N-30D/A 1 ml6687.txt MERCURY TOTAL RETURN BOND AMENDED (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com Annual Report June 30, 2001 Mercury Total Return Bond Fund of Mercury HW Funds 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. The Fund seeks to maximize long-term total return. The Fund will seek to achieve its objective by investing all of its assets in Total Return Bond Master Portfolio of Fund Asset Management Master Trust, which has the same investment objective as the Fund. The Portfolio may invest a portion of its assets in non-investment- grade debt securities, commonly referred to as high yield "junk" bonds, which may be subject to greater market fluctuations and risk of loss of income and principle than securities in higher rating categories. The Portfolio may also invest a portion of its assets in emerging markets and other foreign securities, which involve special risks including fluctuating foreign exchange rates, foreign government regulations, differing degrees of liquidity, and the possibility of substantial volatility due to adverse political, economic or other developments. Mercury Total Return Bond Fund of Mercury HW Funds 725 South Figueroa Street, Suite 4000 Los Angeles, CA 90017-5400 Printed on post-consumer recycled paper OFFICERS AND TRUSTEES Robert L. Burch III, Trustee John A. G. Gavin, Trustee Joe Grills, Trustee Nigel Hurst-Brown, Trustee Madeline A. Kleiner, Trustee Richard R. West, Trustee Nancy D. Celick, President Donald C. Burke, Vice President and Treasurer Phillip S. Gillespie, Secretary Anna Marie S. Lopez, Assistant Treasurer and Assistant Secretary 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 (888) 763-2260 IMPORTANT TAX INFORMATION (UNAUDITED) Of the net investment income distributions paid monthly by Mercury Total Return Bond Fund during the fiscal year ended June 30, 2001, 17.72% 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 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. June 30, 2001 Mercury Total Return Bond Fund DEAR SHAREHOLDER Fiscal Year in Review We are pleased to present to you this annual report of Mercury Total Return Bond Fund for the fiscal year ended June 30, 2001. The past 12 months have brought significant uncertainty and change in the financial markets. Investors experienced a lesson on the whole concept of the value of a company. The economy moved from a period of the strongest year-over-year growth ever seen in the United States to bumping along at a near-zero growth rate, while debates over whether or not we were in a recession became the primary discussion. Federal Reserve Board Chairman Alan Greenspan changed his reputation as a gradualist by aggressively cutting the Federal Funds rate 275 basis points (2.75%) through six interest rate reductions in six months. In June 2000, the US economy was coming off a quarter of 5.6% growth but began showing signs of slowing slightly. High energy prices and a decline in the equity markets (particularly the NASDAQ) were beginning to weigh on the pace of economic growth. It was clear to us that the manufacturing sector was bearing the brunt of the incipient slowing. The yield curve began to steepen as investors were looking ahead to probable moves by the Federal Reserve Board. These expectations proved correct as more signs of a real slowdown in the economy emerged and Federal Reserve Board Chairman Greenspan began cutting interest rates aggressively. The Federal Reserve Board's urgency may, in part, have stemmed from the fact that growth outside the United States also was slowing, adding to the pressure on the US economy. Interestingly, employment was slow to show any effects of a weakening economy, perhaps a sign of just how tight the labor market had become. Interest rates in the intermediate and long segments of the yield curve moved lower by more than 130 basis points in the latter half of 2000, while short-term rates were largely unchanged. As 2001 got underway, the Federal Reserve Board started easing monetary policy and short-term interest rates moved down quickly while long-term interest rates actually moved higher. From the time the Federal Reserve Board first cut the Federal Funds rate from 6% to 5.5% at the end of January, the 10-year Treasury note's yield moved up 30 basis points. This created a challenging investing environment in which corporate spreads tightened and interest rates moved higher, while the economy was slowing and the default rate was rising. This is certainly contrary to historical precedent. There were two major national stories that kept the focus of the markets for large parts of the past year: the presidential election and the budget surplus. The election, while it garnered much of the market's, as well as the nation's, attention for most of the fourth quarter of 2000, did not appear to have a significant impact on the financial markets. The budget surplus, on the other hand, has continued to be a dominant theme in the valuation of the bond market for a year and a half. The notion of a budget surplus inspired Treasury buybacks and prompted a huge rally in US Treasury securities during early and mid-2000. Since then, the buybacks have kept pressure on interest rates, keeping them lower than otherwise might have been the case, especially in the long end of the curve. This is particularly noticeable when looking at swap spreads, a good proxy for general credit spreads, which have stayed near all-time highs for more than a year. In other words, we have seen a larger- than-normal difference between the general level of interest rates (for example, corporate borrowing rates, mortgage rates and consumer loan rates) and the rate at which the Government borrows. June 30, 2001 Mercury Total Return Bond Fund While it is true that general spreads remain at historically wide levels, spread products have actually performed quite well during the first half of 2001. This recovery followed the breathtakingly poor performance of these sectors in the previous year. During the year 2000, the credit portion of the unmanaged Lehman Brothers Aggregate Bond Index posted -417 basis points of excess return. Mortgage-backed securities posted a comparatively good -69 basis points during the same time period. This set up the recovery in spread product, which occurred during the first half of 2001 despite an economy that is struggling from a possible recession. The credit component of the Index contributed 282 basis points of excess return between January 1, 2001 and June 30, 2001. Mortgage-backed securities added 28 basis points of excess return for the same period. Asset-backed securities were somewhat less volatile, contributing 40 basis points and 86 basis points during the year 2000 and first half of 2001, respectively. For the year ended June 30, 2001, the Fund's Class I and Class A Shares provided total returns of +8.18% and +7.76%, respectively. For the period October 6, 2000 (inception) through June 30, 2001, the Fund's Class B and Class C Shares provided total returns of +5.08% and +4.10%, respectively. (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 6 - 9 of this report to shareholders.) Performance was helped by the excellent performance of the bond market. Unfortunately, this was below the +11.23% return of the unmanaged Lehman Brothers Aggregate Bond Index for the year ended June 30, 2001. The Fund's heavy weighting in corporate securities in the second half of 2000 negatively affected the relative returns of the Fund. This was compounded by our holding debt issued by Comdisco Inc., a company that suffered financial difficulties, which negatively affected performance during the second quarter of 2001. Our substantial holdings of asset-backed securities, on the other hand, were a positive factor. The structure of the portfolio along the yield curve was a slight negative as our concentration in intermediate-term securities meant that the Fund held fewer notes in the short portion of the yield curve, which was the best-performing sector during the first part of 2001. June 30, 2001 Mercury Total Return Bond Fund In Conclusion We appreciate your continued support of Mercury Total Return Bond Fund, and we look forward to serving your investment needs in the months and years ahead. Sincerely, (Nancy D. Celick) Nancy D. Celick President (Christopher G. Ayoub) Christopher G. Ayoub Portfolio Manager (James J. Pagano) James J. Pagano Portfolio Manager August 17, 2001 Effective August 1, 2001, Christopher G. Ayoub and James J. Pagano became Portfolio Managers of Mercury Total Return Bond Fund, primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Ayoub is Managing Director of Mercury Advisers (the "Adviser") and Manager of the Core Fixed Income Department of the Adviser. He joined the Adviser in 1982. Mr. Pagano is Vice President and Portfolio Manager responsible for Core Fixed Income products, a position he has held since 1998. He joined the Adviser in 1997 and has held various positions at Merrill Lynch & Co. since 1992. June 30, 2001 Mercury Total Return Bond Fund FUND PERFORMANCE DATA ABOUT FUND PERFORMANCE The Fund offers four classes of shares, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. CLASS I SHARES incur a maximum initial sales charge of 4.25% and bear no ongoing distribution and account maintenance fees. Class I Shares are available only to eligible investors. CLASS A SHARES incur a maximum initial sales charge of 4.25% and an account maintenance fee of 0.25% (but no distribution fee). CLASS B SHARES are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first two years, decreasing to 3% for each of the next two years and decreasing 1% each year thereafter to 0% after the sixth 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 A Shares after approximately 10 years. 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 may be subject to a 1% contingent deferred sales charge if redeemed within one year after purchase. 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 I, Class A, Class B and Class C Shares in excess of 0.65%, 0.90%, 1.65% and 1.65%, 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. June 30, 2001 Mercury Total Return Bond Fund FUND PERFORMANCE DATA (CONTINUED) RECENT PERFORMANCE RESULTS
6-Month 12-Month Since Inception Standardized As of June 30, 2001 Total Return Total Return Total Return 30-Day Yield Class I* + 2.70% + 8.18% +66.79% 6.07% Class A* + 2.49 + 7.76 +10.55 5.83 Class B* + 2.29 -- + 5.08 6.11 Class C* + 1.33 -- + 4.10 6.63 Lehman Brothers Aggregate Bond Index** + 3.62 +11.23 +67.83/+17.83/+8.13 -- *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 the Fund's net asset values for the periods shown, and assume reinvestment of all dividends and capital gains at net asset value on the payable date. The Fund's Class I Shares commenced operations on 12/06/94; Class A Shares on 6/02/99; and Class B and Class C Shares on 10/06/00. **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 12/06/94, 6/02/99 and 10/06/00, respectively.
June 30, 2001 Mercury Total Return Bond Fund FUND PERFORMANCE DATA (CONTINUED) TOTAL RETURN BASED ON A $10,000 INVESTMENT A line graph illustrating the growth of a $10,000 investment in Mercury Total Return Bond Fund++ Class I Shares* compared to a similar investment in the Lehman Brothers Aggregate Bond Index++++. Values illustrated are: Mercury Total Return Bond Fund++-- Class I Shares* Year Value 12/06/1994 $ 9,575 6/1995 $10,713 6/1996 $11,465 6/1997 $12,668 6/1998 $14,065 6/1999 $14,388 6/2000 $14,762 6/2001 $15,970 Lehman Brothers Aggregate Bond Index++++ Year Value 12/1994 $10,000 6/1995 $11,144 6/1996 $11,703 6/1997 $12,657 6/1998 $13,991 6/1999 $14,431 6/2000 $15,090 6/2001 $16,784 A line graph illustrating the growth of a $10,000 investment in Mercury Total Return Bond Fund++ Class A Shares* compared to a similar investment in the Lehman Brothers Aggregate Bond Index++++. Values illustrated are: Mercury Total Return Bond Fund++-- Class A Shares* Year Value 6/1999 $ 9,575 6/2000 $ 9,823 6/2001 $10,585 Lehman Brothers Aggregate Bond Index++++ Year Value 6/1999 $10,000 6/2000 $10,456 6/2001 $11,658 A line graph illustrating the growth of a $10,000 investment in Mercury Total Return Bond Fund++ Class B and Class C Shares* compared to a similar investment in the Lehman Brothers Aggregate Bond Index++++. Values illustrated are: Mercury Total Return Bond Fund++-- Class B Shares* Year Value 10/06/2000 $10,000 6/2001 $10,108 Mercury Total Return Bond Fund++-- Class C Shares* Year Value 10/06/2000 $10,000 6/2001 $10,311 Lehman Brothers Aggregate Bond Index++++ 10/2000 $10,000 6/2001 $10,813 *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 US 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 US Treasury and government agency issues with at least one year to maturity. Past performance is not indicative of future results. June 30, 2001 Mercury Total Return Bond Fund FUND PERFORMANCE DATA (CONCLUDED) AVERAGE ANNUAL TOTAL RETURN % Return % Return Without Sales With Sales Class I Shares* Charge Charge** One Year Ended 6/30/01 +8.18% +3.59% Five Years Ended 6/30/01 +6.85 +5.93 Inception (12/06/94) through 6/30/01 +8.10 +7.39 *Maximum sales charge is 4.25%. **Assuming maximum sales charge. % Return % Return Without Sales With Sales Class A Shares* Charge Charge** One Year Ended 6/30/01 +7.76% +3.18% Inception (6/02/99) through 6/30/01 +4.95 +2.78 *Maximum sales charge is 4.25%. **Assuming maximum sales charge. AGGREGATE TOTAL RETURN % Return % Return Without With Class B Shares* CDSC CDSC** Inception (10/06/00) through 6/30/01 +5.08% +1.08% *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 6 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without With Class C Shares* CDSC CDSC** Inception (10/06/00) through 6/30/01 +4.10% +3.10% *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. June 30, 2001 Mercury Total Return Bond Fund STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 2001 MERCURY TOTAL RETURN BOND FUND Assets: Investment in Total Return Bond Master Portfolio, at value (identified cost--$154,689,754) $ 154,019,513 --------------- Total assets 154,019,513 --------------- Liabilities: Payables: Dividends to shareholders $ 29,866 Administrator 14,338 Distributor 14,309 58,513 --------------- --------------- Accrued expenses 58,340 --------------- Total liabilities 116,853 --------------- Net Assets: Net assets $ 153,902,660 =============== Net Assets Consist of: Paid-in capital $ 161,412,325 Undistributed investment income--net 55,633 Accumulated realized capital losses on investments and from the Portfolio--net (6,895,057) Unrealized depreciation on investments from the Portfolio--net (670,241) --------------- Net assets $ 153,902,660 =============== Net Asset Value: Class I--Based on net assets of $86,849,286 and 6,961,702 shares outstanding++ $ 12.48 =============== Class A--Based on net assets of $66,907,586 and 5,368,648 shares outstanding++ $ 12.46 =============== Class B--Based on net assets of $145,775 and 11,736 shares outstanding++ $ 12.42 =============== Class C--Based on net assets of $12.91 and 1.053 shares outstanding++ $ 12.26 =============== ++Unlimited shares of no par value authorized. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund STATEMENT OF OPERATIONS
For the Year Ended June 30, 2001++ MERCURY TOTAL RETURN BOND FUND Investment Income: Dividends $ 172 Interest and discount earned 3,086,140 Investment income allocated from the Portfolio 8,194,830 Expenses allocated from the Portfolio (489,254) --------------- Total income and net investment income from the Portfolio 10,791,888 =============== Expenses: Administration fees $ 290,046 Investment advisory fees 218,793 Transfer agent fees--Class I 149,178 Account maintenance fees--Class A 138,509 Transfer agent fees--Class A 74,648 Printing and shareholder reports 68,845 Registration fees 56,817 Accounting services 36,830 Professional fees 27,481 Pricing fees 17,564 Custodian fees 6,768 Trustees' fees and expenses 2,418 Account maintenance and distribution fees--Class B 355 Transfer agent fees--Class B 44 Other 8,950 --------------- Total expenses before reimbursement 1,097,246 Reimbursement of expenses (428,447) --------------- Total expenses after reimbursement 668,799 --------------- Investment income--net 10,123,089 --------------- Realized & Unrealized Gain (Loss) from Investments and the Portfolio--Net: Realized gain from: Investments--net 629,730 The Portfolio--net 897,000 1,526,730 --------------- Change in unrealized appreciation/depreciation on: Investments--net (571,620) The Portfolio--net 1,094,083 522,463 --------------- -------------- Net Increase in Net Assets Resulting from Operations $ 12,172,282 ============== ++On October 6, 2000, the Fund converted from a fund of a stand- alone investment company to a "feeder" fund that seeks to achieve its investment objective by investing all of its assets in the Portfolio, a fund of the Master Trust that has the same investment objective as the Fund. All investments will be made at the Portfolio level. This structure is sometimes called a "master/feeder" structure. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund STATEMENTS OF CHANGES IN NET ASSETS
MERCURY TOTAL RETURN BOND FUND For the Year Ended June 30, Increase (Decrease) in Net Assets: 2001++ 2000 Operations: Investment income--net $ 10,123,089 $ 8,960,030 Realized gain (loss) on investments and from the Portfolio--net 1,526,730 (6,981,068) Change in unrealized appreciation/depreciation on investments and the Portfolio--net 522,463 1,666,645 -------------- -------------- Net increase in net assets resulting from operations 12,172,282 3,645,607 -------------- -------------- Dividends to Shareholders: Investment income--net: Class I (6,633,259) (7,291,962) Class A (3,591,934) (1,500,514) Class B (3,295) -- Class C (1) -- -------------- -------------- Net decrease in net assets resulting from dividends to shareholders (10,228,489) (8,792,476) -------------- -------------- Capital Share Transactions: Net increase in net assets derived from capital share transactions 7,647,697 24,788,415 -------------- -------------- Net Assets: Total increase in net assets 9,591,490 19,641,546 Beginning of year 144,311,170 124,669,624 -------------- -------------- End of year* $ 153,902,660 $ 144,311,170 ============== ============== *Undistributed investment income--net $ 55,633 $ 159,921 ============== ============== ++On October 6, 2000, the Fund converted from a fund of a stand- alone investment company to a "feeder" fund that seeks to achieve its investment objective by investing all of its assets in the Portfolio, a fund of the Master Trust that has the same investment objective as the Fund. All investments will be made at the Portfolio level. This structure is sometimes called a "master/feeder" structure. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund FINANCIAL HIGHLIGHTS MERCURY TOTAL RETURN BOND FUND
The following per share data and ratios have been derived from information provided in the financial statements. Class I++ Increase (Decrease) in For the Year Ended June 30, Net Asset Value: 2001+++ 2000 1999 1998 1997 Per Share Operating Performance: Net asset value, beginning of year $ 12.33 $ 12.85 $ 13.46 $ 13.04 $ 12.78 -------- -------- -------- -------- -------- Investment income--net .83 .86 .81 .89 .99 Realized and unrealized gain (loss) on investments and from the Portfolio--net .15 (.54) (.49) .50 .30 -------- -------- -------- -------- -------- Total from investment operations .98 .32 .32 1.39 1.29 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.83) (.84) (.83) (.97) (.92) Realized gain on investments--net -- -- (.10) -- (.11) -------- -------- -------- -------- -------- Total dividends and distributions (.83) (.84) (.93) (.97) (1.03) -------- -------- -------- -------- -------- Net asset value, end of year $ 12.48 $ 12.33 $ 12.85 $ 13.46 $ 13.04 ======== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share 8.18% 2.59% 2.30% 11.04% 10.48% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses, net of reimbursement++++ .65% .65% .65% .65% .65% ======== ======== ======== ======== ======== Expenses++++ .93% .92% .79% 1.02% .95% ======== ======== ======== ======== ======== Investment income--net 6.60% 6.80% 5.78% 6.65% 7.08% ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $ 86,849 $100,372 $124,320 $ 45,250 $ 14,310 ======== ======== ======== ======== ======== Portfolio turnover -- 247% 233% 195% 173% ======== ======== ======== ======== ======== *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. ++Prior to October 6, 2000, Class I Shares were designated Investor Class Shares. ++++Includes the Fund's share of the Portfolio's allocated expenses. +++On October 6, 2000, the Fund converted from a fund of a stand- alone investment company to a "feeder" fund that seeks to achieve its investment objective by investing all of its assets in the Portfolio, a fund of the Master Trust that has the same investment objective as the Fund. All investments will be made at the Portfolio level. This structure is sometimes called a "master/feeder" structure. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund FINANCIAL HIGHLIGHTS (CONTINUED) MERCURY TOTAL RETURN BOND FUND The following per share data and ratios have been derived from information provided in the financial statements. Class A+++++ For the Period June 2, 1999++ For the Year Ended June 30, to June 30, Increase (Decrease) in Net Asset Value: 2001++++++ 2000 1999 Per Share Operating Performance: Net asset value, beginning of period $ 12.33 $ 12.85 $ 12.88 ----------- ----------- ----------- Investment income--net .78 .80 .06 Realized and unrealized gain (loss) on investments and from the Portfolio--net .15 (.51) (.03) ----------- ----------- ----------- Total from investment operations .93 .29 .03 ----------- ----------- ----------- Less dividends from investment income--net (.80) (.81) (.06) ----------- ----------- ----------- Net asset value, end of period $ 12.46 $ 12.33 $ 12.85 =========== =========== =========== Total Investment Return:** Based on net asset value per share 7.76% 2.37% .23%+++ =========== =========== =========== Ratios to Average Net Assets: Expenses, net of reimbursement++++ .90% .90% .90%* =========== =========== =========== Expenses++++ 1.18% 1.17% 1.18%* =========== =========== =========== Investment income--net 6.31% 6.55% 6.26%* =========== =========== =========== Supplemental Data: Net assets, end of period (in thousands) $ 66,908 $ 43,940 $ 350 =========== =========== =========== Portfolio turnover -- 247% 233% =========== =========== =========== *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. ++++++On October 6, 2000, the Fund converted from a fund of a stand- alone investment company to a "feeder" fund that seeks to achieve its investment objective by investing all of its assets in the Portfolio, a fund of the Master Trust that has the same investment objective as the Fund. All investments will be made at the Portfolio level. This structure is sometimes called a "master/ feeder" structure. +++Aggregate total investment return. +++++Prior to October 6, 2000, Class A Shares were designated Distributor Class Shares. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund FINANCIAL HIGHLIGHTS (CONCLUDED) MERCURY TOTAL RETURN BOND FUND The following per share data and ratios have been derived from information provided in the financial statements. For the Period October 6, 2000++ to June 30, 2001 Increase (Decrease) in Net Asset Value: Class B Class C Per Share Operating Performance: Net asset value, beginning of period $ 12.38 $ 12.38 ----------- ----------- Investment income--net .55 .41 Realized and unrealized gain on investments and from the Portfolio--net .07 .09 ----------- ----------- Total from investment operations .62 .50 ----------- ----------- Less dividends from investment income--net (.58) (.62) ----------- ----------- Net asset value, end of period $ 12.42 $ 12.26 =========== =========== Total Investment Return:** Based on net asset value per share 5.08%+++ 4.10%+++ =========== =========== Ratios to Average Net Assets: Expenses, net of reimbursement++++ 1.40%* .43%* =========== =========== Expenses++++ 1.65%* .43%* =========== =========== Investment income--net 5.63%* 3.97%* =========== =========== Supplemental Data: Net assets, end of period (in thousands) $ 146 $ -- =========== =========== *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. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund NOTES TO FINANCIAL STATEMENTS MERCURY TOTAL RETURN BOND FUND 1 Significant Accounting Policies: Mercury Total Return Bond Fund (the "Fund") is a fund of Mercury HW Funds (the "Trust"). The Trust is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company which is organized as a Massachusetts business trust. On October 6, 2000, the Fund converted from a fund of a stand-alone investment company to a "feeder" fund that seeks to achieve its investment objective by investing all of its assets in the Total Return Bond Master Portfolio (the "Portfolio"), of the Fund Asset Management Master Trust (the "Master Trust"), which has the same investment objective as the Fund. All investments will be made at the Portfolio level. This structure is sometimes called a "master/feeder" structure. 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 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 percentage of the Portfolio owned by the Fund at June 30, 2001, was 98.0%. The Fund offers four classes of shares. Class I and Class A Shares are sold with a front-end sales charge. Class B and Class C Shares 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 A, Class B and Class C 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. 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. JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) (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) Expenses--Common expenses incurred by the Trust are allocated among the funds based upon: (i)relative net assets; (ii) as incurred on a specific identification basis; or (iii) evenly among the funds, depending on the nature of the expenditure. (h) 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 $4,029 have been reclassified between undistributed net investment income and accumulated net realized capital losses, $43 has been reclassified between paid-in capital and accumulated net realized capital losses and $5,141 has been reclassified between paid-in capital and undistributed net investment income. These reclassifications have no effect on net assets or net asset values per share. 2 Transactions with Affiliates: The Trust on behalf of the Fund has entered into an Administrative Services Agreement with Fund Asset Management L.P., doing business as Mercury Advisors. The general partner of Mercury Advisors is Princeton Services, Inc. ("PSI"), an indirect, 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 portfolio activities) necessary for the operation of the Fund. Mercury Advisors has contractually agreed to pay all annual operating expenses of Class I, Class A, Class B and Class C Shares in excess of .65%, .90%, 1.65%, and 1.65%, respectively, as applied to the daily net assets of each class through June 30, 2001. For the year ended June 30, 2001, Mercury Advisors earned fees of $290,046, all of which was waived. Also, Mercury Advisors reimbursed the Fund $135,932 for additional expenses. The Trust on behalf of the Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), an indirect, wholly-owned subsidiary of Merrill Lynch Group, Inc. JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pursuant to the Distribution Plans adopted by the Trust 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 of the Fund as follows: Account Maintenance Fee Distribution Fee Class A .25% -- Class B .25% .75% Class C .25% .75% Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., and selected dealers also provide account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor, MLPF&S and selected dealers for providing account maintenance services to Class A, Class B and Class C shareholders. The ongoing distribution fee compensates the Distributor, MLPF&S and selected dealers for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended June 30, 2001, FAMD earned underwriting discounts and MLPF&S earned dealer concessions on sales of the Fund's Class A Shares as follows: FAMD MLPF&S Class A $69 $69 Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Certain officers and/or trustees of the Trust are officers and/or directors of Mercury Advisors, PSI, FAMD, FDS, and/or ML & Co. Certain authorized agents of the Fund charge a fee for accounting and shareholder services that they provide to the Fund on behalf of certain shareholders. The portion of this fee paid by the Fund is included within Transfer agent fees in the Statement of Operations. 3 Investments: Increases and decreases in the Fund's investment in the Portfolio for the period October 6, 2000 to June 30, 2001 were $62,915,237 and $72,938,900, respectively. JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4 Capital Share Transactions: Net increase in net assets derived from capital share transactions were $7,647,697 and $24,788,415 for the years ended June 30, 2001 and June 30, 2000, respectively. Transactions in capital shares for each class were as follows: Class I Shares for the Year Ended June 30, 2001++ Shares Dollar Amount Shares sold 2,662,783 $ 33,340,206 Shares issued to shareholders in reinvestment of dividends 515,036 6,432,056 ----------------------------- Total issued 3,177,819 39,772,262 Shares redeemed (4,356,721) (54,880,020) ----------------------------- Net decrease (1,178,902) $ (15,107,758) ============================= ++Prior to October 6, 2000, Class I Shares were designated Investor Class Shares. Class I Shares for the Year Ended June 30, 2000++ Shares Dollar Amount Shares sold 3,371,903 $ 41,986,625 Shares issued to shareholders in reinvestment of dividends 438,484 5,463,345 ----------------------------- Total issued 3,810,387 47,449,970 Shares redeemed (5,343,164) (66,748,481) ----------------------------- Net decrease (1,532,777) $ (19,298,511) ============================= ++Prior to October 6, 2000, Class I Shares were designated Investor Class Shares. Class A Shares for the Year Ended June 30, 2001++ Shares Dollar Amount Shares sold 6,653,859 $ 83,529,962 Shares issued to shareholders in reinvestment of dividends 283,785 3,543,768 ----------------------------- Total issued 6,937,644 87,073,730 Shares redeemed (5,132,161) (64,465,949) ----------------------------- Net increase 1,805,483 $ 22,607,781 ============================= ++Prior to October 6, 2000, Class A Shares were designated Distributor Class Shares. Class A Shares for the Year Ended June 30, 2000++ Shares Dollar Amount Shares sold 4,965,604 $ 61,723,153 Shares redeemed (1,429,672) (17,636,227) ----------------------------- Net increase 3,535,932 $ 44,086,926 ============================= ++Prior to October 6, 2000, Class A Shares were designated Distributor Class Shares. JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND NOTES TO FINANCIAL STATEMENTS (CONCLUDED) Class B Shares for the Period October 6, 2000++ to June 30, 2001 Shares Dollar Amount Shares sold 11,730 $ 147,587 Shares issued to shareholders in reinvestment of dividends 6 74 ----------------------------- Net increase 11,736 $ 147,661 ============================= ++Commencement of operations. Class C Shares for the Period October 6, 2000++ to June 30, 2001 Shares Dollar Amount Shares sold 1 $ 13 ----------------------------- Net increase 1 $ 13 ============================= ++Commencement of operations. 5 Capital Loss Carryforward: At June 30, 2001, the Fund had a net capital loss carryforward of approximately $4,531,000, of which $3,007,000 expires in 2008 and $1,524,000 expires in 2009. This amount will be available to offset like amounts of any future taxable gains. 6 Subsequent Event: On July 26, 2001, the Trust's Board of Trustees declared an ordinary income dividend in the amount of $.068453 per Class IShare, $.065721 per Class A Share, $.065908 per Class B Share and $.068453 per Class DShare payable on July 31, 2001 to shareholders of record as of July 25, 2001. 7 Change in Independent Auditors: On July 31, 2001, the Board of Trustees of the Trust, upon the recommendation of the Board's audit committee, approved a change of the Fund's independent auditors to Ernst & Young LLP. For the periods ended June 30, 1997 through June 30, 2000, PricewaterhouseCoopers LLP expressed an unqualified opinion on the Fund's financial statements. Further, there were no disagreements between Fund management and PricewaterhouseCoopers LLP prior to their resignation. June 30, 2001 Mercury Total Return Bond Fund REPORT OF INDEPENDENT AUDITORS To The Board of Trustees of Mercury HW Funds and Shareholders of the Mercury Total Return Bond Fund: We have audited the accompanying statement of assets and liabilities of the Mercury Total Return Bond Fund (one of the portfolios comprising the Mercury HW Funds) as of June 30, 2001, and the related statements of operations and changes in net assets and the financial highlights for the year then ended. 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 audit. The statement of changes in net assets for the year ended June 30, 2000 and financial highlights for each of the four years in the period then ended, were audited by other auditors, whose report dated August 17, 2000 expressed an unqualified opinion on such financial statement and financial highlights. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Mercury Total Return Bond Fund at June 30, 2001, and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG MetroPark, New Jersey August 17, 2001 June 30, 2001 Mercury Total Return Bond Fund SCHEDULE OF INVESTMENTS
TOTAL RETURN BOND MASTER PORTFOLIO Face Industries Amount Investments Value CORPORATE BONDS & NOTES--35.0% Banking-- $ 1,100,000 MBNA Corporation, 4.228% due 6/17/2002 (a) $ 1,099,103 3.2% 3,100,000 Royal Bank of Scotland Group PLC, 7.816% due 11/29/2049 3,242,402 750,000 Standard Chartered Bank, 8% due 5/30/2031 (b) 761,835 ------------ 5,103,340 Defense-- 2,325,000 Northrop Grumman Corporation, 7.125% due 1.5% 2/15/2011 2,297,542 Drug/Pharma- 1,250,000 Eli Lilly & Company, 7.125% due 6/01/2025 1,280,550 ceuticals-- 0.8% Electric-- 3,400,000 Mirant Americas, 8.30% due 5/01/2011 (b) 3,424,881 Integrated-- NRG Energy Inc.: 3.7% 625,000 7.50% due 6/15/2007 630,931 1,675,000 7.75% due 4/01/2011 1,698,165 ------------ 5,753,977 Financial 2,725,000 AXA Financial Inc., 7.75% due 8/01/2010 2,898,119 Services-- 1,700,000 Countrywide Home Loan, 5.25% due 6/15/2004 1,684,717 9.3% 5,000,000 Pemex Finance Ltd., 8.02% due 5/15/2007 5,207,700 2,075,000 Pemex Project Funding Master Trust, 9.125% due 10/13/2010 (b) 2,196,906 2,600,000 Salomon Smith Barney Holdings, 6.50% due 2/15/2008 2,613,182 ------------ 14,600,624 Manufacturing 3,250,000 Boeing Capital Corporation, 6.10% due --4.3% 3/01/2011 3,170,115 Bombardier Capital Ltd. (b): 1,500,000 6% due 1/15/2002 1,510,131 2,000,000 7.50% due 8/15/2004 2,083,382 ------------ 6,763,628 Multimedia-- 3,000,000 AOL Time Warner Inc., 6.75% due 4/15/2011 2,944,140 1.9% Oil-- 1,000,000 Ashland Inc., 4.54% due 3/07/2003 (a) 998,861 Integrated-- 280,000 Halliburton Company, 6.75% due 2/01/2027 287,924 4.7% 2,400,000 Kinder Morgan Energy, 6.75% due 3/15/2011 2,363,064 1,100,000 Pennzoil-Quaker State, 9.40% due 12/01/2002 1,110,604 2,750,000 Williams Companies, 7.75% due 6/15/2031 2,654,410 ------------ 7,414,863
June 30, 2001 Mercury Total Return Bond Fund SCHEDULE OF INVESTMENTS (CONTINUED)
Face Industries Amount Investments Value CORPORATE BONDS & NOTES (concluded) Real Estate $ 675,000 Avalonbay Communities, 6.58% due 2/15/2004 $ 677,842 Investment Trust--0.4% Telephone 3,200,000 Cox Communications Inc., 6.75% due Communi- 3/15/2011 3,124,576 cations--2.0% Transpor- 250,000 Delta Airlines, 9.90% due 1/02/2002 254,040 tation--1.0% 1,300,000 Norfolk Southern Corporation, 7.35% due 5/15/2007 1,346,254 ------------ 1,600,294 Trucking & 1,000,000 Amerco, 8.80% due 2/04/2005 994,207 Leasing--0.6% Utilities-- 2,450,000 WorldCom, Inc., 8.25% due 5/15/2010 2,529,037 Telecommuni- cation--1.6% Total Corporate Bonds & Notes (Cost--$55,439,816) 55,084,620 GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES++--24.5% Collateralized Fannie Mae: Mortgage 1,292,567 2001-18 ZA, 7% due 6/25/2030 1,279,033 Obligations-- 36,426 G93-27 SB, 6.957% due 8/25/2023 (a) 30,432 16.1% 5,500,000 G94-9 PH, 6.50% due 9/17/2021 5,601,310 Freddie Mac: 824,712 1261-J, 8% due 7/15/2021 837,092 931,979 1552 QB, 13.43% due 8/15/2023 933,705 79,934 1564-SE, 8.134% due 8/15/2008 (a) 80,601 389,364 1573-GC, 9.42% due 1/15/2023 (a) 386,007 2,023,800 2160, 15.47% due 6/15/2029 2,011,537 698,208 2264 SM, 9.50% due 10/15/2030 699,297 4,375,000 2295 PN, 5.75% due 6/15/2021 4,332,694
June 30, 2001 Mercury Total Return Bond Fund SCHEDULE OF INVESTMENTS (CONTINUED)
Face Industries Amount Investments Value GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (concluded) Collateralized Freddie Mac(concluded): Mortgage $ 1,396,437 2295 SJ, 12.903% due 3/15/2031 $ 1,235,397 Obligations 1,006,170 2295 Z, 6.50% due 3/15/2031 1,001,024 (concluded) 2,750,000 2319 JZ, 6.50% due 5/15/2031 2,674,375 Government National Mortgage Association: 2,792,518 2001-5 SB, 21.897% due 4/20/2028 3,026,614 1,200,000 2001-7 TV, 6% due 2/20/2025 1,194,375 ------------ 25,323,493 Pass-Through Fannie Mae: Securities-- 3,209,868 6% due 10/01/2013 3,188,997 8.4% 7,525,000 6.50% due 12/31/2030 7,409,717 Freddie Mac: 1,489,620 1999-15 SL, 12.74%due 4/25/2029 1,303,418 1,364,219 1999-64 SM, 13.132% due 1/25/2030 1,309,274 ------------ 13,211,406 Stripped 112,676 Fannie Mae, 1998-48 CI, 6.50% due Mortgage- 8/25/2028 (c) 18,425 Backed Securities-- 0.0% Total Government Agency Mortgage-Backed Securities (Cost--$38,529,074) 38,553,324 GOVERNMENT AGENCY OBLIGATIONS--12.3% Government 3,875,000 Fannie Mae, 6.25% due 2/01/2011 $ 3,825,943 Agency Freddie Mac: Obligations-- 5,550,000 5.75% due 4/15/2008 5,511,816 12.3% 4,905,000 7% due 3/15/2010 5,188,558 4,650,000 6.75% due 3/15/2031 4,740,815 Total Government Agency Obligations (Cost--$19,249,896) 19,267,132
June 30, 2001 Mercury Total Return Bond Fund SCHEDULE OF INVESTMENTS (CONTINUED)
Face Industries Amount Investments Value NON-AGENCY MORTGAGE-BACKED SECURITIES++--10.5% Asset-Backed $ 84,736 CPS Auto Trust, 1998-1 A, 6% due 8/15/2003 $ 85,198 Securities-- 750,000 CS First Boston Mortgage Securities Corporation, 9.0% 1995-WF1 D, 7.532% due 12/21/2027 781,944 2,066,720 Chase Commercial Mortgage Securities Corporation, 1998-2 A1, 6.025% due 8/18/2007 2,072,391 98,978 Commercial Mortgage Acceptance Corporation 1996-C2 A2, 6.729% due 9/15/2023 (a) 101,329 1,462,519 Delta Funding Home Equity Loan Trust, 1991-1 A2F, 5.98% due 2/15/2023 1,474,663 2,370,251 First Union NB-Bank of America Commercial Mortgage Trust, 2001-C1 A1, 5.711% due 3/15/2033 2,319,883 368,415 Fund America Investors Trust I, 1998-NMC1 M1, 4.413% due 6/25/2028 (a) 365,828 3,158,708 GS Mortgage Securities Corporation II, 1998-C1 A1, 6.06% due 10/18/2030 3,180,250 22,431 Green Tree Financial Corporation, 1995-4 A4, 6.75% due 6/15/2025 22,479 450,000 Green Tree Recreational Equipment and Consumer Trust, 1996-B, 7.70% due 7/15/2018 443,425 850,000 Nomura Asset Securities Corporation, 1995-MD3 A1B, 8.15% due 3/04/2020 905,138 Resolution Trust Corporation: 1,870,067 1994-C1 E, 8% due 6/25/2026 1,858,529 463,264 1994-C2 G, 8% due 4/25/2025 459,832 ------------ 14,070,889 Collateralized 85,896 Blackrock Capital Finance L.P., 1997-R2 AP, Mortgage 13.33% due 12/25/2035 (a) 87,184 Obligations-- 200,000 CMC Securities Corporation IV, 1994-G A4, 7% 1.5% due 9/25/2024 194,940 146,264 Collateralized Mortgage Obligation Trust, 57 D, 9.90% due 2/01/2019 152,507 169,843 GE Capital Mortgage Services, Inc., 1994-24 A4, 7% due 7/25/2024 167,540
June 30, 2001 Mercury Total Return Bond Fund SCHEDULE OF INVESTMENTS (CONTINUED)
Face Industries Amount Investments Value NON-AGENCY MORTGAGE-BACKED SECURITIES (concluded) Collateralized Housing Securities Inc.: Mortgage $ 338,492 1994-1 AB2, 6.50% due 3/25/2009 $ 250,484 Obligations 183,288 1994-2 B1, 6.50% due 7/25/2009 144,797 (concluded) 422,724 Independent National Mortgage Corporation, 1995-F A5, 8.25% due 5/25/2010 430,116 372,515 Ocwen Residential MBS Corporation, 1998-R2 AP, 8.081% due 11/25/2034 (a)(b) 367,858 600,000 Washington Mutual, 2000-1 B1, 8.089% due 1/25/2040 (a)(b) 595,500 ------------ 2,390,926 Total Non-Agency Mortgage-Backed Securities (Cost--$16,486,335) 16,461,815 PREFERRED STOCKS--0.2% Shares Held 500 Home Ownership Funding 2 373,500 Total Preferred Stocks (Cost--$500,000) 373,500 US TREASURY OBLIGATIONS--17.7% Face Amount US Treasury $15,000,000 US Strip Principal, 0% due 8/15/2009 (d) 9,673,350 Obligations-- US Treasury Bonds: 17.7% 800,000 7.25% due 5/15/2016 911,248 500,000 8.75% due 8/15/2020 662,110 7,000,000 US Treasury Inflation Index Notes, 3.625% due 1/15/2008 (d) 7,835,315 US Treasury Notes: 2,500,000 5.75% due 11/15/2005 2,560,525 1,950,000 6.625% due 5/15/2007 2,094,729 820,000 6% due 8/15/2009 860,483 3,350,000 5% due 2/15/2011 3,250,003 Total US Treasury Obligations (Cost--$28,005,629) 27,847,763 SHORT-TERM INVESTMENTS--4.4% Commercial $ 4,650,000 Powergen US Funding LLC, 4.05% due Paper*-- 8/07/2001 $ 4,631,168 4.4% 2,300,000 Safeway Incorporated, 4.30% due 7/02/2001 2,300,000 6,931,168 Total Short-Term Investments (Cost--$6,931,168) 6,931,168 Total Investments (Cost--$165,141,918)--104.6% 164,519,322 Time Deposit**--0.1% 71,229 Variation Margin on Financial Futures Contracts++++--0.0% 36,092 Liabilities in Excess of Other Assets--(4.7%) (7,395,208) ------------ Net Assets--100.0% $157,231,435 ============ *Commercial Paper is traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Portfolio. **Time deposit bears interest at 2.75% and matures on 7/02/2001. ++Mortgage-Backed Securities are subject to principal paydowns as a result of prepayments or refinancings of the underlying instruments. As a result, the average life may be substantially less than the original maturity. ++++Financial futures contracts purchased as of June 30, 2001 were as follows: Number of Expiration Contracts Issue Date Value 375 US Treasury Notes September 2001 $ 38,630,858 Total Financial Futures Contracts Purchased (Total Contract Price--$39,188,486) $ 38,630,858 ============== Financial futures contracts sold as of June 30, 2001 were as follows: Number of Expiration Contracts Issue Date Value 265 US Treasury Notes September 2001 $ 26,582,813 Total Financial Futures Contracts Sold (Total Contract Price--$27,079,258) $ 26,582,813 ============== (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)All or a portion of security held as collateral in connection with open financial futures contracts. See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 2001 TOTAL RETURN BOND MASTER PORTFOLIO Assets: Investments, at value (identified cost--$165,141,918) $ 164,519,322 Cash 422 Time deposit 71,229 Receivables: Securities sold $ 9,518,841 Contributions 2,435,595 Interest 1,966,683 Paydowns 213,793 Variation margin 36,092 14,171,004 -------------- -------------- Total assets 178,761,977 -------------- Liabilities: Payables: Securities purchased 20,190,054 Withdrawals 1,212,694 Investment adviser 72,929 21,475,677 -------------- Accrued expenses and other liabilities 54,865 -------------- Total liabilities 21,530,542 -------------- Net Assets: Net assets $ 157,231,435 ============== Net Assets Consist of: Partners' capital $ 157,915,214 Unrealized depreciation on investments--net (683,779) -------------- Net assets $ 157,231,435 ============== See Notes to Financial Statements.
June 30, 2001 Mercury Total Return Bond Fund STATEMENT OF OPERATIONS
For the Period October 6, 2000++ to June 30, 2001 Total Return Bond Master Portfolio Investment Income: Interest and discount earned $ 8,188,873 Dividends 61,268 -------------- Total income 8,250,141 -------------- Expenses: Investment advisory fees $ 353,026 Accounting services 105,583 Custodian fees 8,354 Trustees' fees and expenses 8,026 Offering costs 5,179 Pricing fees 4,852 Professional fees 1,630 Other 6,309 -------------- Total expenses 492,959 -------------- Investment income--net 7,757,182 -------------- Realized & Unrealized Gain on Investments--Net: Realized gain on investments--net 895,917 Change in unrealized depreciation on investments--net 1,080,545 -------------- Net Increase in Net Assets Resulting from Operations $ 9,733,644 ============== ++Commencement of operations. See Notes to Financial Statements.
JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND STATEMENT OF CHANGES IN NET ASSETS
TOTAL RETURN BOND MASTER PORTFOLIO For the Period October 6, 2001++ Increase in Net Assets: to July 30, 2000 Operations: Investment income--net $ 7,757,182 Realized gain on investments--net 895,917 Change in unrealized depreciation on investments--net 1,080,545 -------------- Net increase in net assets resulting from operations 9,733,644 -------------- Net Capital Contributions: Increase in net assets derived from capital contributions 147,447,691 -------------- Net Assets: Total increase in net assets 157,181,335 Beginning of period 50,100 -------------- End of period $ 157,231,435 ============== ++Commencement of operations. See Notes to Financial Statements.
JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND FINANCIAL HIGHLIGHTS
TOTAL RETURN BOND MASTER PORTFOLIO The following ratios have been derived from information provided in the financial statements. For the Period October 6, 2001++ to July 30, 2000 Ratios to Average Net Assets: Expenses .42%* ============== Investment income--net 6.59%* ============== Supplemental Data: Net assets, end of period (in thousands) $ 157,231 ============== Portfolio turnover 276.08% ============== *Annualized. ++Commencement of operations. See Notes to Financial Statements.
JUNE 30, 2001 MERCURY TOTAL RETURN BOND FUND 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. On October 6, 2000, the Portfolio received all of the assets of a registered investment company that converted to a master/feeder structure. 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 the 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 seek 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 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. June 30, 2001 Mercury Total Return Bond Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) (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. (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. Prior to January 1, 2001, FAM provided accounting services to the Portfolio at its cost and the Portfolio reimbursed FAM for these services. FAM continues to provide certain accounting services to the Portfolio. The Portfolio reimburses FAM at its cost for such services. For the period October 6, 2000 to June 30, 2001, the Portfolio reimbursed FAM an aggregate of $36,178 for the above- described services. The Master Trust entered into an agreement with State Street Bank and Trust Company ("State Street"), effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Portfolio. The Portfolio pays a fee for these 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 period October 6, 2000 to June 30, 2001 were $599,391,639 and $581,982,695, respectively. June 30, 2001 Mercury Total Return Bond Fund NOTES TO FINANCIAL STATEMENTS (CONCLUDED) Net realized gains (losses) for the period October 6, 2000 to June 30, 2001 and net unrealized losses as of June 30, 2001 were as follows: Realized Unrealized Gains (Losses) Losses Long-term investments $ 1,036,992 $ (622,596) Financial futures contracts (141,075) (61,183) ------------------------------ Total investments $ 895,917 $ (683,779) ============================== As of June 30, 2001, net unrealized depreciation for Federal income tax purposes aggregated $630,952, of which $833,984 related to appreciated securities and $1,464,936 related to depreciated securities. At June 30, 2001, the aggregate cost of investments for Federal income tax purposes was $165,150,274. 4 Short-Term Borrowings: On December 1, 2000, the Master Trust, along with certain other funds managed by FAM and its affiliates, renewed and amended 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 facility. Amounts borrowed under the facility 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. The Portfolio did not borrow under the facility during the period October 6, 2000 to June 30, 2001. 5 Change in Independent Auditors: On July 31, 2001, the Board of Trustees of the Master Trust, upon the recommendation of the Board's audit committee, approved a change of the Fund's independent auditors to Ernst & Young LLP. There were no disagreements between Fund management and PricewaterhouseCoopers LLP prior to their resignation. June 30, 2001 Mercury Total Return Bond Fund 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, 2001, and the related statements of operations and changes in net assets and the financial highlights 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 audit. We conducted our audit 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, 2001, by correspondence with the custodian and brokers. 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 audit provides 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, 2001, and the results of its operations, the changes in its net assets and the financial highlights for the period from October 6, 2000 to June 30, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG MetroPark, New Jersey August 17, 2001 June 30, 2001 Mercury Total Return Bond Fund