MERRILL
LYNCH
MICHIGAN
MUNICIPAL
BOND FUND
Semi-Annual Report January 31, 1994
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.
Merrill Lynch Michigan
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, New Jersey
08543-9011
TO OUR SHAREHOLDERS
As 1993 drew to a close, the US economy showed signs of strong
improvement. The initial estimate for gross domestic product
(GDP) growth in the final quarter of 1993 was +5.9% in real
terms, the strongest quarterly performance since the fourth
quarter of 1987. GDP growth was led by interest rate-sensitive
sectors, such as housing, durable goods orders and business
investment in capital equipment. Consumer confidence also
improved after remaining lackluster throughout most of 1993.
While the exceptionally robust rate of growth may not be
sustainable in the first quarter of 1994 (especially considering
the harsh winter weather experienced by virtually half of the
country in January), this strong showing suggests that the US
economy may at last be gaining momentum. This was supported by
the December increase in the Index of Leading Economic
Indicators, the fifth monthly rise in this indicator of future
economic activity.
<PAGE>
At the same time, the rate of inflation remains in check.
Nevertheless, concerns arose late in 1993 that the rate of
business activity might increase inflationary pressures, which
were reflected in an upturn of longer-term interest rates. In
January, Federal Reserve Board Chairman Alan Greenspan indicated
in Congressional testimony that continued strong expansion of
economic activity would lead the central bank to tighten
monetary policy in an effort to contain inflation. On February 4,
1994, the central bank broke with tradition and publicly
announced an increase in short-term interest rates. In the weeks
ahead, investors will continue to gauge the pace of the economic
expansion and watch for signs of an overheating economy that
could prompt successive Federal Reserve Board actions to raise
short-term interest rates.
The Municipal Market
Yields on tax-exempt securities generally declined over the three
months ended January 31, 1994. Long-term revenue bond yields, as
measured by the Bond Buyer Revenue Bond Index, declined an
additional six basis points (0.06%) to end the quarter at 5.50%.
US Treasury bond yields, however, rose approximately 25 basis
points to end the period at approximately 6.20%. This
outperformance by municipal securities is likely to be the
dominant theme for much of 1994.
During the January quarter, taxable yields remained volatile in
reaction to the inherent conflicts between the extremely strong
economic recovery seen during the last quarter of 1993 and
continued low inflationary pressures. Tax-exempt bond yields,
however, reflected very positive technical factors. During the 12
months ended January 31, 1994, municipalities issued more than
$288 billion in securities, an increase of more than 21% versus
one year ago. As we have discussed in earlier reports to
shareholders, much of this increase has been the result of
municipalities refinancing existing higher-couponed debt. At
current yield levels, few of these issues remain to be refunded.
This has led to estimates of municipal bond issuance declining to
approximately $175 billion for all of 1994. More than $290
billion in long-term tax-exempt securities was issued in 1993.
In addition to this dramatic decline in issuance, investor demand
is expected to increase in the coming year. Greater demand should
be generated by a number of factors, with the recent increases in
marginal Federal income tax rates the most important. Also, bond
calls and early redemptions are expected to increase
significantly in the coming quarters and last into early 1995, at
least. The combination of declining new-issue volume and
increasing numbers of bonds redeemed prior to their stated
maturities will eventually lead to a net decline in the number of
bonds outstanding. In such a scenario, investor demand rises as
bondholders are forced to continually purchase new municipal
bonds to replace their previous holdings.
<PAGE>
The outlook for the municipal bond market is very favorable.
While the historic declines in yields seen over the last year are
unlikely to be repeated, the strong technical framework within
the tax-exempt market would support further modest declines in
tax-exempt yields. At the very least, should interest rates rise
in response to continued strong economic growth and a resurgence
in inflationary pressures, we believe that municipal bond price
deterioration will be limited in comparison to taxable investment
alternatives.
Portfolio Strategy
During the quarter ended January 31, 1994, we focused the Fund's
investments on those securities which generated high levels of
coupon income. We purchased non-callable bonds whenever they were
attractively priced in an effort to maintain the Fund's current
yield. Over the last 12 months, Michigan municipalities issued
over $7.2 billion in long-term securities, an increase of over
12% versus the prior year's issuance. However, it is unlikely
that the increase in issuance seen last year will be repeated,
and the supply of Michigan securities will probably be similar to
that of the national market. In fact, we expect issuance for 1994
to decline by approximately one-third. This expected reduction in
supply serves to support our positive investment outlook. Conse-
quently, the Fund remains fully invested.
We appreciate your ongoing interest in Merrill Lynch Michigan
Municipal Bond Fund, and we look forward to serving your
investment needs and objectives in the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
March 9, 1994
<TABLE>
PERFORMANCE DATA
None of the past results shown should be considered a representation of future performance.
Investment return and principal value of Class A and Class B Shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
<CAPTION>
Performance Summary--Class A Shares
<PAGE>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
1/29/93-12/31/93 $10.00 $10.52 -- $0.545 +10.87%
1/1/94-1/31/94 10.52 10.65 -- 0.032 + 1.63
------
Total $0.577
Cumulative total return as of 1/31/94: +12.68%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date, and do not include sales charge;
results would be lower if sales charge was included.
<CAPTION>
Performance Summary--Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
1/29/93-12/31/93 $10.00 $10.53 -- $0.497 +10.46%
1/1/94-1/31/94 10.53 10.65 -- 0.028 + 1.51
------
Total $0.525
Cumulative total return as of 1/31/94: +12.12%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date, and do not reflect deduction of any sales
charge; results would be lower if sales charge was deducted.
</TABLE>
Aggregate Total Return
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Inception (1/29/93)
through 12/31/93 +10.87% +6.43%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Inception (1/29/93)
through 12/31/93 +10.46% +6.46%
[FN]
*Maximum contingent deferred sales charge is 4% and is
reduced to 0% after 4 years.
**Assuming payment of applicable contingent deferred sales
charge.
<PAGE>
<TABLE>
PERFORMANCE DATA (concluded)
Recent Performance Results* 12 Month 3 Month
1/31/93 10/31/93 1/31/92 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $10.65 $10.60 $10.00 + 6.50% +0.47%
Class B Shares 10.65 10.60 10.00 + 6.50 +0.47
Class A Shares--Total Return +12.68(1) +2.27(2)
Class B Shares--Total Return +12.12(3) +2.14(4)
Class A Shares--Standardized 30-day Yield 4.61%
Class B Shares--Standardized 30-day Yield 4.31%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction
of any sales charges.
(1) Percent change includes reinvestment of $0.577 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.187 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.526 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.174 per share ordinary income dividends.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <S> <C> <S> <C>
Michigan--102.0%
AAA Aaa $ 1,670 Battle Creek, Michigan, Water Supply System, Revenue Refunding Bonds,
4.75% due 9/01/2010 (d) $ 1,623
AAA Aaa 2,000 Central Michigan University, Revenue Refunding Bonds, 5.50%
due 10/01/2010 (d) 2,067
AA A1 1,000 Clarkston, Michigan, Community Schools Refunding Bonds, UT, 5.90% due 5/01/2016 1,059
AAA Aaa 2,000 Dearborn, Michigan, School District Refunding Bonds, UT, 5% due 5/01/2014 (b) 1,962
Delta County, Michigan, Economic Development Corp., Environmental Impact Revenue
Bonds (Mead Escambia Paper), VRDN (a):
NR P1 300 Series C, 2.15% due 12/01/2023 300
NR P1 400 Series E, 2.20% due 12/01/2023 400
NR P1 200 Series F, 2.20% due 12/01/2013 200
A1 NR 1,000 Detroit, Michigan, Tax Increment Finance Authority Revenue Bonds (Central Industrial
Park Project), VRDN, 2.15% due 10/01/2010 (a) 1,000
AAA Aaa 4,500 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, 4.75%
due 7/01/2019 (c) 4,240
BBB Baa1 1,500 Dickinson County, Michigan, Economic Development Corp., PCR, Refunding (Champion
International Corp.), 5.85% due 10/01/2018 1,515
<PAGE>
BBB Baa1 1,960 Dickinson County, Michigan, Economic Development Corp., Solid Waste Disposal Revenue
Refunding Bonds (Champion International Corp.), 6.55% due 3/01/2007 2,087
AA- A1 1,500 Grand Rapids, Michigan, Sanitary Sewer System Improvement Revenue Bonds, 6% due
1/01/2022 1,590
A1+ VMIG1 300 Grand Rapids, Michigan, Water Supply System, Revenue Refunding Bonds, VRDN, 2% due
1/01/2020 (a)(c) 300
AAA Aaa 1,500 Grand Traverse County, Michigan, Hospital Finance Authority, Hospital Revenue Refunding
Bonds (Munson Healthcare), Series A, 6.25% due 7/01/2022 (d) 1,631
AA- A1 985 Kalamazoo, Michigan, Building Authority Revenue Bonds, Series A, 5.90% due 10/01/2017 1,041
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Michigan Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated
the names of some of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <S> <C> <S> <C>
Michigan (continued)
Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue Bonds
(Borgess Medical Center) (c):
AAA Aaa $ 1,000 7.10% due 1/01/1996 (e) $ 1,090
AAA Aaa 3,000 Series A, 6.25% due 6/01/2014 3,417
A+ A1 2,000 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue Refunding
and Improvement Bonds (Bronson Methodist), Series A, 6.375% due 5/15/2017 2,149
AAA Aaa 1,000 Kelloggsville, Michigan, Public School District Revenue Bonds, UT,
5.75% due 5/01/2018 (c) 1,050
A+ A1 1,000 Kent Hospital Finance Authority, Michigan, Hospital Facility, Revenue Refunding Bonds
(Butterworth Hospital), Series A, 5.375% due 1/15/2019 1,000
BBB NR 2,000 LaPeer, Michigan, Economic Development Corp., Limited Obligation Revenue Bonds
(LaPeer Health Services Project), 8.50% due 2/01/2012 (e) 2,489
AA Aa 1,000 Michigan Municipal Bond Authority Revenue Bonds (State Revolving Fund), Series A,
6.55% due 10/01/2013 1,132
<PAGE>
Michigan Public Power Agency, Revenue Refunding Bonds (Belle River Project):
AA- A1 5,295 Series A, 5.25% due 1/01/2018 5,259
AA- A1 3,050 Series B, 5% due 1/01/2019 2,995
AA- A 1,750 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 6.25% due
10/01/2020 1,907
AA- A1 1,500 Michigan State Comprehensive Transportation Revenue Refunding Bonds, Series B,
5.75% due 5/15/2011 1,558
Michigan State Hospital Finance Authority, Revenue Refunding Bonds:
A- A 1,250 (Detroit Medical Center--Obligation Group), Series A, 6.50% due 8/15/2018 1,358
AAA Aaa 500 (Henry Ford Health Systems), 6% due 9/01/2011 (d) 559
AA Aa 3,000 (Henry Ford Health Systems), 5.75% due 9/01/2017 3,096
AAA Aaa 2,500 Michigan State Housing Development Authority, Rental Housing Revenue Refunding Bonds,
Series A, 5.875% due 10/01/2017 (d) 2,554
Michigan State Strategic Fund, Limited Obligation Revenue Bonds:
A A2 1,250 (Ford Motor Company Project), Refunding, Series A, 7.10% due 2/01/2006 1,473
AA- A1 1,000 (Waste Management, Inc. Project), AMT, 6.625% due 12/01/2012 1,085
Michigan State Trunk Line Bonds, Series A:
AAA NR 1,500 7% due 8/15/1999 (e) 1,748
AA- A1 1,250 6% due 8/15/2019 1,325
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <S> <C> <S> <C>
Michigan (concluded)
Michigan State University, General Revenue Refunding Bonds, Series A:
AA- A1 $ 1,500 6% due 8/15/2016 $ 1,598
AA- A1 1,750 5.50% due 8/15/2022 1,750
A-1 P1 300 Midland County, Michigan, Economic Development Corp., Limited Obligation Revenue
Bonds (Dow Chemical Co. Project), Series A, AMT, VRDN, 2.35% due 12/01/2014 (a) 300
NR P1 2,600 Monroe County, Michigan, Economic Development Corp., Limited Obligation Revenue
Refunding Bonds (Detroit Edison Co.), Series CC, VRDN, 2.25% due 10/01/2024 (a) 2,600
AAA Aaa 1,000 Monroe County, Michigan, PCR (Detroit Edison Co.), AMT, Collateral, Series CC, 6.55% due
6/01/2024 (b) 1,117
AAA Aaa 1,000 Port Huron, Michigan, Area School District Refunding Bonds, UT, 6% due 5/01/2012 (d) 1,065
AAA Aaa 1,690 Romulus, Michigan, Community Schools Refunding Bonds, UT, 5.82%* due 5/01/2018 (c) 446
<PAGE>
NR A 1,775 Saginaw-Midland, Michigan, Municipal Water Supply Corp. Revenue Bonds, 5.50% due
9/01/2012 1,836
AA Aa 1,250 University of Michigan, University Hospital Revenue Bonds, 6.375% due 12/01/2024 1,316
University of Michigan, University Revenue Refunding Bonds:
NR VMIG1 600 (Hospital), Series A, VRDN, 2.15% due 12/01/2019 (a) 600
AA Aa 1,725 (Parking System), Series A, 5% due 6/01/2015 1,700
AA+ Aa 1,790 (Student Fee), 5.50% due 4/01/2011 1,863
AAA Aaa 1,500 Western Michigan University Revenue Bonds, 6.125% due 11/15/2022 (c) 1,626
AA A1 1,100 Wyoming, Michigan, Public Schools Refunding Bonds, 5.90% due 5/01/2022 1,163
Total Investments (Cost--$73,951)--102.0% 77,239
Liabilities in Excess of Other Assets--(2.0%) (1,517)
---------
Net Assets--100.0% $ 75,722
=========
<FN>
(a) The interest rate is subject to change periodically based upon the prevailing market rate.
The interest rates shown are the rates in effect at January 31, 1994.
(b) MBIA Insured.
(c) FGIC Insured.
(d) AMBAC Insured.
(e) Prerefunded.
*Represents the yield to maturity on this zero coupon issue.
Futures contracts sold as of January 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1a)
40 US Treasury Bonds March 1994 $(4,686,250)
Total Futures Contracts
(Total Contract Price--$4,703,750) $(4,686,250)
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL INFORMATION
<CAPTION>
Statement of Assets and Liabilities as of January 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$73,950,510) (Note 1a) $ 77,238,841
Cash 100,177
Receivables:
Interest $ 1,058,807
Beneficial interest sold 746,276
Investment adviser (Note 2) 79,639
Variation margin 11,250 1,895,972
------------
Deferred organization expenses (Note 1e) 48,028
Prepaid expenses and other assets 458
------------
Total assets 79,283,476
------------
Liabilities: Payables:
Securities purchased 3,348,497
Beneficial interest redeemed 74,986
Dividends to shareholders (Note 1f) 63,772
Distributor (Note 2) 22,657 3,509,912
------------
Accrued expenses and other liabilities 51,449
------------
Total liabilities 3,561,361
------------
Net Assets: Net assets $ 75,722,115
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $ 151,536
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 559,653
Paid-in capital in excess of par 71,763,781
Accumulated realized capital losses--net (58,686)
Unrealized appreciation on investments--net 3,305,831
------------
Net assets $ 75,722,115
============
Net Asset Value: Class A--Based on net assets of $16,134,165 and 1,515,363 shares of
beneficial interest outstanding $ 10.65
============
Class B--Based on net assets of $59,587,950 and 5,596,526 shares of
beneficial interest outstanding $ 10.65
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL INFORMATION (continued)
<CAPTION>
Statement of Operations
For the Six
Months Ended
January 31, 1994
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 1,777,882
(Note 1d):
Expenses: Investment advisory fees (Note 2) 183,685
Distribution fees--Class B (Note 2) 130,579
Printing and shareholder reports 63,077
Professional fees 27,992
Accounting services (Note 2) 21,271
Transfer agent fees--Class B (Note 2) 16,034
Registration fees (Note 1e) 13,996
Custodian fees 5,835
Amortization of organization expenses (Note 1e) 5,416
Transfer agent fees--Class A (Note 2) 3,832
Pricing fees 2,862
Trustees' fees and expenses 1,449
Other 1,368
------------
Total expenses before reimbursement 477,396
Reimbursement of expenses (Note 2) (263,324)
------------
Total expenses after reimbursement 214,072
------------
Investment income--net 1,563,810
------------
Realized & Realized gain on investments--net 248,827
Unrealized Gain on Change in unrealized appreciation on investments--net 2,304,718
Investments--Net ------------
(Notes 1d & 3): Net Increase in Net Assets Resulting from Operations $ 4,117,355
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL INFORMATION (continued)
<CAPTION>
Statements of Changes in Net Assets
For the
For the Period
Six Months January 29,
Ended 1993++ to
January 31, July 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 1,563,810 $ 1,120,889
Realized gain on investments--net 248,827 54,899
Change in unrealized appreciation on investments--net 2,304,718 1,001,113
------------ ------------
Net increase in net assets resulting from operations 4,117,355 2,176,901
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (369,468) (290,870)
Shareholders Class B (1,194,342) (830,019)
(Note 1f): Realized gain on investments--net:
Class A (77,279) --
Class B (285,133) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (1,926,222) (1,120,889)
------------ ------------
Beneficial Interest Net increase in net assets derived from beneficial interest transactions 15,562,657 56,812,313
Transactions ------------ ------------
(Note 4):
Net Assets: Net increase in net assets 17,753,790 57,868,325
Beginning of period 57,968,325 100,000
------------ ------------
End of period $ 75,722,115 $ 57,968,325
============ ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL INFORMATION (concluded)
<CAPTION>
Financial Highlights
Class A Class B
------------------- -------------------
For the For the For the For the
Six Period Six Period
The following per share data and ratios have been derived Months Jan. 29, Months Jan. 29,
from information provided in the financial statements. Ended 1993++ to Ended 1993++ to
Jan. 31, July 31, Jan. 31, July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1994 1993
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.29 $ 10.00 $ 10.29 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .27 .26 .24 .24
Realized and unrealized gain on investments--net .41 .29 .41 .29
------- ------- ------- -------
Total from investment operations .68 .55 .65 .53
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.27) (.26) (.24) (.24)
Realized gain on investments--net (.05) -- (.05) --
------- ------- ------- -------
Total dividends and distributions (.32) (.26) (.29) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.65 $ 10.29 $ 10.65 $ 10.29
======= ======= ======= =======
Total Investment Based on net asset value per share 6.69%+++ 5.61%+++ 6.43%+++ 5.35%+++
Return:++++ ======= ======= ======= =======
Ratios to Expenses, excluding distribution fees and net of
Average reimbursement .25%* .08%* .25%* .08%*
Net Assets: ======= ======= ======= =======
Expenses, net of reimbursement .25%* .08%* .75%* .58%*
======= ======= ======= =======
Expenses 1.03%* 1.02%* 1.54%* 1.53%*
======= ======= ======= =======
Investment income--net 5.07%* 5.20%* 4.57%* 4.71%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $16,134 $13,276 $59,588 $44,692
Data: ======= ======= ======= =======
Portfolio turnover 32.33% 31.23% 32.33% 31.23%
======= ======= ======= =======
<FN>
++Commencement of Operations.
++++Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
*Annualized.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Michigan Municipal Bond Fund (the "Fund") is part
of Merrill Lynch Multi-State Municipal Series Trust (the
"Trust"). The Fund is registered under the Investment Company Act
of 1940 as a non-diversified, open-end management investment
company. The Fund offers both Class A and Class B Shares. Class A
Shares are sold with a front-end sales charge. Class B Shares may
be subject to a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B
Shares bear certain expenses related to the distribution of such
shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued
at the last available bid price in the over-the-counter market or
on the basis of yield equivalents as obtained from one or more
dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are
valued at their settlement prices as of the close of such
exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Short-term
investments with a remaining maturity of sixty days or less are
valued on an amortized cost basis, which approximates market.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by
or under the direction of the Board of Trustees of the Trust,
including valuations furnished by a pricing service retained by
the Trust, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the
Trustees.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
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 Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund
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 Fund as unrealized gains or losses. When the
contract is closed, the Fund 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.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
<PAGE>
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Interest income is recognized on
the accrual basis. Original issue discounts and market premiums
are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost
basis.
(e) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration
fees are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of
capital gains are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994,
the investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co. The Fund has also entered
into Distribution Agreements and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of MLIM.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee based upon the
average daily value of the Fund's net assets at the following
annual rates: 0.55% of the Fund's average daily net assets not
exceeding $500 million; 0.525% of average daily net assets in
excess of $500 million but not exceeding $1 billion; and 0.50% of
average daily net assets in excess of $1 billion. For the six
months ended January 31, 1994, FAM earned fees of $183,685, all
of which was voluntarily waived. FAM also reimbursed the Fund
additional expenses of $79,639.
<PAGE>
Pursuant to a distribution plan (the "Distribution Plan") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor an ongoing
account maintenance fee and distribution fee relating to Class B
Shares, which are accrued daily and paid monthly at the annual
rates of 0.25% and 0.25%, respectively, of the average daily net
assets of the Class B Shares of the Fund. Pursuant to a sub-
agreement with the Distributor, Merrill Lynch also provides
account maintenance and distribution services to the Fund. As
authorized by the Plan, the Distributor has entered into an
agreement with Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), an affiliate of FAM, which provides for the
compensation of MLPF&S for providing distribution-related
services to the Fund. For the six months ended January 31, 1994,
MLFD earned underwriting discounts of $5,335, and MLPF&S earned
dealer concessions of $33,839 on sales of the Fund's Class A
Shares.
MLPF&S also received contingent deferred sales charges of $27,996
relating to Class B Share transactions during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, MLIM, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the six months ended January 31, 1994 were
$34,214,022 and $20,648,346, respectively.
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains as of January 31, 1994 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 203,764 $ 3,288,331
Financial futures contracts 45,063 17,500
----------- -----------
Total $ 248,827 $ 3,305,831
=========== ===========
As of January 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $3,288,331, all of which related
to appreciated securities. The aggregate cost of investments at
January 31, 1994 for Federal income tax purposes was $73,950,510.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $15,562,657 and $56,812,313 for the six months
ended January 31, 1994 and the period January 29, 1993
(commencement of operations) to July 31, 1993, respectively.
<PAGE>
Transactions in shares of beneficial interest for Class A and
Class B Shares were as follows:
Class A Shares for the Six Dollar
Months Ended Jan. 31, 1994 Shares Amount
Shares sold 313,193 $ 3,303,023
Shares issued to shareholders
in reinvestment of dividends
and distributions 13,573 142,766
----------- -----------
Total issued 326,766 3,445,789
Shares redeemed (101,972) (1,071,912)
----------- -----------
Net increase 224,794 $ 2,373,877
=========== ===========
Class A Shares for the
Period Jan. 29, 1993++ Dollar
to July 31, 1993 Shares Amount
Shares sold 1,318,905 $13,316,740
Shares issued to shareholders
in reinvestment of dividends
and distributions 14,012 142,932
----------- -----------
Total issued 1,332,917 13,459,672
Shares redeemed (47,348) (481,138)
----------- -----------
Net increase 1,285,569 $12,978,534
=========== ===========
[FN]
++Prior to January 29, 1993 (commencement of operations), the
Fund issued 5,000 shares to FAM for $50,000.
<PAGE>
Class B Shares for the Six Dollar
Months Ended Jan. 31, 1994 Shares Amount
Shares sold 1,364,295 $14,367,333
Shares issued to shareholders
in reinvestment of dividends
and distributions 34,360 361,555
----------- -----------
Total issued 1,398,655 14,728,888
Shares redeemed (146,480) (1,540,108)
----------- -----------
Net increase 1,252,175 $13,188,780
=========== ===========
Class B Shares for the
Period Jan. 29, 1993++ Dollar
to July 31, 1993 Shares Amount
Shares sold 4,381,535 $44,258,981
Shares issued to shareholders
in reinvestment of dividends 47,013 479,835
----------- -----------
Total issued 4,428,548 44,738,816
Shares redeemed (89,197) (905,037)
----------- -----------
Net increase 4,339,351 $43,833,779
=========== ===========
[FN]
++Prior to January 29, 1993 (commencement of operations), the
Fund issued 5,000 shares to FAM for $50,000.
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Kenneth S. Axelson, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
Custodian
National Westminster Bank NJ
10 Exchange Place
Jersey City, New Jersey 07302
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
