 2,933,927
32,228 Hershey Foods Corporation 2,481,234
85,665 Kellogg Company 3,262,123
31,900 McCormick & Company Incorporated 960,190
178,141 Sara Lee Corporation 3,867,441
51,370 Wm. Wrigley Jr. Company 2,887,508
------------
28,941,783
20 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Gas Utilities--0.3% 36,061 KeySpan Corporation $ 1,327,045
26,834 Kinder Morgan, Inc. 1,585,889
10,054 NICOR, Inc. 342,238
60,137 NiSource Inc. 1,319,406
8,204 Peoples Energy Corporation 344,896
43,938 Sempra Energy 1,320,776
------------
6,240,250
--------------------------------------------------------------------------------------------------------------------------
Health Care Equipment & 43,655 Applera Corporation--Applied Biosystems Group 904,095
Supplies--1.9% 13,187 Bausch & Lomb Incorporated 684,405
134,927 Baxter International Inc. 4,117,972
60,095 Becton, Dickinson and Company 2,472,308
68,935 Biomet, Inc. 2,509,923
196,364 + Boston Scientific Corporation 7,218,341
12,009 C.R. Bard, Inc. 975,731
69,821 Guidant Corporation 4,203,224
285,940 Medtronic, Inc. 13,899,543
8,655 + Millipore Corporation 372,598
41,194 + St. Jude Medical, Inc. 2,527,252
42,355 Stryker Corporation 3,600,599
59,777 + Zimmer Holdings, Inc. 4,208,301
------------
47,694,292
--------------------------------------------------------------------------------------------------------------------------
Health Care Providers & 37,092 Aetna Inc. (New Shares) 2,506,677
Services--1.8% 27,143 AmerisourceBergen Corporation 1,524,079
31,680 + Anthem, Inc. 2,376,000
32,996 CIGNA Corporation 1,897,270
106,891 Cardinal Health, Inc. 6,537,454
24,000 + Express Scripts, Inc. 1,594,320
124,406 HCA Inc. 5,344,482
52,600 Health Management Associates, Inc. (Class A) 1,262,400
37,004 + Humana Inc. 845,541
59,640 IMS Health Incorporated 1,482,650
20,604 Manor Care, Inc. 712,280
62,384 McKesson HBOC, Inc. 2,006,269
62,001 + Medco Health Solutions, Inc. 2,107,414
23,500 Quest Diagnostics Incorporated 1,718,085
111,337 + Tenet Healthcare Corporation 1,786,959
142,618 UnitedHealth Group Incorporated 8,297,515
36,506 + WellPoint Health Networks Inc. 3,540,717
------------
45,540,112
--------------------------------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.2% 135,880 Carnival Corporation 5,398,512
38,807 Darden Restaurants, Inc. 816,499
28,230 Harrah's Entertainment, Inc. 1,405,007
86,331 Hilton Hotels Corporation 1,478,850
82,520 International Game Technology 2,945,964
53,127 Marriott International, Inc. (Class A) 2,454,467
291,518 McDonald's Corporation 7,238,392
89,512 + Starbucks Corporation 2,959,267
50,168 Starwood Hotels & Resorts Worldwide, Inc. 1,804,543
26,472 Wendy's International, Inc. 1,038,761
66,034 + YUM! Brands, Inc. 2,271,570
------------
29,811,832
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Household Durables--0.6% 13,516 + American Greetings Corporation (Class A) $ 295,595
21,442 The Black & Decker Corporation 1,057,519
5 + Cavco Industries, Inc. 120
19,934 Centex Corporation 2,145,895
33,215 Fortune Brands, Inc. 2,374,540
17,711 KB HOME 1,284,402
44,216 Leggett & Platt, Incorporated 956,392
15,903 Maytag Corporation 442,899
76,554 Newell Rubbermaid Inc. 1,743,135
13,793 Pulte Corporation 1,291,301
13,252 Snap-On Incorporated 427,244
19,543 The Stanley Works 740,093
13,133 Tupperware Corporation 227,726
18,760 Whirlpool Corporation 1,362,914
------------
14,349,775
--------------------------------------------------------------------------------------------------------------------------
Household Products--1.9% 52,398 The Clorox Company 2,544,447
121,581 Colgate-Palmolive Company 6,085,129
116,623 Kimberly-Clark Corporation 6,891,253
304,698 The Procter & Gamble Company 30,433,236
------------
45,954,065
--------------------------------------------------------------------------------------------------------------------------
IT Services--1.1% 135,380 Automatic Data Processing, Inc. 5,362,402
42,950 + Computer Sciences Corporation 1,899,679
114,139 + Concord EFS, Inc. 1,693,823
31,714 + Convergys Corporation 553,726
113,987 Electronic Data Systems Corporation 2,797,241
179,440 First Data Corporation 7,373,190
45,692 + Fiserv, Inc. 1,805,291
86,958 Paychex, Inc. 3,234,838
32,673 Sabre Holdings Corporation 705,410
62,300 + Sungard Data Systems Inc. 1,726,333
75,082 + Unisys Corporation 1,114,968
------------
28,266,901
--------------------------------------------------------------------------------------------------------------------------
Industrial Conglomerates--4.2% 185,488 3M Co. 15,772,045
2,354,281 General Electric Company 72,935,625
31,014 Textron, Inc. 1,769,659
489,025 Tyco International Ltd. 12,959,163
------------
103,436,492
--------------------------------------------------------------------------------------------------------------------------
Insurance--4.5% 59,810 ACE Limited 2,477,330
117,699 AFLAC Incorporated 4,258,350
153,444 The Allstate Corporation 6,601,161
26,066 Ambac Financial Group, Inc. 1,808,720
620,807 American International Group, Inc. 41,147,088
71,585 Aon Corporation 1,713,745
51,753 The Chubb Corporation 3,524,379
36,911 Cincinnati Financial Corporation 1,545,833
67,025 The Hartford Financial Services Group, Inc. 3,956,486
32,636 Jefferson--Pilot Corporation 1,653,013
66,242 John Hancock Financial Services, Inc. 2,484,075
40,119 Lincoln National Corporation 1,619,604
40,990 Loews Corporation 2,026,956
22 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Insurance 32,945 MBIA, Inc. $ 1,951,332
(concluded) 120,998 Marsh & McLennan Companies, Inc. 5,794,594
170,542 MetLife, Inc. 5,742,149
49,140 The Progressive Corporation 4,107,613
128,800 Prudential Financial, Inc. 5,379,976
31,722 SAFECO Corporation 1,234,937
62,311 The St. Paul Companies, Inc. 2,470,631
26,656 Torchmark Corporation 1,213,914
230,579 Travelers Property Casualty Corp. (Class B) 3,912,926
65,967 UnumProvident Corporation 1,040,300
38,505 XL Capital Ltd. (Class A) 2,986,063
------------
110,651,175
--------------------------------------------------------------------------------------------------------------------------
Internet & Catalog Retail--0.4% 155,300 + eBay Inc. 10,030,827
--------------------------------------------------------------------------------------------------------------------------
Internet Software & Services--0.3% 143,630 + Yahoo! Inc. 6,487,767
--------------------------------------------------------------------------------------------------------------------------
Leisure Equipment & Products--0.2% 20,664 Brunswick Corporation 657,735
84,553 Eastman Kodak Company 2,170,476
38,694 Hasbro, Inc. 823,408
94,934 Mattel, Inc. 1,829,378
------------
5,480,997
--------------------------------------------------------------------------------------------------------------------------
Machinery--1.4% 83,144 Caterpillar Inc. 6,902,615
13,388 Crane Co. 411,547
17,309 Cummins Engine Company, Inc. 847,103
34,525 Danaher Corporation 3,167,669
59,898 Deere & Company 3,896,365
40,759 Dover Corporation 1,620,170
16,875 Eaton Corporation 1,822,163
21,396 ITT Industries, Inc. 1,587,797
66,621 Illinois Tool Works Inc. 5,590,168
35,298 Ingersoll-Rand Company (Class A) 2,396,028
19,258 + Navistar International Corporation 922,266
28,316 PACCAR Inc. 2,410,258
28,103 Pall Corporation 754,003
26,688 Parker-Hannifin Corporation 1,587,936
------------
33,916,088
--------------------------------------------------------------------------------------------------------------------------
Media--3.9% 137,504 Clear Channel Communications, Inc. 6,439,312
404,643 + Comcast Corporation (Class A) 13,300,615
126,605 + Comcast Corporation (Special Class A) 3,960,204
18,319 Dow Jones & Company, Inc. 913,202
70,779 Gannett Co., Inc. 6,310,656
89,286 + The Interpublic Group of Companies, Inc. 1,392,862
18,651 Knight Ridder, Inc. 1,443,028
45,108 The McGraw-Hill Companies, Inc. 3,153,951
11,421 Meredith Corporation 557,459
34,547 The New York Times Company (Class A) 1,651,001
43,197 Omnicom Group Inc. 3,772,394
1,060,484 + Time Warner Inc. 19,078,107
65,242 Tribune Company 3,366,487
73,471 + Univision Communications Inc. (Class A) 2,916,064
412,463 Viacom, Inc. (Class B) 18,305,108
480,347 The Walt Disney Company 11,206,496
------------
97,766,946
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 23
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Metals & Mining--0.8% 189,645 Alcoa Inc. $ 7,206,510
15,228 Allegheny Technologies Incorporated 201,314
51,834 Freeport-McMoRan Copper & Gold, Inc. (Class B) 2,183,766
99,986 Newmont Mining Corporation 4,860,319
17,916 Nucor Corporation 1,003,296
21,288 + Phelps Dodge Corporation 1,619,804
41,422 United States Steel Corporation 1,450,598
19,667 Worthington Industries, Inc. 354,596
------------
18,880,203
--------------------------------------------------------------------------------------------------------------------------
Multi-Utilities & Unregulated 138,460 + The AES Corporation 1,307,062
Power--0.5% 103,360 + Calpine Corporation 497,162
31,149 Constellation Energy Group 1,219,795
206,519 Duke Energy Corporation 4,223,314
111,371 + Dynegy Inc. (Class A) 476,668
149,215 El Paso Corporation 1,222,071
51,764 Public Service Enterprise Group Incorporated 2,267,263
118,686 The Williams Companies, Inc. 1,165,497
------------
12,378,832
--------------------------------------------------------------------------------------------------------------------------
Multiline Retail--1.0% 26,795 + Big Lots, Inc. 380,757
19,164 Dillard's, Inc. (Class A) 315,439
68,250 Dollar General Corporation 1,432,568
34,464 Family Dollar Stores, Inc. 1,236,568
47,567 Federated Department Stores, Inc. 2,241,833
82,598 J.C. Penney Company, Inc. 2,170,675
82,009 + Kohl's Corporation 3,685,484
66,128 The May Department Stores Company 1,922,341
29,236 Nordstrom, Inc. 1,002,795
61,418 Sears, Roebuck & Co. 2,793,905
205,735 Target Corporation 7,900,224
------------
25,082,589
--------------------------------------------------------------------------------------------------------------------------
Office Electronics--0.1% 176,602 + Xerox Corporation 2,437,108
--------------------------------------------------------------------------------------------------------------------------
Oil & Gas--4.9% 20,367 Amerada Hess Corporation 1,082,913
63,761 Anadarko Petroleum Corporation 3,252,449
41,521 Apache Corporation 3,367,353
15,658 Ashland Inc. 689,892
45,918 Burlington Resources Inc. 2,542,939
251,150 ChevronTexaco Corporation 21,696,849
153,389 ConocoPhillips 10,057,717
52,979 Devon Energy Corporation 3,033,578
25,870 EOG Resources, Inc. 1,194,418
1,575,212 Exxon Mobil Corporation++ 64,583,692
24,965 Kerr-McGee Corporation 1,160,623
62,747 Marathon Oil Corporation 2,076,298
82,329 Occidental Petroleum Corporation 3,477,577
22,385 Sunoco, Inc. 1,144,993
59,074 Unocal Corporation 2,175,695
------------
121,536,986
24 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Paper & Forest Products--0.5% 57,367 Georgia-Pacific Group $ 1,759,446
126,662 International Paper Company 5,460,399
18,128 + Louisiana-Pacific Corporation 324,129
45,972 MeadWestvaco Corporation 1,367,667
49,461 Weyerhaeuser Company 3,165,504
------------
12,077,145
--------------------------------------------------------------------------------------------------------------------------
Personal Products--0.5% 11,528 Alberto-Culver Company (Class B) 727,186
52,580 Avon Products, Inc. 3,548,624
234,301 The Gillette Company 8,605,876
------------
12,881,686
--------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals--8.2% 367,117 Abbott Laboratories 17,107,652
30,564 Allergan Inc. 2,347,621
455,561 Bristol-Myers Squibb Company 13,029,045
270,977 Eli Lilly and Company 19,057,812
88,364 + Forest Laboratories, Inc. 5,460,895
697,377 Johnson & Johnson 36,026,496
47,755 + King Pharmaceuticals, Inc. 728,741
526,057 Merck & Co., Inc. 24,303,833
1,798,781 Pfizer, Inc. 63,550,933
344,925 Schering-Plough Corporation 5,998,246
27,481 + Watson Pharmaceuticals, Inc. 1,264,126
312,799 Wyeth 13,278,318
------------
202,153,718
--------------------------------------------------------------------------------------------------------------------------
Real Estate--0.4% 21,500 Apartment Investment & Management Company (Class A) 741,750
90,964 Equity Office Properties Trust 2,606,119
65,840 Equity Residential Properties Trust 1,942,938
42,000 Plum Creek Timber Company Inc. 1,278,900
42,400 ProLogis Trust 1,360,616
43,300 Simon Property Group, Inc. 2,006,522
------------
9,936,845
--------------------------------------------------------------------------------------------------------------------------
Road & Rail--0.4% 84,194 Burlington Northern Santa Fe Corporation 2,723,676
48,278 CSX Corporation 1,735,111
89,342 Norfolk Southern Corporation 2,112,938
57,476 Union Pacific Corporation 3,993,432
------------
10,565,157
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 25
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Semiconductors & Semiconductor 108,647 + Advanced Micro Devices, Inc. $ 1,618,840
Equipment--4.1% 86,490 + Altera Corporation 1,963,323
79,616 Analog Devices, Inc. 3,634,470
374,076 + Applied Materials, Inc. 8,398,006
68,567 + Applied Micro Circuits Corporation 410,031
67,781 + Broadcom Corporation (Class A) 2,310,654
1,529,831 Intel Corporation 49,260,558
46,037 + KLA-Tencor Corporation 2,700,991
79,366 + LSI Logic Corporation 703,976
71,699 Linear Technology Corporation 3,016,377
79,360 Maxim Integrated Products, Inc. 3,952,128
139,468 + Micron Technology, Inc. 1,878,634
56,820 + NVIDIA Corporation 1,321,065
50,086 + National Semiconductor Corporation 1,973,889
44,800 + Novellus Systems, Inc. 1,883,840
47,554 + PMC--Sierra, Inc. 958,213
40,532 + Teradyne, Inc. 1,031,539
390,672 Texas Instruments Incorporated 11,477,943
88,893 + Xilinx, Inc. 3,443,715
------------
101,938,192
--------------------------------------------------------------------------------------------------------------------------
Software--4.6% 54,325 Adobe Systems Incorporated 2,134,973
31,064 Autodesk, Inc. 763,553
49,020 + BMC Software, Inc. 914,223
45,705 + Citrix Systems, Inc. 969,403
132,512 Computer Associates International, Inc. 3,622,878
84,049 + Compuware Corporation 507,656
67,400 + Electronic Arts Inc. 3,220,372
47,052 + Intuit Inc. 2,489,521
26,927 + Mercury Interactive Corporation 1,309,729
2,541,124 Microsoft Corporation++ 69,982,555
84,424 + Novell, Inc. 888,140
1,229,885 + Oracle Corporation 16,234,482
59,765 + Parametric Technology Corporation 235,474
91,522 + PeopleSoft, Inc. 2,086,702
119,937 + Siebel Systems, Inc. 1,663,526
81,600 + Symantec Corporation 2,827,440
94,581 + VERITAS Software Corporation 3,514,630
------------
113,365,257
26 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued) Master S&P 500 Index Series
Industry* Shares Held Common Stocks Value
==========================================================================================================================
Specialty Retail--2.4% 64,500 + AutoNation, Inc. $ 1,184,865
22,377 + AutoZone, Inc. 1,906,744
72,924 + Bed, Bath & Beyond Inc. 3,161,255
77,846 Best Buy Co., Inc. 4,066,675
30,424 Boise Cascade Corporation 999,733
62,323 Circuit City Stores--Circuit City Group 631,332
198,393 The Gap, Inc. 4,604,702
540,086 The Home Depot, Inc. 19,167,652
107,544 The Limited, Inc. 1,939,018
184,140 Lowe's Companies, Inc. 10,199,515
70,758 + Office Depot, Inc. 1,182,366
39,598 RadioShack Corporation 1,214,867
33,592 The Sherwin-Williams Company 1,166,986
121,934 + Staples, Inc. 3,328,798
115,348 The TJX Companies, Inc. 2,543,423
32,801 Tiffany & Co. 1,482,605
48,797 + Toys 'R' Us, Inc. 616,794
--------------
59,397,330
--------------------------------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury 33,860 Jones Apparel Group, Inc. 1,192,888
Goods--0.3% 24,338 Liz Claiborne, Inc. 863,025
63,510 Nike, Inc. (Class B) 4,347,895
25,987 Reebok International Ltd. 1,021,809
22,767 V. F. Corporation 984,445
--------------
8,410,062
--------------------------------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.8% 45,037 Countrywide Credit Industries, Inc. 3,416,057
232,173 Fannie Mae 17,426,905
155,303 Freddie Mac 9,057,271
34,448 Golden West Financial Corporation 3,554,689
24,780 MGIC Investment Corporation 1,410,973
231,898 Washington Mutual, Inc. 9,303,748
--------------
44,169,643
--------------------------------------------------------------------------------------------------------------------------
Tobacco--1.2% 476,918 Altria Group, Inc. 25,953,878
31,400 R.J. Reynolds Tobacco Holdings, Inc. 1,825,910
38,235 UST Inc. 1,364,607
--------------
29,144,395
--------------------------------------------------------------------------------------------------------------------------
Trading Companies & 21,045 W. W. Grainger, Inc. 997,323
Distributors--0.0%
--------------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 621,447 + AT&T Wireless Services Inc. 4,965,362
Services--0.5% 230,477 + Nextel Communications, Inc. (Class A) 6,467,185
214,139 + Sprint Corp. (PCS Group) 1,203,461
--------------
12,636,008
--------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost--$2,244,136,433)--97.6% 2,415,881,673
==========================================================================================================================
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 27
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) Master S&P 500 Index Series
Beneficial Interest/
Shares Held Short-Term Securities Value
==========================================================================================================================
$ 48,169,443 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I (a) $ 48,169,443
$212,260,313 Merrill Lynch Liquidity Series, LLC Money Market
Series (a)(b) $ 212,260,313
70,753,437 Merrill Lynch Premier Institutional Fund (a)(b) 70,753,437
--------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$331,183,193)--13.4% 331,183,193
==========================================================================================================================
Total Investments (Cost--$2,575,319,626)--111.0% 2,747,064,866
Short Sales (Proceeds--$188,360)***--0.0% (188,146)
Variation Margin on Financial Futures Contracts**--0.0% 207,180
Liabilities in Excess of Other Assets--(11.0%) (272,488,150)
--------------
Net Assets--100.0% $2,474,595,750
==============
+ Non-income producing security.
++ All or a portion of security held as collateral in connection with open
financial futures contracts.
* For Series compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Series management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
** Financial futures contracts purchased as of December 31, 2003 were as
follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Gains
--------------------------------------------------------------------------
291 S&P 500 March
Stock Index 2004 $78,035,264 $2,760,886
--------------------------------------------------------------------------
Total Unrealized Gains--Net $2,760,886
==========
*** Short sales entered into as of December 31, 2003 were as follows:
--------------------------------------------------------------------------
Shares Issue Value
--------------------------------------------------------------------------
4,526 Piper Jaffray Companies, Inc. $(188,146)
--------------------------------------------------------------------------
Total (Proceeds--$188,360) $(188,146)
=========
(a) Investments in companies considered to be an affiliate of the Series (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch & Co., Inc. 33,600 $128,299
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 25,408,528 $580,427
Merrill Lynch Liquidity Series, LLC
Money Market Series $ (79,386,418) $196,309
Merrill Lynch Premier
Institutional Fund (187,876,682) $118,173
--------------------------------------------------------------------------
(b) Security was purchased with the cash proceeds from securities loans.
See Notes to Financial Statements.
28 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Statement of Assets and Liabilities Master S&P 500 Index Series
As of December 31, 2003
==================================================================================================================================
Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Investments, at value (including securities loaned of $276,069,037)
(identified cost--$2,575,319,626) ................................ $ 2,747,064,866
Receivables:
Contributions ................................................... $ 20,668,243
Dividends ....................................................... 3,321,169
Variation margin ................................................ 207,180
Securities sold ................................................. 188,360
Interest ........................................................ 52,533
Securities lending--net ......................................... 27,154 24,464,639
---------------
Prepaid expenses ................................................... 10,167
---------------
Total assets ....................................................... 2,771,539,672
---------------
==================================================================================================================================
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock sold short, at market value (proceeds--$188,360) ...... 188,146
Collateral on securities loaned, at value .......................... 283,013,750
Payables:
Withdrawals ..................................................... 13,593,392
Other affiliates ................................................ 22,976
Investment adviser .............................................. 1,689 13,618,057
---------------
Accrued expenses and other liabilities ............................. 123,969
---------------
Total liabilities .................................................. 296,943,922
---------------
==================================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets ......................................................... $ 2,474,595,750
===============
==================================================================================================================================
Net Assets Consist of
- ----------------------------------------------------------------------------------------------------------------------------------
Investors' capital ................................................. $ 2,300,089,410
Unrealized appreciation on investments--net ........................ 174,506,340
---------------
Net Assets ......................................................... $ 2,474,595,750
===============
See Notes to Financial Statements.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 29
[LOGO] Merrill Lynch Investment Managers
Statement of Operations Master S&P 500 Index Series
For the Year Ended December 31, 2003
==================================================================================================================================
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends .......................................................... $ 36,674,658
Interest ........................................................... 582,380
Securities lending--net ............................................ 314,482
---------------
Total income ....................................................... 37,571,520
---------------
==================================================================================================================================
Expenses
- ----------------------------------------------------------------------------------------------------------------------------------
Accounting services ................................................ $ 364,139
Professional fees .................................................. 173,574
Investment advisory fees ........................................... 104,372
Custodian fees ..................................................... 86,667
Trustees' fees and expenses ........................................ 26,126
Printing and shareholder reports ................................... 22,798
Other .............................................................. 61,017
---------------
Total expenses ..................................................... 838,693
---------------
Investment income--net ............................................. 36,732,827
---------------
==================================================================================================================================
Realized & Unrealized Gain on Investments--Net
- ----------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net .................................. 6,988,294
Change in unrealized appreciation/depreciation on investments--net . 502,365,410
---------------
Total realized and unrealized gain on investments--net ............. 509,353,704
---------------
Net Increase in Net Assets Resulting from Operations ............... $ 546,086,531
===============
See Notes to Financial Statements.
30 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Statements of Changes in Net Assets Master S&P 500 Index Series
For the Year Ended
December 31,
-----------------------------------
Increase (Decrease) in Net Assets: 2003 2002
==================================================================================================================================
Operations
- ----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................. $ 36,732,827 $ 29,710,172
Realized gain (loss) on investments--net ........................... 6,988,294 (82,782,120)
Change in unrealized appreciation/depreciation on investments--net . 502,365,410 (435,785,828)
-----------------------------------
Net increase (decrease) in net assets resulting from operations .... 546,086,531 (488,857,776)
-----------------------------------
==================================================================================================================================
Capital Transactions
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from contributions ........................................ 818,978,064 589,333,536
Fair value of withdrawals .......................................... (617,173,500) (267,267,758)
-----------------------------------
Net increase in net assets derived from capital transactions ....... 201,804,564 322,065,778
-----------------------------------
==================================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................ 747,891,095 (166,791,998)
Beginning of year .................................................. 1,726,704,655 1,893,496,653
-----------------------------------
End of year ........................................................ $ 2,474,595,750 $ 1,726,704,655
===================================
See Notes to Financial Statements.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 31
[LOGO] Merrill Lynch Investment Managers
Financial Highlights Master S&P 500 Index Series
For the Year Ended
December 31,
The following ratios have been derived ----------------------------------------------------------------
from information provided in the financial statements. 2003 2002 2001 2000 1999
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return .............. 28.70% (22.22%) (11.97%) -- --
================================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses ............................. .04% .04% .05% .07% .07%
================================================================
Investment income--net ............... 1.76% 1.59% 1.29% 1.16% 1.33%
================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $2,474,596 $1,726,705 $1,893,497 $1,714,631 $1,690,336
================================================================
Portfolio turnover ................... 3.60% 4.59% 3.21% 9.71% 29.91%
================================================================
* Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See Notes to Financial Statements.
32 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Notes to Financial Statements Master S&P 500 Index Series
1. Significant Accounting Policies:
Master S&P 500 Index Series (the "Series") is part of Quantitative Master Series
Trust (the "Trust"). The Trust is registered under the Investment Company Act of
1940, as amended, and is organized as a Delaware statutory trust. The
Declaration of Trust permits the Trustees to issue nontransferable interests in
the Series, subject to certain limitations. The Series' financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America, which may require the use of management accruals and
estimates. The following is a summary of significant accounting policies
followed by the Series.
(a) Valuation of investments -- Equity securities that are held by the Series
that are traded on stock exchanges or the Nasdaq National Market are valued at
the last sale price or official close price on the exchange, 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 equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available ask price. 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.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased 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. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Trust
employs pricing services to provide certain securities prices for the Trust.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by the
pricing services retained by the Trust, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the Trust's Board
of Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net assets of the Series are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Series' net assets. If
events (for example, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect the
value of such securities, those securities may be valued at their fair value as
determined in good faith by the Trust's Board of Trustees or by the Investment
Adviser using a pricing service and/or procedures approved by the Trust's Board
of Trustees.
(b) Derivative financial instruments -- The Series may engage in various
portfolio investment strategies to provide liquidity or as a proxy for a direct
investment in securities underlying the Series' index. Losses may arise due to
changes in the value of the contract or if the counterparty does not perform
under the contract.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 33
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued) Master S&P 500 Index Series
o Financial futures contracts -- The Series may purchase or sell financial
futures contracts and options on such futures contracts. Future contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the
Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to
the contract, the Series agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as variation margin and are recorded
by the Series as unrealized gains or losses. When the contract is closed,
the Series records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed.
o Options -- The Series may purchase and write call and put options. When
the Series writes an option, an amount equal to the premium received by
the Series is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the
current market value of the option written. When a security is purchased
or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Series enters into a closing transaction),
the Series realizes a gain or loss on the option to the extent of the
premiums received or paid (or a gain or loss to the extent that the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- The Series is classified as a partnership for Federal income
tax purposes. As such, each investor in the Series is treated as owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Series. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest, dividends and capital gains at various rates. It is
intended that the Series' assets will be managed so an investor in the Series
can satisfy the requirements of subchapter M of the Internal Revenue Code.
(e) Security transactions and investment income -- Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis.
(f) Short sales -- When the Series engages in a short sale, an amount equal to
the proceeds received by the Series is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the market value of the short sale. The Series maintains a segregated
account of securities as collateral for the short sales. The Series is exposed
to market risk based on the amount, if any, that the market value of the stock
exceeds the market value of the securities in the segregated account. The Series
is required to repay the counterparty any dividends or interest received on the
security sold short.
(g) Securities lending -- The Series may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. The
market value of the loaned securities is determined at the close of business of
the Series and any additional required collateral is delivered to the Series on
the next business day. Where the Series receives securities as collateral for
the loaned securities, it collects a fee from the borrower. The Series typically
receives the income on the loaned securities but does not receive the income on
the collateral. Where the Series receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities within five
business days. The Series may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any
34 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Notes to Financial Statements (concluded) Master S&P 500 Index Series
other reason, the Series could experience delays and costs in gaining access to
the collateral. The Series also could suffer a loss where the value of the
collateral falls below the market value of the borrowed securities, in the event
of borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of .005% of the average daily value of the Series' net
assets.
The Trust has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., or its
affiliates. Pursuant to that order, the Trust also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Trust and the Series, invest cash
collateral received by the Series for such loans, among other things, in a
private investment company managed by MLIM, LLC or in registered money market
funds advised by FAM or its affiliates. As of December 31, 2003, the Series lent
securities with a value of $9,718,180 to MLPF&S or its affiliates. For the year
ended December 31, 2003, MLIM, LLC received $127,484 in securities lending agent
fees from the Series.
In addition, MLPF&S received $14 in commissions on the execution of portfolio
security transactions for the Series for the year ended December 31, 2003.
Merrill Lynch Trust Company, an indirect, wholly-owned subsidiary of ML & Co.,
is the Series' custodian.
For the year ended December 31, 2003, the Series reimbursed FAM $43,249 for
certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, MLTC, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2003 were $300,790,655 and $72,751,598 respectively.
Net realized gains for the year ended December 31, 2003 and net unrealized gains
as of December 31, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................. 862,940 $171,745,240
Financial futures contracts ............ 6,125,354 2,760,886
Short sales ............................ -- 214
--------------------------------
Total .................................. $ 6,988,294 $174,506,340
================================
As of December 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $94,081,656, of which $362,908,594 related to appreciated
securities and $268,826,938 related to depreciated securities. At December 31,
2003, the aggregate cost of investments for Federal income tax purposes was
$2,652,983,210.
4. Short-Term Borrowings:
The Series, along with certain other funds managed by FAM and its affiliates, is
a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. The Series may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The Series
may borrow up to the maximum amount allowable under the Series' current
prospectus and statement of additional information, subject to various other
legal, regulatory or contractual limits. The Series pays a commitment fee of
..09% per annum based on the Series pro rata share of the unused portion of the
credit agreement. Amounts borrowed under the credit agreement bear interest at a
rate equal to, at each fund's election, the Federal Funds rate plus .50% or a
base rate as determined by Bank One, N.A. On November 28, 2003, the credit
agreement was renewed for one year under the same terms. The Series did not
borrow under the credit agreement during the year ended December 31, 2003.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 35
[LOGO] Merrill Lynch Investment Managers
Independent Auditors' Report Master S&P 500 Index Series
To the Investors and Board of Trustees of
Quantitative Master Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Master S&P 500 Index Series, one of the
portfolios constituting the Quantitative Master Series Trust (the "Trust"), as
of December 31, 2003, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Master
S&P 500 Index Series of the Quantitative Master Series Trust as of December 31,
2003, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 2004
36 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Officers and Directors/Trustees (unaudited)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length Overseen by Held by
Held with of Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Director/Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President and Chairman of the Merrill Lynch Invest- 123 Funds None
Glenn* Princeton, NJ and present ment Managers, L.P. ("MLIM")/Fund Asset 160 Portfolios
08543-9011 Director/ and Management, L.P. ("FAM")--Advised Funds since
Age: 63 Trustee 1997 to 1999; Chairman (Americas Region) of MLIM from
present 2000 to 2002; Executive Vice President of FAM
and MLIM (which terms as used herein include
their corporate predecessors) from 1983 to 2002;
President of FAM Distributors, Inc. ("FAMD") from
1986 to 2002 and Director thereof from 1991 to
2002; Executive Vice President and Director of
Princeton Services, Inc. ("Princeton Services")
from 1993 to 2002; President of Princeton
Administrators, L.P. from 1989 to 2002; Director of
Financial Data Services, Inc. since 1985.
- ------------------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or
MLIM acts as investment adviser. Mr. Glenn is an "interested person" as described in the Investment Company Act, of
the Fund/Trust based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators,
L.P. The Director's/Trustee's term is unlimited. Directors/Trustees serve until their resignation, removal, or death,
or until December 31 of the year in which they turn 72. As Fund/Trust President, Mr. Glenn serves at the pleasure of
the Board of Directors/Trustees.
====================================================================================================================================
Independent Directors/Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald W. P.O. Box 9095 Director/ 2002 to Manager of The Burton Partnership, Limited 23 Funds ITC Delta-
Burton Princeton, NJ Trustee present Partnership since 1979; Managing General Partner 36 Portfolios Com, Inc.,
08543-9095 of the South Atlantic Venture Funds, Limited ITC
Age: 59 Partnerships and Chairman of South Atlantic Financial
Private Equity Fund IV, Limited Partnership since Services,
1983; Member of the Investment Advisory Council Knology,
of the Florida State Board of Administration Inc.,
since 2001. PriCare,
Inc.,
Symbion, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
M. Colyer P.O. Box 9095 Director/ 2000 to James R. Williston Professor of Investment 24 Funds Cambridge
Crum Princeton, NJ Trustee present Management Emeritus, Harvard Business 37 Portfolios Bancorp
08543-9095 School since 1996; Chairman and Director of
Age: 71 Phaeton International, Ltd. from 1985 to present;
Director of Cambridge Bancorp since 1969.
- ------------------------------------------------------------------------------------------------------------------------------------
Laurie P.O. Box 9095 Director/ 2000 to Professor of Finance and Economics, Graduate 23 Funds None
Simon Princeton, NJ Trustee present School of Business, Columbia University since 36 Portfolios
Hodrick 08543-9095 1998; Associate Professor of Finance and
Age: 41 Economics, Graduate School of Business,
Columbia University from 1996 to 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 37
[LOGO] Merrill Lynch Investment Managers
Officers and Directors/Trustees (unaudited)(concluded)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length Overseen by Held by
Held with of Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Directors/Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
David H. P.O. Box 9095 Director/ 2003 to Consultant with Putnam Investments since 1993 23 Funds None
Walsh Princeton, NJ Trustee present and employed in various capacities therewith from 36 Portfolios
08543-9095 1971 to 1992; Director of the National Audubon
Age: 62 Society since 2000; Director of the American Museum
of Fly Fishing since 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
Fred G. P.O. Box 9095 Director/ 2000 to Managing Director of FGW Associates since 1997; 23 Funds Watson
Weiss Princeton, NJ Trustee present Vice President, Planning, Investment and Devel- 36 Portfolios Pharma-
08543-9095 opment of Warner Lambert Co. from 1979 to 1997; ceuticals,
Age: 62 Director of BTG International, PLC since 2001; Inc.
Director of KIMC Investment, Inc. since 2003;
Director of Osmotica Holdings Corp. AVV since 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
* The Director's/Trustee's term is unlimited. Directors/Trustees serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72.
- ------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length
Held with of Time
Name Address & Age Fund/Trust Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund/Trust Officers
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1997 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice
08543-9011 and and President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer 1999 to
present
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior Vice 1999 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ President present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc. from 1990 to
Age: 49 MLIM since 1999 and Chief Investment Officer thereof from 1998 to 1999; Executive
Vice President of Oppenheimer Funds, Inc. from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard P.O. Box 9011 Vice 1999 to Managing Director and Head of Global Index and Enhanced Index products for Merrill
Vella Princeton, NJ President present Lynch Quantitative Advisors since 1999; Managing Director and Head of the Global
08543-9011 Index and Enhanced Index business at Bankers Trust from 1984 to 1999.
Age: 46
- ------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith from
Stewart Princeton, NJ present 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001.
08543-9011
Age: 34
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund/Trust serve at the pleasure of the Board of Directors/Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Merrill Lynch Trust Company, FSB
1300 Merrill Lynch Drive
3rd Floor--MSC 0303
Pennington, NJ 08534
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
38 MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this website
http://www.icsdelivery.com/live and follow the instructions. When you visit this
site, you will obtain a personal identification number (PIN). You will need this
PIN should you wish to update your e-mail address, choose to discontinue this
service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
MERRILL LYNCH S&P 500 INDEX FUND DECEMBER 31, 2003 39
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
Merrill Lynch Index Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
#Index 4 -- 12/03
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Donald W.
Burton, (2) M. Colyer Crum, (3) Laurie Simon Hodrick, (4) David H.
Walsh and (5) Fred G. Weiss.
The registrant's board of directors has determined that Laurie Simon
Hodrick and M. Colyer Crum qualify as financial experts pursuant to
Item 3(c)(4) of Form N-CSR.
Ms. Hodrick has a thorough understanding of generally accepted
accounting principals, financial statements, and internal controls and
procedures for financial reporting. Ms. Hodrick earned a Ph.D. in
economics and has taught courses in finance for over 15 years. Her
M.B.A.-level course centers around the evaluation and analysis of
firms' corporate financial statements. She has also taught in financial
analysts' training programs. Ms. Hodrick has also worked with several
prominent corporations in connection with the analysis of financial
forecasts and projections and analysis of the financial statements of
those companies, serving on the Financial Advisory Council of one of
these major corporations. She has also served as the Treasurer and
Finance Chair of a 501(c)(3) organization. Ms. Hodrick has published a
number of articles in leading economic and financial journals and is
the associate editor of two leading finance journals.
M. Colyer Crum also possesses a thorough understanding of generally
accepted accounting principals, financial statements, and internal
controls and procedures for financial reporting through a combination
of education and experience. Professor Crum was a professor of
investment management at the Harvard Business School for 25 years. The
courses taught by Professor Crum place a heavy emphasis on the analysis
of underlying company financial statements with respect to stock
selection and the analysis of credit risk in making loans. Professor
Crum has also served on a number of boards of directors and has served
on the audit committees, and in some cases chaired the audit committee,
for several major corporations and financial institutions. For two such
organizations, Professor Crum has performed extensive investment
analysis of financial statements in connection with investment
management decisions. From these experiences, he has gained significant
experience with the establishment of reserves and accounting policies,
differences between U.S. GAAP and Canadian GAAP and executive
compensation issues.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - 2003 -- $39,000 2002 -- $44,500
(b) Audit-Related Fees - 2003 -- $12,000 2002 -- $22,500
The nature of the services include assurance
and related services reasonably related to the
performance of the audit of financial
statements not included in Audit Fees above.
(c) Tax Fees - 2003 -- $22,200 2002 -- $24,400
The nature of the services include tax compliance, tax
advice and tax planning.
(d) All Other Fees - 2003 -- $0 2002 -- $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services
provided to the registrant on an annual basis require specific
pre-approval by the Committee. The Committee also must approve
other non-audit services provided to the registrant and those
non-audit services provided to the registrant's affiliated
service providers that relate directly to the operations and the
financial reporting of the registrant. Certain of these
non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and
recurring services that will not impair the independence of the
independent accountants may be approved by the Committee without
consideration on a specific case-by-case basis ("general
pre-approval"). However, such services will only be deemed
pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for the
project as a whole. Any proposed services exceeding the
pre-approved cost levels will require specific pre-approval by
the Committee, as will any other services not subject to general
pre-approval (e.g., unanticipated but permissible services). The
Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person
board meeting.
(e)(2) 0%
(f) N/A
(g) 2003 -- $18,690,437 2002 -- $17,012,158
(h) The registrant's audit committee has considered that the provision
of non-audit services that were rendered to the registrant's
investment adviser and any entity controlling, controlled by, or
under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is
compatible with maintaining the principal accountant's
independence.
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Reserved
Item 9 - Controls and Procedures
9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to the
filing date of this report.
9(b) - There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 10 - Exhibits attached hereto
10(a) - Not Applicable
10(b) - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Merrill Lynch S&P 500 Index Fund and Master S&P 500 Index Series
By: /s/ Terry K. Glenn
----------------------------------
Terry K. Glenn,
President of
Merrill Lynch S&P 500 Index Fund and Master S&P 500 Index Series
Date: February 23, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
----------------------------------
Terry K. Glenn,
President of
Merrill Lynch S&P 500 Index Fund and Master S&P 500 Index Series
Date: February 23, 2004
By: /s/ Donald C. Burke
----------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch S&P 500 Index Fund and Master S&P 500 Index Series
Date: February 23, 2004