Exhibit 17(m)
(BULL LOGO)
Merrill Lynch Investment Managers
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 Total Return Bond Fund of
Merrill Lynch Investment Managers Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper # ML-3090-6/02
(BULL LOGO)
Merrill Lynch Investment Managers
Annual Report
June 30, 2002
Merrill Lynch
Total Return
Bond Fund
www.mlim.ml.com
MERRILL LYNCH TOTAL RETURN BOND FUND
Proxy Results
During the six-month period ended June 30, 2002, Merrill Lynch Total
Return Bond Fund's shareholders voted on the following proposal.
The proposal was approved at a shareholders' meeting on April 15,
2002. A description of the proposal and number of shares voted are
as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Fund's Board of Directors: Terry K. Glenn 1,964,773 25,795
James H. Bodurtha 1,964,773 25,795
Joe Grills 1,964,773 25,795
Herbert I. London 1,964,773 25,795
Andre F. Perold 1,963,832 26,736
Roberta Cooper Ramo 1,964,773 25,795
Robert S. Salomon, Jr. 1,964,773 25,795
Melvin R. Seiden 1,964,773 25,795
Stephen B. Swensrud 1,963,832 26,736
During the six-month period ended June 30, 2002, Fund Asset Management Master
Trust's shareholders voted on the following proposal. A proposal was approved
at a shareholders' meeting on April 15, 2002. A description of the proposal
and number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Master Trust's Board of Trustees: Terry K. Glenn,
James H. Bodurtha, Joe Grills, Herbert I. London, Andre F. Perold,
Roberta Cooper Ramo, Robert S. Salomon, Jr., Melvin R. Seiden and
Stephen B. Swensrud 32,663,096 396,947
Merrill Lynch Total Return Bond Fund, June 30, 2002
DEAR SHAREHOLDER
Investment Environment
At the end of June 2002, it was evident that the U.S. economy took a back seat
to a series of events and world issues. The threat of further terrorism in the
United States, a potential nuclear conflict between Pakistan and India,
accounting transparency, the lack of corporate governance, Securities and
Exchange Commission inquiries and the fallout from the Enron Corporation
scandal are some of the major issues that overshadowed the economy. During the
last week of the period, moreover, WorldCom, Inc. announced a $3.8 billion
restatement of financial results, whereby the company was booking certain
expenses as capital expenditures and amortizing them over a number of years
instead of expensing them as they occurred. This revelation continued to send
shock waves through the financial community and will probably result in
further government regulation and oversight committees for Corporate America.
Given all of these uncertainties it appears that the U.S. equity markets are
suffering the most with the Dow Jones Industrial Average, Standard & Poor's
500 Index and NASDAQ Composite Index down approximately 10%, 18% and 32%,
respectively, for the 12-month period ended June 30, 2002. In this
environment, the fixed income markets along with gold prices have been the
main beneficiaries as the broad fixed income indexes posted gains of 8.5%,
while gold prices have advanced more than 18% for the same 12-month period.
During the 12-month period ended June 30, 2002, the U.S. economy appeared to
grow in excess of 2% after a surprisingly weak first-half year. The U.S.
economy proved remarkably resilient after the events of September 11, 2001.
The United States technically avoided a recession but corporate profitability
has de-coupled from the real economy as profits continue to be pressured while
economic growth appears to show solid gains. Gross domestic product (GDP)
growth in the first quarter of 2002 was recently revised to 6.1%, and based on
economic releases during the second quarter, growth should moderate to 2.5% -
3% for the second quarter. The restocking of inventories should add less to
growth in the second quarter than in the first quarter but consumers continue
to do more than their part to add to growth. The U.S. consumer has proven
remarkably resilient during the last 12 months, as personal consumption, which
comprises the majority of gross domestic product, should exceed 3% for the
first two quarters of 2002. This is an impressive figure given the rise in
unemployment and the reduction of wealth that has occurred in the equity
markets. One reason consumer spending has remained so strong lies in the
housing market, which has defied gravity and continued to show impressive gains
during the period. Housing starts, new home sales and the mortgage refinancing
index have all continued to grow at above-average levels. In addition, more
recently the Mortgage Bankers Association index of new applications hit an
all-time high, suggesting that the housing sector should continue to add to
growth.
The manufacturing sector also appears to be on a solid recovery path as the
index of the Institute for Supply Management (ISM) released for June 2002 came
in at 56.2 and the service sector of the ISM index came in at 60.1 as of May
31, 2002. As long as these indicators stay above 50, they should continue to
add growth. Durable goods orders rose in excess of 1%, further suggesting that
an economic recovery is well underway. Non-defense capital goods new orders
have also been improving, rising 10% for the nine months ended May 31, 2002.
This increase suggests that perhaps the much-needed increase in capital
expenditures is just around the corner. However, it appears that business
leaders are more pessimistic than economists and investors, which could prove
problematic for any major resumption of business spending. We agree with
Federal Reserve Board Chairman Alan Greenspan's recent view on this topic when
he stated, "This dichotomy is going to be resolved more in terms of the
business community coming closer to the economists."
The most recent decline of the U.S. dollar has some serious implications for
U.S. financial assets. The U.S. economy has been running a current account
deficit in excess of 4% of GDP. History suggests that this cannot be
sustained, and there needs to be some adjustment once we cross this 4%
threshold for an extended period. More importantly, once investors believe
that the return on capital in the United States may not be as competitive with
alternatives found around the world, then the U.S. dollar (and financial
assets) may suffer as a consequence. We simply view the most recent U.S.
dollar weakness as a necessary decline and adjustment to reflect a more even
balance of return on investment from the lofty expectations investors had for
U.S. financial assets during the late 1990s.
Fiscal Year in Review
For the 12-month period ended June 30, 2002, the Fund's Class A, Class B,
Class C and Class D Shares had total returns of +9.30%, +8.21%, +8.22% and
+9.03%, respectively. The Fund performed in line with its unmanaged benchmark,
the Lehman Brothers Aggregate Bond Index, which had a total return of +8.63%
for the same 12-month period. (Fund results do not reflect sales charges and
would be lower if sales charges were included. Complete performance
information can be found on pages 4 - 6 of this report to shareholders.)
During the 12-month period ended June 30, 2002, we positioned the Portfolio to
benefit from a cyclical economic recovery. We remained overweighted in the
corporate market and shifted from an underweighted to an overweighted position
in the mortgage market, maintaining a portfolio duration that was slightly
shorter than the Fund's benchmark. During the second half of 2001, we
positioned the Portfolio underweighted to the mortgage market and overweighted
to the corporate sector. We thought that spreads in the corporate market
justified our overweight to the sector, while uncertainty and increased
volatility justified our underweight to the mortgage sector. As we moved
through the first half of 2002, we shifted our 6% underweight in the mortgage
sector to a 3% overweight. We believed that the mortgage sector represented
value given our view that nominal spreads and option adjusted spreads were
wide, and that volatility would trend lower. In addition, we believed that the
steep yield curve would continue to benefit this sector. This allocation
proved to be beneficial to portfolio returns as the mortgage sector
outperformed U.S. Treasury securities by more than 150 basis points (1.50%) in
the first half of 2002. More recently, we reduced our exposure in the
corporate sector from an 8% overweight to a 6% overweight position and further
increased our allocation to the mortgage sector from a 6% overweight to an 8%
overweight position. We also reduced certain subsections within the corporate
market including banking, consumer goods and non-corporate credit. We believe
that these sectors are trading expensive relative to alternatives. Within the
corporate market, we are overweight in the auto and electric utilities
sectors, with a slight overweight to the banking sector.
In this difficult investment environment, we recently increased the
Portfolio's duration and brought it even to that of our benchmark. At June 30,
2002, the overall portfolio duration was 4.44 years. We also hedged some of
our spread exposure by entering into a spreadlock trade that will benefit the
Portfolio if swap spreads widen. Moreover, in an effort to continue to exploit
as many available options as available to us, we have recently purchased
dollar-denominated Brazilian debt that trades at 970 basis points over U.S.
Treasury securities. We believe that this investment offers strong
fundamentals and relative value that may benefit the Fund going forward.
2
3
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director/Trustee
(Patrick Maldari)
Patrick Maldari
Portfolio Manager
(James J. Pagano)
James J. Pagano
Portfolio Manager
August 8, 2002
- ------------------------------------------------------------------------------
We are pleased to announce that Patrick Maldari has been named Portfolio
Manager of Merrill Lynch Total Return Bond Fund and is responsible for the
day-to-day operations of the Fund along with James J. Pagano. Mr. Maldari has
been employed by Merrill Lynch Investment Managers, L.P. since 1984. He has
been Senior Portfolio Manager since 2001. Mr. Maldari is also head of a team
of investment professionals managing high-quality investment-grade portfolios.
He also has broad experience managing institutional fixed income portfolios.
Mr. Maldari is a CFA(R) charterholder.
- ------------------------------------------------------------------------------
Merrill Lynch Total Return Bond Fund, June 30, 2002
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:
* Class A Shares incur a maximum initial sales charge (front-end load) of
4.25% and bear no ongoing distribution or account maintenance fees. Class
A Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge
of 4% if redeemed during the first year, decreasing 1% each year
thereafter to 0% after the fourth year. In addition, Class B Shares are
subject to a distribution fee of 0.75% and an account maintenance fee of
0.25%. These shares automatically convert to Class D Shares after
approximately ten years. (There is no initial sales charge for automatic
share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% 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.
* Class D Shares incur a maximum initial sales charge of 4.25% and an
account maintenance fee of 0.25% (but no distribution fee).
The performance results depicted on pages 4 - 6 are those of Merrill
Lynch Total Return Bond Fund and, prior to October 6, 2000, a predecessor
Fund investing in the same underlying portfolio and with the same fees as
Merrill Lynch Total Return Bond Fund. Performance results prior to
October 6, 2000 reflect the annual operating expenses of the predecessor
Fund. If Merrill Lynch Total Return Bond Fund's operating expenses were
reflected, the results may have been less than those shown for this time
period. Performance results after October 6, 2000 include actual
operating expenses of Merrill Lynch Total Return Bond Fund. The Fund
commenced operations on October 6, 2000.
None of the past results shown should be considered a representation of
future performance. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the
redemption of fund shares. Figures shown in 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
ex-dividend date. The Portfolio's investment adviser pays annual
operating expenses of the Fund's Class A, Class B, Class C and Class D
Shares in excess of .65%, 1.65%, 1.65% and .90%, respectively, of the
average net assets of each Class. If the investment adviser did not pay
such expenses, net returns would be lower. 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.
Total Return
Based on a
$10,000
Investment
A line graph illustrating the growth of a $10,000 investment in ML Total
Return Bond Fund++ Class A Shares* compared to a similar investment in Lehman
Brothers Aggregate Bond Index++++. Values illustrated are as follows:
4
5
ML Total Return Bond Fund++
Class A Shares*
Date Value
12/06/1994** $ 9,575.00
June 1995 $10,713.00
June 1996 $11,465.00
June 1997 $12,667.00
June 1998 $14,064.00
June 1999 $14,388.00
June 2000 $14,762.00
June 2001 $16,030.00
June 2002 $17,521.00
Lehman Brothers Aggregate Bond Index++++
Date Value
12/30/1994** $10,000.00
June 1995 $11,144.00
June 1996 $11,703.00
June 1997 $12,657.00
June 1998 $13,991.00
June 1999 $14,431.00
June 2000 $15,090.00
June 2001 $16,784.00
June 2002 $18,232.00
A line graph illustrating the growth of a $10,000 investment in ML Total
Return Bond Fund++ Class B and Class C Shares* compared to a similar
investment in Lehman Brothers Aggregate Bond Index++++. Values illustrated are
as follows:
ML Total Return Bond Fund++
Class B Shares*
Date Value
10/06/2000** $10,000.00
June 2001 $10,539.00
June 2002 $11,062.00
ML Total Return Bond Fund++
Class C Shares*
Date Value
10/06/2000** $10,000.00
June 2001 $10,539.00
June 2002 $11,405.00
Lehman Brothers Aggregate Bond Index++++
Date Value
10/31/2000** $10,000.00
June 2001 $10,726.00
June 2002 $11,652.00
A line graph illustrating the growth of a $10,000 investment in ML Total
Return Bond Fund++ Class D Shares* compared to a similar investment in Lehman
Brothers Aggregate Bond Index++++. Values illustrated are as follows:
ML Total Return Bond Fund++
Class D Shares*
Date Value
06/02/1999** $ 9,575.00
June 1999 $ 9,597.00
June 2000 $ 9,824.00
June 2001 $10,617.00
June 2002 $11,576.00
Lehman Brothers Aggregate Bond Index++++
Date Value
June 1999 $10,000.00
June 2000 $10,456.00
June 2001 $11,630.00
June 2002 $12,634.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Fund invests all of its assets in Total Return Bond Master Portfolio
of the Fund Asset Management Master Trust. The Portfolio invests in a
diversified portfolio of bonds of different maturities, including U.S.
government securities, corporate bonds, asset-backed securities and
mortgage-backed securities.
++++This unmanaged market-weighted Index is comprised of investment-grade
corporate bonds (rated BBB or better), mortgages and U.S. Treasury and
government agency issues with at least one year to maturity. The starting
date for the Index is from 12/31/94 in the Class A Shares' graph, from
10/31/00 in the Class B and C Shares' graph and from 6/30/99 in the
Class D Shares' graph.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
- ---------------------------------------------------------------------
Class A Shares*
- ---------------------------------------------------------------------
One Year Ended 6/30/02 +9.30% +4.65%
Five Years Ended 6/30/02 +6.65 +5.73
Inception (12/06/94) through 6/30/02 +8.28 +7.66
*Maximum sales charge is 4.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
- ---------------------------------------------------------------------
Class B Shares*
- ---------------------------------------------------------------------
One Year Ended 6/30/02 +8.21% +4.21%
Inception (10/06/00) through 6/30/02 +7.87 +6.22
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after
four years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
- ---------------------------------------------------------------------
Class C Shares*
- ---------------------------------------------------------------------
One Year Ended 6/30/02 +8.22% +7.22%
Inception (10/06/00) through 6/30/02 +7.88 +7.88
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
- ---------------------------------------------------------------------
Class D Shares*
- ---------------------------------------------------------------------
One Year Ended 6/30/02 +9.03% +4.39%
Inception (6/02/99) through 6/30/02 +6.30 +4.81
*Maximum sales charge is 4.25%.
**Assuming maximum sales charge.
Merrill Lynch Total Return Bond Fund, June 30, 2002
PERFORMANCE DATA (concluded)
Recent
Performance
Results
6-Month 12-Month Since Inception Standardized
As of June 30, 2002 Total Return Total Return Total Return 30-Day Yield
- --------------------------------------------------------------------------------------------------------
ML Total Return Bond Fund Class A Shares* +3.36% +9.30% +82.54% 4.52%
ML Total Return Bond Fund Class B Shares* +2.85 +8.21 +14.04 3.72
ML Total Return Bond Fund Class C Shares* +2.85 +8.22 +14.06 3.73
ML Total Return Bond Fund Class D Shares* +3.23 +9.03 +20.70 4.28
Lehman Brothers Aggregate Bond Index** +3.79 +8.63 +82.33/+26.34/+16.52 --
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge were 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 since inception periods are from 12/06/94 for Class A Shares,
from 10/06/00 for Class B and Class C Shares, and from 6/02/99 for
Class D Shares.
**This unmanaged market-weighted Index is comprised of investment-
grade corporate bonds (rated BBB or better), mortgages and U.S.
Treasury and government agency issues with at least one year to
maturity. Since inception total returns are from 12/31/94, 6/30/99
and 10/31/00, respectively.
STATEMENT OF ASSETS AND LIABILITIES
MERRILL LYNCH
TOTAL RETURN
BOND FUND As of June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Assets: Investment in Total Return Bond Master Portfolio, at value
(identified cost--$31,279,725) $ 31,490,743
Receivable from administrator 7,792
--------------
Total assets 31,498,535
--------------
Liabilities: Payables:
Dividends to shareholders $ 37,265
Distributor 16,725 53,990
--------------
Accrued expenses 10,780
--------------
Total liabilities 64,770
--------------
Net Assets: Net assets $ 31,433,765
==============
Net Assets Class A Shares of Common Stock, $.01 par value, 100,000,000
Consist of: shares authorized $ 829
Class B Shares of Common Stock, $.01 par value, 200,000,000
shares authorized 9,609
Class C Shares of Common Stock, $.01 par value, 100,000,000
shares authorized 9,819
Class D Shares of Common Stock, $.01 par value, 100,000,000
shares authorized 9,591
Paid-in capital in excess of par 31,427,426
Accumulated investment loss--net $ (858)
Accumulated realized capital losses on investments from the
Portfolio--net (233,669)
Unrealized appreciation on investments from the Portfolio--net 211,018
--------------
Total accumulated losses--net (23,509)
--------------
6
7
Net assets $ 31,433,765
==============
Net Asset Class A--Based on net assets of $874,492 and 82,890 shares
Value: outstanding $ 10.55
==============
Class B--Based on net assets of $10,113,394 and 960,859 shares
outstanding $ 10.53
==============
Class C--Based on net assets of $10,338,881 and 981,907 shares
outstanding $ 10.53
==============
Class D--Based on net assets of $10,106,998 and 959,072 shares
outstanding $ 10.54
==============
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
MERRILL LYNCH
TOTAL RETURN
BOND FUND For the Year Ended June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Investment Net investment income allocated from the Portfolio:
Income from the Interest $ 970,300
Portfolio--Net: Dividends 7,690
Expenses (82,944)
--------------
Net investment income from the Portfolio 895,046
--------------
Expenses: Account maintenance and distribution fees--Class B $ 60,946
Printing and shareholder reports 43,347
Registration fees 43,295
Administration fees 42,269
Account maintenance and distribution fees--Class C 38,554
Account maintenance fees--Class D 16,369
Professional fees 16,316
Offering costs 14,556
Transfer agent fees--Class B 4,679
Transfer agent fees--Class D 4,059
Transfer agent fees--Class C 2,349
Transfer agent fees--Class A 269
Other 8,145
--------------
Total expenses before reimbursement 295,153
Reimbursement of expenses (152,172)
--------------
Total expenses after reimbursement 142,981
--------------
Investment income--net 752,065
--------------
Realized & Realized loss on investments from the Portfolio--net (147,374)
Unrealized Change in unrealized depreciation on investments from the Portfolio--net 224,559
Gain (Loss) --------------
from the Total realized and unrealized gain on investments from the Portfolio--net 77,185
Portfolio--Net: --------------
Net Increase in Net Assets Resulting from Operations $ 829,250
==============
See Notes to Financial Statements.
Merrill Lynch Total Return Bond Fund, June 30, 2002
STATEMENTS OF CHANGES IN NET ASSETS
For the For the Period
MERRILL LYNCH Year Ended Oct. 6, 2000+
TOTAL RETURN June 30, to June 30,
BOND FUND Increase (Decrease) in Net Assets: 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Operations: Investment income--net $ 752,065 $ 44,378
Realized loss on investments from the Portfolio--net (147,374) (12,851)
Change in unrealized depreciation on investments from the
Portfolio--net 224,559 (13,541)
-------------- --------------
Net increase in net assets resulting from operations 829,250 17,986
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (21,127) (1,432)
Shareholders: Class B (258,324) (23,621)
Class C (158,109) (3,691)
Class D (320,034) (13,419)
Realized gain on investments--net:
Class A (473) --
Class B (7,467) --
Class C (3,664) --
Class D (9,703) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (778,901) (42,163)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 28,178,439 3,179,154
Transactions: -------------- --------------
Net Assets: Total increase in net assets 28,228,788 3,154,977
Beginning of period 3,204,977 50,000
-------------- --------------
End of period* $ 31,433,765 $ 3,204,977
============== ==============
*Undistributed (accumulated) investment income (loss)--net $ (858) $ 2,165
============== ==============
+Commencement of operations.
See Notes to Financial Statements.
9
9
FINANCIAL HIGHLIGHTS
Class A Class B
--------------------- -----------------------
The following per share data and ratios For the For the For the For the
have been derived from information Year Period Year Period
MERRILL LYNCH provided in the financial statements. Ended Oct. 6, 2000++ Ended Oct. 6, 2000++
TOTAL RETURN June 30, to June 30, June 30, to June 30,
BOND FUND Increase (Decrease) in Net Asset Value: 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period $ 10.20 $ 10.00 $ 10.18 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .51+++++ .45 .44+++++ .35
Realized and unrealized gain on investments from the
Portfolio--net .42 .17 .39 .18
-------- -------- -------- --------
Total from investment operations .93 .62 .83 .53
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.57) (.42) (.47) (.35)
Realized gain on investments--net (.01) -- (.01) --
-------- -------- -------- --------
Total dividends and distributions (.58) (.42) (.48) (.35)
-------- -------- -------- --------
Net asset value, end of period $ 10.55 $ 10.20 $ 10.53 $ 10.18
======== ======== ======== ========
Total Based on net asset value per share 9.30% 6.23%+++ 8.21% 5.39%+++
Investment ======== ======== ======== ========
Return:**
Ratios to Expenses, net of reimbursement++++ .65% .65%* 1.65% 1.65%*
Average ======== ======== ======== ========
Net Assets: Expenses++++ 1.54% 19.00%* 2.58% 20.00%*
======== ======== ======== ========
Investment income--net 5.07% 6.56%* 4.22% 5.32%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 875 $ 64 $ 10,113 $ 2,077
Data: ======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales charges. The
Portfolio's investment adviser reimbursed a portion of the Fund's
expenses. Without such reimbursement, the Fund's performance would
have been lower.
++Commencement of operations.
++++Includes the Fund's share of the Portfolio's allocated expenses.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
Merrill Lynch Total Return Bond Fund, June 30, 2002
FINANCIAL HIGHLIGHTS (concluded)
Class C Class D
-------------------- ------------------------
The following per share data and ratios For the For the For the For the
have been derived from information Year Period Year Period
MERRILL LYNCH provided in the financial statements. Ended Oct. 6, 2000++ Ended Oct. 6, 2000++
TOTAL RETURN June 30, to June 30, June 30, to June 30,
BOND FUND Increase (Decrease) in Net Asset Value: 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period $ 10.18 $ 10.00 $ 10.19 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .40+++++ .36 .51+++++ .42
Realized and unrealized gain on investments from the
Portfolio--net .47 .17 .41 .17
-------- -------- -------- --------
Total from investment operations .87 .53 .92 .59
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.51) (.35) (.56) (.40)
Realized gain on investments--net (.01) -- (.01) --
-------- -------- -------- --------
Total dividends and distributions (.52) (.35) (.57) (.40)
-------- -------- -------- --------
Net asset value, end of period $ 10.53 $ 10.18 $ 10.54 $ 10.19
======== ======== ======== ========
Total Based on net asset value per share 8.22% 5.39%+++ 9.03% 5.97%+++
Investment ======== ======== ======== ========
Return:**
Ratios to Expenses, net of reimbursement++++ 1.64% 1.65%* .90% .90%*
Average ======== ======== ======== ========
Net Assets: Expenses++++ 2.51% 20.00%* 1.80% 19.25%*
======== ======== ======== ========
Investment income--net 4.07% 5.44%* 4.85% 6.19%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 10,339 $ 259 $ 10,107 $ 805
Data: ======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales charges. The
Portfolio's investment adviser reimbursed a portion of the Fund's
expenses. Without such reimbursement, the Fund's performance would
have been lower.
++Commencement of operations.
++++Includes the Fund's share of the Portfolio's allocated expenses.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
10
11
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
TOTAL RETURN
BOND FUND
1. Significant Accounting Policies:
Merrill Lynch Total Return Bond Fund (the "Fund") is a fund of Merrill Lynch
Investment Managers Funds, Inc. (the "Company"). The Company is a diversified,
open-end management investment company which is organized as a Maryland
corporation. The Fund seeks to achieve its investment objective by investing
all of its assets in Total Return Bond Master Portfolio (the "Portfolio") of
the Fund Asset Management Master Trust (the "Trust"), which has the same
investment objective as the Fund. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net assets of the
Portfolio. The performance of the Fund is directly affected by the performance
of the Portfolio. The financial statements of the Portfolio, including the
Schedule of Investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The percentage of
the Portfolio owned by the Fund at June 30, 2002 was 20.5%. 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 and the additional incremental transfer agency costs resulting from the
deferred sales charge arrangements. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and distribution
expenditures. Income, expenses (other than expenses attributable to a specific
class) and realized and unrealized gains and losses on investments are
allocated daily to each class based on its relative net assets. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--The Fund records its investment in the Portfolio
at fair value. Valuation of securities held by the Portfolio is discussed in
Note 1a of the Portfolio's Notes to Financial Statements, which are included
elsewhere in this report.
(b) Investment income and expenses--The Fund records daily its proportionate
share of the Portfolio's income, expenses and realized and unrealized gains
and losses. In addition, the Fund accrues its own expenses.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no Federal income tax provision is required.
(d) Prepaid registration fees--Prepaid registration fees are charged to
expenses as the related shares are issued.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
(f) Investment transactions--Investment transactions in the Portfolio are
accounted for on a trade date basis.
(g) Reclassification--Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting.
Accordingly, the current year's permanent book/tax differences of $589 have
been reclassified between accumulated net investment loss and accumulated net
realized capital losses, $49,677 has been reclassified between accumulated net
realized capital losses and paid-in capital in excess of par and $3,095 has
been reclassified between accumulated net realized capital losses and
accumulated net investment loss. These reclassifications have no effect on net
assets or net asset values per share.
2. Transactions with Affiliates:
The Company has also entered into an Administrative Services Agreement with
Fund Asset Management, L.P ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner. The Fund pays a monthly fee at an
annual rate of .25% of the Fund's average daily net assets for the performance
of administrative services (other than investment advice and related
Merrill Lynch Total Return Bond Fund, June 30, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
TOTAL RETURN
BOND FUND
portfolio activities) necessary for the operation of the Fund. FAM has
contractually agreed to pay all annual operating expenses of the Fund's Class
A, Class B, Class C and Class D Shares in excess of .65%, 1.65%, 1.65% and
..90%, respectively, as applied to the daily net assets of each Class through
June 30, 2002. For the year ended June 30, 2002, FAM earned fees of $42,269,
all of which was waived. Also, FAM reimbursed the Fund $109,903 for additional
expenses.
The Company has also entered into a Distribution Agreement and Distribution
Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is an
indirect, wholly-owned subsidiary of Merrill Lynch Group, Inc.
Pursuant to the Distribution Plans adopted by the Company 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 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% .75%
Class C .25% .75%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended June 30, 2002, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class D Shares as
follows:
FAMD MLPF&S
- -------------------------------------------------------
Class D $2,968 $26,978
For the year ended June 30, 2002, MLPF&S received contingent deferred sales
charges of $18,601 and $2,052 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $5,000 relating to transactions subject to front-end sales charge
waivers in Class D Shares, respectively.
Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent. Certain officers and/or directors of
the Company are officers and/or directors of FAM, PSI, FAMD, FDS, and/or ML &
Co.
3. Investments:
Increases and decreases in the Fund's investment in the Portfolio for the year
ended June 30, 2002 were $29,926,881 and $2,693,613, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$28,178,439 and $3,179,154 for the year ended June 30, 2002 and for the period
October 6, 2000 to June 30, 2001, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Ended Dollar
June 30, 2002 Shares Amount
- --------------------------------------------------------------------
Shares sold 90,986 $ 959,466
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,235 12,923
---------- ------------
Total issued 92,221 972,389
Shares redeemed (15,606) (163,062)
------------ ------------
Net increase 76,615 $ 809,327
============ ============
Class A Shares for the Period Dollar
October 6, 2000++ to June 30, 2001 Shares Amount
- --------------------------------------------------------------------
Shares sold 4,939 $ 50,796
Shares issued to shareholders in
reinvestment of dividends 86 877
------------ ------------
Net increase 5,025 $ 51,673
============ ============
++Prior to October 6, 2000 (commencement of operations), the Fund issued
1,250 shares to FAM for $12,500.
Class B Shares for the Year Ended Dollar
June 30, 2002 Shares Amount
- --------------------------------------------------------------------
Shares sold 957,144 $ 10,042,376
Shares issued to shareholders in
reinvestment of dividends and
distributions 13,945 145,691
------------ ------------
Total issued 971,089 10,188,067
Automatic conversion of shares (43) (451)
Shares redeemed (214,241) (2,238,470)
------------ ------------
Net increase 756,805 $ 7,949,146
============ ============
Class B Shares for the Period Dollar
October 6, 2000++ to June 30, 2001 Shares Amount
- --------------------------------------------------------------------
Shares sold 212,597 $ 2,180,717
Shares issued to shareholders in
reinvestment of dividends 1,277 13,044
------------ ------------
Total issued 213,874 2,193,761
Shares redeemed (11,070) (114,014)
------------ ------------
Net increase 202,804 $ 2,079,747
============ ============
++Prior to October 6, 2000 (commencement of operations), the Fund issued
1,250 shares to FAM for $12,500.
Class C Shares for the Year Dollar
Ended June 30, 2002 Shares Amount
- --------------------------------------------------------------------
Shares sold 1,021,783 $ 10,711,445
Shares issued to shareholders in
reinvestment of dividends and
distributions 10,172 106,321
------------ ------------
Total issued 1,031,955 10,817,766
Shares redeemed (75,484) (790,676)
------------ ------------
Net increase 956,471 $ 10,027,090
============ ============
Class C Shares for the Period Dollar
October 6, 2000++ to June 30, 2001 Shares Amount
- --------------------------------------------------------------------
Shares sold 32,761 $ 336,387
Shares issued to shareholders in
reinvestment of dividends 140 1,431
------------ ------------
Total issued 32,901 337,818
Shares redeemed (8,715) (89,332)
------------ ------------
Net increase 24,186 $ 248,486
============ ============
++Prior to October 6, 2000 (commencement of operations), the Fund issued
1,250 shares to FAM for $12,500.
Class D Shares for the Year Dollar
Ended June 30, 2002 Shares Amount
- --------------------------------------------------------------------
Shares sold 977,576 $ 10,422,064
Automatic conversion of shares 43 451
Shares issued to shareholders in
reinvestment of dividends and
distributions 27,083 283,035
------------ ------------
Total issued 1,004,702 10,705,550
Shares redeemed (124,615) (1,312,674)
------------ ------------
Net increase 880,087 $ 9,392,876
============ ============
12
13
Class D Shares for the Period Dollar
October 6, 2000++ to June 30, 2001 Shares Amount
- --------------------------------------------------------------------
Shares sold 76,557 $ 787,204
Shares issued to shareholders in
reinvestment of dividends 1,212 12,391
------------ ------------
Total issued 77,769 799,595
Shares redeemed (34) (347)
------------ ------------
Net increase 77,735 $ 799,248
============ ============
++Prior to October 6, 2000 (commencement of operations), the Fund issued
1,250 shares to FAM for $12,500.
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended June 30,
2002 and June 30, 2001 was as follows:
6/30/2002 6/30/2001
- --------------------------------------------------------------------
Distributions paid from:
Ordinary income $ 778,901 $ 42,163
------------ ------------
Total taxable distributions $ 778,901 $ 42,163
============ ============
As of June 30, 2002, the components of accumulated losses on a tax
basis were as follows:
Undistributed ordinary income--net $ --
Undistributed long-term capital gains--net --
------------
Total undistributed earnings--net --
Unrealized losses--net (23,509)*
------------
Total accumulated losses--net $ (23,509)
============
*The difference between book-basis and tax-basis net unrealized losses is
attributable primarily to the tax deferral of losses on wash sales, the tax
deferral of losses on straddles and the deferral of post-October capital
losses for tax purposes.
Merrill Lynch Total Return Bond Fund, June 30, 2002
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Merrill Lynch Investment
Managers Funds, Inc. and Shareholders of
Merrill Lynch Total Return Bond Fund:
We have audited the accompanying statement of assets and liabilities of
Merrill Lynch Total Return Bond Fund as of June 30, 2002, the related
statement of operations for the year then ended and the statements of changes
in net assets and financial highlights for the year then ended and for the
period from October 6, 2000 (commencement of operations) to June 30, 2001.
These financial statements and financial highlights are the responsibility of
the Fund's Management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Total Return Bond Fund at June 30, 2002, and the results of its
operations, the changes in its net assets and the financial highlights for
each of the indicated periods, in conformity with accounting principles
generally accepted in the United States.
(Ernst & Young LLP)
MetroPark, New Jersey
August 20, 2002
IMPORTANT TAX INFORMATION (unaudited)
Of the net investment income distributions paid monthly by Merrill Lynch Total
Return Bond Fund during the fiscal year ended June 30, 2002, 11.09% is
attributable to income from Federal obligations. In calculating the foregoing
percentage, Fund expenses 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 with 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.
14
15
SCHEDULE OF INVESTMENTS (in U.S. dollars)
Total Return Bond Master Portfolio
-------------------------------------------------------------------------------------------------------------
Face
Industries Amount Investments Value
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE Aerospace & $ 170,000 Martin Marietta Corp., 7.375% due 4/15/2013 $ 187,063
BONDS & Defense--0.8% 305,000 Northrop Grumman Corporation, 7.125% due 2/15/2011 324,842
NOTES--41.3% Raytheon Company:
300,000 6.50% due 7/15/2005 314,644
210,000 6.75% due 3/15/2018 211,966
220,000 United Technology Corporation, 6.35% due 3/01/2011 231,285
------------
1,269,800
Automotive--7.7% Chrysler Financial Company LLC:
274,000 2.019% due 2/03/2003 273,784
274,000 2.009% due 3/06/2003 273,690
Daimler-Chrysler NA Holdings:
2,154,000 7.125% due 4/10/2003 2,214,107
260,000 6.40% due 5/15/2006 269,948
95,000 Ford Motor Company, 7.45% due 7/16/2031 88,430
Ford Motor Credit Company:
3,000,000 2.66% due 4/17/2003 2,989,146
1,000,000 6.875% due 2/01/2006 1,023,066
96,000 7.375% due 2/01/2011 97,238
General Motors Acceptance Corp.:
3,000,000 2.224% due 7/21/2003 (a) 2,986,068
1,160,000 6.125% due 9/15/2006 1,176,420
421,000 8% due 11/01/2031 430,578
------------
11,822,475
Automotive 65,000 Delphi Auto Systems Corporation, 6.55% due 6/15/2006 67,773
Equipment--0.0%
Banking--3.5% 245,000 BB&T Corporation, 6.50% due 8/01/2011 256,300
205,000 The Bank of New York, 5.20% due 7/01/2007 209,005
700,000 Bank One Corp., 6.875% due 8/01/2006 756,493
510,000 BankAmerica Corp., 5.875% due 2/15/2009 514,213
1,000,000 FleetBoston Financial Corp., 7.25% due 9/15/2005 1,087,469
105,000 Hudson United Bancorp Inc., 8.20% due 9/15/2006 110,432
270,000 J.P. Morgan Chase & Company, 6.625% due 3/15/2012 277,672
1,000,000 MBNA Corporation, 6.25% due 1/17/2007 1,023,429
150,000 Regions Financial Corporation, 6.375% due 5/15/2012 154,395
175,000 Washington Mutual Inc., 7.50% due 8/15/2006 189,291
800,000 Wells Fargo Company, 5.125% due 2/15/2007 809,407
------------
5,388,106
Merrill Lynch Total Return Bond Fund, June 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Total Return Bond Master Portfolio (continued)
--------------------------------------------------------------------------------------------------------------
Face
Industries Amount Investments Value
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE Beverage $ 150,000 Coors Brewing Company, 6.375% due 5/15/2012 $ 154,350
BONDS & NOTES Brewing &
(continued) Distilling--0.1%
Broadcasting/ 300,000 Liberty Media Corporation, 7.875% due 7/15/2009 301,588
Media--0.2%
Cable & Media-- 330,000 Clear Channel Communications, 7.875% due 6/15/2005 347,203
0.9% 120,000 Comcast Cable Communications, 6.375% due 1/30/2006 116,222
470,000 News America Inc., 7.25% due 5/18/2018 444,087
460,000 Viacom Inc., 7.875% due 7/30/2030 499,521
------------
1,407,033
Canadian 350,000 Canada Government Bond, 5.25% due 11/05/2008 361,199
Provinces--0.8% 250,000 Province of Ontario, 5.50% due 10/01/2008 259,463
75,000 Province of Saskatchewan, 8% due 7/15/2004 81,743
450,000 Quebec Province, 7.50% due 9/15/2029 515,262
------------
1,217,667
Cellular AT&T Wireless Services Inc.:
Telephones--0.1% 30,000 8.125% due 5/01/2012 24,463
138,000 8.75% due 3/01/2031 106,576
------------
131,039
Chemicals--0.4% 190,000 Chevron Phillips Chemical Company, 5.375% due 6/15/2007 (b) 189,306
125,000 Eastman Chemical, 7% due 4/15/2012 131,018
100,000 Methanex Corporation, 8.75% due 8/15/2012 102,000
225,000 Praxair Inc., 6.375% due 4/01/2012 233,309
------------
655,633
Commercial 250,000 Cendant Corporation, 6.875% due 8/15/2006 251,437
Services &
Supplies--0.2%
Communications 700,000 GTE Corporation, 6.84% due 4/15/2018 644,237
--0.4%
Diversified 300,000 Citigroup Inc., 6.625% due 6/15/2032 290,037
Financials-- 430,000 General Electric Capital Corporation, 6.75% due 3/15/2032 422,377
0.5% ------------
712,414
Drug/ 59,000 Eli Lilly & Company, 7.125% due 6/01/2025 64,175
Pharmaceuticals
--0.0%
Electric--0.8% 235,000 AmerenEnergy Generating, 7.95% due 6/01/2032 245,214
510,000 Oncor Electric Delivery, 6.375% due 5/01/2012 (b) 524,001
150,000 PSEG Power, 6.95% due 6/01/2012 (b) 150,786
250,000 Southern Power Company, 6.25% due 7/15/2012 (b) 250,701
------------
1,170,702
Electric 252,000 Conectiv Inc., 5.30% due 6/01/2005 253,854
Utilities--0.3% 225,000 Teco Energy Inc., 7% due 5/01/2012 235,963
------------
489,817
page 16 & 17
Electrical-- 150,000 Allete Inc., 7.80% due 2/15/2008 161,039
16
17
0.3% 75,000 Commonwealth Edison Company, 6.15% due 3/15/2012 (b) 77,175
185,000 Duke Energy Corporation, 6.25% due 1/15/2012 188,652
------------
426,866
Finance--1.9% 215,000 AT&T Capital Corporation, 6.60% due 5/15/2005 204,897
110,000 Boeing Capital Corporation, 7.10% due 9/27/2005 119,023
CIT Group Inc.:
100,000 7.25% due 8/15/2005 96,725
570,000 7.75% due 4/02/2012 561,123
Capital One Bank:
315,000 6.50% due 7/30/2004 318,182
220,000 6.875% due 2/01/2006 217,453
Household Financial Corporation:
610,000 6.50% due 1/24/2006 623,655
190,000 6.375% due 10/15/2011 181,757
130,000 International Lease Finance Corporation, 5.50% due 6/07/2004 134,003
450,000 Morgan Stanley, Dean Witter, Discover & Co., 7.25% due 4/01/2032 458,650
------------
2,915,468
Financial-- 450,000 Goldman Sachs Group, Inc., 6.875% due 1/15/2011 466,534
Other--0.3%
Financial 1,700,000 Countrywide Home Loan, 5.25% due 6/15/2004 1,747,525
Services-- 1,400,000 Salomon Smith Barney Holdings, 6.50% due 2/15/2008 1,496,223
2.1% ------------
3,243,748
Food--0.2% 125,000 Dole Foods Company, 7.25% due 5/01/2009 (b) 127,810
230,000 SuperValu Inc., 7.50% due 5/15/2012 240,233
------------
368,043
Food & 210,000 Coca-Cola Enterprises, 6.125% due 8/15/2011 216,262
Beverage--0.2% 220,000 Pepsi Bottling Holdings Inc., 5.625% due 2/17/2009 (b) 223,542
------------
439,804
Foreign 1,500,000 Federal Republic of Brazil, 11.625% due 4/15/2004 1,329,000
Government 190,000 Republic of Finland, 5.875% due 2/27/2006 202,308
Obligations-- 740,000 United Mexican States, 9.875% due 2/01/2010 826,950
1.5% ------------
2,358,258
Forest 310,000 Weyerhaeuser Company, 5.95% due 11/01/2008 313,270
Products--0.2%
Gaming & 510,000 Circus Circus Enterprises, Inc., 6.70% due 11/15/2096 512,091
Lodging--0.3%
Health Tenet Healthcare Corporation:
Care--0.6% 645,000 5% due 7/01/2007 639,598
270,000 6.875% due 11/15/2031 265,787
------------
905,385
Hotels--0.2% 255,000 Starwood Hotels & Resorts, 7.375% due 5/01/2007 250,856
Merrill Lynch Total Return Bond Fund, June 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Total Return Bond Master Portfolio (continued)
--------------------------------------------------------------------------------------------------------------
Face
Industries Amount Investments Value
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE Industrial-- Tele-Communications Inc.:
BONDS & NOTES Other--0.6% $ 300,000 8.25% due 1/15/2003 $ 304,416
(continued) 635,000 9.80% due 2/01/2012 691,316
------------
995,732
Industrial-- 265,000 Aramark Services Inc., 6.75% due 8/01/2004 272,909
Services--0.4% 360,000 First Data Corporation, 6.75% due 7/15/2005 388,307
------------
661,216
Industrials-- 50,000 Abitibi Consolidated Inc., 8.55% due 8/01/2010 52,190
0.9% 50,000 Domtar Inc., 7.875% due 10/15/2011 54,257
85,000 Norsk Hydro A/S, 6.36% due 1/15/2009 87,905
530,000 Ocean Energy Inc., 7.25% due 10/01/2011 556,097
90,000 Sappi Papier Holdings AG, 6.75% due 6/15/2012 (b) 91,133
540,000 Tyson Foods, Inc., 6.625% due 10/01/2004 562,965
------------
1,404,547
Insurance--0.2% 190,000 John Hancock Financial Services, 5.625% due 12/01/2008 193,398
80,000 MetLife Inc., 5.25% due 12/01/2006 81,827
------------
275,225
Medical--0.2% 250,000 HealthSouth Corporation, 7.625% due 6/01/2012 (b) 247,655
Metal--Other-- 230,000 Noranda Inc., 7.25% due 7/15/2012 228,780
0.2%
Metals & Alcoa Inc.:
Mining--0.2% 175,000 2.176% due 12/06/2004 175,111
140,000 6% due 1/15/2012 143,674
------------
318,785
Oil--0.8% Anadarko Finance Company:
90,000 6.75% due 5/01/2011 94,175
550,000 7.50% due 5/01/2031 586,655
260,000 Colonial Pipeline, 7.63% due 4/15/2032 (b) 276,196
210,000 Murphy Oil Corporation, 6.375% due 5/01/2012 214,045
------------
1,171,071
Oil & Gas-- 133,000 Transocean Offshore, 6.625% due 4/15/2011 136,949
0.1%
Oil--Integrated Conoco Inc.:
--0.3% 180,000 5.90% due 4/15/2004 187,467
200,000 6.35% due 4/15/2009 210,401
Texaco Capital Inc.:
55,000 8.625% due 6/30/2010 65,602
55,000 8.625% due 11/15/2031 70,956
------------
534,426
Oil 160,000 Apache Corporation, 6.25% due 4/15/2012 165,178
Exploration &
Production--0.1%
18
18
Paper--0.2% 295,000 Georgia-Pacific Corporation, 8.125% due 5/15/2011 282,344
Pipelines-- 430,000 Kinder Morgan Energy, 6.75% due 3/15/2011 442,465
Gas--0.3%
Pipelines-- 230,000 Consolidated Natural Gas, 5.375% due 11/01/2006 230,817
Oil & Gas--0.1%
Real Estate 675,000 Avalonbay Communities, 6.58% due 2/15/2004 703,124
Investment EOP Operating LP:
Trust--1.7% 420,000 7.375% due 11/15/2003 439,416
250,000 6.75% due 2/15/2012 258,710
65,000 Health Care Properties Inc., 7.48% due 4/05/2004 69,181
280,000 Health Care Properties Investors Inc., 6.45% due 6/25/2012 278,983
790,000 Prologis Trust, 7% due 10/01/2003 817,840
------------
2,567,254
Retail--0.7% Kroger Company:
185,000 6.20% due 6/15/2012 184,181
455,000 7.50% due 4/01/2031 473,671
55,000 Safeway Inc., 6.50% due 3/01/2011 56,668
245,000 Sears Roebuck Acceptance Corporation, 7% due 6/01/2032 234,696
100,000 Wal-Mart Stores, Inc., 6.875% due 8/10/2009 109,848
------------
1,059,064
Special 245,000 Principal Life Global, 6.25% due 2/15/2012 (b) 251,061
Services--0.2%
Supranational 480,000 Corp Andina de Fomento, 6.875% due 3/15/2012 (b) 492,392
--0.3%
Telephone-- 250,000 Citizens Communications Company, 7.625% due 8/15/2008 228,446
0.2% 85,000 France Telecom, 9% due 3/01/2031 75,184
------------
303,630
Telephone 170,000 Alltel Corporation, 7% due 7/01/2012 169,623
Service--0.5% 375,000 British Telecom PLC, 8.375% due 12/15/2010 408,074
125,000 Deutsche Telekom International Finance, 7.75% due 6/15/2005 (f) 127,894
------------
705,591
Tobacco--0.1% 100,000 RJ Reynolds Tobacco Holdings, 6.50% due 6/01/2007 102,386
Transportation 250,000 Burlington Northern Santa Fe, 6.75% due 7/15/2011 262,389
--0.6% 155,000 Continental Airlines, 6.563% due 2/15/2012 161,398
Southwest Airlines Co.:
250,000 8% due 3/01/2005 273,963
200,000 7.875% due 9/01/2007 225,794
------------
923,544
U.S. 3,700,000 Fannie Mae, 7% due 7/15/2005 4,046,316
Government 2,200,000 Freddie Mac, 7% due 7/15/2005 2,409,106
Agency--4.2% ------------
6,455,422
Merrill Lynch Total Return Bond Fund, June 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Total Return Bond Master Portfolio (continued)
--------------------------------------------------------------------------------------------------------------
Face
Industries Amount Investments Value
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE Utilities-- $ 165,000 360 Communications Co., 7.50% due 3/01/2006 $ 174,213
BONDS & NOTES Communication 250,000 Ameritech Capital Funding, 6.45% due 1/15/2018 247,813
(concluded) --0.9% 1,060,000 Sprint Capital Corporation, 5.70% due 11/15/2003 941,936
------------
1,363,962
Utilities-- 210,000 Commonwealth Edison Company, 6.95% due 7/15/2018 213,431
Electric & 105,000 Consolidated Edison Inc., 7.15% due 12/01/2009 114,775
Gas--1.1% 210,000 FirstEnergy Corp., 6.45% due 11/15/2011 203,888
210,000 Mississippi Power, 6.05% due 5/01/2003 215,228
175,000 Progress Energy Inc., 5.85% due 10/30/2008 176,241
South Carolina Electric & Gas:
490,000 7.50% due 6/15/2005 533,685
210,000 6.70% due 2/01/2011 221,458
------------
1,678,706
Yankee-- 55,000 Alcan Inc., 7.25% due 3/15/2031 59,419
Corporates-- 85,000 BSCH Issuances Ltd., 7.625% due 9/14/2010 93,196
1.7% 250,000 Canadian National Railway Co., 6.90% due 7/15/2028 255,489
150,000 Korea Development Bank, 7.125% due 4/22/2004 159,112
1,680,000 Pemex Project Funding Master Trust, 9.125% due 10/13/2010 1,764,000
250,000 Potash Corporation of Saskatchewan, 7.75% due 5/31/2011 278,372
------------
2,609,588
Total Corporate Bonds & Notes (Cost--$63,201,007) 63,556,359
GOVERNMENT Collateralized Fannie Mae:
AGENCY Mortgage 5,500,000 6.50% due 9/17/2021 5,812,435
MORTGAGE- Obligations-- 2,083 G93-27 SB, 13.195% due 8/25/2023 (a) 2,085
BACKED 12.5% Freddie Mac:
SECURITIES++ 709,345 5.57% due 7/15/2022 725,521
- --49.9% 1,618,156 2160, 24.743% due 6/15/2029 1,757,498
4,375,000 2295 PN 5.75% due 6/15/2021 4,470,935
Freddie Mac Participation Certificates--Gold Program:
2,000,000 6.50% due 12/31/2030 2,043,632
3,200,000 6% due 12/31/2030 3,197,363
1,200,000 Ginnie Mae 2001-7 TV, 6% due 2/20/2025 1,225,875
------------
19,235,344
Government Ginnie Mae:
National 3,973,126 6% due 12/31/2030 (e) 3,977,167
Mortgage 2,932,996 6.50% due 10/15/2031 3,003,241
Association-- ------------
4.5% 6,980,408
Pass-Through Freddie Mac Gold Program, 30 Year:
Securities-- 91,158 6.50% due 6/01/2030 93,156
4.4% 6,518,653 6.50% due 5/01/2031 6,659,775
------------
6,752,931
20
21
Stripped 87,441 Fannie Mae, 6.50% due 8/25/2028 (c) 2,010
Mortgage-Backed
Securities--0.0%
U.S. Fannie Mae:
Government 2,120,000 5.25% due 6/15/2006 2,206,348
Agency--28.5% 590,000 7.125% due 3/15/2007 658,657
1,280,000 6.375% due 6/15/2009 1,384,561
890,000 6% due 5/15/2011 (g) 932,742
1,470,000 7.125% due 1/15/2030 1,646,122
3,000,000 7.50% due 12/01/2030 3,149,990
3,600,000 6% due 12/31/2030 (e) 3,595,907
7,300,000 6% due 12/31/2030 (e) 7,455,716
7,200,000 7% due 12/31/2030 (e) 7,460,734
4,091,640 7% due 9/01/2031 4,242,131
7,023,780 6.50% due 12/01/2031 7,171,909
2,078,408 7.50% due 3/01/2032 2,182,343
1,670,000 Freddie Mac, 6.625% due 9/15/2009 1,831,756
------------
43,918,916
Total Government Agency Mortgage-Backed Securities
(Cost--$75,841,083) 76,889,609
NON-AGENCY Asset-Backed 1,077,000 CIT Equipment Collateral, Series 2002-VT1, Class A2, 2.90%
MORTGAGE- Securities-- due 6/21/2004 1,082,697
BACKED 11.6% 750,000 CS First Boston Mortgage Securities Corporation, 1995-WF1 D,
SECURITIES++ 7.532% due 12/21/2027 815,219
- --15.7% 1,197,834 EQCC Home Equity Loan Trust, Series 1999-1, Class A3F, 5.915%
due 11/20/2024 1,226,624
2,234,564 First Union NB-Bank of America Commercial Mortgage Trust,
2001-C1 A1, 5.711% due 3/15/2033 (a) 2,223,391
2,416,952 GS Mortgage Securities Corporation II, 1998-C1 A1, 6.06%
due 10/18/2030 (a) 2,499,217
1,400,000 Household Automotive Trust, Series 2002-1, Class A2, 2.75%
due 5/17/2005 1,404,047
1,350,000 Household Home Equity Loan Trust, Series 2002-2, Class A,
2.14% due 4/20/2032 1,350,000
1,350,000 Ikon Receivables LLC, Series 2002-1, Class A2, 2.91% due
2/15/2005 1,356,666
547,898 MBNA Master Credit Card Trust, Series 1999-F, Class B, 2.29%
due 1/16/2007 548,391
844,461 Nomura Asset Securities Corporation, 1995-MD3 A1B, 8.15% due
3/04/2020 919,303
1,350,000 Option One Mortgage Loan Trust, Series 2002-4, Class A, 2.10%
due 7/25/2032 1,349,141
981,666 Resolution Trust Corporation, 1994-C1 E, 8% due 6/25/2026 986,666
1,048,987 Structured Asset Securities Corporation, Series 2002-9,
Class A2, 2.14% due 10/25/2027 1,048,987
1,100,000 Superior Wholesale Inventory Financing Trust, Series 2001-A7,
2.24% due 6/15/2006 1,100,352
------------
17,910,701
Merrill Lynch Total Return Bond Fund, June 30, 2002
SCHEDULE OF INVESTMENTS (concluded) (in U.S. dollars)
Total Return Bond Master Portfolio (concluded)
--------------------------------------------------------------------------------------------------------------
Face
Industries Amount Investments Value
- ----------------------------------------------------------------------------------------------------------------------------
NON-AGENCY Collatera- $ 67,677 Blackrock Capital Finance L.P., 1997-R2 AP, 1.097% due
MORTGAGE- lized 12/25/2035 (a) $ 72,298
BACKED Mortgage 200,000 CMC Securities Corporation IV, 1994-G A4, 7% due 9/25/2024 204,912
SECURITIES++ Obligations-- 107,253 Collateralized Mortgage Obligation Trust, 57 D, 9.90%
(concluded) 4.1% due 2/01/2019 108,103
169,843 GE Capital Mortgage Services, Inc., 1994-24 A4, 7% due 7/25/2024 175,039
Housing Securities Inc.:
241,536 1994-1 AB2, 6.50% due 3/25/2009 163,112
140,784 1994-2 B1, 6.50% due 7/25/2009 110,141
216,476 Independent National Mortgage Corporation, 1995-F A5, 8.25%
due 5/25/2010 220,357
1,250,000 LB-UBS Commercial Mortgage Trust, Series 2002-C1, Class A3,
6.226% due 3/15/2026 1,313,373
308,186 Ocwen Residential MBS Corporation, 1998-R2 AP, 7.085% due
11/25/2034 (a)(b) 301,396
708,809 Residential Funding Mortgage Securities Inc., Series 2001-S23,
Class 2A1, 5.50% due 10/25/2031 718,506
600,000 Washington Mutual, 2000-1 B1, 5.84% due 1/25/2040 (a)(b) 596,344
900,000 Washington Mutual Inc., Series 2002-AR4, Class A7, 5.598%
due 4/25/2032 923,063
1,305,943 Wells Fargo Mortgage-Backed Securities Trust, Series 2002-A,
Class A2, 5.90% due 3/25/2032 1,336,461
------------
6,243,105
Total Non-Agency Mortgage-Backed Securities (Cost--$23,881,860) 24,153,806
Shares
Held
- ----------------------------------------------------------------------------------------------------------------------------
PREFERRED 500 Home Ownership Funding 2 325,070
STOCKS--0.2%
Total Preferred Stocks (Cost--$500,000) 325,070
Face
Amount
- ----------------------------------------------------------------------------------------------------------------------------
U.S.TREASURY U.S. Treasury Bonds:
OBLIGATIONS-- $ 770,000 7.50% due 11/15/2016 926,652
12.2% 430,000 8.125% due 8/15/2019 550,785
1,380,000 7.25% due 8/15/2022 1,643,804
430,000 6.25% due 8/15/2023 460,714
430,000 6.625% due 2/15/2027 482,808
------------
4,064,763
U.S. Treasury Notes:
868,000 7.50% due 2/15/2005 960,903
3,150,000 6.50% due 5/15/2005 3,419,498
760,000 5.75% due 11/15/2005 811,063
430,000 6.25% due 2/15/2007 470,522
2,870,000 4.375% due 5/15/2007 2,909,463
1,110,000 6.125% due 8/15/2007 1,209,837
22
23
750,000 4.75% due 11/15/2008 763,721
460,000 6.50% due 2/15/2010 514,225
660,000 5% due 2/15/2011 671,171
3,000,000 4.875% due 2/15/2012 3,011,250
------------
14,741,653
Total U.S. Treasury Obligations (Cost--$18,898,027) 18,806,416
SHORT-TERM Commercial 3,950,000 AOL Time Warner, Inc., 2.05% due 7/15/2002 3,946,851
INVESTMENTS-- Paper*--2.6%
2.6% Total Short-Term Investments (Cost--$3,946,851) 3,946,851
OPTIONS Call Options 3,500,000 FNMA 30-Year TBA Purchase, expiring August 2002 at USD 103.33 (13,125)
WRITTEN--0.0% Written--0.0%
Total Options Written (Premiums Received--$14,082) (13,125)
Total Investments, Net of Options Written
(Cost--$186,254,746)--121.9% 187,664,986
Time Deposit--0.1%** 215,638
Unrealized Appreciation on Interest Rate Spreadlocks--0.0%*** (d) 8,648
Liabilities in Excess of Other Assets--(22.0%) (33,945,663)
------------
Net Assets--100.0% $153,943,609
============
(a) Floating rate note.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Represents the interest-only portion of a mortgage-backed obligation.
(d) Restricted securities as to resale. The value of the Portfolio's
investment in restricted securities was approximately $44,448,
representing less than 0.1% of net assets.
Acquisition
Issue Date Cost Value
- -------------------------------------------------------------
European Spreadlock 6/05/2002 $53,132 $44,448
------- -------
Total $53,132 $44,448
======= =======
(e) Represents a "to-be-announced" (TBA) transaction. The Portfolio has
committed to selling securities for which all specific information is not
available at this time.
(f) Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase by the Portfolio.
(g) All or a portion of security held as collateral in connection with
openinterest rate spreadlocks.
++ Mortgage-Backed Securities are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage instruments. As
a result, the average life may be substantially less than the original
maturity.
* Commercial Paper is traded on a discount basis; the interest
rate shown reflects the discount rate paid at the time of purchase by the
Portfolio.
** Time deposit bears interest at 0.77% and matures on 7/01/2002.
*** Interest rate spreadlocks sold as of June 30, 2002 were as follows:
Notional Expiration
Par Value Issue Exchange Date Value
- ----------------------------------------------------------------------
8,000,000 European Over-the-Counter- July 2002 $ 44,448
Spreadlock Other
---------
Total Interest Rate Spreadlocks Sold
(Total Contract Price--$53,132) $ 44,448
=========
See Notes to Financial Statements.
Merrill Lynch Total Return Bond Fund, June 30, 2002
STATEMENT OF ASSETS AND LIABILITIES
TOTAL RETURN
BOND MASTER
PORTFOLIO As of June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
Assets: Investments, at value (identified cost--$186,268,828) $ 187,678,111
Cash 196
Time deposit 215,638
Unrealized appreciation on interest rate spreadlocks 8,648
Receivables:
Securities sold $ 17,691,439
Interest 1,889,657
Contributions 499,300
Paydowns 119,728 20,200,124
--------------
Prepaid expenses and other assets 126,695
--------------
Total assets 208,229,412
--------------
Liabilities: Options written, at value (premiums received--$14,082) 13,125
Payables:
Securities purchased 44,775,084
Withdrawals 9,386,565
Investment adviser 37,662 54,199,311
--------------
Accrued expenses and other liabilities 73,367
--------------
Total liabilities 54,285,803
--------------
Net Assets: Net assets $ 153,943,609
==============
Net Assets Investors' capital $ 152,524,685
Consist of: Unrealized appreciation on investments--net 1,418,924
--------------
Net assets $ 153,943,609
==============
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
TOTAL RETURN
BOND MASTER
PORTFOLIO For the Year Ended June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
Investment Interest $ 9,393,962
Income: Dividends 83,548
--------------
24
25
Total income 9,477,510
--------------
page 24 & 25
Expenses: Investment advisory fees $ 473,041
Accounting services 169,142
Professional fees 49,581
Custodian fees 17,055
Pricing fees 16,947
Trustees' fees and expenses 10,647
Offering costs 1,727
Other 13,242
--------------
Total expenses 751,382
--------------
Investment income--net 8,726,128
--------------
Realized & Realized gain on investments--net 2,570,410
Unrealized Change in unrealized appreciation/depreciation on investments--net 2,102,703
Gain on --------------
Investments-- Total realized and unrealized gain on investments--net 4,673,113
Net: --------------
Net Increase in Net Assets Resulting from Operations $ 13,399,241
==============
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the For the Period
TOTAL RETURN Year Ended October 6, 2000++
BOND MASTER June 30, to June 30,
PORTFOLIO Increase (Decrease) in Net Assets: 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Operations: Investment income--net $ 8,726,128 $ 7,757,182
Realized gain on investments--net 2,570,410 895,917
Change in unrealized appreciation/depreciation on investments--net 2,102,703 1,080,545
-------------- --------------
Net increase in net assets resulting from operations 13,399,241 9,733,644
-------------- --------------
Net Capital Proceeds from contributions 119,146,818 253,897,559
Transactions: Fair value of withdrawals (135,833,885) (106,449,868)
-------------- --------------
Net increase (decrease) in net assets derived from capital transactions (16,687,067) 147,447,691
-------------- --------------
Net Assets: Total increase (decrease) in net assets (3,287,826) 157,181,335
Beginning of period 157,231,435 50,100
-------------- --------------
End of period $ 153,943,609 $ 157,231,435
============== ==============
++Commencement of operations.
See Notes to Financial Statements.
Merrill Lynch Total Return Bond Fund, June 30, 2002
FINANCIAL HIGHLIGHTS
For the For the Period
TOTAL RETURN Year Ended October 6, 2000++
BOND MASTER The following ratios have been derived from June 30, to June 30,
PORTFOLIO information provided in the financial statements. 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Total 9.97% --
Investment ============== ==============
Return:
Ratios to Expenses .48% .42%*
Average ============== ==============
Net Assets: Investment income--net 5.53% 6.59%*
============== ==============
Supplemental Net assets, end of period (in thousands) $ 153,944 $ 157,231
Data: ============== ==============
Portfolio turnover 208.91% 276.08%
============== ==============
*Annualized.
++Commencement of operations.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
TOTAL RETURN
BOND MASTER
PORTFOLIO
1. Significant Accounting Policies:
Total Return Bond Master Portfolio (the "Portfolio") is a fund of
Fund Asset Management Master Trust (the "Master Trust"). The Master
Trust is registered under the Investment Company Act of 1940 and is
organized as a Delaware business trust. The Declaration of Trust
permits the Trustees to issue nontransferable interests in the
Portfolio, subject to certain limitations. The Portfolio'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 following
is a summary of significant accounting policies followed by the
Portfolio.
(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities that are traded in the over-
the-counter market are valued at the last available bid price prior
to the time of valuation. In cases where securities are traded on
more than one exchange, the securities are valued on he exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities that are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Short-term securities are
valued at amortized cost, which approximates market value. Other
investments are stated at market value. Securities and assets for
which market quotations are not readily available are valued at fair
market value, as determined in good faith by or under the direction
of the Master Trust's Board of Trustees.
(b) Derivative financial instruments--The Portfolio may engage in various
portfolio strategies to increase or decrease the level of risk to which the
Portfolio is exposed more quickly and efficiently than transactions in other
types of instruments. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Portfolio may purchase or sell financial
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into
a contract, the Portfolio deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Portfolio agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and are
recorded by the Portfolio as unrealized gains or losses. When the contract is
closed, the Portfolio records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.
* Options--The Portfolio is authorized to purchase and write call and put
options. When the Portfolio writes an option, an amount equal to the premium
received by the Portfolio is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Portfolio enters into a closing transaction),
the Portfolio realizes a gain or loss on the option to the extent of the
premiums received or paid (or a gain or loss to the extent that the cost of
the closing transaction exceeds the premium paid or received).
* Interest rate spreadlocks--The Portfolio is authorized to enter into
interest rate spreadlocks, which are over-the-counter contracts in which one
party agrees to make periodic payments based on the change in the market value
of a specified security, basket of securities or index in exchange for
periodic payments based on a fixed or variable interest rate or the change in
market value of a different security, basket of securities or index.
Agreements may be used to obtain exposure to the underlying investments
without taking physical custody of the securities in circumstances where
direct investment is restricted by law or is otherwise impractical.
(c) Income taxes--The Portfolio is classified as a partnership for Federal
income tax purposes. As such, each investor in the Portfolio is treated as
owner of its proportionate share of the net assets, income, expenses and
realized and unrealized gains and losses of the Portfolio. Accordingly, as a
"pass through" entity, the Portfolio pays no income dividends or capital gains
distributions. Therefore, no Federal income tax provision is required. It is
intended that the Portfolio's assets will be managed so an investor in the
Portfolio can satisfy the requirements of subchapter M of the Internal Revenue
Code.
26
27
(d) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Realized gains and losses on security transactions are determined on
the identified cost basis. Dividend income is recorded on the ex-dividend
dates. Interest income (including amortization of premium and discount) is
recognized on the accrual basis.
(e) Prepaid registration fees--Prepaid registration fees are charged to
expenses as the related shares are issued.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Master Trust has entered into an Investment Advisory Agreement for the
Portfolio with Fund Asset Management, L.P. ("FAM"). The general partner of FAM
is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Portfolio's investments and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Portfolio. For such services, the
Portfolio pays a monthly fee at an annual rate of .30% of the average daily
value of the Portfolio's net assets.
For the year ended June 30, 2002, Merrill Lynch Security Pricing Service, an
affiliate of MLPF&S, earned $4,434 for providing security price quotations to
compute the Fund's net asset value.
For the year ended June 30, 2002, the Fund reimbursed FAM $22,514 for certain
accounting services.
Certain officers and/or trustees of the Master Trust are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2002 were $353,231,219 and $327,754,852, respectively.
Net realized gains for the year ended June 30, 2002 and net unrealized gains
as of June 30, 2002 were as follows:
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------
Long-term investments $ 2,531,776 $ 1,409,283
Options written -- 957
Interest rate spreadlocks -- 8,684
Financial futures contracts 38,634 --
------------- -------------
Total investments $ 2,570,410 $ 1,418,924
============= =============
Merrill Lynch Total Return Bond Fund, June 30, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
TOTAL RETURN
BOND MASTER
PORTFOLIO
As of June 30, 2002, net unrealized appreciation for Federal income tax
purposes aggregated $1,353,807, of which $2,425,270 related to appreciated
securities and $1,071,463 related to depreciated securities. At June 30, 2002,
the aggregate cost of investments, net of options written, for Federal income
tax purposes was $186,311,179.
Transactions in call options written for the year ended June 30, 2002, were as
follows:
Nominal Value
Covered by Premiums
Options Written Received
- --------------------------------------------------------------------
Outstanding call options written,
beginning of year -- --
Call options written 3,500,000 $ 14,082
------------- -------------
Outstanding call options written,
end of year 3,500,000 $ 14,082
============= =============
4. Short-Term Borrowings:
The Master Trust, along with certain other funds managed by FAM and its
affiliates, is a party to a $1,000,000,000 credit agreement with Bank One,
N.A. and certain other lenders. The Portfolio may borrow under the credit
agreement to fund partner withdrawals and for other lawful purposes other than
for leverage. The Portfolio may borrow up to the maximum amount allowable
under the Portfolio's current prospectus and statement of additional
information, subject to various other legal, regulatory or contractual limits.
The Portfolio pays a commitment fee of .09% per annum based on the Portfolio's
pro rata share of the unused portion of the credit agreement. Amounts borrowed
under the credit agreement bear interest at a rate equal to, at each fund's
election, the Federal Funds rate plus .50% or a base rate as determined by
Bank One, N.A. On November 30, 2001, the credit agreement was renewed for one
year under the same terms. The Portfolio did not borrow under the credit
agreement during the year ended June 30, 2002.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of Fund Asset Management
Master Trust and Investors of Total Return Bond
Master Portfolio:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Total Return Bond Master Portfolio
as of June 30, 2002, the related statement of operations for the year then
ended, and the statement of changes in net assets and financial highlights for
the year then ended and for the period from October 6, 2000 (commencement of
operations) to June 30, 2001. These financial statements and financial
highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of June 30, 2002, by
correspondence with the custodian and others. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Total Return Bond Master Portfolio at June 30, 2002, the results of its
operations, the changes in its net assets and the financial highlights for
each of the indicated periods, in conformity with accounting principles
generally accepted in the United States.
28
29
(Ernst & Young LLP)
MetroPark, New Jersey
August 20, 2002
OFFICERS AND DIRECTORS/TRUSTEES (unaudited)
Number of Other
Portfolios in Director-
Fund Complex ships
Position(s) Length Overseen by Held by
Held of Time Director/ Director/
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------
Interested Director/Trustee
- --------------------------------------------------------------------------------------------------------------------
Terry K. Glenn* President 2001 to Chairman, Americas Region since 2001, and 117 Funds None
P.O. Box 9011 and present Executive Vice President since 1983 of 169 Portfolios
Princeton, Director/ Fund Asset Management, L.P. ("FAM") and
NJ 08543-9011 Trustee Merrill Lynch Investment Managers, L.P.
Age: 61 ("MLIM"); President of Merrill Lynch
Mutual Funds since 1999; President of
FAM Distributors, Inc. ("FAMD") since
1986 and Director thereof since 1991;
Executive Vice President and Director
of Princeton Services, Inc. ("Princeton
Services") since 1993; President of
Princeton Administrators, L.P. since
1988; Director of Financial Data Services,
Inc. since 1985.
*Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which FAM or MLIM acts as
investment adviser. Mr. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
positions as Chairman (Americas Region) and Executive Vice President
of FAM and MLIM; President of FAMD; Executive Vice President of
Princeton Services; and President of Princeton Administrators, L.P.
The Director/Trustee's term is unlimited. Directors/Trustees serve
until their resignation, removal or death, or until December 31 of
the year in which they turn 72. As Fund President, Mr. Glenn serves
at the pleasure of the Board of Directors/Trustees.
Merrill Lynch Total Return Bond Fund, June 30, 2002
OFFICERS AND DIRECTORS/TRUSTEES (unaudited) (concluded)
Number of Other
Portfolios in Director-
Fund Complex ships
Position(s) Length Overseen by Held by
Held of Time Director/ Director/
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
Independent Directors/Trustees
- -------------------------------------------------------------------------------------------------------------------------
James H. Bodurtha Director/ 2002 to Director and Executive Vice President, The 39 Funds Berkshire
P.O. Box 9011 Trustee present China Business Group, Inc. since 1996. 59 Portfolios Holding
Princeton, Corporation
NJ 08543-9011
Age: 58
Joe Grills Director/ 2000 to Member of Committee on Investment of 42 Funds Duke
P.O. Box 9011 Trustee present Employee Benefit Assets of the 62 Portfolios Management
Princeton, Association for Financial Professionals Company;
NJ 08543-9011 since 1986. Kimco
Age: 67 Realty;
Montpelier
Foundation
Herbert I. London Director/ 2002 to John M. Olin Professor of Humanities, 39 Funds None
P.O. Box 9011 Trustee present New York University since 1993. 59 Portfolios
Princeton,
NJ 08543-9011
Age: 62
Andre F. Perold Director/ 2002 to George Gund Professor of Finance and 39 Funds None
P.O. Box 9011 Trustee present Banking, Harvard School of Business since 59 Portfolios
Princeton, 2000; Finance Area Chair since 1996.
NJ 08543-9011
Age: 49
Roberta Cooper Ramo Director/ 2002 to Shareholder, Modrall, Sperling, Roehl, 39 Funds None
P.O. Box 9011 Trustee present Harris & Sisk, P.A. since 1993. 59 Portfolios
Princeton,
NJ 08543-9011
Age: 59
Robert S. Salomon, Jr. Director/ 2002 to Principal of STI Management since 1994. 42 Funds None
P.O. Box 9011 Trustee present 62 Portfolios
Princeton,
NJ 08543-9011
Age: 65
Melvin R. Seiden Director/ 2002 to Director, Silbanc Properties, Ltd. (real 42 Funds None
P.O. Box 9011 Trustee present estate, investment and consulting) since 62 Portfolios
Princeton, 1987; Chairman and President of Seiden &
NJ 08543-9011 de Cuevas, Inc. (private investment firm)
Age: 71 from 1964 to 1987.
Stephen B. Swensrud Director/ 2002 to Chairman, Fernwood Advisors since 1996. 42 Funds International
P.O. Box 9011 Trustee present 62 Portfolios Mobile
Princeton, Communi-
NJ 08543-9011 cations,
Age: 69 Inc.
*The Director/Trustee's term is unlimited. Directors/Trustees serve
until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
30
31
Position(s) Length
Held of Time
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
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Fund Officers
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Donald C. Burke Vice 2000 to First Vice President of FAM and MLIM since 1997 and the Treasurer thereof
P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services since
Princeton, and 1999; Vice President of FAMD since 1999; Vice President of FAM and MLIM
NJ 08543-9011 Treasurer from 1990 to 1997; Director of Taxation of MLIM since 1990.
Age: 42
Patrick Maldari Portfolio 2002 to Managing Director of Americas Fixed Income for Merrill Lynch Investment
P.O. Box 9011 Manager present Managers since 2000; Director of Fixed Income Institutional Business from
Princeton, 1997 to 2000.
NJ 08543-9011
Age: 40
James J. Pagano Portfolio 2001 to Senior Fixed Income Analyst since 1998; Risk Manager from 1997 to 1998.
P.O. Box 9011 Manager present
Princeton,
NJ 08543-9011
Age: 39
Phillip S. Gillespie Secretary 2001 to First Vice President of MLIM since 2001; Director of MLIM from 2000 to 2001;
P.O. Box 9011 present Vice President of MLIM from 1999 to 2000; Attorney associated with MLIM
Princeton, since 1998; Assistant General Counsel of Chancellor LGT Asset Management
NJ 08543-9011 Inc. from 1997 to 1998; Senior Counsel and Attorney in the Division of
Age: 38 Investment Management and the Office of General Counsel at the U.S.
Securities and Exchange Commission from 1993 to 1997.
*Officers of the Fund serve at the pleasure of the Board of
Directors/Trustees.
Further information about the Fund's Officers and Directors is
available in the Fund's Statement of Additional Information, which
can be obtained without charge by calling 1-800-MER-FUND.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863