MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 1998
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Fiscal Year in Review
Despite the fact that it was a very turbulent 12 months for the financial
markets, Merrill Lynch Intermediate Government Bond Fund performed well.
Interest rates trended lower for the first part of the year as inflation
remained low. The ten-year Treasury note started the fiscal year with a yield
just below 6%, and moved to an interim low of about 5.4% in mid-January. The
bond market then traded sideways, remaining in a narrow range until the end of
July. As economic turmoil from overseas increased, highlighted by Russia's
currency devaluation, debt devaluation and unstable politics, Treasury issues
began to rally. The ensuing crisis picked up steam, and investors began selling
most forms of assets with higher levels of risk (including stocks, corporate
bonds and mortgages), and placing the proceeds into the Treasury market. Selling
by leveraged hedge funds accelerated this process. The yield on the ten-year
note reached its low for the period (4.16%) in early October. Stability was
restored only after two easings of monetary policy by the Federal Reserve Board
in late September and mid-October.
We took advantage of market volatility to enhance the Fund's returns. At the end
of July, the Fund had 36% of net assets invested in Treasury securities and 51%
in US Government agency debt. Since yield spreads widened relative to Treasury
securities for other fixed-income asset classes (including debt issued by
Government agencies), these investments underperformed credit risk-free Treasury
issues. Therefore, in the last three months of the fiscal year, we increased the
Fund's allocation to Treasury issues significantly, bringing the mix of Treasury
issues and agency debt to 69% of net assets and 21%, respectively, by the end of
September. We accomplished this largely by investing the Fund's large cash flow
into Treasury issues. Our allocation along the yield curve remained basically
neutral to the market, since we do not invest by attempting to predict the slope
of the yield curve. As a result of these strategies, the Fund's Class A, Class
B, Class C and Class D Shares had total returns of +10.23%, +9.68%, +10.05% and
+10.12%, respectively, for the 12 months ended October 31, 1998. The Fund
outperformed Lipper Analytical Services Inc.'s peer group of Intermediate US
Government Bond Funds, which had an average total return of +8.53%.
Growth of net assets during the 12 months ended October 31, 1998 was
significant. We started the fiscal year with net assets of about $30.1 million.
As investors became more familiar with the Fund, net assets climbed slowly to
almost $33 million at the end of July. With the ensuing market turmoil, net
assets rose sharply, exceeding $80 million at the close of the fiscal year, the
highest level since 1994.
In Conclusion
We thank you for your continued investment in Merrill Lynch Intermediate
Government Bond Fund, and we look forward to discussing our outlook and strategy
with you in our upcoming quarterly report to shareholders.
Sincerely,
/s/ Robert W. Crook
Robert W. Crook
President and Trustee
/s/ Ralph A. DeCesare
Ralph A. DeCesare
Vice President and Portfolio Manager
December 4, 1998
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
OFFICERS AND TRUSTEES
Robert W. Crook, President and Trustee
A. Bruce Brackenridge, Trustee
Charles C. Cabot Jr., Trustee
James T. Flynn, Trustee
Terry K. Glenn, Trustee
George W. Holbrook Jr., Trustee
W. Carl Kester, Trustee
Christopher G. Ayoub, Senior Vice President
Michael J. Brady, Senior Vice President
William M. Breen, Senior Vice President
James J. Fatseas, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
William Wasel, Senior Vice President
Donald C. Burke, Vice President
Ann Catlin, Vice President
Ralph A. DeCesare, Vice President
Diana Frankland, Vice President
Jay C. Harbeck, Vice President
Mark E. Maguire, Vice President
Dianne F. McDonough, Vice President
Patricia A. Schena, Vice President
Barry F. X. Smith, Vice President
Karen D. Young, Vice President
Gerald M. Richard, Treasurer
Phillip Gillespie, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
IMPORTANT TAX INFORMATION
None of the ordinary income distributions paid monthly by Merrill Lynch
Intermediate Government Bond Fund during its fiscal year ended October 31, 1998
qualify for the dividends received deduction for corporations. Additionally,
there were no long-term capital gains distributions paid during the year.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Listed in the table at right are the percentages of total assets of the Fund
invested in Federal obligations as of the end of each quarter of the fiscal
year:
- --------------------------------------------------------------------------------
Percentage of
Quarter Ended Federal Obligations*
- --------------------------------------------------------------------------------
January 31, 1998........................................... 43.00%
April 30, 1998............................................. 51.32%
July 31, 1998.............................................. 46.90%
October 31, 1998........................................... 73.34%
- --------------------------------------------------------------------------------
Of the Fund's ordinary income dividends paid during its fiscal year ended
October 31, 1998, 62.63% was attributable to Federal obligations. In calculating
the foregoing percentage, expenses of the Fund have been allocated on a pro-rata
basis.
Please retain this information for your records.
* For purposes of this calculation, Federal obligations include US Treasury
Notes, US Treasury Bills, and US Treasury Bonds. Also included are
obligations issued by the following agencies: Banks for Cooperatives,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Home Loan
Banks, and the Student Loan Marketing Association. Repurchase agreements
are not included in this calculation.
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of 1%
and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 1% if redeemed during the first year, decreasing to 0% after the first
year. In addition, Class B Shares are subject to a distribution fee of
0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years. (There is no
initial sales charge for automatic share conversions.)
o Class C Shares are subject to a distribution fee of 0.25% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 1% and an account
maintenance fee of 0.10% (but no distribution fee). The Fund's
shareholders as of February 18, 1997 became holders of Class D Shares.
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Recent Performance Results" and
"Average Annual Total Return" tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the payable 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*
<TABLE>
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 10/31/98
====================================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +10.23% +5.31% + 15.79% 3.71%
- ------------------------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares + 9.68 +5.07 + 14.96 3.51
- ------------------------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +10.05 +5.24 + 15.09 3.79
- ------------------------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +10.12 +5.28 +107.32+ 3.93
====================================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Total investment returns are based
on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's ten-year/since inception periods are
Class A, Class B & Class C Shares, from 2/18/97 to 10/31/98 and Class D
Shares, for the ten years ended 10/31/98.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
3
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares,
Class B Shares, and Class C Shares compared to growth of an investment in the ML
US Treasury Bond Index and the ML US Treasury & Government Agency Bond Index.
Beginning and ending values are:
2/18/97** 10/98
------- -----
ML Intermediate Government Bond Fund+
Class A Shares*............................. $ 9,600 $11,463
Class B Shares*............................. $10,000 $11,496
Class C Shares*............................. $10,000 $11,509
ML US Treasury Bond Index++................. $10,000 $11,930
ML US Treasury & Government
Agency Bond Index+++...................... $10,000 $11,861
A line graph depicting the growth of an investment in the Fund's Class D Shares
compared to growth of an investment in the ML US Treasury Bond Index and the ML
US Treasury & Government Agency Bond Index. Beginning and ending values are:
10/88 10/98
----- -----
ML Intermediate Government Bond Fund+
Class D Shares*............................. $ 9,600 $20,525
ML US Treasury Bond Index++................. $10,000 $24,478
ML US Treasury & Government
Agency Bond Index+++...................... $10,000 $24,394
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of operations.
+ ML Intermediate Government Bond Fund invests in intermediate-term debt
securities issued or guaranteed by the US Government, its agencies or
instrumentalities with a maximum maturity not to exceed fifteen years.
Under normal market conditions, the Fund will maintain a dollar-weighted
average maturity of six to eight years.
++ This unmanaged Index is comprised of US Treasury securities maturing in
five to seven years.
+++ This unmanaged Index is comprised of US Treasury and Government agency
securities maturing in five to seven years.
Past performance is not predictive of future performance.
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 9/30/98 +12.10% +10.98%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/98 + 9.64 + 8.96
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 9/30/98 +11.54% +10.54%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/98 + 9.18 + 9.18
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Year Ended 9/30/98 +11.78% +10.78%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/98 + 9.25 + 9.25
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Year Ended 9/30/98 +11.99% +10.87%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98+ + 5.80 + 5.59
- --------------------------------------------------------------------------------
Ten Years Ended 9/30/98+ + 7.69 + 7.59
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
5
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
====================================================================================================================================
US Government & Agency Obligations--91.6%
====================================================================================================================================
<S> <C> <C> <C> <C>
US Treasury Notes & Bonds $1,000,000 8.875% 2/15/99 $ 1,011,560
250,000 5.625 12/31/99 253,438
1,000,000 5.125 8/31/00 1,014,530
1,000,000 6.25 8/31/00 1,033,280
2,000,000 7.875 8/15/01 2,182,500
2,100,000 13.375 8/15/01 2,590,224
500,000 6.625 4/30/02 535,705
1,000,000 7.50 5/15/02 1,100,160
1,000,000 6.50 5/31/02 1,068,910
250,000 5.75 10/31/02 262,070
5,500,000 6.25 2/15/03 5,900,455
3,250,000 5.25 8/15/03 3,391,180
8,000,000 5.75 8/15/03 8,478,720
4,400,000 7.25 5/15/04 4,999,500
3,750,000 7.25 8/15/04 4,277,925
1,000,000 7.875 11/15/04 1,175,780
3,250,000 7.50 2/15/05 3,777,118
4,000,000 5.50 2/15/08 4,273,760
7,500,000 5.625 5/15/08 8,084,775
1,000,000 10.00 5/15/10 1,291,560
====================================================================================================================================
Federal Home Loan Banks 1,000,000 6.67 5/10/01 1,044,690
====================================================================================================================================
Federal Home Loan Mortgage Corporation 2,000,000 5.75 7/15/03 2,076,560
1,000,000 5.75 4/15/08 1,038,750
====================================================================================================================================
Federal National Mortgage Association 1,000,000 6.50 10/25/03 1,030,860
995,141 6.40 1/01/06+ 1,039,152
2,000,000 6.95 11/13/06 2,106,240
998,309 6.105 8/01/08+ 1,023,533
499,115 6.175 8/01/08+ 514,126
2,000,000 7.15 8/27/12 2,121,560
3,050,000 6.96 9/05/12 3,387,879
====================================================================================================================================
Student Loan Marketing Association 2,000,000 7.50 3/08/00 2,071,560
====================================================================================================================================
Total US Government & Agency Obligations (Cost--$72,626,891) 74,158,060
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Face Amount Short-Term Securities
====================================================================================================================================
US Government Agency Obligations*--6.7%
====================================================================================================================================
<S> <C> <C>
$5,399,000 Federal Home Loan Mortgage Corporation, 5.42% due 11/02/1998 5,399,000
====================================================================================================================================
Total US Government Agency Obligations (Cost--$5,399,000) 5,399,000
====================================================================================================================================
Total Investments (Cost--$78,025,891)--98.3% 79,557,060
Other Assets Less Liabilities--1.7% 1,404,526
-----------
Net Assets--100.0% $80,961,586
===========
====================================================================================================================================
</TABLE>
* Certain US Government Agency Obligations are traded on a discount basis;
the interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
+ Subject to principal paydowns.
See Notes to Financial Statements.
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of October 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$78,025,891) (Note 1a)............ $ 79,557,060
Receivables:
Interest ............................................................... $ 1,276,380
Beneficial interest sold ............................................... 691,099
Loaned securities (Note 5) ............................................. 21,194
Principal paydowns ..................................................... 2,223 1,990,896
-----------
Prepaid registration fees and other assets (Note 1d)...................... 43,443
------------
Total assets.............................................................. 81,591,399
------------
====================================================================================================================================
Liabilities: Payables:
Beneficial interest redeemed ........................................... 408,054
Dividends to shareholders (Note 1e) .................................... 120,654
Distributor (Note 2) ................................................... 19,351
Investment adviser (Note 2) ............................................ 6,592 554,651
-----------
Accrued expenses and other liabilities.................................... 75,162
------------
Total liabilities......................................................... 629,813
------------
====================================================================================================================================
Net Assets: Net assets................................................................ $ 80,961,586
============
====================================================================================================================================
Net Assets Class A Shares of beneficial interest, $0.10 par
Consist of: value, unlimited number of shares authorized.............................. $ 18,838
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized ..................................................... 395,349
Class C Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized ..................................................... 46,257
Class D Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized ..................................................... 340,323
Paid-in capital in excess of par.......................................... 85,754,313
Accumulated realized capital losses on investments--net (Note 6).......... (7,124,663)
Unrealized appreciation on investments--net............................... 1,531,169
------------
Net assets................................................................ $ 80,961,586
============
====================================================================================================================================
Net Asset Value: Class A--Based on net assets of $1,904,433 and 188,385 shares of
beneficial interest outstanding .......................................... $ 10.11
============
Class B--Based on net assets of $39,975,361 and 3,953,488 shares
of beneficial interest outstanding ....................................... $ 10.11
============
Class C--Based on net assets of $4,674,312 and 462,570 shares
of beneficial interest outstanding ....................................... $ 10.11
============
Class D--Based on net assets of $34,407,480 and 3,403,232 shares
of beneficial interest outstanding ....................................... $ 10.11
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended October 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned.............................................. $ 2,544,232
(Note 1c):
====================================================================================================================================
Expenses: Investment advisory fees (Note 2)......................................... $ 150,322
Professional fees......................................................... 70,763
Registration fees (Note 1d)............................................... 56,052
Printing and shareholder reports.......................................... 45,230
Account maintenance and distribution fees--Class B (Note 2)............... 38,868
Accounting services (Note 2).............................................. 37,878
Trustees' fees and expenses............................................... 31,500
Account maintenance fees--Class D (Note 2)................................ 28,168
Custodian fees............................................................ 8,257
Transfer agent fees--Class D (Note 2)..................................... 6,776
Transfer agent fees--Class B (Note 2)..................................... 2,303
Account maintenance and distribution fees--Class C (Note 2)............... 1,938
Pricing fees.............................................................. 1,468
Transfer agent fees--Class C (Note 2)..................................... 242
Transfer agent fees--Class A (Note 2)..................................... 197
Other..................................................................... 3,512
-----------
Total expenses before reimbursement....................................... 483,474
Reimbursement of expenses (Note 2)........................................ (123,213)
-----------
Total expenses after reimbursement........................................ 360,261
------------
Investment income--net.................................................... 2,183,971
------------
====================================================================================================================================
Realized & Realized gain from investments--net....................................... 807,327
Unrealized Gain on Change in unrealized appreciation on investments--net..................... 805,550
Investments--Net ------------
(Notes 1c & 3): Net Increase in Net Assets Resulting from Operations...................... $ 3,796,848
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended October 31,
-----------------------------------
Increase (Decrease) in Net Assets: 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net..................................................... $ 2,183,971 $ 2,187,672
Realized gain (loss) on investments--net................................... 807,327 (1,031,827)
Change in unrealized appreciation/depreciation on investments--net......... 805,550 918,657
------------ ------------
Net increase in net assets resulting from operations...................... 3,796,848 2,074,502
------------ ------------
====================================================================================================================================
Dividends to Investment income--net:
Shareholders Class A ................................................................ (51,694) (14,144)
(Note 1e): Class B ................................................................ (415,382) (12,287)
Class C ................................................................ (42,950) (77)
Class D ................................................................ (1,673,945) (2,161,164)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders....... (2,183,971) (2,187,672)
------------ ------------
====================================================================================================================================
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions..................................................... 49,242,919 (17,062,260)
Transactions ------------ ------------
(Note 4):
====================================================================================================================================
Net Assets: Total increase (decrease) in net assets................................... 50,855,796 (17,175,430)
Beginning of year......................................................... 30,105,790 47,281,220
------------ ------------
End of year............................................................... $ 80,961,586 $ 30,105,790
============ ============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
The following per share data and ratios have been derived -------------------------------- --------------------------------
from information provided in the financial statements. For the Year For the Period For the Year For the Period
Ended Feb. 18, 1997+ to Ended Feb. 18, 1997+ to
Increase (Decrease) in Net Asset Value: Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1998 Oct. 31, 1997
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period........ $ 9.74 $ 9.66 $ 9.74 $ 9.66
Operating ------- ------- ------- -------
Performance: Investment income--net...................... .59 .39 .54 .37
Realized and unrealized gain on
investments--net............................ .37 .08 .37 .08
------- ------- ------- -------
Total from investment operations............ .96 .47 .91 .45
------- ------- ------- -------
Less dividends from investment
income--net................................. (.59) (.39) (.54) (.37)
------- ------- ------- -------
Net asset value, end of period.............. $ 10.11 $ 9.74 $ 10.11 $ 9.74
======= ======= ======= =======
====================================================================================================================================
Total Investment Based on net asset value per share.......... 10.23% 5.04%++ 9.68% 4.81%++
Return:** ======= ======= ======= =======
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement.............. .76% 1.12%* 1.23% 1.39%*
Net Assets: ======= ======= ======= =======
Expenses.................................... 1.09% 2.08%* 1.54% 2.42%*
======= ======= ======= =======
Investment income--net...................... 5.99% 5.95%* 5.34% 5.69%*
======= ======= ======= =======
====================================================================================================================================
Supplemental Net assets, end of period (in thousands).... $ 1,905 $ 425 $39,975 $ 829
Data: ======= ======= ======= =======
Portfolio turnover.......................... 108.06% 201.55% 108.06% 201.55%
======= ======= ======= =======
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class C
The following per share data and ratios have been derived --------------------------------
from information provided in the financial statements. For the Year For the Period
Ended Feb. 18, 1997+ to
Increase (Decrease) in Net Asset Value: Oct. 31, 1998 Oct. 31, 1997
====================================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period.................................... $ 9.73 $ 9.66
Operating ------- -------
Performance: Investment income--net................................................... .57 .36
Realized and unrealized gain on investments--net......................... .38 .07
------- -------
Total from investment operations........................................ .95 .43
------- -------
Less dividends from investment income--net............................... (.57) (.36)
------- -------
Net asset value, end of period.......................................... $ 10.11 $ 9.73
======= =======
====================================================================================================================================
Total Investment Based on net asset value per share...................................... 10.05% 4.57%++
Return:** ======= =======
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement.......................................... .95% 1.47%*
Net Assets: ======= =======
Expenses................................................................ 1.26% 2.64%*
======= =======
Investment income--net................................................... 5.54% 5.55%*
======= =======
====================================================================================================================================
Supplemental Net assets, end of period (in thousands)................................ $ 4,674 $ 47
Data: ======= =======
Portfolio turnover...................................................... 108.06% 201.55%
======= =======
====================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
The following per share data and ratios have been derived ----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended October 31,
----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year........ $ 9.74 $ 9.68 $ 9.82 $ 9.60 $ 10.31
Operating ------- ------- ------- ------- -------
Performance: Investment income--net.................... .58 .55 .61 .62 .55
Realized and unrealized gain (loss) on
investments--net ......................... .37 .06 (.14) .22 (.71)
------- ------- ------- ------- -------
Total from investment operations.......... .95 .61 .47 .84 (.16)
------- ------- ------- ------- -------
Less dividends from investment income--
net ...................................... (.58) (.55) (.61) (.62) (.55)
------- ------- ------- ------- -------
Net asset value, end of year.............. $ 10.11 $ 9.74 $ 9.68 $ 9.82 $ 9.60
======= ======= ======= ======= =======
====================================================================================================================================
Total Investment Based on net asset value per share........ 10.12% 6.60% 4.87% 9.00% (1.54%)
Return:* ======= ======= ======= ======= =======
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement............ .89% 1.25% .97% .96% .83%
Net Assets: ======= ======= ======= ======= =======
Expenses.................................. 1.22% 1.69% .97% .96% .83%
======= ======= ======= ======= =======
Investment income--net.................... 5.94% 5.71% 6.19% 6.38% 5.55%
======= ======= ======= ======= =======
====================================================================================================================================
Supplemental Net assets, end of year (in thousands).... $34,408 $28,805 $47,281 $65,139 $81,407
Data: ======= ======= ======= ======= =======
Portfolio turnover........................ 108.06% 201.55% 51.44% 47.90% 172.51%
======= ======= ======= ======= =======
====================================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Intermediate Government Bond Fund (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund offers four classes of shares under the Merrill
Lynch Select Pricing(SM) System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities traded in the
over-the-counter markets are valued at the last available bid price or yield
equivalent as obtained from dealers who make a market in the securities. US
Government securities and securities issued by Federal agencies are traded in
the over-the-counter market. Securities with remaining maturities of sixty days
or less are valued at amortized cost, which approximates market value.
(b) 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 its shareholders.
Therefore, no Federal income tax provision is required.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of discount and premium) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of 0.40% of the average daily net assets of the Fund. For the
year ended October 31, 1998, MLAM earned fees of $150,322, of which $122,202 was
waived. MLAM also reimbursed the Fund for additional expenses of $1,011.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The Distributor voluntarily
did not collect any Class C distribution fees for the year ended October 31,
1998. The fees are accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B ............................ 0.25% 0.25%
Class C ............................ 0.25% 0.25%
Class D ............................ 0.10% --
- --------------------------------------------------------------------------------
This fee is to compensate MLFD for the services it provides and the expenses
borne by MLFD under the Distribution Agreement. As authorized by the
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
Distribution Plans, MLFD has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), which provides for the compensation of
MLPF&S for providing distribution-related services to the Fund. Such services
relate to the sale, promotion, and marketing of the shares of the Fund.
For the year ended October 31, 1998, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class D Shares as
follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class D ............................................ $570 $5,939
- --------------------------------------------------------------------------------
For the year ended October 31, 1998, MLPF&S received a contingent deferred sales
charge of $11,866 relating to transactions in Class B Shares.
For the year ended October 31, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $1,305 for security price quotations to
compute the net asset value of the Fund.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
MLAM, PSI, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1998 were $82,546,464 and $39,120,214, respectively.
Net realized gains for the year ended October 31, 1998 and net unrealized gains
as of October 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .......................... $ 807,327 $1,531,169
---------- ----------
- --------------------------------------------------------------------------------
Total .......................................... $ 807,327 $1,531,169
========== ==========
- --------------------------------------------------------------------------------
As of October 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $1,481,237, of which $1,699,340 related to appreciated
securities and $218,103 related to depreciated securities. The aggregate cost of
investments at October 31, 1998 for Federal income tax purposes was $78,075,823.
4. Transactions in Shares of Beneficial Interest:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $49,242,919 and $(17,062,260) for the years ended October 31,
1998 and October 31, 1997, respectively.
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ........................... 544,445 $ 5,453,565
Shares issued to shareholders
in reinvestment of dividends .......... 2,124 21,048
--------- -------------
Total issued .......................... 546,569 5,474,613
Shares redeemed ....................... (401,812) (4,027,247)
--------- -------------
Net increase .......................... 144,757 $ 1,447,366
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 49,642 $ 467,013
Shares issued to shareholders
in reinvestment of dividends ............. 124 1,191
--------- -------------
Total issued ............................. 49,766 468,204
Shares redeemed .......................... (6,138) (58,663)
--------- -------------
Net increase ............................. 43,628 $ 409,541
========= ============
- --------------------------------------------------------------------------------
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 4,530,074 $ 45,305,487
Shares issued to shareholders
in reinvestment of dividends ......... 29,013 288,719
--------- -------------
Total issued ......................... 4,559,087 45,594,206
Automatic conversion
of shares ............................ (5,817) (40,396)
Shares redeemed ...................... (684,891) (6,813,993)
--------- -------------
Net increase ......................... 3,868,379 $ 38,739,817
========= ============
- --------------------------------------------------------------------------------
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Class B Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 100,605 $ 964,735
Shares issued to shareholders
in reinvestment of dividends ............ 922 8,835
--------- -------------
Total issued ............................ 101,527 973,570
Shares redeemed ......................... (16,418) (156,834)
--------- -------------
Net increase ............................ 85,109 $ 816,736
========= ============
- --------------------------------------------------------------------------------
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ........................... 506,793 $ 5,074,086
Shares issued to shareholders
in reinvestment of dividends .......... 2,869 28,676
--------- -------------
Total issued .......................... 509,662 5,102,762
Shares redeemed ....................... (51,908) (517,906)
--------- -------------
Net increase .......................... 457,754 $ 4,584,856
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................ 4,812 $ 46,564
Shares issued to shareholders
in reinvestment of dividends ............... 4 38
--------- -------------
Net increase ............................... 4,816 $ 46,602
========= ============
- --------------------------------------------------------------------------------
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 1,420,622 $ 14,078,604
Automatic conversion
of shares ............................ 5,819 40,396
Shares issued to shareholders
in reinvestment of dividends ......... 123,655 1,215,520
---------- -------------
Total issued ......................... 1,550,096 15,334,520
Shares redeemed ...................... (1,105,420) (10,863,640)
---------- -------------
Net increase ......................... 444,676 $ 4,470,880
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 564,311 $ 5,452,644
Shares issued to shareholders
in reinvestment of dividends ......... 192,051 1,843,504
---------- -------------
Total issued ......................... 756,362 7,296,148
Shares redeemed ...................... (2,681,230) (25,631,287)
---------- -------------
Net decrease ......................... (1,924,868) $(18,335,139)
========== ============
- --------------------------------------------------------------------------------
5. Loaned Securities:
At October 31, 1998, the Fund held US Treasury notes and bonds having an
aggregate value of approximately $16,353,000 as collateral for portfolio
securities loaned having a market value of approximately $15,750,000.
6. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $7,075,000, of which $3,224,000 expires in 2002, $1,996,000
expires in 2003, $977,000 expires in 2004 and $878,000 expires in 2005. This
amount will be available to offset like amounts of any future taxable gains.
Expired capital loss carryforward in the amount of $3,938,679 has been
reclassified to paid-in capital in excess of par.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Intermediate Government Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Intermediate Government Bond Fund
as of October 31, 1998, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and broker. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Intermediate Government Bond Fund as of October 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 7, 1998
15
<PAGE>
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.
Merrill Lynch
Intermediate Government
Bond Fund
Box 9011
Princeton, NJ
08543-9011 #IGB01--10/98
[RECYCLE LOGO] Printed on post-consumer recycled paper
