MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 2000
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Fiscal Year in Review
Interest rates fluctuated broadly during the fiscal year ended October 31, 2000,
but demonstrated a general downward trend. The Treasury's ten-year note began
the fiscal year at around 6%, then steadily climbed to 6.8% in late January
2000, its high for the fiscal period. Except for a four-week period in late
April and early May, interest rates trended lower for the rest of the fiscal
year, closing the period near a low point of 5.6% in late October. The Federal
Reserve Board found it necessary to tighten monetary policy four times during
this period, raising its targeted Federal Funds rate by 125 basis points (1.25%)
to 6.5%. This was in light of the strong economic growth and the low
unemployment rate in the United States, coupled with stock market speculation
and irrational valuations in certain sectors, as well as the rising cost of oil.
Two main themes during the year were the shape of the yield curve and the
potential for a change in legislation concerning government-sponsored
enterprises. As the Federal government's budget surplus grew, there was
speculation that the Treasury's 30-year bond would no longer be issued. This
created a perceived scarcity value of all long-term Treasury debt, which rallied
interest rates in the long end of the yield curve. The yield curve became
inverted, with the yields on short-term debt higher than the yields on
longer-term debt. This made it difficult to price the debt of non-Treasury
issuers (such as Government agency issues and corporate bonds) in the longer
maturities, which caused the yield premium (or spread) between Treasury debt and
non-Treasury debt to widen. This hurt the performance of the Fund's investments
in Government agency debt and mortgage-backed securities. Government agency debt
also suffered from Congress' investigation into how much actual and implied
support it was willing to give to the agencies, as the agencies have entered
into different lines of business.
These extreme trends have begun to reverse themselves, restoring some semblance
of order in the markets in which the Fund participates. The yield spread on
Government agency debt and mortgage-backed securities has begun to narrow,
providing investors of this debt with the opportunity to gather returns greater
than that provided by Treasury debt.
The Fund stayed close to its stated maximum weighted average life of 8 years
throughout the fiscal year and benefited from the general trend in lower
interest rates that occurred. The Fund's duration rarely strayed far relative to
its unmanaged benchmark, the Salomon Smith Barney Government Mortgage Index. We
maintained a balanced approach for the Fund by investing among the three major
sectors: Treasury securities, agency issues and mortgage-backed securities.
Throughout the fiscal year, Treasury securities were underweighted in favor of
mortgages. The yield curve distribution of investments was close to the Index.
This style of management benefited the Fund's returns relative to the Fund's
Lipper peer group average. For the 12 months ended October 31, 2000, the Fund's
Class A, Class B, Class C and Class D Shares had total returns of +6.77%,
+6.23%, +6.38% and +6.67%, respectively, as compared to the Lipper Intermediate
US Government Average of +6.29%. (Fund results shown do not reflect sales
charges, and would be lower if sales charges were included. Complete performance
information can be found on pages 3-5 of this report to shareholders.)
In Conclusion
On December 18, 2000, Merrill Lynch Intermediate Government Bond Fund will be
acquired by Merrill Lynch Short-Term U.S. Government Fund, Inc. in
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
exchange for newly issued shares of Merrill Lynch Short-Term U.S. Government
Fund, Inc. Both Funds have a similar investment objective and are managed by
Merrill Lynch Investment Managers, L.P. (MLIM). The plan of reorganization was
approved at a meeting of shareholders on November 21, 2000.
We thank you for your continued investment in Merrill Lynch Intermediate
Government Bond Fund.
Sincerely,
/s/ Robert W. Crook
Robert W. Crook
President and Trustee
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Portfolio Manager
December 5, 2000
We are pleased to announce that Christopher G. Ayoub is responsible for the
day-to-day management of Merrill Lynch Intermediate Government Bond Fund. Mr.
Ayoub has been employed by Merrill Lynch Investment Managers, L.P. since 1982 in
the fixed-income portfolio management group. He has been Portfolio Manager since
1984.
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
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
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
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. If applicable, the Fund's Investment Adviser
voluntarily waived a portion of its management fee. Without such waiver,
the Fund's performance would have been lower.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/
6 Month 12 Month Since Inception Standardized
As of October 31, 2000 Total Return Total Return Total Return 30-Day Yield
====================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +5.58% +6.77% +21.48% 5.80%
--------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +5.31 +6.23 +19.38 5.34
--------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +5.33 +6.38 +19.98 5.59
--------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +5.53 +6.67 +84.63++ 5.71
====================================================================================================================
</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, 2000
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 Smith
Barney Government/Mortgage Index. Beginning and ending values are:
2/18/97** 10/00
ML Intermediate Government
Bond Fund+ -- Class A Shares* $ 9,900 $12,026
ML Intermediate Government
Bond Fund+ -- Class B Shares* $10,000 $11,938
ML Intermediate Government
Bond Fund+ -- Class C Shares* $10,000 $11,998
Salomon Smith Barney Government/
Mortgage Index++ $10,000 $12,776
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 Smith Barney
Government/Mortgage Index. Beginning and ending values are:
10/90 10/00
ML Intermediate Government
Bond Fund+ -- Class D Shares* $ 9,900 $18,280
Salomon Smith Barney Government/
Mortgage Index++ $10,000 $21,477
* 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.
Past performance is not predictive of future performance.
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 9/30/00 +6.20% +5.14%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/00 +5.32 +5.03
--------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 9/30/00 +5.65% +4.65%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/00 +4.83 +4.83
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 9/30/00 +5.80% +4.80%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 9/30/00 +4.97 +4.97
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 9/30/00 +6.09% +5.03%
--------------------------------------------------------------------------------
Five Years Ended 9/30/00++ +5.23 +5.02
--------------------------------------------------------------------------------
Ten Years Ended 9/30/00++ +6.38 +6.27
--------------------------------------------------------------------------------
* 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, 2000
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
====================================================================================================================================
<S> <C> <C> <C> <C>
US Government & Agency Obligations -- 97.8%
====================================================================================================================================
US Treasury Notes & Bonds $ 1,000,000 6.00 % 8/15/2009 $ 1,010,000
2,000,000 6.125 8/15/2007 2,028,120
500,000 6.125 8/15/2029 517,810
250,000 6.25 5/15/2030 266,250
1,000,000 6.50 2/15/2010 1,046,720
2,500,000 6.75 5/15/2005 2,591,800
2,000,000 7.00 7/15/2006 2,107,500
1,000,000 7.625 2/15/2025 1,207,970
1,900,000 8.50 2/15/2020 2,434,375
1,000,000 10.00 5/15/2010 1,153,750
2,000,000 11.25 2/15/2015 2,998,740
2,000,000 11.875 11/15/2003 2,321,560
2,100,000 13.375 8/15/2001 2,208,612
====================================================================================================================================
Fannie Mae 2,000,000 6.50 4/29/2009 1,904,380
2,000,000 7.00 7/15/2005 2,037,820
2,000,000 7.125 3/15/2007 2,055,620
2,000,000 7.15 8/27/2012 1,929,380
3,000,000 7.25 1/15/2010 3,109,680
====================================================================================================================================
Fannie Mae Mortgage-Backed Securities* 984,861 6.50 10/25/2003 982,599
5,569,699 6.50 2/01/2029-9/01/2029 5,356,422
10,905,393 7.00 5/01/2029-4/01/2030 10,694,094
4,250,888 7.50 11/01/2026-3/01/2029 4,257,398
====================================================================================================================================
Federal Home Loan Banks 1,000,000 6.75 2/01/2002 1,003,120
====================================================================================================================================
Freddie Mac 3,200,000 7.375 5/15/2003 3,268,512
====================================================================================================================================
Freddie Mac Participation Certificates -- Gold Program* 6,461,235 6.50 4/01/2029-9/01/2030 6,217,211
====================================================================================================================================
Freddie Mac Participation Certificates 1,413,586 6.25 2/15/2027 1,368,082
Mortgage-Backed Securities* 2,000,000 7.00 11/15/2006 2,001,380
5,708,370 7.00 1/15/2024-10/15/2027 5,656,179
870,049 7.219 11/20/2023 875,730
====================================================================================================================================
Total US Government & Agency Obligations (Cost -- $74,809,966) 74,610,814
====================================================================================================================================
</TABLE>
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Amount Short-Term Securities Value
====================================================================================================================================
<S> <C> <C>
Repurchase Agreements** -- 1.1%
====================================================================================================================================
$877,000 Warburg Dillon Read LLC, purchased on 10/31/2000 to yield 6.55% to 11/01/2000 $ 877,000
====================================================================================================================================
Total Short-Term Securities (Cost -- $877,000) 877,000
====================================================================================================================================
Total Investments (Cost -- $75,686,966) -- 98.9% 75,487,814
Other Assets Less Liabilities -- 1.1% 837,645
-----------
Net Assets -- 100.0% $76,325,459
===========
====================================================================================================================================
</TABLE>
* 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.
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of October 31, 2000
<TABLE>
<S> <C> <C>
Assets: Investments, at value (identified cost -- $75,686,966) ........................... $ 75,487,814
Cash ............................................................................. 994
Receivables:
Interest ...................................................................... $982,047
Beneficial interest sold ...................................................... 260,071
Loaned securities ............................................................. 2,038
Principal paydowns ............................................................ 1,679 1,245,835
--------
Prepaid registration fees and other assets ....................................... 58,696
------------
Total assets ..................................................................... 76,793,339
------------
====================================================================================================================================
Liabilities: Payables:
Beneficial interest redeemed .................................................. 157,042
Dividends to shareholders ..................................................... 150,855
Investment adviser ............................................................ 26,620
Distributor ................................................................... 12,263 346,780
--------
Accrued expenses ................................................................. 121,100
------------
Total liabilities ................................................................ 467,880
------------
====================================================================================================================================
Net Assets: Net assets ....................................................................... $ 76,325,459
============
====================================================================================================================================
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized ...................................................... $ 272,634
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................................... 258,875
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................................... 21,948
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................................... 256,941
Paid-in capital in excess of par ................................................. 88,576,774
Accumulated realized capital losses on investments -- net ........................ (12,862,561)
Unrealized depreciation on investments -- net .................................... (199,152)
------------
Net assets ....................................................................... $ 76,325,459
============
====================================================================================================================================
Net Asset Value: Class A -- Based on net assets of $25,679,267 and 2,726,340 shares of
beneficial interest outstanding .................................................. $ 9.42
============
Class B -- Based on net assets of $24,382,008 and 2,588,749 shares of
beneficial interest outstanding .................................................. $ 9.42
============
Class C -- Based on net assets of $2,065,771 and 219,480 shares of
beneficial interest outstanding .................................................. $ 9.41
============
Class D -- Based on net assets of $24,198,413 and 2,569,408 shares of
beneficial interest outstanding .................................................. $ 9.42
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended October 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income: Interest and discount earned ................................................... $ 5,686,977
Other .......................................................................... 16,307
------------
Total income ................................................................... 5,703,284
------------
====================================================================================================================================
Expenses: Investment advisory fees ....................................................... $319,536
Account maintenance and distribution fees -- Class B ........................... 136,679
Professional fees .............................................................. 80,310
Printing and shareholder reports ............................................... 66,754
Accounting services ............................................................ 65,949
Registration fees .............................................................. 57,018
Trustees' fees and expenses .................................................... 36,000
Transfer agent fees -- Class B ................................................. 25,510
Account maintenance fees -- Class D ............................................ 24,994
Transfer agent fees -- Class A ................................................. 19,922
Transfer agent fees -- Class D ................................................. 19,693
Custodian fees ................................................................. 19,218
Account maintenance and distribution fees -- Class C ........................... 6,043
Pricing fees ................................................................... 5,869
Transfer agent fees -- Class C ................................................. 2,332
Other .......................................................................... 2,832
--------
Total expenses ................................................................. 888,659
------------
Investment income -- net ....................................................... 4,814,625
------------
====================================================================================================================================
Realized & Realized loss from investments -- net .......................................... (2,147,931)
Unrealized Gain Change in unrealized depreciation on investments -- net ........................ 2,125,344
(Loss) on ------------
Investments -- Net: Net Increase in Net Assets Resulting from Operations ........................... $ 4,792,038
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended October 31,
----------------------------
Increase (Decrease) in Net Assets: 2000 1999
====================================================================================================================================
<S> <C> <C>
Operations: Investment income -- net..................................................... $ 4,814,625 $ 5,261,721
Realized loss on investments -- net.......................................... (2,147,931) (3,589,967)
Change in unrealized appreciation/depreciation on investments -- net......... 2,125,344 (3,855,665)
------------ -------------
Net increase (decrease) in net assets resulting from operations.............. 4,792,038 (2,183,911)
------------ -------------
====================================================================================================================================
Dividends to Investment income -- net:
Shareholders: Class A ................................................................. (1,571,664) (1,082,025)
Class B.................................................................. (1,562,559) (2,184,370)
Class C.................................................................. (143,997) (258,444)
Class D.................................................................. (1,536,405) (1,736,882)
------------ -------------
Net decrease in net assets resulting from dividends to shareholders......... (4,814,625) (5,261,721)
------------ -------------
====================================================================================================================================
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions: interest transactions ...................................................... (16,558,962) 19,391,054
------------ -------------
====================================================================================================================================
Net Assets: Total increase (decrease) in net assets..................................... (16,581,549) 11,945,422
Beginning of year........................................................... 92,907,008 80,961,586
------------ -------------
End of year................................................................. $ 76,325,459 $ 92,907,008
============ ============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived Feb. 18,
from information provided in the financial statements. For the Year Ended October 31, 1997+ to
------------------------------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ............. $ 9.39 $ 10.11 $ 9.74 $ 9.66
Operating ---------- ---------- ---------- ----------
Performance: Investment income -- net ......................... .58 .55 .59 .39
Realized and unrealized gain (loss)
on investments -- net ............................ .03 (.72) .37 .08
---------- ---------- ---------- ----------
Total from investment operations ................. .61 (.17) .96 .47
---------- ---------- ---------- ----------
Less dividends from investment income -- net ..... (.58) (.55) (.59) (.39)
---------- ---------- ---------- ----------
Net asset value, end of period ................... $ 9.42 $ 9.39 $ 10.11 $ 9.74
========== ========== ========== ==========
====================================================================================================================================
Total Investment Based on net asset value per share ............... 6.77% (1.74%) 10.23% 5.04%++
Return:** ========== ========== ========== ==========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement ................... .90% .75% .76% 1.12%*
Net Assets: ========== ========== ========== ==========
Expenses ......................................... .90% .78% 1.09% 2.08%*
========== ========== ========== ==========
Investment income -- net ......................... 6.24% 5.60% 5.99% 5.95%*
========== ========== ========== ==========
====================================================================================================================================
Supplemental Net assets, end of period (in thousands) ......... $ 25,679 $ 24,019 $ 1,905 $ 425
Data: ========== ========== ========== ==========
Portfolio turnover ............................... 157.00% 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.
11
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived Feb. 18,
from information provided in the financial statements. For the Year Ended October 31, 1997+ to
------------------------------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ............ $ 9.39 $ 10.11 $ 9.74 $ 9.66
Operating ---------- ---------- ---------- ----------
Performance: Investment income -- net ........................ .54 .50 .54 .37
Realized and unrealized gain (loss) on
investments -- net .............................. .03 (.72) .37 .08
---------- ---------- ---------- ----------
Total from investment operations ................ .57 (.22) .91 .45
---------- ---------- ---------- ----------
Less dividends from investment income -- net .... (.54) (.50) (.54) (.37)
---------- ---------- ---------- ----------
Net asset value, end of period .................. $ 9.42 $ 9.39 $ 10.11 $ 9.74
========== ========== ========== ==========
====================================================================================================================================
Total Investment Based on net asset value per share .............. 6.23% (2.24%) 9.68% 4.81%++
Return:** ========== ========== ========== ==========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement .................. 1.41% 1.20% 1.23% 1.39%*
Net Assets: ========== ========== ========== ==========
Expenses ........................................ 1.41% 1.28% 1.54% 2.42%*
========== ========== ========== ==========
Investment income -- net ........................ 5.70% 5.13% 5.34% 5.69%*
========== ========== ========== ==========
====================================================================================================================================
Supplemental Net assets, end of period (in thousands) ........ $ 24,382 $ 36,334 $ 39,975 $ 829
Data: ========== ========== ========== ==========
Portfolio turnover .............................. 157.00% 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.
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived Feb. 18,
from information provided in the financial statements. For the Year Ended October 31, 1997+ to
------------------------------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ............ $ 9.39 $ 10.11 $ 9.73 $ 9.66
Operating --------- --------- --------- ---------
Performance: Investment income -- net ........................ .56 .52 .57 .36
Realized and unrealized gain (loss) on
investments -- net .............................. .02 (.72) .38 .07
--------- --------- --------- ---------
Total from investment operations ................ .58 (.20) .95 .43
--------- --------- --------- ---------
Less dividends from investment income -- net .... (.56) (.52) (.57) (.36)
--------- --------- --------- ---------
Net asset value, end of period .................. $ 9.41 $ 9.39 $ 10.11 $ 9.73
========= ========= ========= =========
====================================================================================================================================
Total Investment Based on net asset value per share .............. 6.38% (2.00%) 10.05% 4.57%++
Return:** ========= ========= ========= =========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement .................. 1.16% .94% .95% 1.47%*
Net Assets: ========= ========= ========= =========
Expenses ........................................ 1.16% 1.03% 1.26% 2.64%*
========= ========= ========= =========
Investment income -- net ........................ 5.94% 5.37% 5.54% 5.55%*
========= ========= ========= =========
====================================================================================================================================
Supplemental Net assets, end of period (in thousands) ........ $ 2,066 $ 3,397 $ 4,674 $ 47
Data: ========= ========= ========= =========
Portfolio turnover .............................. 157.00% 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.
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
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: 2000 1999 1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ............ $ 9.39 $ 10.11 $ 9.74 $ 9.68 $ 9.82
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income -- net ...................... .58 .54 .58 .55 .61
Realized and unrealized gain (loss) on
investments -- net ............................ .03 (.72) .37 .06 (.14)
---------- ---------- ---------- ---------- ----------
Total from investment operations .............. .61 (.18) .95 .61 .47
---------- ---------- ---------- ---------- ----------
Less dividends from investment income -- net .. (.58) (.54) (.58) (.55) (.61)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .................. $ 9.42 $ 9.39 $ 10.11 $ 9.74 $ 9.68
========== ========== ========== ========== ==========
====================================================================================================================================
Total Investment Based on net asset value per share ............ 6.67% (1.83%) 10.12% 6.60% 4.87%
Return:* ========== ========== ========== ========== ==========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement ................ .99% .79% .89% 1.25% .97%
Net Assets: ========== ========== ========== ========== ==========
Expenses ...................................... .99% .87% 1.22% 1.69% .97%
========== ========== ========== ========== ==========
Investment income -- net ...................... 6.13% 5.55% 5.94% 5.71% 6.19%
========== ========== ========== ========== ==========
====================================================================================================================================
Supplemental Net assets, end of year (in thousands) ........ $ 24,198 $ 29,157 $ 34,408 $ 28,805 $ 47,281
Data: ========== ========== ========== ========== ==========
Portfolio turnover ............................ 157.00% 191.16% 108.06% 201.55% 51.44%
========== ========== ========== ========== ==========
====================================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales charges.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
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 conformity
with accounting principles generally accepted in the United States of America,
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. If the seller defaults and the fair
value of the collateral declines, liquidation of the collateral of the Fund may
be delayed or limited.
(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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLIM 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.
15
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
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,
2000. 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 FAMD for the services it provides and the expenses
borne by FAMD under the Distribution Agreement. As authorized by the
Distribution Plans, FAMD 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, 2000, FAMD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class D Shares as follows:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class D....................................... $123 $1,409
--------------------------------------------------------------------------------
For the year ended October 31, 2000, MLPF&S received a contingent deferred sales
charge of $92,717 relating to transactions in Class B Shares. Furthermore,
MLPF&S received a contingent deferred sales charge of $932 relating to
transactions subject to front-end sales charge waivers in Class D Shares.
For the year ended October 31, 2000, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $3,526 for security price quotations to
compute the net asset value of the Fund.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
MLIM, PSI, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2000 were $119,541,099 and $134,107,022, respectively.
Net realized losses for the year ended October 31, 2000 and net unrealized
losses as of October 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
--------------------------------------------------------------------------------
Long-term investments...................... $(2,147,931) $ (199,152)
----------- -----------
Total...................................... $(2,147,931) $ (199,152)
=========== ===========
--------------------------------------------------------------------------------
As of October 31, 2000, net unrealized depreciation for Federal income tax
purposes aggregated $199,152, of which $969,968 related to appreciated
securities and $1,169,120 related to depreciated securities. The aggregate cost
of investments at October 31, 2000 for Federal income tax purposes was
$75,686,966.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(16,558,962) and $19,391,054 for the years ended October 31,
2000 and October 31, 1999, respectively.
Transactions in shares of beneficial interest were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended October 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold...................................... 802,490 $ 7,435,587
Shares issued to shareholders
in reinvestment of dividends .................... 2,024 18,772
------- ------------
Total issued..................................... 804,514 7,454,359
Shares redeemed.................................. (635,539) (5,901,913)
------- ------------
Net increase..................................... 168,975 $ 1,552,446
======= ============
--------------------------------------------------------------------------------
16
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
--------------------------------------------------------------------------------
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
=========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended October 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 1,028,385 $ 9,565,170
Shares issued to shareholders
in reinvestment of dividends ........... 104,273 967,741
----------- ------------
Total issued ........................... 1,132,658 10,532,911
Automatic conversion of shares ......... (12,689) (117,849)
Shares redeemed ........................ (2,400,080) (22,256,179)
----------- ------------
Net decrease ........................... (1,280,111) $(11,841,117)
=========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended October 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 177,641 $ 1,647,295
Shares issued to shareholders
in reinvestment of dividends ............. 8,887 82,341
---------- -----------
Total issued ............................. 186,528 1,729,636
Shares redeemed .......................... (328,988) (3,045,669)
---------- -----------
Net decrease ............................. (142,460) $(1,316,033)
========== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended October 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 294,551 $ 2,753,804
Automatic conversion of shares ........... 12,690 117,849
Shares issued to shareholders
in reinvestment of dividends ............. 108,740 1,009,092
---------- -----------
Total issued ............................. 415,981 3,880,745
Shares redeemed .......................... (951,499) (8,835,003)
---------- -----------
Net decrease ............................. (535,518) $(4,954,258)
========== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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)
========== ============
--------------------------------------------------------------------------------
5. Loaned Securities:
At October 31, 2000, the Fund held US Treasury Notes and Bonds having an
aggregate value of approximately $2,741,000 as collateral for portfolio
securities loaned having a market value of approximately $2,592,000.
6. Capital Loss Carryforward:
At October 31, 2000, the Fund had a net capital loss carryforward of
approximately $12,863,000, of which $3,224,000 expires in 2002, $1,996,000
expires in 2003, $977,000 expires in 2004, $878,000 expires in 2005, $3,640,000
expires in 2007 and $2,148,000 expires in 2008. This amount will be available to
offset like amounts of any future taxable gains.
7. Reorganization Plan:
On November 21, 2000, the Fund's Shareholders approved a plan of reorganization,
whereby Merrill Lynch Short-Term U.S. Government Fund, Inc. would acquire
substantially all of the assets and liabilities of the Fund in exchange for
newly issued shares of Merrill Lynch Short-Term U.S. Government Fund, Inc. Both
Funds are registered, open-end management investment companies that have a
similar investment objective and are managed by MLIM.
17
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
INDEPENDENT AUDITOR'S 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, 2000, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and 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, 2000 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, 2000, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
December 8, 2000
18
<PAGE>
Merrill Lynch Intermediate Government Bond Fund October 31, 2000
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, 2000
qualify for the dividends received deduction for corporations. Additionally,
there were no long-term capital gains distributions paid during the year.
Of the Fund's ordinary income distributions paid during its fiscal year ended
October 31, 2000, 35.40% was attributable to Federal obligations. In calculating
the foregoing percentage, expenses of the Fund have been allocated on a pro-rata
basis.
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.
Please retain this information for your records.
19
<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--10/00
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