N-CSR 1 e400175_ncsr-mlsp500.txt ANNUAL REPORT 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