MERRILL LYNCH
ARIZONA
MUNICIPAL
BOND FUND
FUND LOGO
Annual Report
July 31, 1997
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Robert E. Putney III, Secretary
<PAGE>
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch Arizona
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
<PAGE>
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended July 31, 1997, a number of very
favorable factors combined to push both tax-exempt and taxable bond
yields to recent historic lows. A slowing domestic economy, a
continued benign, if not improving, inflationary environment, a
declining Federal budget deficit with resultant reduced Treasury
borrowing needs, and a successful Congressional budget accord all
resulted in significant declines in fixed-income yields. By the end
of July, 30-year US Treasury bond yields had declined approximately
50 basis points (0.50%) to 6.30%, their lowest level in over a year.
Similarly, as measured by the Bond Buyer Revenue Bond Index, long-
term municipal revenue bond yields fell over 50 basis points to end
the July 31, 1997 quarter at 5.49%, their lowest level since early
1994.
The decline in tax-exempt yields in recent months was even more
impressive given that the municipal market lost much of the
technical support it enjoyed for over a year. In previous quarters,
new tax-exempt bond issuance declined, or remained stable. During
the six months ended July 31, 1997, approximately $100 billion in
new long-term municipal securities was underwritten, an increase of
over 7.5% versus the comparable period in 1996. As tax-exempt bond
yields declined, many municipal bond issuers took this opportunity
to both issue new debt as well as refinance older, higher-couponed
debt with new, lower-yielding issues. This refinancing led to a
surge in tax-exempt issuance in recent months. Over the three months
ended July 31, 1997, new long-term tax-exempt bond issuance totaled
approximately $55 billion, an increase of over 15% versus the July
31, 1996 quarter.
The decline in municipal bond yields also resulted in some reduction
in retail investor demand. In earlier episodes of rapidly declining
interest rates, individual investor demand initially fell until
investors became more acclimated to the current levels. Should
interest rates stabilize, we expect investor demand to return to
earlier levels. Also, this past June and July, municipal bond
investors received over $50 billion in assets from coupon income
payments, bond maturities, and the proceeds from early bond
redemptions. Despite the continued allure of the US equity market,
it is likely that most of these assets will be reallocated to the
municipal bond market as investors adjust to the new investment
environment.
<PAGE>
Looking forward, given the extent of the recent bond market rally,
some retrenchment or at least a period of consolidation is likely.
However, the positive backdrop of modest economic growth and low
inflation suggests that any such adjustment is not likely to be
excessive. Despite recent increases in new bond issuance, supply for
all of 1997 is not expected to be materially different than earlier
estimates of approximately $175 billion. It is likely that the
recent increase in issuance has largely borrowed from that
originally scheduled for later this year. Additionally, any
significant increase in tax-exempt bond yields will prevent any
further bond refinancings, reducing future supply. Unless the
current positive economic fundamentals undergo immediate and
significant deterioration, any increase in municipal bond yields is
likely to be viewed as an opportunity to purchase more attractively
priced tax-exempt securities.
Fiscal Year in Review
Our portfolio strategy during the fiscal year provided shareholders
with yield and total return results in line with similar Arizona tax-
exempt mutual funds.
During the 12 months ended July 31, 1997, interest rates experienced
a great deal of volatility. At the start of the Fund's fiscal year
in August 1996, we believed that the economy was showing full
employment and expected inflation to accelerate. However, inflation
never surfaced, which set the bond market up for a significant
rally. After being defensively postured in the late spring, we
restructured the Fund to take advantage of any increase in bond
prices. This strategy paid off for the first six months of the
fiscal year. However, we experienced an extremely strong economy in
the first quarter of 1997 and expected a Federal Reserve Board
interest rate increase. The increase of 25 basis points came in
February, and many economists predicted more would follow.
While Federal Reserve Board Chairman Alan Greenspan's "irrational
exuberance" and the "new paradigm" theories worked themselves out,
our investment strategy went into a neutral mode to seek to protect
the Fund's net asset values. We increased cash reserves to 5% in
March, which proved ineffective as the bond market reached its high
in yields for the year. However, being in the market soon became
beneficial to the Fund, because spring brought lower yields and
higher bond prices. Since April the Fund has been fully invested and
fully participated in the powerful market appreciation. As interest
rates continue to decline, our strategy is expected to become
slightly more defensive in order to seek to protect some of the
gains the Fund enjoyed during the fiscal year.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Arizona
Municipal Bond Fund, and we look forward to serving your investment
needs in the months and years to come.
Sincerely,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Hugh T. Hurley III)
Hugh T. Hurley III
Vice President and Portfolio Manager
August 26, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% 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. (There is no initial
sales charge for automatic share conversions.)
<PAGE>
* 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).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the payable date. 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.
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A Shares and
Class B Shares
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the Lehman Brothers Municipal Bond Index. Beginning
and ending values are:
11/29/91** 7/97
ML Arizona Municipal Bond Fund++--
Class A Shares* $ 9,600 $14,706
ML Arizona Municipal Bond Fund++--
Class B Shares* $10,000 $14,885
Lehman Brothers Municipal Bond Index++++ $10,000 $15,394
Total Return Based on a $10,000 Investment--Class C Shares and
Class D Shares
<PAGE>
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the Lehman Brothers Municipal Bond Index. Beginning
and ending values are:
10/21/94** 7/97
ML Arizona Municipal Bond Fund++--
Class C Shares* $10,000 $12,349
ML Arizona Municipal Bond Fund++--
Class D Shares* $ 9,600 $12,020
Lehman Brothers Municipal Bond Index++++ $10,000 $13,054
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++ML Arizona Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the State of
Arizona, its political subdivisions, agencies and instrumentalities
and obligations of other qualifying issuers.
++++This unmanaged Index consists of long-term revenue bonds,
prerefunded bonds, general obligation bonds and insured bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +6.74% +2.47%
Five Years Ended 6/30/97 +6.75 +5.88
Inception (11/29/91)
through 6/30/97 +7.44 +6.66
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
<PAGE>
Year Ended 6/30/97 +6.20% +2.20%
Five Years Ended 6/30/97 +6.21 +6.21
Inception (11/29/91)
through 6/30/97 +6.90 +6.90
[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*
Year Ended 6/30/97 +6.20 +5.20%
Inception (10/21/94)
through 6/30/97 +7.15 +7.15
[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*
Year Ended 6/30/97 +6.64% +2.37%
Inception (10/21/94)
through 6/30/97 +7.68 +6.06
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<PAGE>
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
11/29/91--12/31/91 $10.00 $10.24 -- $0.052 + 2.92%
1992 10.24 10.49 -- 0.741 +10.01
1993 10.49 11.07 $0.065 0.739 +13.48
1994 11.07 9.79 0.054 0.568 - 6.03
1995 9.79 10.98 -- 0.545 +18.11
1996 10.98 10.65 -- 0.545 + 2.09
1/1/97--7/31/97 10.65 10.87 -- 0.308 + 5.21
------ ------
Total $0.119 Total $3.498
Cumulative total return as of 7/31/97: +53.17%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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**
<S> <C> <C> <C> <C> <C>
11/29/91--12/31/91 $10.00 $10.24 -- $0.047 + 2.87%
1992 10.24 10.49 -- 0.688 + 9.45
1993 10.49 11.07 $0.065 0.684 +12.91
1994 11.07 9.79 0.054 0.516 - 6.50
1995 9.79 10.98 -- 0.492 +17.52
1996 10.98 10.65 -- 0.491 + 1.58
1/1/97--7/31/97 10.65 10.87 -- 0.278 + 4.90
------ ------
Total $0.119 Total $3.196
Cumulative total return as of 7/31/97: +48.85%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.05 $ 9.79 $0.054 $0.091 - 1.13%
1995 9.79 10.98 -- 0.480 +17.39
1996 10.98 10.65 -- 0.480 + 1.48
1/1/97--7/31/97 10.65 10.87 -- 0.272 + 4.84
------ ------
Total $0.054 Total $1.323
Cumulative total return as of 7/31/97: +23.49%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.05 $ 9.78 $0.054 $0.107 - 1.07%
1995 9.78 10.97 -- 0.534 +18.01
1996 10.97 10.64 -- 0.534 + 1.99
1/1/97--7/31/97 10.64 10.86 -- 0.301 + 5.15
------ ------
Total $0.054 Total $1.476
Cumulative total return as of 7/31/97: +25.21%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
7/31/97 4/30/97 7/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.87 $10.49 $10.54 +3.13% +3.62%
Class B Shares* 10.87 10.49 10.54 +3.13 +3.62
Class C Shares* 10.87 10.48 10.54 +3.13 +3.72
Class D Shares* 10.86 10.48 10.53 +3.13 +3.63
Class A Shares--Total Return* +8.63(1) +4.99(2)
Class B Shares--Total Return* +8.08(3) +4.85(4)
Class C Shares--Total Return* +7.97(5) +4.93(6)
Class D Shares--Total Return* +8.52(7) +4.96(8)
Class A Shares--Standardized 30-day Yield 4.31%
Class B Shares--Standardized 30-day Yield 3.99%
Class C Shares--Standardized 30-day Yield 3.89%
Class D Shares--Standardized 30-day Yield 4.22%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.550 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.496 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.125 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.486 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.123 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.539 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.136 per share ordinary
income dividends.
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Arizona 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 below and at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <S> <C> <S> <C>
Arizona--91.4%
Arizona Educational Loan Marketing Corporation, Educational Loan Revenue
Bonds, AMT, Series B:
NR* A $ 1,600 7% due 3/01/2003 $ 1,734
NR* A 1,100 7% due 3/01/2005 1,188
NR* A 750 Arizona Educational Loan Marketing Corporation, Educational Loan Revenue
Bonds, AMT, Sub-Series, 6.625% due 9/01/2005 809
NR* Aaa 2,245 Arizona Health Facilities Authority, Hospital System Revenue Refunding
Bonds (Saint Luke's Health Systems), 7.25% due 11/01/2003 (h) 2,566
AA Aa 1,660 Arizona State Transportation Board, Highway Revenue Refunding Bonds,
Sub-Series A, 5% due 7/01/2010 1,709
AA+ Aa1 2,000 Arizona State Wastewater Management Authority, Wastewater Treatment
Financial Assistance Revenue Bonds (City of Phoenix), 6.80% due 7/01/2011 2,245
NR* Aa 2,000 Arizona Student Loan Acquisition Authority, Student Loan Revenue Bonds,
AMT, Senior Series B, 6.60% due 5/01/2010 2,182
NR* Aaa 665 Arizona Water Infrastructure Financing Authority Revenue Bonds (Water
Quality Financial Assistance), Series A, 6.10% due 7/01/2006 (d) 747
AAA Aaa 700 Avondale, Arizona, Municipal Development Corporation, Municipal Facilities
Revenue Bonds, 6.625% due 7/01/2001 (d)(h) 770
AAA Aaa 1,000 Chandler, Arizona, Water and Sewer Revenue Bonds, 6.50% due 7/01/2014 (d) 1,129
Coconino and Yavapai Counties, Arizona, Joint Unified School District No.
9, GO (Sedona Oak Creek), UT, Series A (h):
A- Baa1 200 6.70% due 7/01/2001 220
A- Baa1 250 6.75% due 7/01/2001 276
BBB- NR* 1,750 Coconino County, Arizona, Pollution Control Corporation, PCR (Nevada
Power Co. Project), AMT, 6.375% due 10/01/2036 1,811
AAA Aaa 3,620 Gilbert, Arizona, Water and Sewer Revenue Refunding Bonds, 6.50% due
7/01/2022 (b) 4,034
<PAGE>
Glendale, Arizona, IDA, Educational Facilities Revenue Refunding Bonds
(American Graduate School International) (g):
AAA NR* 1,000 7.125% due 7/01/2005 (h) 1,185
AAA NR* 500 5.875% due 7/01/2015 527
AAA Aaa 2,250 Maricopa County, Arizona, Elementary School District No. 38 (Madison), UT,
Series A, 5% due 7/01/2014 (b) 2,245
AAA Aaa 4,500 Maricopa County, Arizona, Elementary School District No. 68, Revenue
Refunding Bonds (Alhambra), UT, Series A, 6.75% due 7/01/2014 (f) 5,099
BBB- Baa1 1,000 Maricopa County, Arizona, Hospital Revenue Refunding Bonds (Sun Health
Corporation), 6.125% due 4/01/2018 1,037
AAA Aaa 2,000 Maricopa County, Arizona, IDA, Health Facilities Revenue Bonds (Saint
Joseph's Care Center Project), Series A, 7.75% due 7/01/2020 (d) 2,221
Maricopa County, Arizona, IDA, Hospital Facilities Revenue Bonds:
AAA Aaa 1,495 7.50% due 12/01/2013 (c) 1,666
AAA Aaa 750 Refunding (Samaritan Health Services), Series A, 7% due 12/01/2013 (d) 825
Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding:
A1+ P1 600 (Arizona Public Service Co.), VRDN, Series C, 3.60% due 5/01/2029 (a) 600
BB+ Ba1 1,500 (Public Service Company of New Mexico Project), Series A, 6.30% due
12/01/2026 1,571
AAA Aaa 2,125 Mesa, Arizona, Utilities System Revenue Bonds, 6.125% due 7/01/2013 (b) 2,342
NR* NR* 2,000 Mohave County, Arizona, IDA, IDR (North Star Steel Co. Project), AMT, 6.70%
due 3/01/2020 2,169
</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>
Arizona (concluded)
AAA Aaa $ 1,325 Mohave County, Arizona, Unified High School District No. 30 (Mohave), GO,
UT, Series B, 6.70% due 7/01/2001 (b) (h) $ 1,461
Peoria, Arizona, Improvement District No. 8801, Special Assessment Bonds
(North Valley Power Center):
BBB NR* 200 7.30% due 1/01/2009 223
BBB NR* 395 7.30% due 1/01/2011 438
Peoria, Arizona, Improvement District No. 8802, Special Assessment Bonds:
BBB NR* 430 7.20% due 1/01/2010 476
BBB NR* 510 7.20% due 1/01/2013 565
<PAGE>
AAA Aaa 1,000 Peoria, Arizona, Water and Sewer Revenue Refunding Bonds, 6.625% due
7/01/2006 (b) 1,079
AAA Aaa 2,000 Phoenix, Arizona, Civic Improvement Corporation, Municipal Facilities Excise
Tax Revenue Bonds, 6.90% due 7/01/2004 (d) (h) 2,331
AA- Aa 1,250 Phoenix, Arizona, Civic Improvement Corporation, Water System Revenue Bonds
Junior Lien, 6% due 7/01/2019 1,322
AA+ Aa1 1,400 Phoenix, Arizona, GO, Refunding, UT, Series A, 6.25% due 7/01/2017 1,621
AAA Aaa 750 Pima County, Arizona, IDA, Revenue Refunding Bonds (Healthpartners),
Series A, 5.625% due 4/01/2014 (d) 786
AAA Aaa 950 Pima County, Arizona, Sewer Revenue Refunding Bonds, 6.75% due 7/01/2015 (b) 1,038
BBB NR* 750 Prescott Valley, Arizona, Improvement District, Special Assessment Sewer
Collection System, Roadway Repair Revenue Bonds, 7.90% due 1/01/2012 855
AA Aa 4,000 Salt River Project, Arizona, Agricultural Improvement and Power District,
Electric System Revenue Bonds, Series A, 6.50% due 1/01/2022 4,330
BBB NR* 1,600 Sedona, Arizona, Sewer Revenue Refunding Bonds, 7% due 7/01/2012 1,767
AAA Aaa 500 Tucson, Arizona, Airport Authority Revenue Bonds, AMT, Series B, 7.25% due
6/01/2020 (d) 544
Tucson, Arizona, Water Revenue Bonds:
A+ A1 1,250 Refunding, 6.50% due 7/01/2016 1,357
A+ NR* 1,650 Series D, 6.75% due 7/01/2001 (h) 1,834
University of Arizona Revenue Bonds:
AA A1 2,000 Refunding, Series A, 6.20% due 6/01/2016 2,283
AA NR* 1,570 Series B, 6.90% due 6/01/2000 (h) 1,717
Puerto Rico--5.7%
AAA Aaa 2,000 Puerto Rico Commonwealth, YCN, 7.888% due 7/01/2020 (c) (e) 2,205
AAA Aaa 1,900 Puerto Rico Electric Power Authority, Power Revenue Bonds, LEVRRS, 8.084%
due 7/01/2023 (c) (e) 2,111
Total Investments (Cost--$66,856)--97.1% 73,250
Other Assets Less Liabilities--2.9% 2,189
-------
Net Assets--100.0% $75,439
=======
<PAGE>
<FN>
*Not Rated.
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1997.
(f)AMBAC Insured.
(g)Connie Lee Insured.
(h)Prerefunded.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$66,855,932) (Note 1a) $ 73,249,878
Cash 76,075
Receivables:
Securities sold $ 2,529,667
Interest 609,431
Beneficial interest sold 34,950 3,174,048
------------
Prepaid expenses and other assets 2,135
------------
Total assets 76,502,136
------------
Liabilities: Payables:
Securities purchased 736,003
Beneficial interest redeemed 101,070
Dividends to shareholders (Note 1f) 97,384
Investment adviser (Note 2) 35,210
Distributor (Note 2) 25,485 995,152
------------
Accrued expenses and other liabilities 67,942
------------
Total liabilities 1,063,094
------------
<PAGE>
Net Assets: Net assets $ 75,439,042
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 128,857
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 535,961
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 8,805
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 20,142
Paid-in capital in excess of par 70,346,854
Accumulated realized capital losses on investments--net (Note 5) (1,995,523)
Unrealized appreciation on investments--net 6,393,946
------------
Net assets $ 75,439,042
============
Net Asset Value: Class A--Based on net assets of $14,011,872 and 1,288,569
shares of beneficial interest outstanding $ 10.87
============
Class B--Based on net assets of $58,281,886 and 5,359,612
shares of beneficial interest outstanding $ 10.87
============
Class C--Based on net assets of $957,090 and 88,049
shares of beneficial interest outstanding $ 10.87
============
Class D--Based on net assets of $2,188,194 and 201,417
shares of beneficial interest outstanding $ 10.86
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended July 31, 1997
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 4,818,937
(Note 1d):
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 442,015
Account maintenance and distribution fees--Class B (Note 2) 314,905
Accounting services (Note 2) 62,922
Professional fees 52,728
Transfer agent fees--Class B (Note 2) 24,491
Registration fees 15,867
Printing and shareholder reports 13,836
Account maintenance and distribution fees--Class C (Note 2) 7,326
Pricing fees 5,881
Custodian fees 5,298
Amortization of organization expenses (Note 1e) 4,868
Transfer agent fees--Class A (Note 2) 4,361
Trustees' fees and expenses 3,960
Account maintenance fees--Class D (Note 2) 2,042
Transfer agent fees--Class D (Note 2) 630
Transfer agent fees--Class C (Note 2) 485
Other 3,721
------------
Total expenses 965,336
------------
Investment income--net 3,853,601
------------
Realized & Realized gain on investments--net 151,745
Unrealized Gain on Change in unrealized appreciation on investments--net 2,230,318
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 6,235,664
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 3,853,601 $ 4,136,261
Realized gain on investments--net 151,745 375,382
Change in unrealized appreciation on investments--net 2,230,318 351,174
------------ ------------
Net increase in net assets resulting from operations 6,235,664 4,862,817
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (735,203) (769,592)
(Note 1f): Class B (2,958,031) (3,253,699)
Class C (56,040) (57,446)
Class D (104,327) (55,524)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (3,853,601) (4,136,261)
------------ ------------
<PAGE>
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (11,798,372) (4,200,184)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (9,416,309) (3,473,628)
Beginning of year 84,855,351 88,328,979
------------ ------------
End of year $ 75,439,042 $ 84,855,351
============ ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.54 $ 10.46 $ 10.40 $ 11.01 $ 10.74
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .55 .54 .55 .57 .60
Realized and unrealized gain (loss) on
investments--net .33 .08 .11 (.39) .39
-------- -------- -------- -------- --------
Total from investment operations .88 .62 .66 .18 .99
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.55) (.54) (.55) (.57) (.60)
Realized gain on investments--net -- -- (.01) (.22) (.12)
In excess of realized gain on investments
--net -- -- (.04) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.55) (.54) (.60) (.79) (.72)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.87 $ 10.54 $ 10.46 $ 10.40 $ 11.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 8.63% 6.04% 6.76% 1.62% 9.62%
Return:* ======== ======== ======== ======== ========
<PAGE>
Ratios to Expenses, net of reimbursement .79% .79% .80% .56% .41%
Average ======== ======== ======== ======== ========
Net Assets: Expenses .79% .79% .83% .80% .81%
======== ======== ======== ======== ========
Investment income--net 5.21% 5.09% 5.44% 5.32% 5.57%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 14,012 $ 14,988 $ 14,893 $ 18,363 $ 17,988
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.68% 36.39% 62.65% 53.35% 73.48%
======== ======== ======== ======== ========
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.54 $ 10.46 $ 10.40 $ 11.01 $ 10.74
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .50 .49 .50 .52 .54
Realized and unrealized gain (loss) on
investments--net .33 .08 .11 (.39) .39
-------- -------- -------- -------- --------
Total from investment operations .83 .57 .61 .13 .93
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.50) (.49) (.50) (.52) (.54)
Realized gain on investments--net -- -- (.01) (.22) (.12)
In excess of realized gain on investments
--net -- -- (.04) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.50) (.49) (.55) (.74) (.66)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.87 $ 10.54 $ 10.46 $ 10.40 $ 11.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 8.08% 5.49% 6.22% 1.11% 9.07%
Return:* ======== ======== ======== ======== ========
Ratios to Expenses, net of reimbursement 1.30% 1.30% 1.31% 1.07% .92%
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.30% 1.30% 1.33% 1.30% 1.32%
======== ======== ======== ======== ========
Investment income--net 4.70% 4.59% 4.92% 4.82% 5.06%
======== ======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of year (in thousands). $ 58,282 $ 66,497 $ 72,090 $ 80,616 $ 81,078
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.68% 36.39% 62.65% 53.35% 73.48%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
Period Period
The following per share data and ratios have been derived For the Oct. 21, For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to Year Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.54 $ 10.46 $ 10.05 $ 10.53 $ 10.45 $ 10.05
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .49 .48 .37 .54 .53 .42
Realized and unrealized gain on
investments--net .33 .08 .46 .33 .08 .45
-------- -------- -------- -------- -------- --------
Total from investment operations .82 .56 .83 .87 .61 .87
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.49) (.48) (.37) (.54) (.53) (.42)
Realized gain on investments--net -- -- (.01) -- -- (.01)
In excess of realized gain on
investments--net -- -- (.04) -- -- (.04)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.49) (.48) (.42) (.54) (.53) (.47)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 10.87 $ 10.54 $ 10.46 $ 10.86 $ 10.53 $ 10.45
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.97% 5.38% 8.53%+++ 8.52% 5.93% 8.92%+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.40% 1.40% 1.43%* .89% .89% .93%*
Net Assets: ======== ======== ======== ======== ======== ========
Expenses 1.40% 1.40% 1.43%* .89% .89% .93%*
======== ======== ======== ======== ======== ========
Investment income--net 4.59% 4.49% 4.58%* 5.11% 5.01% 5.23%*
======== ======== ======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 957 $ 1,499 $ 729 $ 2,188 $ 1,871 $ 617
======== ======== ======== ======== ======== ========
Portfolio turnover 29.68% 36.39% 62.65% 29.68% 36.39% 62.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect 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 Arizona 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
diversified, open-end management investment company. 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
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.
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
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the 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. 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--Deferred organization expenses
are charged to expense on a straight-line basis over a five-year
period.
(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"). 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.
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% --
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 year ended July 31, 1997, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
<PAGE>
MLFD MLPF&S
Class A $2,092 $1,700
Class D $ 339 $3,679
For the year ended July 31, 1997, MLPF&S received contingent
deferred sales charges of $121,732 and $2,010 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1997 were $23,114,287 and $34,576,170,
respectively.
Net realized and unrealized gains (losses) as of July 31, 1997 were
as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 565,207 $ 6,393,946
Financial futures contracts (413,462) --
------------ ------------
Total $ 151,745 $ 6,393,946
============ ============
As of July 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $6,393,946, all of which related to
appreciated securities. The aggregate cost of investments at July
31, 1997 for Federal income tax purposes was $66,855,932.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $11,798,372 and $4,200,184 for the years ended July
31, 1997 and July 31, 1996, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the
Year Ended Dollar
July 31, 1997 Shares Amount
Shares sold 135,108 $ 1,430,774
Shares issued to shareholders
in reinvestment of dividends 37,066 392,786
------------ ------------
Total issued 172,174 1,823,560
Shares redeemed (305,791) (3,233,977)
------------ ------------
Net decrease (133,617) $ (1,410,417)
============ ============
Class A Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 158,471 $ 1,664,285
Shares issued to shareholders
in reinvestment of dividends 37,815 403,055
------------ ------------
Total issued 196,286 2,067,340
Shares redeemed (197,525) (2,098,198)
------------ ------------
Net decrease (1,239) $ (30,858)
============ ============
Class B Shares for the
Year Ended Dollar
July 31, 1997 Shares Amount
Shares sold 617,462 $ 6,538,480
Shares issued to shareholders
in reinvestment of dividends 112,661 1,193,941
------------ ------------
Total issued 730,123 7,732,421
Automatic conversion of
shares (33,885) (358,302)
Shares redeemed (1,646,309) (17,437,458)
------------ ------------
Net decrease (950,071) $(10,063,339)
============ ============
<PAGE>
Class B Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 1,176,459 $ 12,522,295
Shares issued to shareholders
in reinvestment of dividends 121,346 1,293,460
------------ ------------
Total issued 1,297,805 13,815,755
Automatic conversion of
shares (32,533) (348,316)
Shares redeemed (1,845,769) (19,662,985)
------------ ------------
Net decrease (580,497) $ (6,195,546)
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 28,288 $ 298,514
Shares issued to shareholders
in reinvestment of dividends 3,437 36,392
------------ ------------
Total issued 31,725 334,906
Shares redeemed (86,000) (912,398)
------------ ------------
Net decrease (54,275) $ (577,492)
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 89,888 $ 953,026
Shares issued to shareholders
in reinvestment of dividends 3,816 40,631
------------ ------------
Total issued 93,704 993,657
Shares redeemed (21,076) (224,505)
------------ ------------
Net increase 72,628 $ 769,152
============ ============
<PAGE>
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 44,242 $ 470,086
Automatic conversion of
shares 33,915 358,302
Shares issued to shareholders
in reinvestment of dividends 4,452 47,135
------------ ------------
Total issued 82,609 875,523
Shares redeemed (58,869) (622,647)
------------ ------------
Net increase 23,740 $ 252,876
============ ============
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 101,332 $ 1,072,810
Automatic conversion of
shares 32,564 348,316
Shares issued to shareholders
in reinvestment of dividends 2,352 25,016
------------ ------------
Total issued 136,248 1,446,142
Shares redeemed (17,616) (189,074)
------------ ------------
Net increase 118,632 $ 1,257,068
============ ============
5. Capital Loss Carryforward:
At July 31, 1997, the Fund had a net capital loss carryforward of
approximately $798,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Arizona Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
<PAGE>
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of July 31, 1997, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at July 31,
1997 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-
State Municipal Series Trust as of July 31, 1997, the results of its
operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 2, 1997
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by
Merrill Lynch Arizona Municipal Bond Fund during its taxable year
ended July 31, 1997 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, there were no capital gains distributions made by the
Fund during the year.
Please retain this information for your records.
<PAGE>
