MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
April 30, 2000
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Extraordinary events characterized the bond market during the six months ended
April 30, 2000. Six months ago, the yield curve (the graphic representation of
Treasury yields of all maturities) showed its typical upward slope, where issues
with shorter maturities had lower yields than issues with longer maturities. As
the economy continued to show significant strength and inflation began to
appear, interest rates on all maturities started to rise. The US Treasury
Department, riding the wave of a Federal budget surplus, announced that it would
be a strong buyer of existing Treasury debt, especially at the longer-term end
of the maturity spectrum. President Clinton went as far as to predict the
elimination of Federal debt (which means all Treasury securities) by the year
2013. Instantly, long-term Treasury securities had a perceived scarcity value.
The yield on the 30-year Treasury bond rallied sharply from a high of 6.75% in
late January to its period low of 5.67% in mid-April. This was despite three
tightenings of monetary policy by the Federal Reserve Board during the six-month
period. Ultimately, this inflationary fear and the Federal Reserve Board's
monetary policy tightening raised short-term interest rates, with the two-year
note rising from 5.81% to 6.72% during the period. However, the 30-year bond
started the six-month period at 6.18% and closed at 5.99%. As a result, the
yield curve inverted.
During the six months ended April 30, 2000, the performance of agency debentures
and mortgage-backed securities was in line, but significantly underperformed
Treasury issues. When the yield on 30-year Treasury securities fell below the
yield on ten-year Treasury issues, difficulties arose in pricing debt securities
of long-term non-Treasury issues, such as corporate bonds and agency debentures.
Investors were not willing to accept a lower absolute yield for longer,
higher-risk debt than the shorter-term debt of the same issuer. Yield
differences between those non-Treasury securities and Treasury issues in the
long end of the yield curve widened sharply to compensate. As a result, the
yield difference between agency debentures and Treasury securities were pushed
wider, causing agency issues to underperform Treasury securities on a total
return basis. In addition, Congress questioned the business practices of the
Government-sponsored agencies, and even questioned whether the Government should
continue to provide a backup line of credit. This proposal appeared politically
motivated by a strong lobby and was backed up by the fact that both the Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation have
had sharply higher leverage (debt-to-equity ratio) in the past two years. It is
uncertain whether this proposal has any strength during an election year as it
may appear anti-housing since these Government-sponsored agencies provide
support to the market for mortgage-backed securities.
Portfolio Matters
Merrill Lynch Intermediate Government Bond Fund performed reasonably well during
the period. For the six months ended April 30, 2000, the Fund's Class A, Class
B, Class C and Class D Shares had total returns of +1.13%, +0.87%, +1.00% and
+1.08%, respectively, comparable to the average total return of +1.09% as
measured by the Fund's peer group, Lipper Analytical Services Inc.'s
Intermediate US Government Bond Funds. (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 2 and 3 of this report to shareholders.) The
overweighting we had in agency debentures hurt our relative performance, but our
holdings were grouped more toward the shorter maturities, limiting any damage.
Our overweighting
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
in mortgages also hurt Fund performance, but the overweighting was small and our
holdings were balanced. We did enjoy much of the rally in the long end of the
Treasury yield curve because we owned 30-year Treasury securities and various
issues within the 10-year-20-year sector as well.
Going forward, we expect the shock of the Treasury curve inversion to wear off,
allowing for a more constructive tone to the markets for agency debentures and
mortgage-backed securities. As for the issues surrounding Government-sponsored
enterprises, we believe that it is possible that some limitations may be placed
on these companies as to which businesses they may enter and to help lower their
leverage, but that the close support of Government will remain. We will continue
to pursue a balanced approach to our portfolio management, buying securities all
along the yield curve in all three of our highlighted sectors (Treasury
securities, agency issues and mortgages) in an effort to generate a conservative
source of total return and yield for our shareholders.
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
May 22, 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. The Fund's Investment Adviser voluntarily waived
a portion of its management fee. Without such waiver, the Fund's
performance would have been lower.
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
PERFORMANCE DATA (concluded)
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/
6 Month 12 Month Since Inception Standardized
As of April 30, 2000 Total Return Total Return Total Return 30-Day Yield
=====================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +1.13% +0.21% +15.06% 5.67%
---------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +0.87 -0.30 +13.37 5.22
---------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +1.00 +0.04 +13.91 5.48
---------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +1.08 +0.11 +85.79+ 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 3/31/00 +0.65% -0.35%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/00 +4.70 +4.37
--------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 3/31/00 +0.24% -0.71%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/00 +4.22 +4.22
--------------------------------------------------------------------------------
* 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 3/31/00 +0.38% -0.57%
--------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/00 +4.34 +4.34
--------------------------------------------------------------------------------
* 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 3/31/00 +0.65% -0.35%
--------------------------------------------------------------------------------
Five Years Ended 3/31/00+ +5.41 +5.19
--------------------------------------------------------------------------------
Ten Years Ended 3/31/00+ +6.41 +6.30
--------------------------------------------------------------------------------
* 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.
3
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
=========================================================================================================================
<S> <C> <C> <C> <C>
US Government & Agency Obligations--90.4%
=========================================================================================================================
US Treasury Notes & Bonds $ 4,500,000 5.875% 11/15/04 $ 4,381,155
2,000,000 6.25 5/15/30 2,078,740
3,900,000 8.50 2/15/20 4,860,999
1,000,000 10.00 5/15/10 1,136,870
4,000,000 11.25 2/15/15 5,852,480
2,000,000 11.875 11/15/03 2,321,240
2,100,000 13.375 8/15/01 2,269,974
=========================================================================================================================
Federal Home Loan Banks 4,000,000 5.63 9/02/03 3,805,640
1,000,000 6.75 2/01/02 994,220
=========================================================================================================================
Federal Home Loan Mortgage Corporation--Gold Program* 3,959,066 7.00 8/01/29 3,790,673
1,959,315 7.50 11/01/29 1,919,949
=========================================================================================================================
Federal Home Loan Mortgage Corporation 1,500,526 6.25 2/15/27 1,404,762
Mortgage-Backed Securities* 977,295 6.73 11/20/23 976,548
5,927,485 7.00 1/15/24-10/15/27 5,708,297
=========================================================================================================================
Federal National Mortgage Association 2,000,000 6.50 4/29/09 1,850,320
1,950,000 6.625 9/15/09 1,860,125
2,000,000 7.10 10/18/04 1,965,000
2,000,000 7.125 3/15/07 1,978,440
2,000,000 7.15 8/27/12 1,859,680
1,000,000 7.25 1/15/10 997,030
=========================================================================================================================
Federal National Mortgage Association 1,000,000 6.50 10/25/03 974,391
Mortgage-Backed Securities* 11,204,885 7.00 5/01/29-4/01/30 10,720,908
5,687,229 7.50 11/01/26-3/01/29 5,580,970
=========================================================================================================================
Total US Government & Agency Obligations (Cost--$71,253,730) 69,288,411
=========================================================================================================================
<CAPTION>
Face Amount Short-Term Securities
=========================================================================================================================
<C> <C> <C>
Repurchase Agreements**--10.0%
=========================================================================================================================
$3,819,000 J.P. Morgan, purchased on 4/28/2000 to yield 5.70% to 5/01/2000 3,819,000
3,820,000 Warburg Dillon Read LLC, purchased on 4/28/2000 to yield 5.71% to 5/01/2000 3,820,000
=========================================================================================================================
Total Short-Term Securities (Cost--$7,639,000) 7,639,000
=========================================================================================================================
Total Investments (Cost--$78,892,730)--100.4% 76,927,411
=========================================================================================================================
Liabilities in Excess of Other Assets--(0.4%) (304,564)
-----------
Net Assets--100.0% $76,622,847
===========
=========================================================================================================================
</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.
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of April 30, 2000
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$78,892,730) ............. $ 76,927,411
Cash ............................................................. 789
Receivables:
Interest ...................................................... $ 952,579
Beneficial interest sold ...................................... 85,668
Loaned securities ............................................. 212 1,038,459
---------
Prepaid registration fees and other assets ....................... 41,457
------------
Total assets ..................................................... 78,008,116
------------
===================================================================================================================
Liabilities: Payables:
Securities purchased .......................................... 978,266
Beneficial interest redeemed .................................. 249,949
Dividends to shareholders ..................................... 92,641
Investment adviser ............................................ 23,691
Distributor ................................................... 12,071 1,356,618
---------
Accrued expenses and other liabilities ........................... 28,651
------------
Total liabilities ................................................ 1,385,269
------------
===================================================================================================================
Net Assets: Net assets ....................................................... $ 76,622,847
============
===================================================================================================================
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized ...................................... $ 273,644
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................... 274,325
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................... 20,893
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ...................................... 262,790
Paid-in capital in excess of par ................................. 90,515,326
Accumulated realized capital losses on investments--net .......... (12,758,812)
Unrealized depreciation on investments--net ...................... (1,965,319)
------------
Net assets ....................................................... $ 76,622,847
============
===================================================================================================================
Net Asset Value: Class A--Based on net assets of $25,213,564 and 2,736,436 shares
of beneficial interest outstanding ............................... $ 9.21
============
Class B--Based on net assets of $25,275,380 and 2,743,246 shares
of beneficial interest outstanding ............................... $ 9.21
============
Class C--Based on net assets of $1,923,622 and 208,930 shares
of beneficial interest outstanding ............................... $ 9.21
============
Class D--Based on net assets of $24,210,281 and 2,627,897 shares
of beneficial interest outstanding ............................... $ 9.21
============
===================================================================================================================
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended April 30, 2000
<TABLE>
<S> <C> <C> <C>
Investment Income: Interest and discount earned .............................. $ 2,917,850
Other ..................................................... 2,727
-----------
Total income .............................................. 2,920,577
-----------
=============================================================================================================
Expenses: Investment advisory fees .................................. $ 166,453
Account maintenance and distribution fees--Class B ........ 75,699
Professional fees ......................................... 38,558
Accounting services ....................................... 36,461
Registration fees ......................................... 30,570
Printing and shareholder reports .......................... 28,401
Trustees' fees and expenses ............................... 16,440
Account maintenance fees--Class D ......................... 12,945
Transfer agent fees--Class B .............................. 12,302
Custodian fees ............................................ 9,721
Transfer agent fees--Class D .............................. 8,596
Transfer agent fees--Class A .............................. 8,102
Account maintenance and distribution fees--Class C ........ 3,419
Pricing fees .............................................. 2,648
Transfer agent fees--Class C .............................. 1,167
Other ..................................................... 3,804
---------
Total expenses ............................................ 455,286
-----------
Investment income--net .................................... 2,465,291
-----------
=============================================================================================================
Realized & Realized loss from investments--net ....................... (2,044,182)
Unrealized Change in unrealized depreciation on investments--net ..... 359,177
Gain (Loss) on -----------
Investments--Net: Net Increase in Net Assets Resulting from Operations ...... $ 780,286
===========
=============================================================================================================
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 2000 1999
===============================================================================================================================
<S> <C> <C>
Operations: Investment income--net .............................................. $ 2,465,291 $ 5,261,721
Realized loss on investments--net ................................... (2,044,182) (3,589,967)
Change in unrealized appreciation/depreciation on investments--net .. 359,177 (3,855,665)
------------ ------------
Net increase (decrease) in net assets resulting from operations ..... 780,286 (2,183,911)
------------ ------------
===============================================================================================================================
Dividends to Investment income--net:
Shareholders: Class A ........................................................ (749,143) (1,082,025)
Class B ........................................................ (852,360) (2,184,370)
Class C ........................................................ (80,279) (258,444)
Class D ........................................................ (783,509) (1,736,882)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders . (2,465,291) (5,261,721)
------------ ------------
===============================================================================================================================
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions: interest transactions ............................................... (14,599,156) 19,391,054
===============================================================================================================================
Net Assets: Total increase (decrease) in net assets ............................. (16,284,161) 11,945,422
Beginning of period ................................................. 92,907,008 80,961,586
------------ ------------
End of period ....................................................... $ 76,622,847 $ 92,907,008
============ ============
===============================================================================================================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------------------------
For the For the
Six Period
The following per share data and ratios have been derived Months For the Year Feb. 18,
from information provided in the financial statements. Ended Ended October 31, 1997+ to
April 30, --------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
==================================================================================================================================
<S> <C> <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 ................................... .28 .55 .59 .39
Realized and unrealized gain (loss) on investments--net .. (.18) (.72) .37 .08
-------- -------- ------- -------
Total from investment operations ......................... .10 (.17) .96 .47
-------- -------- ------- -------
Less dividends from investment income--net ............... (.28) (.55) (.59) (.39)
-------- -------- ------- -------
Net asset value, end of period ........................... $ 9.21 $ 9.39 $ 10.11 $ 9.74
======== ======== ======= =======
==================================================================================================================================
Total Investment Based on net asset value per share ....................... 1.13%++ (1.74%) 10.23% 5.04%++
Return:** ======== ======== ======= =======
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement ........................... .87%* .75% .76% 1.12%*
Net Assets: ======== ======== ======= =======
Expenses ................................................. .87%* .78% 1.09% 2.08%*
======== ======== ======= =======
Investment income--net ................................... 6.14%* 5.60% 5.99% 5.95%*
======== ======== ======= =======
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) ................. $ 25,214 $ 24,019 $ 1,905 $ 425
Data: ======== ======== ======= =======
Portfolio turnover ....................................... 90.98% 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.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
-----------------------------------------------
For the For the
Six Period
The following per share data and ratios have been derived Months For the Year Feb. 18,
from information provided in the financial statements. Ended Ended October 31, 1997+ to
April 30, --------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
==================================================================================================================================
<S> <C> <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 .26 .50 .54 .37
Realized and unrealized gain (loss) on investments--net (.18) (.72) .37 .08
-------- -------- -------- -------
Total from investment operations .08 (.22) .91 .45
-------- -------- -------- -------
Less dividends from investment income--net (.26) (.50) (.54) (.37)
-------- -------- -------- -------
Net asset value, end of period $ 9.21 $ 9.39 $ 10.11 $ 9.74
======== ======== ======== =======
==================================================================================================================================
Total Investment Based on net asset value per share .87%++ (2.24%) 9.68% 4.81%++
Return:** ======== ======== ======== =======
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement 1.38%* 1.20% 1.23% 1.39%*
Net Assets: ======== ======== ======== =======
Expenses 1.38%* 1.28% 1.54% 2.42%*
======== ======== ======== =======
Investment income--net 5.61%* 5.13% 5.34% 5.69%*
======== ======== ======== =======
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) $ 25,275 $ 36,334 $ 39,975 $ 829
Data: ======== ======== ======== =======
Portfolio turnover 90.98% 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.
9
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
-----------------------------------------------
For the For the
Six Period
The following per share data and ratios have been derived Months For the Year Feb. 18,
from information provided in the financial statements. Ended Ended October 31, 1997+ to
April 30, --------------------- Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
==================================================================================================================================
<S> <C> <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 ................................... .27 .52 .57 .36
Realized and unrealized gain (loss) on investments--net .. (.18) (.72) .38 .07
------- -------- ------- -------
Total from investment operations ......................... .09 (.20) .95 .43
------- -------- ------- -------
Less dividends from investment income--net ............... (.27) (.52) (.57) (.36)
------- -------- ------- -------
Net asset value, end of period ........................... $ 9.21 $ 9.39 $ 10.11 $ 9.73
======= ======== ======= =======
==================================================================================================================================
Total Investment Based on net asset value per share ....................... 1.00%++ (2.00%) 10.05% 4.57%++
return:** ======= ======== ======= =======
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement ........................... 1.13%* .94% .95% 1.47%*
Net Assets: ======= ======== ======= =======
Expenses ................................................. 1.13%* 1.03% 1.26% 2.64%*
======= ======== ======= =======
Investment income--net ................................... 5.85%* 5.37% 5.54% 5.55%*
======= ======== ======= =======
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) ................. $ 1,924 $ 3,397 $ 4,674 $ 47
Data: ======= ======== ======= =======
Portfolio turnover ....................................... 90.98% 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 April 30, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
--------------------------------------------------------------
For the
Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended For the Year Ended October 31,
April 30, -----------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..... $ 9.39 $ 10.11 $ 9.74 $ 9.68 $ 9.82
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................... .28 .54 .58 .55 .61
Realized and unrealized gain (loss) on
investments--net ......................... (.18) (.72) .37 .06 (.14)
-------- -------- -------- -------- --------
Total from investment operations ......... .10 (.18) .95 .61 .47
-------- -------- -------- -------- --------
Less dividends from investment income--net (.28) (.54) (.58) (.55) (.61)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 9.21 $ 9.39 $ 10.11 $ 9.74 $ 9.68
======== ======== ======== ======== ========
=================================================================================================================================
Total Investment Based on net asset value per share ....... 1.08%++ (1.83%) 10.12% 6.60% 4.87%
Return:** ======== ======== ======== ======== ========
=================================================================================================================================
Ratios to Average Expenses, net of reimbursement ........... .96%* .79% .89% 1.25% .97%
Net Assets: ======== ======== ======== ======== ========
Expenses ................................. .96%* .87% 1.22% 1.69% .97%
======== ======== ======== ======== ========
Investment income--net ................... 6.04%* 5.55% 5.94% 5.71% 6.19%
======== ======== ======== ======== ========
=================================================================================================================================
Supplemental Net assets, end of period (in thousands) . $ 24,210 $ 29,157 $ 34,408 $ 28,805 $ 47,281
Data: ======== ======== ======== ======== ========
Portfolio turnover ....................... 90.98% 191.16% 108.06% 201.55% 51.44%
======== ======== ======== ======== ========
=================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of
sales charges.
++ Aggregate total investment return.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 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 accordance
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature. 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
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,
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
the Fund pays a monthly fee at the annual rate of .40% of the average daily net
assets of the Fund.
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 six months ended April 30,
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 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 six months ended April 30, 2000, 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......................................... $168 $1,377
--------------------------------------------------------------------------------
For the six months ended April 30, 2000, MLPF&S received a contingent deferred
sales charge of $63,322 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 six months ended April 30, 2000, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $867 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 six
months ended April 30, 2000 were $72,138,003 and $90,358,291, respectively.
Net realized losses for the six months ended April 30, 2000 and net unrealized
losses as of April 30, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
--------------------------------------------------------------------------------
Long-term investments ................ $(2,044,182) $(1,965,319)
----------- -----------
Total ................................ $(2,044,182) $(1,965,319)
=========== ===========
--------------------------------------------------------------------------------
As of April 30, 2000, net unrealized depreciation for Federal income tax
purposes aggregated $1,965,319, of which $22,993 related to appreciated
securities and $1,988,312 related to depreciated securities. The aggregate cost
of investments at April 30, 2000 for Federal income tax purposes was
$78,892,730.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(14,599,156) and $19,391,054 for the six months ended April
30, 2000 and for the year ended October 31, 1999, respectively.
Transactions in shares of beneficial interest were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended April 30, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 497,260 $ 4,614,578
Shares issued to shareholders
in reinvestment of dividends ............. 1,163 10,791
--------- -----------
Total issued ............................. 498,423 4,625,369
Shares redeemed .......................... (319,352) (2,963,862)
--------- -----------
Net increase ............................. 179,071 $ 1,661,507
========= ===========
--------------------------------------------------------------------------------
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
--------------------------------------------------------------------------------
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 Six Months Dollar
Ended April 30, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 521,537 $ 4,840,951
Shares issued to shareholders
in reinvestment of dividends ........... 59,253 549,308
---------- ------------
Total issued ........................... 580,790 5,390,259
Automatic conversion
of shares .............................. (7,066) (65,073)
Shares redeemed ........................ (1,699,338) (15,753,514)
---------- ------------
Net decrease ........................... (1,125,614) $(10,428,328)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 Six Months Dollar
Ended April 30, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 130,488 $ 1,211,050
Shares issued to shareholders
in reinvestment of dividends ............. 5,717 52,917
---------- ------------
Total issued ............................. 136,205 1,263,967
Shares redeemed .......................... (289,215) (2,675,046)
---------- ------------
Net decrease ............................. (153,010) $ (1,411,079)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 Six Months Dollar
Ended April 30, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 104,629 $ 971,460
Automatic conversion
of shares ................................ 7,067 65,073
Shares issued to shareholders
in reinvestment of dividends ............. 56,635 524,801
---------- ------------
Total issued ............................. 168,331 1,561,334
Shares redeemed .......................... (645,360) (5,982,590)
---------- ------------
Net decrease ............................. (477,029) $ (4,421,256)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 April 30, 2000, the Fund held US Treasury Notes and Bonds having an aggregate
value of approximately $6,690,000 as collateral for portfolio securities loaned
having a market value of approximately $6,460,000.
6. 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.
7. Reorganization Plan:
On June 6, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby Merrill Lynch Adjustable Rate Securities Fund, Inc. would acquire
substantially all of the assets and liabilities of the Fund in exchange for
newly issued shares of Merrill Lynch Adjustable Rate Securities Fund, Inc. Both
Funds are registered, open-end management investment companies that have a
similar investment objective and are managed by MLAM.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 2000
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
15
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Intermediate Government
Bond Fund
Box 9011
Princeton, NJ
08543-9011 #IGB01--4/00
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