MERRILL
LYNCH
NORTH CAROLINA
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
North Carolina
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 perform-
ance 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 over-
heating 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 in-
crease 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 gene-
rated 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 invest-
ment alternatives.
Portfolio Strategy
For the quarter ended January 31, 1994, net assets for Merrill Lynch North
Carolina Municipal Bond Fund totaled $64 million. This reflects a 9.7% in-
crease over the October quarter. Demand for municipal bonds remains high as
investors anticipate dwindling volume. The North Carolina sector of the tax-
exempt market outperformed the general market as supply remained low. As a
result, the Fund is fully invested in long-term North Carolina tax-exempt
securities. Looking ahead, our portfolio strategy will continue to focus on
investing new assets in high-quality securities that will yield an attractive
level of income while offering superior price appreciation potential.
We appreciate your ongoing interest in Merrill Lynch North Carolina 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 11, 1994
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.
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
9/25/92--12/31/92 $10.00 $10.16 -- $0.138 + 3.00%
1993 10.16 10.90 -- 0.616 +13.62
1/1/94--1/31/94 10.90 11.03 -- 0.034 + 1.60
------
Total $0.788
Cumulative total return as of 1/31/94: +18.90%**
<PAGE>
<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.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
9/25/92--12/31/92 $10.00 $10.16 -- $0.124 + 2.86%
1993 10.16 10.90 -- 0.562 +13.06
1/1/94--1/31/94 10.90 11.03 -- 0.030 + 1.56
------
Total $0.716
Cumulative total return as of 1/31/94: +18.11%**
<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>
Average Annual Total Return
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 12/31/93 +13.62% +9.08%
Inception (9/25/92) through
12/31/93 +13.23 +9.64
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 12/31/93 +13.06% + 9.06%
Inception (9/25/92) through
12/31/93 +12.66 +10.36
[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>
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
1/31/94 10/31/93 1/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $11.03 $10.98 $10.21 + 8.03% +0.46%
Class B Shares 11.03 10.98 10.21 + 8.03 +0.46
Class A Shares--Total Return +14.39(1) +2.32(2)
Class B Shares--Total Return +13.82(3) +2.19(4)
Class A Shares--Standardized 30-day Yield 4.55%
Class B Shares--Standardized 30-day Yield 4.23%
<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 $0.616 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.200 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.563 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.187 per share ordinary income dividends.
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch North Carolina
Municipal Bond Fund's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many of
the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
LEVRRS Leveraged Reverse Rate Securities
RIB Residual Interest Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina--91.1%
<S> <S> <C> <S> <C>
AAA Aaa $1,500 Buncombe County, North Carolina, Metropolitan Sewer District Sewer Systems,
Revenue Refunding Bonds, Series A, 5.50% due 7/01/2022 (f) $ 1,555
AAA Aaa 600 Catawba County, North Carolina, Hospital Revenue Refunding Bonds (Catawba
Memorial Hospital Project), 6.20% due 10/01/2009 (b) 663
AAA Aaa 2,500 Charlotte, North Carolina, COP (Convention Facility Project), 6.75% due
12/01/2001 (b)(g) 2,959
AA Aa 2,000 Charlotte, North Carolina, Hospital Authority, Health Care System,
Revenue Refunding Bonds (Charlotte--Mecklenburg Hospital), 6.25% due 1/01/2020 2,172
AAA Aaa 1,500 Cleveland County, North Carolina, Refunding Bonds, UT, 5.10% due 6/01/2007 (f) 1,562
AAA Aaa 1,000 Concord, North Carolina, Utilities System Revenue Bonds, 5.75% due 12/01/2017 (c) 1,061
NR Aa1 500 Craven County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Resources Revenue Bonds (Craven Wood Energy), VRDN,
AMT, Series B, 2.35% due 5/01/2011 (a) 500
AAA Aaa 1,000 Cumberland County, North Carolina, Hospital Facilities Revenue Bonds (Cumberland
County Hospital System), 6% due 10/01/2021 (c) 1,056
AAA Aaa 1,500 Durham County, North Carolina, GO, UT, 5.75% due 2/01/2010 1,614
AAA Aa1 1,280 Durham, North Carolina, Public Improvement Bonds, GO, 4.90% due 2/01/2014 1,262
AAA Aaa 500 Fayetteville, North Carolina, Public Works Commission Revenue Bonds, Series A,
6% due 3/01/2016 (d) 540
AAA Aaa 3,500 Fayetteville, North Carolina, Public Works Commission Revenue Refunding
Bonds, 4.75% due 3/01/2014 (f) 3,390
AA+ Aa1 1,525 Forsyth County, North Carolina, GO Refunding, UT, Series A, 4.60% due 3/01/2004 1,558
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina (continued)
<S> <S> <C> <S> <C>
NR Aa2 $ 200 Halifax County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Exempt Facilities Revenue Bonds, VRDN, AMT, 2.25% due
12/01/2019 (a) $ 200
BBB Baa1 2,500 Haywood County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Solid Waste Disposal Revenue Bonds (Champion
International Corporation Project), AMT, 5.50% due 10/01/2018 2,440
A A2 3,500 Martin County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Solid Waste Weyerhaeuser Company), AMT,
5.65% due 12/01/2023 3,524
AAA Aaa 1,500 Mecklenburg County, North Carolina, Public Improvement Bonds, GO, UT, 6.25%
due 1/01/2002 (g) 1,727
AAA Aaa 2,475 New Hanover County, North Carolina, Hospital Revenue Bonds (New Hanover
Regional Medical Center Project), 4.75% due 10/01/2023 (b) 2,297
A- A 1,000 North Carolina Eastern Municipal Power Agency, Power System Revenue Refunding
Bonds, Series A, 6.50% due 1/01/2017 1,080
North Carolina Educational Facilities, Finance Agency Revenue Refunding Bonds:
AA NR 1,000 (Davidson College Project), 6% due 12/01/2012 1,065
AAA NR 900 (Elon College Project), 6.375% due 1/01/2007 (e) 1,005
AA Aa 1,700 North Carolina HFA, GO, 5.45% due 9/01/2024 (i) 1,700
A+ Aa 670 North Carolina HFA, Revenue Bonds, Series U, GO, 6.70% due 3/01/2018 721
A+ Aa 2,780 North Carolina HFA, Revenue Bonds, Series V, GO, AMT, 6.80% due 9/01/2025 3,004
North Carolina Medical Care Community Hospital Revenue Bonds:
NR Baa 800 (Halifax Memorial Hospital Project), 6.75% due 8/15/2024 864
A+ A 2,000 (Moore Regional Hospital Project), 5% due 10/01/2018 1,902
AA Aa 1,200 (Presbyterian Health Service Corporation Project), 6% due 10/01/2024 1,252
A+ A1 1,500 (Rex Hospital Project), 6.25% due 6/01/2017 1,625
NR VMIG1 100 (Scotland Memorial Hospital Project), Series A, VRDN, 2.25% due 10/01/2013 (a)(g) 100
AAA Aaa 1,000 (Wilson Memorial Hospital Project), 6.50% due 11/01/2020 (b) 1,109
A A 3,350 North Carolina Municipal Power Agency, Electric Revenue Refunding Bonds (Catawba
Electric Project Number 1), 6.25% due 1/01/2017 3,626
AAA Aaa 1,000 Piedmont Triad Airport Authority, North Carolina, Airport Revenue Refunding Bonds,
5% due 7/01/2016 (c) 987
A+ A 800 Rocky Mountain, North Carolina, Water and Sewer Bonds, GO, UT, 6.30% due 5/01/2009 880
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $2,085 Rutherford County, North Carolina, Refunding Bonds, UT, 5.10% due 6/01/2008 (c) $ 2,138
A- A 700 Shelby, North Carolina, Combined Producing Facilities System Revenue Bonds
(Capital Improvement), 6.625% due 6/01/2017 781
A+ Al 800 Union County, North Carolina, School Bonds, GO, UT, 5.90% due 3/01/2009 861
AA- Al 800 University of North Carolina, Chapel Hill, University of North Carolina, Hospital
Revenue Bonds (Board of Governors), 6.375% due 2/15/2017 869
AA Aa 2,400 University of North Carolina, Utilities Systems Revenue Refunding Bonds (Chapel
Hill), 5% due 8/01/2011 2,397
Puerto Rico--11.8%
Puerto Rico, Commonwealth, Highway and Transportation Authority Revenue Bonds,
Series T:
A NR 1,000 AMT, 6.625% due 7/01/2018 1,124
A NR 1,000 6.50% due 7/01/2002 (g) 1,174
AAA NR 700 Puerto Rico, Commonwealth, Public Improvement Bonds, GO, UT, Series A, 6.50% due
7/01/1999 (g) 789
AAA Aaa 1,250 Puerto Rico, Commonwealth, Public Improvement Bonds, RIB, 9.132% due 7/01/2020 (d)(h) 1,433
A Baa1 1,000 Puerto Rico, Commonwealth, Refunding Bonds, GO, UT, 5.25% due 7/01/2018 983
A- Baa1 1,500 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds, Series 0, 6%
due 7/01/2010 1,562
AAA Aaa 400 Puerto Rico Electric Power Authority Revenue Bonds, LEVRRS, 9.428% due
7/01/2023 (d)(h) 464
Total Investments (Cost--$61,783)--102.9% 65,575
Liabilities in Excess of Other Assets--(2.9%) (1,879)
-------
Net Assets--100.0% $63,696
=======
<FN>
(a)The interest rate is subject to change periodically based
upon the prevailing market rate. The interest rates
shown are those in effect at January 31, 1994.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FSA Insured.
(e)Insured by Connie Lee.
(f)FGIC Insured.
(g)Prerefunded.
(h)The interest rate is subject to change periodically and inversely
based upon the prevailing market rate. The interest rates shown are
those in effect at January 31, 1994.
(i)FHA Insured.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of January 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$61,783,486) (Note 1a) $65,575,497
Cash 63,000
Receivables:
Interest $ 799,196
Beneficial interest sold 324,295 1,123,491
--------
Deferred organization expenses (Note 1e) 42,691
Prepaid expenses and other assets (Note 1e) 20,405
-----------
Total assets 66,825,084
-----------
Liabilities: Payables:
Securities purchased 2,957,719
Dividends to shareholders (Note 1f) 56,610
Distributor (Note 2) 19,905
Beneficial interest redeemed 13,769
Investment adviser (Note 2) 2,472 3,050,475
-----------
Accrued expenses and other liabilities 78,646
-----------
Total liabilities 3,129,121
-----------
Net Assets: Net assets $63,695,963
===========
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $ 111,529
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 466,117
Paid-in capital in excess of par 59,269,717
Undistributed realized capital gains--net 56,589
Unrealized appreciation on investments--net 3,792,011
-----------
Net assets $63,695,963
===========
Net Asset Value: Class A--Based on net assets of $12,296,752 and 1,115,290 shares of
beneficial interest outstanding $ 11.03
===========
Class B--Based on net assets of $51,399,211 and 4,661,165 shares of
beneficial interest outstanding $ 11.03
===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Six
Months Ended
January 31, 1994
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 1,570,927
(Note 1d):
Expenses: Investment advisory fees (Note 2) 157,773
Distribution fees--Class B (Note 2) 116,158
Professional fees 35,823
Printing and shareholder reports 27,562
Accounting services (Note 2) 21,103
Transfer agent fees--Class B (Note 2) 11,706
Custodian fees 6,424
Registration fees (Note 1e) 6,289
Amortization of organization expenses (Note 1e) 5,020
Pricing fees 3,076
Transfer agent fees--Class A (Note 2) 2,357
Trustees' fees and expenses 1,387
Other 1,072
-----------
Total expenses before reimbursement 395,750
Reimbursement of expenses (Note 2) (151,231)
-----------
Total expenses after reimbursement 244,519
-----------
Investment income--net 1,326,408
-----------
Realized & Realized gain on investments--net 396,151
Unrealized Gain on Change in unrealized appreciation on investments--net 1,732,469
Investments--Net -----------
(Notes 1d & 3): Net Increase in Net Assets Resulting from Operations $ 3,455,028
===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the
For the Period
Six Months Sept. 25,
Ended 1992++ to
Jan. 31, July 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 1,326,408 $ 1,334,089
Realized gain on investments--net 396,151 17,883
Change in unrealized appreciation on investments--net 1,732,469 2,059,542
----------- -----------
Net increase in net assets resulting from operations 3,455,028 3,411,514
----------- -----------
Dividends & Investment income--net:
Distributions to Class A (274,554) (263,852)
Shareholders Class B (1,051,854) (1,070,237)
(Note 1f): Realized gain on investments--net:
Class A (70,229) --
Class B (287,216) --
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders (1,683,853) (1,334,089)
----------- -----------
Beneficial Interest Net increase in net assets derived from beneficial interest transactions 12,642,853 47,104,510
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 14,414,028 49,181,935
Beginning of period 49,281,935 100,000
----------- -----------
End of period $63,695,963 $49,281,935
=========== ===========
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
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 Sept. 25, Months Sept. 25,
from information provided in the financial statements. Ended 1992++ to Ended 1992++ 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 $ 10.67 $ 10.00 $ 10.67 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .28 .46 .25 .41
Realized and unrealized gain on investments--net .42 .67 .42 .67
-------- -------- -------- --------
<PAGE>
Total from investment operations .70 1.13 .67 1.08
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.28) (.46) (.25) (.41)
Realized gain on investments--net (.06) -- (.06) --
-------- -------- -------- --------
Total dividends and distributions (.34) (.46) (.31) (.41)
-------- -------- -------- --------
Net asset value, end of period $ 11.03 $ 10.67 $ 11.03 $ 10.67
======== ======== ======== ========
Total Investment Based on net asset value per share 6.61%+++ 11.52%+++ 6.35%+++ 11.06%+++
Return:** ======== ======== ======== ========
Ratios to Expenses, excluding distribution fees and net of
Average reimbursement .44%* .20%* .45%* .20%*
Net Assets: ======== ======== ======== ========
Expenses, net of reimbursement .44%* .20%* .95%* .70%*
======== ======== ======== ========
Expenses .97%* 1.15%* 1.48%* 1.67%*
======== ======== ======== ========
Investment income--net 5.03%* 5.26%* 4.53%* 4.77%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 12,297 $ 9,311 $ 51,399 $ 39,970
Data: ======== ======== ======== ========
Portfolio turnover 24.81% 27.98% 24.81% 27.98%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch North Carolina 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 re-
lating to such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
<PAGE>
(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. Short-term investments with remaining maturities
of sixty days or less are valued at amortized cost, which approximates
market value. 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. 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.
(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.
<PAGE>
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 Manage-
ment, 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 $157,773, of which $147,472 was voluntarily waived. The
Fund has also paid $3,759 in additional expenses.
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 ongoing account maintenance and
distribution fees 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 Distri-
butor, 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 dis-
counts of $4,749, and MLPF&S earned dealer concessions of $34,034 on sales
of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $21,732 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.
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the six months ended January 31, 1994 were $27,799,002 and $13,814,014,
respectively.
Net realized and unrealized gains as of January 31, 1994 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 395,502 $ 3,792,011
Short-term investments 124 --
Financial futures contracts 525 --
---------- -----------
Total $ 396,151 $ 3,792,011
========== ===========
As of January 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $3,792,011, of which $3,794,788 related to
appreciated securities and $2,777 related to depreciated securities. The
aggregate cost of investments at January 31, 1994 for Federal income tax
purposes was $61,783,486.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions
was $12,642,853 for the six months ended January 31, 1994 and $47,104,510
for the period ended July 31, 1993.
Transactions in shares of beneficial interest for Class A and Class B Shares
were as follows:
Class A Shares for the Six Months Dollar
Ended January 31,1994 Shares Amount
Shares sold 277,231 $ 3,027,315
Shares issued to shareholders in
reinvestment of dividends and
distributions 14,191 154,738
------- -----------
Total issued 291,422 3,182,053
Shares redeemed (48,894) (534,221)
------- -----------
Net increase 242,528 $ 2,647,832
======= ===========
Class A Shares for the Period
September 25, 1992++ Dollar
to July 31, 1993 Shares Amount
Shares sold 1,069,200 $11,000,250
Shares issued to shareholders
in reinvestment of dividends and
distributions 8,291 86,876
--------- -----------
Total issued 1,077,491 11,087,126
Shares redeemed (209,729) (2,167,397)
--------- -----------
Net increase 867,762 $ 8,919,729
========= ===========
[FN]
++ Prior to September 25, 1992 (commencement of operations), the
Fund issued 5,000 shares to FAM for $50,000.
Class B Shares for the
Six Months Ended Dollar
January 31, 1994 Shares Amount
Shares sold 1,012,064 $11,050,662
Shares issued to shareholders
in reinvestment of dividends
and distributions 61,617 671,998
--------- -----------
Total issued 1,073,681 11,722,660
Shares redeemed (158,435) (1,727,639)
--------- -----------
Net increase 915,246 $ 9,995,021
========= ===========
Class B Shares for the
Period September 25, 1992++ Dollar
to July 31, 1993 Shares Amount
Shares sold 3,868,435 $39,508,786
Shares issued to shareholders
in reinvestment of dividends
and distributions 41,874 437,748
--------- -----------
Total issued 3,910,309 39,946,534
Shares redeemed (169,390) (1,761,753)
--------- -----------
Net increase 3,740,919 $38,184,781
========= ===========
++Prior to September 25, 1992 (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
<PAGE>
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
