MERRILL LYNCH
ARKANSAS
MUNICIPAL
BOND FUND
FUND LOGO
Semi-Annual Report
January 31, 1995
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
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
<PAGE>
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Merrill Lynch Arkansas
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
We are pleased to provide you with this first semi-annual report for
Merrill Lynch Arkansas Municipal Bond Fund. In this and future
shareholder reports, we will highlight the Fund's investment
performance, describe recent investment activities, and examine some
of the important market developments that helped shape our
investment strategy during the period under review.
Merrill Lynch Arkansas Municipal Bond Fund seeks to provide
shareholders with as high a level of income exempt from Federal and
Arkansas income taxes as is consistent with prudent investment
management. The Fund invests primarily in a portfolio of long-term,
investment-grade obligations, the interest on which is exempt from
Federal and Arkansas income taxes.
The Environment
The combination of heightened inflationary concerns, anticipation of
further tightening of monetary policy by the Federal Reserve Board
and the turmoil of the Mexican currency crisis all exerted negative
influences on the US financial markets during the January quarter.
On the positive side, increasing signs that the US economy may be
losing momentum suggested that most of the interest rate increases
for this economic cycle may be behind us. As a result of these
economic crosscurrents, the US stock and bond markets continued to
be volatile during the period.
<PAGE>
The manufacturing sector proved to be the driving force behind the
US economy through the final quarter of 1994, making an important
contribution to the substantial increase in corporate earnings. US
companies have been successful at containing labor costs, which are
an important component of the inflation outlook. Growth in the
economy has not been translated into higher wages and benefits for
US workers. Consumer spending is growing at a slower pace than in
previous economic recoveries, but households are nonetheless
spending more than saving, as the personal savings rate fell to an
all-time annual low in 1994.
In the weeks ahead, investors will continue to assess economic data
and inflationary trends in order to gauge whether further increases
in short-term interest rates are likely as 1995 unfolds. Despite the
widespread concerns about rising prices for raw materials and
incipient inflationary pressures, 1994's inflation results were as
positive as those in 1993, creating the best sustained inflation
performance in 30 years. However, it is not likely that such
positive inflation results will be duplicated in 1995. Investors
will also focus on the progress that the new Congress makes on both
reducing spending and the Federal budget deficit and passing tax
cuts that promote savings and investment. Legislative progress,
combined with continued indications of moderate and sustainable
levels of economic growth, would be positive for the US capital
markets. However, the lagged effects of higher interest rates could
slow the economy sharply and with it, the growth of corporate
profits.
The Municipal Market
The municipal bond market continued to exhibit considerable interest
rate volatility during the three months ended January 31, 1995.
Yields on A-rated municipal revenue bonds continued to rise
throughout November to a high of 7.37% as measured by the Bond Buyer
Revenue Bond Index. The tax-exempt bond market improved dramatically
for the remainder of the quarter, and yields fell by approximately
60 basis points (0.60%) to a four-month low of 6.78%. However, the
Index failed to capture much of the rally that occurred at the end
of January as market yields declined a further ten basis points into
the 6.65% range. Municipal bond prices have now recaptured most of
their declines of the last six months.
This improvement in municipal bond prices during the January quarter
was largely the result of significant positive change in investor
sentiment. The series of interest rate increases engineered during
1994 have gone a long way in confirming the Federal Reserve Board's
anti-inflationary resolve. Additionally, the recent signs of a
weakening domestic economy, as well as the negative near-term impact
of the Kobe earthquake and Mexican currency situation, have allowed
investors to become more comfortable with the concept that the vast
majority of the recent rise in fixed-income rates has already
occurred and that yields during 1995 are more likely to remain
stable or decline than they are to significantly rise again.
Consequently, current yield levels are being viewed as attractive to
long-term investors.
<PAGE>
In addition to this more positive outlook, the ongoing strong
technical position of the municipal bond market has only fostered
the increase in tax-exempt bond prices seen in recent months. Over
$25 billion in bond proceeds became available to investors at year-
end 1994 from bond maturities, coupon payments and early
redemptions. However, during the recent January quarter, new bond
issuance was less than $25 billion, down 50% from the January 1994
quarter. In January 1995, less than $7 billion in long-term
municipal securities were issued, making this past January's
issuance the lowest monthly total since the mid-1980s. Investor
demand has easily surpassed supply, causing bond prices to rise
rapidly. Also, as 1995 annual issuance is expected to be below the
recent historically low 1994 levels, this positive technical
environment should continue to support the recent improvements in
municipal bond prices into the coming quarters.
Portfolio Strategy
At the Fund's inception (September 30,1994), strong economic growth
and fears of rising inflation led us to adopt a cautious investment
outlook. These concerns have subsided, at least for the time being.
For the quarter ended January 31, 1995, the municipal bond market
bottomed out and staged a dramatic rebound. Merrill Lynch Arkansas
Municipal Bond Fund is fully invested and has benefited from the
increase in municipal bond market prices. New-issue supply fell by a
staggering 31% this quarter over the same quarter last year. Because
of the scarcity of new-issue supply, we have kept the Fund's cash
reserves to a minimum amount. We continue to emphasize quality
securities with over 80% of the portfolio rated A or better by at
least one of the major rating services. Looking ahead, our portfolio
strategy, while cautiously optimistic, will continue to be to invest
new cash flows in high-quality, reasonably priced securities that we
expect to yield attractive amounts of tax-exempt income.
We appreciate your ongoing interest in Merrill Lynch Arkansas
Municipal Bond Fund, and we look forward to assisting you with your
financial needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
<PAGE>
February 28, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund through the Merrill Lynch Select Pricing SM System,
which offers four pricing alternatives:
*Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
*Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years.
*Class C Shares are subject to a distribution fee of 0.35% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
*Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.10% (but no distribution fee).
Performance data for all of the Fund's Shares are presented in the
"Aggregate Total Return" and "Recent Performance Results" tables
below and on page 4.
Performance data for all of the Fund's Shares are presented in the
"Aggregate Total Return" and "Recent Performance Results" tables
below and on page 4.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for all shares for the
since inception and 3-month periods ended January 31, 1995. All data
in this table assume imposition of the actual total expenses
incurred by each class of shares during the relevant period.
None of the past results shown should 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. 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.
<PAGE>
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (9/30/94)
through 12/31/94 - 1.31% - 5.26%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (9/30/94)
through 12/31/94 - 1.44% - 5.32%
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 12/31/94 - 0.97% - 1.95%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (10/21/94)
through 12/31/94 - 0.88% - 4.85%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
Since Inception 3 Month
1/31/95 10/31/94 9/30/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.97 $9.79 $10.00 -0.30% +1.84%
Class B Shares* 9.97 9.79 10.00 -0.30 +1.84
Class C Shares* 9.97 9.79 9.92 +0.50 +1.84
Class D Shares* 9.97 9.79 9.92 +0.50 +1.84
Class A Shares--Total Return* +1.81(1) +3.50(2)
Class B Shares--Total Return* +1.64(3) +3.37(4)
Class C Shares--Total Return* +2.01(5) +3.25(6)
Class D Shares--Total Return* +2.24(7) +3.48(8)
Class A Shares--Standardized 30-day Yield 6.06%
Class B Shares--Standardized 30-day Yield 5.81%
Class C Shares--Standardized 30-day Yield 5.71%
Class D Shares--Standardized 30-day Yield 5.96%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Class A and Class B Shares commenced operations on 9/30/94. Class
C and Class D Shares commenced operations on 10/21/94.
(1)Percent change includes reinvestment of $0.193 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.156 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.177 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.144 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.135 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.133 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.156 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.154 per share ordinary
income dividends.
</TABLE>
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Arkansas
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)
GO General Obligation Bonds
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arkansas--86.7%
<S> <C> <C> <S> <C>
AAA NR* $1,500 Arkansas State Development Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series A, 7.30% due 3/01/2013 (b) $1,569
AA Aa 350 Arkansas State Refunding Bonds (Waste Disposal and Pollution),
Series B, 6.25% due 7/01/2020 351
NR* A 350 Arkansas State Student Loan Authority Revenue Bonds, AMT,
Subseries B, 7.25% due 6/01/2009 351
AA- A1 350 Blytheville, Arkansas, Solid Waste Recycling and Sewer Treatment
Revenue Bonds (Nucor Corp. Project), AMT, 6.375% due 1/01/2023 337
A- A3 1,000 Camden, Arkansas, Environmental Improvement Revenue Bonds
(International Paper Co. Project), AMT, Series A, 7.625%
due 11/01/2018 1,052
A1+ P1 100 Clark County, Arkansas, Solid Waste Disposal Revenue Bonds
(Reynolds Metals Co. Project), VRDN, AMT, 3.75% due 8/01/2022 (a) 100
NR* P1 400 Crossett, Arkansas, PCR (Georgia-Pacific Corp. Project), VRDN,
3.60% due 10/01/2007 (a) 400
AAA Aaa 350 Fort Smith, Arkansas, Water, Sewer and Construction Revenue
Refunding Bonds, 6% due 10/01/2012 (c) 348
NR* NR* 350 Hot Springs, Arkansas, Water Revenue Refunding Bonds, 5.60%
due 9/01/2008 337
<PAGE>
BBB Baa2 200 Jefferson County, Arkansas, PCR, Refunding (Arkansas Power and
Light Co. Project), 6.30% due 6/01/2018 196
A1+ Aaa 100 Little Rock, Arkansas, Health Facilities Board Hospital Revenue
Bonds (Southwest Hospital Capital Guaranty), VRDN, 3.625%
due 10/01/2018 (a) 100
AAA Aaa 375 Little Rock, Arkansas, Municipal Airport Revenue Refunding Bonds,
6% due 11/01/2014 (c) 371
AA+ Aa 500 Little Rock, Arkansas, Refunding Bonds (Capital Improvement), 6.25%
due 2/01/2008 507
AAA Aaa 400 North Little Rock, Arkansas, Electric Revenue Refunding Bonds, Series A,
6.50% due 7/01/2015 (c) 419
BBB Baa2 300 Pope County, Arkansas, PCR, Refunding (Arkansas Power and Light Co.
Project), 6.30% due 12/01/2016 294
A- NR* 500 Pulaski County, Arkansas, Hospital Revenue Bonds (Arkansas Childrens
Hospital Project), Series A, 6.20% due 3/01/2022 472
AAA Aaa 350 Pulaski County, Arkansas, Special School District, Revenue Refunding
Bonds, 5.25% due 2/01/2019 (d) 304
Puerto Rico--15.8%
A Baa1 325 Puerto Rico Commonwealth, GO, UT, 6.50% due 7/01/2023 325
A Baa1 320 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, Series T, 6.625% due 7/01/2018 322
BBB- NR* 425 Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority, Higher
Education Revenue Bonds (PolyTechnic University of Puerto
Rico Project), Series A, 5.50% due 8/01/2024 346
A+ A 400 Puerto Rico Telephone Authority, Revenue Refunding Bonds,
Series L, 5.75% due 1/01/2011 380
Total Investments (Cost--$8,762)--102.5% 8,881
Liabilities in Excess of Other Liabilities--(2.5%) (216)
------
Net Assets--100.0% $8,665
======
<FN>
(a)The interest rate is subject to change periodically based
upon the prevailing market rate. The interest rate shown
is the rate in effect at January 31, 1995.
(b)GNMA Collateralized.
(c)MBIA Insured.
(d)FSA Insured.
*Not Rated.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of January 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$8,761,845) (Note 1a) $8,880,932
Cash 15,168
Receivables:
Interest $ 153,800
Investment adviser (Note 2) 52,449
Beneficial interest sold 21,150 227,399
-----------
Deferred organization expenses (Note 1e) 49,600
Prepaid registration fees and other assets (Note 1e) 10,606
----------
Total assets 9,183,705
----------
Liabilities: Payables:
Securities purchased 501,909
Dividends to shareholders (Note 1f) 13,808
Distributor (Note 2) 2,516 518,233
----------- ----------
Total liabilities 518,233
----------
Net Assets: Net assets $8,665,472
==========
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 20,352
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 65,084
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 320
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 1,146
Paid-in capital in excess of par 8,589,574
Accumulated realized capital losses on investments--net (130,091)
Unrealized appreciation on investments--net 119,087
----------
Net assets $8,665,472
==========
<PAGE>
Net Asset Value: Class A--Based on net assets of $2,029,367 and 203,515 shares of
beneficial interest outstanding $ 9.97
==========
Class B--Based on net assets of $6,489,929 and 650,844 shares of
beneficial interest outstanding $ 9.97
==========
Class C--Based on net assets of $31,935 and 3,202 shares of
beneficial interest outstanding $ 9.97
==========
Class D--Based on net assets of $114,241 and 11,457 shares of
beneficial interest outstanding $ 9.97
==========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Period September 30, 1994++
to January 31, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 171,109
(Note 1d):
Expenses: Printing and shareholder reports $ 20,458
Investment advisory fees (Note 2) 15,016
Accounting services (Note 2) 12,281
Distribution fees--Class B (Note 2) 10,122
Professional fees 6,788
Amortization of organization expenses (Note 1e) 3,402
Registration fees (Note 1e) 2,398
Transfer agent fees--Class B (Note 2) 2,046
Custodian fees 1,725
Pricing fees 1,161
Transfer agent fees--Class A (Note 2) 584
Trustees' fees and expenses 165
Distribution fees--Class C (Note 2) 26
Account maintenance fees--Class D (Note 2) 22
Transfer agent fees--Class D (Note 2) 18
Transfer agent fees--Class C (Note 2) 6
Other 1,417
------------
Total expenses before reimbursement 77,635
Reimbursement of expenses (Note 2) (67,465)
------------
Total expenses after reimbursement 10,170
-----------
Investment income--net 160,939
<PAGE>
Realized & Realized loss on investments--net (130,091)
Unrealized Unrealized appreciation on investments--net 119,087
Gain (Loss) on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 149,935
(Notes 1b, 1d ===========
& 3):
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period Sept. 30, 1994++
Increase (Decrease) in Net Assets: to Jan. 31, 1995
<S> <S> <C>
Operations: Investment income--net $ 160,939
Realized loss on investments--net (130,091)
Unrealized appreciation on investments--net 119,087
----------
Net increase in net assets resulting from operations 149,935
----------
Dividends to Investment income--net:
Shareholders Class A (42,532)
(Note 1f): Class B (116,765)
Class C (252)
Class D (1,390)
----------
Net decrease in net assets resulting from dividends to shareholders (160,939)
----------
Beneficial Net increase in net assets derived from beneficial interest transactions 8,576,476
Interest ----------
Transactions
(Note 4):
Net Assets: Total increase in net assets 8,565,472
Beginning of period 100,000
----------
End of period $8,665,472
==========
</TABLE>
<PAGE>
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived For the Period For the Period
from information provided in the financial statements. Sept. 30, 1994++ Oct. 21, 1994++
to Jan. 31, 1995 to Jan. 31, 1995
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 9.92 $ 9.92
Operating -------- -------- -------- --------
Performance: Investment income--net .21 .19 .15 .17
Realized and unrealized gain
(loss) on investments--net (.03) (.03) .05 .05
-------- -------- -------- --------
Total from investment operations .18 .16 .20 .22
-------- -------- -------- --------
Less dividends:
Investment income--net (.21) (.19) (.15) (.17)
-------- -------- -------- --------
Total dividends (.21) (.19) (.15) (.17)
-------- -------- -------- --------
Net asset value, end of period $ 9.97 $ 9.97 $ 9.97 $ 9.97
======== ======== ======== ========
Total Investment Based on net asset value per share 1.81%+++ 1.64%+++ 2.01%+++ 2.24%+++
Return:** ======== ======== ======== ========
Ratios to Expenses, excluding account maintenance
Average and distribution fees and net of
Net Assets: reimbursement .00%* .00%* .00%* .00%*
======== ======== ======== ========
Expenses, net of reimbursement .00%* .50%* .60%* .10%*
======== ======== ======== ========
Expenses 2.46%* 2.97%* 3.06%* 2.54%*
======== ======== ======== ========
Investment income--net 6.26%* 5.77%* 5.80%* 6.38%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,029 $ 6,490 $ 32 $ 114
Data: ======== ======== ======== ========
Portfolio turnover 27.81% 27.81% 27.81% 27.81%
======== ======== ======== ========
<PAGE>
<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 Arkansas Municipal Bond Fund (the "Fund") is part of
the 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. Prior to
commencement of operations on September 30, 1994, the Fund had no
operations other than those relating to organizational matters and
the issuance of 10,000 shares of beneficial interest of the Fund to
Fund Asset Management, L.P. ("FAM") for $100,000. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class
B and Class C may be subject to a contingent deferred sales charge.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to
the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--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
last settlement prices as of the close of such exchanges. Short-term
investments with a remaining maturity of sixty days or less are
valued on an amortized cost basis, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the 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.
<PAGE>
(b) Derivative financial instruments--The Fund may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt markets.
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 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
portfolio holdings 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 the 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.
NOTES TO FINANCIAL STATEMENTS (concluded)
(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. 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 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. The Fund has also entered into
a Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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. The Investment Advisory Agreement obligates
FAM to reimburse the Fund to the extent of the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the Fund's
next $70 million of average daily net assets, and 1.5% of the
average daily net assets in excess thereof. No fee payment will be
made to the Investment Adviser during any fiscal year which will
cause such expenses to exceed the pro rata expense limitation at the
time of such payment. For the period ended January 31,1995, FAM
earned fees of $15,016, all of which was voluntarily waived. FAM
also voluntarily reimbursed the Fund additional expenses of $52,449.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
<PAGE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the period September 30, 1994 to January 31, 1995, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $570 $68,857
Class D $ 2 $ 37
MLPF&S received contingent deferred sales charges of $775 relating
to transactions in Class B Shares of beneficial interest and $1
relating to transactions in Class C Shares of beneficial interest
for the period ended January 31, 1995.
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, PSI, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period September 30, 1994 to January 31, 1995 were
$10,220,622 and $1,957,758, respectively.
Net realized and unrealized gains (losses) as of January 31, 1995
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (100,501) $ 119,087
Financial futures contracts (29,590) --
----------- ----------
Total $ (130,091) $ 119,087
=========== ==========
<PAGE>
As of January 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $119,087, of which $ 138,068 related
to appreciated securities and $18,981 related to depreciated
securities. The aggregate cost of investments at January 31, 1995
for Federal income tax purposes was $8,761,845.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $8,576,476 for the period ended January 31, 1995.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Period
September 30, 1994++ to Dollar
January 31, 1995 Shares Amount
Shares sold 218,627 $2,184,972
Shares issued to shareholders
in reinvestment of dividends 309 2,997
------------ ----------
Total issued 218,936 2,187,969
Shares redeemed (20,421) (200,920)
------------ -----------
Net increase 198,515 $1,987,049
============ ==========
[FN]
++Prior to September 30, 1994 (commencement of operations),
the Fund issued 5,000 shares to FAM for $50,000.
Class B Shares for the Period
September 30, 1994++ to Dollar
January 31, 1995 Shares Amount
Shares sold 682,258 $6,797,340
Shares issued to shareholders
in reinvestment of dividends 1,104 10,683
----------- ----------
Total issued 683,362 6,808,023
Shares redeemed (37,518) (363,591)
----------- ----------
Net increase 645,844 $6,444,432
=========== ==========
[FN]
++Prior to September 30, 1994 (commencement of operations),
the Fund issued 5,000 shares to FAM for $50,000.
<PAGE>
Class C Shares for the Period
October 21, 1994++ to Dollar
January 31, 1995 Shares Amount
Shares sold 3,204 $ 30,849
Shares issued to shareholders
in reinvestment of dividends 21 208
----------- ----------
Total issued 3,225 31,057
Shares redeemed (23) (222)
----------- ----------
Net increase 3,202 $ 30,835
----------- ----------
++Commencement of Operations.
Class D Shares for the Period
October 21, 1994++ to Dollar
January 31, 1995 Shares Amount
Shares sold 16,288 $ 159,860
Shares issued to shareholders
in reinvestment of dividends 9 91
----------- ----------
Total issued 16,297 159,951
Shares redeemed (4,840) (45,791)
----------- ----------
Net increase 11,457 $ 114,160
=========== ==========
++Commencement of Operations.
