MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 1999
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Fiscal Year in Review
Interest rates increased during most of the fiscal year ended October 31, 1999
as the global economy recovered from the financial panic that had occurred in
the autumn of 1998. Fears of deflation became fears of inflation. Prices of
commodities, such as oil and copper, bounced back from their lows. The
unemployment rate in the United States fell to its lowest level in more than two
decades. Federal Reserve Board Chairman Alan Greenspan was concerned that the
demand for labor would outstrip supply, forcing up wages and eventually causing
pricing levels to increase. The Federal Reserve Board increased its targeted
Federal Funds rate twice following the three interest rate cuts implemented
during the crises.
Higher interest rates boosted mortgage rates. This all but eliminated the
monetary stimulus provided by mortgage refinancing seen earlier in the year.
Also, the stock market was off from its highs set in May, removing another
economic stimulus. These factors began to ease investors' trepidation about
investing in bonds, as they expected the economy to slow and ease pressure on
inflation. The ten-year US Government note traded around the 6% level for the
last four months of the fiscal year.
In the summer of 1999, the bond market experienced a widening of credit spreads
(that is, the yield difference between mortgage-backed securities and agency
debentures relative to the yield of Treasury issues). As investors focused on
the approach of the year 2000, corporate debt issuers flooded the market with
new bonds. Investors feared potential liquidity problems, or the possible
inability to trade securities efficiently, and generally avoided the new
issuance. This forced yields higher. After a problematic summer, corporate
issuers slowed their issuance of this new supply. After actions by the Federal
Reserve Board to help ensure liquidity at year-end, investors became more
comfortable with non-Treasury issues, allowing the yield spread on these issues
to rally. This boosted the prices on these bonds.
We maintained an overweighted position in Government agency issues during the
fiscal year ended October 31, 1999. As a result, Fund performance was initially
hurt by the spread widening. The Fund benefited from the subsequent rally.
However, this was at the expense of Treasury issues. We maintained a neutral
exposure to mortgage-backed securities.
This has been a significant year for Merrill Lynch Intermediate Government Bond
Fund. For example, at the beginning of the year we were prohibited from
investing in mortgage-backed securities. Then, in December, after consultation
with the Fund's Board of Trustees, we began to invest a portion of the Fund's
assets in mortgage-backed securities. In addition, during the third quarter of
the fiscal year, our 15-year final maturity restriction on investments was
eliminated. This restriction had significantly hampered our ability to buy
mortgage-backed securities, which are dominated by issues in the 30-year
maturity sector. We are currently able to invest in Government securities of any
maturity.
Mortgage-backed securities rallied significantly from November 1998 to March
1999. The Merrill Lynch Mortgage Master Index had a total return of +1.95%
during this five-month period, while the Merrill Lynch Treasury/Agency Master
Index had a total return of -1.20%. For the 12-month period ended October 31,
1999, the Fund's Class A, Class B, Class C and Class D Shares had total returns
of -1.74%, -2.24%, -2.00% and -1.83%, respectively, underperforming Lipper
Analytical Services Inc.'s peer group of
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
intermediate-term US Government bond funds, which had an average total return of
- -0.83%. This was largely because the Fund's ability to buy mortgages was limited
in the early part of the year. However, as the Fund began to participate in the
mortgage-backed market, our relative performance has improved. For example, the
Fund's Class A, Class B, Class C and Class D Shares had total returns of +1.15%,
+1.02%, +1.19% and +1.12%, respectively, for the three-month period ended
October 31, 1999. This compares to the +1.03% total return for Lipper Analytical
Services Inc.'s peer group average for the same three-month period.
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 next 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 9, 1999
================================================================================
To reduce shareholder expenses, Merrill Lynch Intermediate Government Bond Fund
will no longer be printing and mailing quarterly reports to shareholders. We
will continue to provide you with reports on a semi-annual and annual basis.
================================================================================
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
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/
3 Month 12 Month Since Inception Standardized
As of October 31, 1999 Total Return Total Return Total Return 30-Day Yield
======================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +1.15% -1.74% +13.78% 5.66%
- ----------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +1.02 -2.24 +12.39 5.23
- ----------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +1.19 -2.00 +12.79 5.48
- ----------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +1.12 -1.83 +86.50+ 5.58
======================================================================================================================
</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
from 2/18/97 for Class A, Class B & Class C Shares and ten years for Class
D Shares.
+ 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, 1999
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, Class
B and Class C Shares compared to growth of an investment in the Salomon Brothers
Mortgage Index, ML US Treasury Bond Index and the ML US Treasury & Government
Agency Bond Index. Beginning and ending values are:
2/18/97** 10/99
ML Intermediate Government+--
Class A Shares* $ 9,900 $11,263
ML Intermediate Government+--
Class B Shares* $10,000 $11,239
ML Intermediate Government+--
Class C Shares* $10,000 $11,279
Salomon Brothers
Mortgage Index++ $10,000 $11,842
ML US Treasury Bond
Index+++-- $10,000 $11,694
ML US Treasury & Government
Agency Bond Index ++++ $10,000 $11,694
A line graph depicting the growth of an investment in the Fund's Class D Shares
compared to growth of an investment in the Salomon Brothers Mortgage Index.
Beginning and ending values are:
10/89 10/99
ML Intermediate Government+--
Class D Shares* $ 9,900 $11,263
Salomon Brothers
Mortgage Index++ $10,000 $21,260
ML US Treasury Bond
Index+++-- $10,000 $21,589
ML US Treasury & Government
Agency Bond Index ++++ $10,000 $21,557
* 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. Under normal market conditions, the Fund will maintain
a dollar-weighted average maturity of six to eight years.
++ This unmanaged Index is comprised of 30-year and 15-year GNMA, FNMA and
FHLMC securities, and FNMA and FHLMC balloon mortgages. The starting date
for the Index in the Class A, Class B & Class C Shares' graph is from
2/28/97.
+++ 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, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 9/30/99 -2.10% -3.08%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/99 +4.99 +4.59
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 9/30/99 -2.60% -3.52%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/99 +4.51 +4.51
- --------------------------------------------------------------------------------
* 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 9/30/99 -2.36% -3.28%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/99 +4.65 +4.65
- --------------------------------------------------------------------------------
* 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 9/30/99 -2.20% -3.18%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/99+ +5.64 +5.43
- --------------------------------------------------------------------------------
Ten Years Ended 9/30/99+ +6.59 +6.48
- --------------------------------------------------------------------------------
* 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.
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
====================================================================================================================
<S> <C> <C> <C> <C>
US Government & Agency Obligations--96.0%
US Treasury Notes & Bonds $1,000,000 5.625% 5/15/08 $ 964,840
250,000 5.75 10/31/02 249,217
1,000,000 6.00 8/15/09 998,590
5,500,000 6.125 11/15/27 5,316,960
2,000,000 7.25 5/15/04 2,096,240
1,000,000 7.50 5/15/02 1,037,340
4,000,000 7.50 11/15/16 4,413,760
2,000,000 7.875 8/15/01 2,068,440
1,000,000 8.875 8/15/17 1,247,340
1,000,000 10.00 5/15/10 1,170,160
2,000,000 11.875 11/15/03 2,403,440
2,100,000 13.375 8/15/01 2,364,138
====================================================================================================================
Federal Home Loan Banks 5,000,000 5.50 8/13/01 4,939,050
4,000,000 5.63 9/02/03 3,885,000
====================================================================================================================
Federal Home Loan Mortgage Corporation 2,000,000 5.50 5/15/02 1,964,380
====================================================================================================================
Federal Home Loan Mortgage Corporation--Gold Program** 2,941,977 6.50 5/01/14-6/01/14 2,885,874
8,779,110 6.50 3/15/26 8,507,748
3,992,590 7.00 8/01/29 3,922,720
2,000,000 7.50 TBA+ 2,007,500
====================================================================================================================
</TABLE>
5
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
====================================================================================================================
<S> <C> <C> <C> <C>
US Government & Agency Obligations (concluded)
Federal Home Loan Mortgage Corporation $2,000,000 7.00% 1/15/24 $ 1,976,240
Mortgage-Backed Securities**
====================================================================================================================
Federal National Mortgage Association 2,000,000 5.43 3/29/01 1,978,740
3,000,000 5.81 3/02/04 2,904,360
1,000,000 6.25 5/15/29 916,720
2,000,000 6.50 4/29/09 1,904,060
1,950,000 6.96 9/05/12 1,906,729
2,000,000 7.15 8/27/12 1,914,680
====================================================================================================================
Federal National Mortgage Association 5,666,468 6.50 10/25/03-3/01/14 5,569,963
Mortgage-Backed Securities** 86,390 7.00 6/01/06 86,362
3,823,161 7.00 5/01/29-6/01/29 3,753,847
6,248,002 7.50 11/01/26-3/01/29 6,268,004
====================================================================================================================
Government National Mortgage Association 7,713,021 7.00 6/15/23-6/15/29 7,566,743
Mortgage-Backed Securities**
====================================================================================================================
Total US Government & Agency Obligations (Cost--$91,513,681) 89,189,185
====================================================================================================================
<CAPTION>
Face Amount Short-Term Securities
====================================================================================================================
US Government Agency Obligations*--1.4%
<S> <C> <C>
$1,300,000 Federal Home Loan Banks, 5.14% due 11/01/1999 1,300,000
====================================================================================================================
Total US Government Agency Obligations (Cost--$1,300,000) 1,300,000
<CAPTION>
Repurchase Agreements***--4.2%
<S> <C> <C>
3,891,000 Warburg Dillon Read LLC, purchased on 10/29/1999 to yield 5.21% to 11/01/1999 3,891,000
====================================================================================================================
Total Repurchase Agreements (Cost--$3,891,000) 3,891,000
====================================================================================================================
Total Short-Term Securities (Cost--$5,191,000)--5.6% 5,191,000
====================================================================================================================
Total Investments (Cost--$96,704,681)--101.6% 94,380,185
Liabilities in Excess of Other Assets--(1.6%) (1,473,177)
-----------
Net Assets--100.0% $92,907,008
===========
====================================================================================================================
</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.
** Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage instrument. As a
result, the average life may be substantially less than the original
maturity.
*** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Represents a "to-be-announced" (TBA) transaction. The Fund has committed
to purchasing securities for which all specific information is not
available at this time.
See Notes to Financial Statements.
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of October 31, 1999
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$96,704,681) (Note 1a) ....... $ 94,380,185
Cash ................................................................. 123
Receivables:
Interest ........................................................... $ 1,213,953
Beneficial interest sold ........................................... 31,833 1,245,786
------------
Prepaid registration fees and other assets (Note 1e) ................. 41,457
------------
Total assets ......................................................... 95,667,551
------------
============================================================================================================================
Liabilities: Payables:
Securities purchased ............................................... 1,994,583
Beneficial interest redeemed ....................................... 530,428
Dividends to shareholders (Note 1f) ................................ 142,653
Investment adviser (Note 2) ........................................ 35,983
Distributor (Note 2) ............................................... 18,899 2,722,546
------------
Accrued expenses and other liabilities ............................... 37,997
------------
Total liabilities .................................................... 2,760,543
------------
============================================================================================================================
Net Assets: Net assets ........................................................... $ 92,907,008
============
============================================================================================================================
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized .......................................... $ 255,737
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized .......................................... 386,886
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized .......................................... 36,194
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized .......................................... 310,493
Paid-in capital in excess of par ..................................... 104,956,824
Accumulated realized capital losses on investments--net (Note 5) ..... (10,714,630)
Unrealized depreciation on investments--net .......................... (2,324,496)
------------
Net assets ........................................................... $ 92,907,008
============
============================================================================================================================
Net Asset Value: Class A--Based on net assets of $24,018,527 and 2,557,365 shares of
beneficial interest outstanding ...................................... $ 9.39
============
Class B--Based on net assets of $36,334,313 and 3,868,860 shares of
beneficial interest outstanding ...................................... $ 9.39
============
Class C--Based on net assets of $3,396,812 and 361,940 shares of
beneficial interest outstanding ...................................... $ 9.39
============
Class D--Based on net assets of $29,157,356 and 3,104,926 shares of
beneficial interest outstanding ...................................... $ 9.39
============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended October 31, 1999
<TABLE>
<S> <C> <C> <C>
Investment Income Interest and discount earned .......................................... $ 6,172,301
(Note 1d): Other ................................................................. 34,865
-----------
Total income .......................................................... 6,207,166
-----------
======================================================================================================================
Expenses: Investment advisory fees (Note 2) ..................................... $ 392,072
Account maintenance and distribution fees--Class B (Note 2) ........... 213,046
Professional fees ..................................................... 84,603
Registration fees (Note 1e) ........................................... 66,049
Accounting services (Note 2) .......................................... 55,751
Trustees' fees and expenses ........................................... 36,000
Printing and shareholder reports ...................................... 33,563
Account maintenance fees--Class D (Note 2) ............................ 31,292
Transfer agent fees--Class B (Note 2) ................................. 31,016
Transfer agent fees--Class D (Note 2) ................................. 18,857
Custodian fees ........................................................ 17,998
Account maintenance and distribution fees--Class C (Note 2) ........... 12,030
Transfer agent fees--Class A (Note 2) ................................. 11,843
Pricing fees .......................................................... 4,234
Transfer agent fees--Class C (Note 2) ................................. 3,628
Other ................................................................. 5,298
----------
Total expenses before reimbursement ................................... 1,017,280
Reimbursement of expenses (Note 2) .................................... (71,835)
----------
Total expenses after reimbursement .................................... 945,445
-----------
Investment income--net ................................................ 5,261,721
-----------
======================================================================================================================
Realized & Realized loss from investments--net ................................... (3,589,967)
Unrealized Loss on Change in unrealized appreciation/depreciation on investments--net .... (3,855,665)
Investments--Net -----------
(Notes 1d & 3): Net Decrease in Net Assets Resulting from Operations .................. $(2,183,911)
===========
======================================================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended October 31,
----------------------------
Increase (Decrease) in Net Assets: 1999 1998
=============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................... $ 5,261,721 $ 2,183,971
Realized gain (loss) on investments--net ............................. (3,589,967) 807,327
Change in unrealized appreciation/depreciation on investments--net ... (3,855,665) 805,550
------------ ------------
Net increase (decrease) in net assets resulting from operations ...... (2,183,911) 3,796,848
------------ ------------
=============================================================================================================================
Dividends to Investment income--net:
Shareholders Class A ............................................................ (1,082,025) (51,694)
(Note 1f): Class B ............................................................ (2,184,370) (415,382)
Class C ............................................................ (258,444) (42,950)
Class D ............................................................ (1,736,882) (1,673,945)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders .. (5,261,721) (2,183,971)
------------ ------------
=============================================================================================================================
Beneficial Interest Net increase in net assets derived from beneficial
Transactions interest transactions ................................................ 19,391,054 49,242,919
(Note 4): ------------ ------------
=============================================================================================================================
Net Assets: Total increase in net assets ......................................... 11,945,422 50,855,796
Beginning of year .................................................... 80,961,586 30,105,790
------------ ------------
End of year .......................................................... $ 92,907,008 $ 80,961,586
============ ============
=============================================================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------
For the
For the Period
The following per share data and ratios have been derived Year Ended Feb. 18,
from information provided in the financial statements. October 31, 1997+ to
------------------ Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...................................... $ 10.11 $ 9.74 $ 9.66
Operating ------- ------- -------
Performance: Investment income--net .................................................... .55 .59 .39
Realized and unrealized gain (loss) on investments--net ................... (.72) .37 .08
------- ------- -------
Total from investment operations .......................................... (.17) .96 .47
------- ------- -------
Less dividends from investment income--net ................................ (.55) (.59) (.39)
------- ------- -------
Net asset value, end of period ............................................ $ 9.39 $ 10.11 $ 9.74
======= ======= =======
================================================================================================================================
Total Investment Based on net asset value per share ........................................ (1.74%) 10.23% 5.04%++
Return:** ======= ======= =======
================================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................................ .75% .76% 1.12%*
Net Assets: ======= ======= =======
Expenses .................................................................. .78% 1.09% 2.08%*
======= ======= =======
Investment income--net .................................................... 5.60% 5.99% 5.95%*
======= ======= =======
================================================================================================================================
Supplemental Net assets, end of period (in thousands) .................................. $24,019 $ 1,905 $ 425
Data: ======= ======= =======
Portfolio turnover ........................................................ 191.16% 108.06% 201.55%
======= ======= =======
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B
-----------------------------
For the
For the Period
The following per share data and ratios have been derived Year Ended Feb. 18,
from information provided in the financial statements. October 31, 1997+ to
------------------ Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...................................... $ 10.11 $ 9.74 $ 9.66
Operating ------- ------- -------
Performance: Investment income--net .................................................... .50 .54 .37
Realized and unrealized gain (loss) on investments--net ................... (.72) .37 .08
------- ------- -------
Total from investment operations .......................................... (.22) .91 .45
------- ------- -------
Less dividends from investment income--net ................................ (.50) (.54) (.37)
------- ------- -------
Net asset value, end of period ............................................ $ 9.39 $ 10.11 $ 9.74
======= ======= =======
================================================================================================================================
Total Investment Based on net asset value per share ........................................ (2.24%) 9.68% 4.81%++
Return:* ======= ======= =======
================================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................................ 1.20% 1.23% 1.39%*
Net Assets: ======= ======= =======
Expenses .................................................................. 1.28% 1.54% 2.42%*
======= ======= =======
Investment income--net .................................................... 5.13% 5.34% 5.69%*
======= ======= =======
================================================================================================================================
Supplemental Net assets, end of period (in thousands) .................................. $36,334 $39,975 $ 829
Data: ======= ======= =======
Portfolio turnover ........................................................ 191.16% 108.06% 201.55%
======= ======= =======
================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C
-----------------------------
For the
For the Period
The following per share data and ratios have been derived Year Ended Feb. 18,
from information provided in the financial statements. October 31, 1997+ to
------------------ Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...................................... $ 10.11 $ 9.73 $ 9.66
Operating ------- ------- -------
Performance: Investment income--net .................................................... .52 .57 .36
Realized and unrealized gain (loss) on investments--net ................... (.72) .38 .07
------- ------- -------
Total from investment operations .......................................... (.20) .95 .43
------- ------- -------
Less dividends from investment income--net ................................ (.52) (.57) (.36)
------- ------- -------
Net asset value, end of period ............................................ $ 9.39 $ 10.11 $ 9.73
======= ======= =======
================================================================================================================================
Total Investment Based on net asset value per share ........................................ (2.00%) 10.05% 4.57%++
Return:** ======= ======= =======
================================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................................ .94% .95% 1.47%*
Net Assets: ======= ======= =======
Expenses .................................................................. 1.03% 1.26% 2.64%*
======= ======= =======
Investment income--net .................................................... 5.37% 5.54% 5.55%*
======= ======= =======
================================================================================================================================
Supplemental Net assets, end of period (in thousands) .................................. $ 3,397 $ 4,674 $ 47
Data: ======= ======= =======
Portfolio turnover ........................................................ 191.16% 108.06% 201.55%
======= ======= =======
================================================================================================================================
</TABLE>
<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: 1999 1998 1997 1996 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ................... $ 10.11 $ 9.74 $ 9.68 $ 9.82 $ 9.60
Operating ------- ------- ------- ------- -------
Performance: Investment income--net ............................... .54 .58 .55 .61 .62
Realized and unrealized gain (loss) on
investments--net ..................................... (.72) .37 .06 (.14) .22
------- ------- ------- ------- -------
Total from investment operations ..................... (.18) .95 .61 .47 .84
------- ------- ------- ------- -------
Less dividends from investment income--net ........... (.54) (.58) (.55) (.61) (.62)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 9.39 $ 10.11 $ 9.74 $ 9.68 $ 9.82
======= ======= ======= ======= =======
================================================================================================================================
Total Investment Based on net asset value per share ................... (1.83%) 10.12% 6.60% 4.87% 9.00%
Return:** ======= ======= ======= ======= =======
================================================================================================================================
Ratios to Average Expenses, net of reimbursement ....................... .79% .89% 1.25% .97% .96%
Net Assets: ======= ======= ======= ======= =======
Expenses ............................................. .87% 1.22% 1.69% .97% .96%
======= ======= ======= ======= =======
Investment income--net ............................... 5.55% 5.94% 5.71% 6.19% 6.38%
======= ======= ======= ======= =======
================================================================================================================================
Supplemental Net assets, end of year (in thousands) ............... $29,157 $34,408 $28,805 $47,281 $65,139
Data: ======= ======= ======= ======= =======
Portfolio turnover ................................... 191.16% 108.06% 201.55% 51.44% 47.90%
======= ======= ======= ======= =======
================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
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's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. 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.
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 Fund.
(b) Repurchase agreements--The Fund invests in US Government securities pursuant
to repurchase agreements. Under such agreements, the counterparty agrees to
repurchase the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities and, if
necessary, receives additional securities daily to ensure that the contract is
fully collateralized.
(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 its shareholders.
Therefore, no Federal income tax provision is required.
(d) 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.
(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(f) 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 the "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 .40% of the average daily net assets of the Fund. For the
year ended October 31, 1999, MLAM earned fees of $392,072, of which $71,835 was
waived.
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
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,
1999. 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 ...................................... .25% .25%
Class C ...................................... .25% .25%
Class D ...................................... .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
Distribution Plans, MLFD has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("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, 1999, 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 ...................................... $425 $3,239
- --------------------------------------------------------------------------------
For the year ended October 31, 1999, MLPF&S received a contingent deferred sales
charge of $173,136 relating to transactions in Class B Shares.
For the year ended October 31, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $2,225 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, 1999 were $202,202,595 and $179,722,777, respectively.
Net realized losses for the year ended October 31, 1999 and net unrealized
losses as of October 31, 1999 were as follows:
- -------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- -------------------------------------------------------------------------------
Long-term investments .................... $ (3,589,967) $ (2,324,496)
------------ ------------
Total .................................... $ (3,589,967) $ (2,324,496)
============ ============
- -------------------------------------------------------------------------------
As of October 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $2,324,496, of which $60,040 related to appreciated
securities and $2,384,536 related to depreciated securities. The aggregate cost
of investments at October 31, 1999 for Federal income tax purposes was
$96,704,681.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions was
$19,391,054 and $49,242,919 for the years ended October 31, 1999 and October 31,
1998, respectively.
Transactions in shares of beneficial interest were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended October 31, 1999 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 3,179,248 $ 31,448,003
Shares issued to shareholders
in reinvestment of dividends ............. 3,582 35,009
------------ ------------
Total issued ............................. 3,182,830 31,483,012
Shares redeemed .......................... (813,850) (7,882,084)
------------ ------------
Net increase ............................. 2,368,980 $ 23,600,928
============ ============
- -------------------------------------------------------------------------------
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
- -------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended October 31, 1999 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 3,402,534 $ 33,446,305
Shares issued to shareholders
in reinvestment of dividends ............. 161,940 1,570,347
------------ ------------
Total issued ............................. 3,564,474 35,016,652
Automatic conversion
of shares ................................ (5,819) (56,863)
Shares redeemed .......................... (3,643,283) (35,350,910)
------------ ------------
Net decrease ............................. (84,628) $ (391,121)
============ ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
============ ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended October 31, 1999 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 397,138 $ 3,927,429
Shares issued to shareholders
in reinvestment of dividends ............. 20,756 201,605
------------ ------------
Total issued ............................. 417,894 4,129,034
Shares redeemed .......................... (518,524) (5,044,390)
------------ ------------
Net decrease ............................. (100,630) $ (915,356)
============ ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended October 31, 1999 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 1,214,984 $ 11,854,285
Automatic conversion
of shares ................................ 5,819 56,863
Shares issued to shareholders
in reinvestment of dividends ............. 127,926 1,239,339
------------ ------------
Total issued ............................. 1,348,729 13,150,487
Shares redeemed .......................... (1,647,035) (16,053,884)
------------ ------------
Net decrease ............................. (298,306) $ (2,903,397)
============ ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
============ ============
- -------------------------------------------------------------------------------
5. Capital Loss Carryforward:
At October 31, 1999, the Fund had a net capital loss carryforward of
approximately $10,715,000, of which $3,224,000 expires in 2002, $1,996,000
expires in 2003, $977,000 expires in 2004, $878,000 expires in 2005 and
$3,640,000 expires in 2007. This amount will be available to offset like amounts
of any future taxable gains.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 1999
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, 1999, 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, 1999 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, 1999, 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 15, 1999
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid monthly by Merrill Lynch
Intermediate Government Bond Fund during its fiscal year ended October 31, 1999
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:
- -------------------------------------------------------------------------------
For the Percentage of
Quarter Ended Federal Obligations*
- -------------------------------------------------------------------------------
January 31, 1999 .......................................... 54.82%
April 30, 1999 ............................................ 49.96%
July 31, 1999 ............................................. 35.86%
October 31, 1999 .......................................... 36.01%
- -------------------------------------------------------------------------------
Of the Fund's ordinary income dividends paid during its fiscal year ended
October 31, 1999, 57.42% 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.
15
<PAGE>
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
Todd Goodwin, 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
Ann Catlin, Vice President
Ralph A. DeCesare, Vice President
Diana Frankland, 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
Donald C. Burke, Vice President and 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
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--10/99
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