MERRILL LYNCH
ARIZONA
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
July 31, 2000
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended July 31, 2000, US domestic economic growth remained
robust. After growing at a 4.2% annual rate in 1999, US domestic economic growth
expanded at a 4.8% rate during the first quarter of 2000 and at a 5.2% rate
during the second quarter. However, despite these significant growth rates, few
price measure indicators have shown any meaningful signs of future price
pressures at the consumer level, despite the lowest unemployment rates since
1970. With few signs of any economic slowdown, the Federal Reserve Board
continued to raise short-term interest rates in February, March and May 2000.
The Federal Reserve Board cited both the continued growth of US employment and
the continued strength of US equity markets as reasons for attempting to
moderate US economic growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong economic
fundamentals and concentrated upon very positive technical supply factors.
Declining bond issuance--both current, and more importantly, expected future
issuance--helped push bond yields lower into mid-April 2000. In late January and
early February 2000, the US Treasury announced its intention to reduce the
amounts to be auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to repurchase
outstanding, higher-couponed Treasury issues, primarily in the 15-year and
longer maturity sector. Both these actions resulted in significant reduction in
the outstanding supply of longer-dated maturity US Treasury debt. Domestic and
international investors quickly began to accumulate what was expected to become
a scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined more than 80 basis
points (0.80%) to 5.67%. During the remainder of the period, US Treasury bond
prices were volatile as strong economic reports and investors' concerns of
additional moves by the Federal Reserve Board occasionally overshadowed the
positive technical position of the long-term US Treasury bond market.
Recently, a number of economic indicators have begun to suggest that the actions
taken by the Federal Reserve Board in 1999 and early 2000 have started to affect
US economic growth. Both new home sales and consumer spending have slowed,
suggesting that economic growth may subside into a 4%-4.5% range by late 2000.
In our opinion, this range of growth was targeted by the Federal Reserve Board
as being sustainable, given current productivity measures, without endangering
the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-term US
Treasury securities and bond prices generally rose for the remainder of the
period. The decline in long-term US Treasury bond yields resulted in an inverted
yield curve as short-term and intermediate-term interest rates did not fall
proportionately to long-term interest rates as the Federal Reserve Board was
expected to continue to raise short-term interest rates. The current inversion
has had as much to do with debt reduction and US Treasury buybacks as with
investor expectations of slower economic growth. During the last six months, US
Treasury bond yields have declined more than 70 basis points to end the period
at 5.78%, their lowest monthly closing level since May 1999.
Tax-exempt bond yields also have declined in recent months. The decline has
largely been in response to the rally in US Treasury securities, as well as a
continued positive technical supply environment. States such as California and
Maryland have announced that their large current and anticipated future budget
surpluses will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to repurchase
existing debt, reducing the supply of tax-exempt bonds in the secondary market
as well. Given the decline in available long-term US Treasury securities, some
investors who need longer maturity investment vehicles have begun to consider
long-term municipal bonds as potential substitutes. This has further
strengthened the overall positive technical position of the tax-exempt market.
During the last six months, long-term municipal revenue bond yields have
declined nearly 50 basis points to 5.85%, their lowest level since late August
1999, as measured by the Bond Buyer Revenue Bond Index.
The relative underperformance of the municipal bond market in recent months has
been especially disappointing given the strong technical position the
1
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
tax-exempt bond market has enjoyed. The issuance of long-term tax-exempt
securities has dramatically declined. During the last year, almost $200 billion
in new long-term municipal securities was issued, a decline of almost 20%
compared to the same period a year earlier. For the six months ended July 31,
2000, approximately $100 billion in new tax-exempt bonds was underwritten, a
decline of 17% compared to the same period in 1999.
Although investors received more than $45 billion in coupon payments, bond
maturities and the proceeds from early bond redemptions during June and July,
overall investor demand has diminished. Long-term municipal bond mutual funds
have seen consistent outflows in recent months as the yields of individual
securities have risen faster than those of larger, more diverse mutual funds.
Thus far this year, tax-exempt mutual funds have had net redemptions of more
than $12 billion.
However, the rate at which these redemptions have been occurring has slowed in
recent months. Recent US equity market volatility, especially in the NASDAQ, has
reduced some investor interest in the stock market. This investor interest,
especially earlier this year, had been siphoning away demand for municipal bonds
by retail investors. Also, the demand from property and casualty companies is
expected to increase in the coming months. These firms are becoming more
profitable after experiencing losses in the past few years resulting from a
series of weather-related natural disasters. Yet as positive as the tax-exempt
bond market's technical environment has been for much of this year, investor
response to the reduction in both the current and future supply of US Treasury
bonds has been overwhelmingly positive and municipal bond yields have
underperformed their taxable counterparts.
Significantly lower municipal bond yields are still likely to require weaker US
employment growth and consumer spending. The actions taken in recent months by
the Federal Reserve Board should eventually slow US economic growth. Recent
declines in US new home sales are perhaps the first sign that consumer spending
is being slowed by higher interest rates. Until further signs develop, it is
likely that the municipal bond market's current favorable technical position
will dampen significant tax-exempt interest rate volatility and provide a
stable environment for eventual improvement in municipal bond prices.
Fiscal Year in Review
Portfolio restructuring within the Arizona marketplace was limited throughout
the past 12 months as primary issuance of Arizona municipal bonds remains down
drastically from prior years. There was limited turnover within the portfolio,
and the Fund typically was in a fully invested position in an effort to achieve
a steady stream of tax-exempt income for shareholders. Few changes in credit
quality were affected, again limited by availability of new securities. At July
31, 2000, 80% of Fund assets were rated A or higher by at least one of the major
rating agencies.
The last 12 months have been volatile within the fixed-income markets with wide
fluctuations in interest rates for both long-term and short-term securities. The
Fund fared well into the end of 1999 with a relatively defensive market
position. As interest rates rose into December, the Fund held few long maturity
discount securities that would have reacted most negatively to these increases.
For the fiscal year ended July 31, 2000, the Fund's Class A, Class B, Class C
and Class D Shares had total returns of +2.82%, +2.30%, +2.20% and +2.72%,
respectively. (Investment results shown do not reflect sales charges and would
be lower if sales charges were included. Complete performance information can be
found on pages 4 and 5 of this report to shareholders.) Our challenge has been
to keep the Fund competitive as the market has improved for debt securities.
We have taken advantage of selective secondary market offerings to put the Fund
in a more neutral position as interest rates declined in the first half of 2000.
A more aggressive stance may have been warranted, yet market technicals made
positioning the Fund difficult. However, the Fund's fully invested position and
use of selective hedging (through the purchase of Treasury notes) enabled the
Fund to remain competitive.
2
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
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,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
September 11, 2000
3
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
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:
o 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.
o 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.)
o 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.
o 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 "Recent Performance Results" and "Average
Annual Total Return" 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 share holders.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/00 +1.84% -2.23%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.94 +4.09
--------------------------------------------------------------------------------
Inception (11/29/91)
through 6/30/00 +6.20 +5.70
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/00 +1.32% -2.54%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.41 +4.41
--------------------------------------------------------------------------------
Inception (11/29/91)
through 6/30/00 +5.66 +5.66
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 +1.22% +0.25%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.30 +4.30
--------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/00 +5.08 +5.08
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 +1.74% -2.33%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.83 +3.98
--------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/00 +5.63 +4.88
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
4
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
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** 7/00
ML Arizona Municipal Bond Fund+--
Class A Shares* $9,600 $16,315
ML Arizona Municipal Bond Fund+--
Class B Shares* $10,000 $16,266
Lehman Brothers Municipal Bond
Index++ $10,000 $17,513
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** 7/00
ML Arizona Municipal Bond Fund+--
Class C Shares* $10,000 $13,441
ML Arizona Municipal Bond Fund+--
Class D Shares* $9,600 $13,296
Lehman Brothers Municipal Bond
Index++ $10,000 $14,849
* 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. The starting date for
the Index in the Class C & Class D Shares' graph is from 10/31/94.
Past performance is not predictive of future performance.
Recent Performance Results*
<TABLE>
<CAPTION>
6 Month 12 Month Since Inception Standardized
As of July 31, 2000 Total Return Total Return Total Return 30-Day Yield
==============================================================================================================
<S> <C> <C> <C> <C>
ML Arizona Municipal Bond Fund Class A Shares +6.12% +2.82% +69.94% 4.55%
--------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class B Shares +5.86 +2.30 +62.66 4.24
--------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class C Shares +5.70 +2.20 +34.41 4.14
--------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class D Shares +6.07 +2.72 +38.50 4.45
==============================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Total investment returns are based
on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's since inception periods are from
11/29/91 for Class A & Class B Shares and from 10/21/94 for Class C &
Class D Shares.
5
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona--81.0%
----------------------------------------------------------------------------------------------------------------------------------
NR* AAA $1,000 Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds
(Saint Luke's Health Systems), 7.25% due 11/01/2003 (f) $ 1,082
----------------------------------------------------------------------------------------------------------------------------------
BBB+ Baa1 2,000 Arizona Health Facilities Authority Revenue Bonds (Catholic Healthcare West), Series A,
6.625% due 7/01/2020 1,986
----------------------------------------------------------------------------------------------------------------------------------
AAA Aa1 1,500 Arizona State Transportation Board, Highway Revenue Refunding Bonds, 5.75% due 7/01/2018 1,533
----------------------------------------------------------------------------------------------------------------------------------
AA+ Aa1 1,000 Arizona State Wastewater Management Authority, Wastewater Treatment Financial Assistance
Revenue Bonds, 6.80% due 7/01/2002 (f) 1,061
----------------------------------------------------------------------------------------------------------------------------------
NR* Aa 2,000 Arizona Student Loan Acquisition Authority, Student Loan Revenue Refunding Bonds, AMT,
Senior Series B, 6.60% due 5/01/2010 2,128
----------------------------------------------------------------------------------------------------------------------------------
Coconino County, Arizona, Pollution Control Corporation, PCR (Nevada Power Co.
Project), AMT:
BBB NR* 1,000 6.375% due 10/01/2036 952
BBB NR* 1,500 Series B, 5.80% due 11/01/2032 1,296
----------------------------------------------------------------------------------------------------------------------------------
A1+ P1 1,000 Coconino County, Arizona, Pollution Control Corporation Revenue Bonds (Arizona Public
Service Co. Project), VRDN, AMT, Series A, 4.35% due 12/01/2031 (h) 1,000
----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Gilbert, Arizona, Water and Sewer Revenue Refunding Bonds, 6.50% due 7/01/2022 (c)(i) 2,131
----------------------------------------------------------------------------------------------------------------------------------
AAA NR* 1,000 Glendale, Arizona, Development Authority, Educational Facilities Revenue Refunding Bonds
(American Graduate School International), 7.125% due 7/01/2005 (b)(f) 1,117
----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Maricopa County, Arizona, Elementary School District No. 68 (Alhambra), GO, Refunding,
Series A, 6.75% due 7/01/2014 (a) 4,345
----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Maricopa County, Arizona, Gilbert Unified School District No. 41, GO, 6.25% due 7/01/2015 (d) 1,068
----------------------------------------------------------------------------------------------------------------------------------
BBB Baa1 1,000 Maricopa County, Arizona, Hospital Revenue Refunding Bonds (Sun Health Corporation),
6.125% due 4/01/2018 961
----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Metro Gardens--Mesa Ridge
Project), Series A, 5.65% due 7/01/2019 (e) 1,000
----------------------------------------------------------------------------------------------------------------------------------
Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding:
A1+ P1 600 (Arizona Public Service Company), VRDN, Series E, 4.30% due 5/01/2029 (h) 600
A1+ P1 700 (Arizona Public Service Company), VRDN, Series F, 4.35% due 5/01/2029 (h) 700
BBB- Baa3 1,500 (Public Service Company of New Mexico Project), Series A, 6.30% due 12/01/2026 1,453
A1 VMIG1@ 1,500 (Southern California Edison Company), VRDN, Series B, 4.35% due 6/01/2035 (h) 1,500
----------------------------------------------------------------------------------------------------------------------------------
NR* NR* 2,000 Mohave County, Arizona, IDA, IDR (North Star Steel Company Project), AMT,
6.70% due 3/01/2020 2,029
----------------------------------------------------------------------------------------------------------------------------------
</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)
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
LEVRRS Leveraged Reverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
6
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona (concluded)
---------------------------------------------------------------------------------------------------------------------------------
Peoria, Arizona, Improvement District No. 8401, Special Assessment Bonds No. 8802:
BBB+ NR* $ 430 7.20% due 1/01/2010 $ 454
BBB+ NR* 510 7.20% due 1/01/2013 537
---------------------------------------------------------------------------------------------------------------------------------
Peoria, Arizona, Improvement District, Special Assessment Bonds No. 8801:
BBB+ NR* 200 7.30% due 1/01/2009 211
BBB+ NR* 395 7.30% due 1/01/2011 418
---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Phoenix, Arizona, Civic Improvement Corporation, Municipal Facilities Excise Tax Revenue
Bonds, 6.90% due 7/01/2004 (e)(f) 2,201
---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 950 Pima County, Arizona, Sewer Revenue Refunding Bonds, 6.75% due 7/01/2015 (c)(e)(f) 978
---------------------------------------------------------------------------------------------------------------------------------
Pinal County, Arizona, IDA, PCR (Newmont Mining), DATES (h):
A1+ P1 700 4.25% due 12/01/2009 700
A1+ P1 1,700 Series A, 4.25% due 12/01/2009 1,700
---------------------------------------------------------------------------------------------------------------------------------
BBB- NR* 750 Prescott Valley, Arizona, Improvement District, Special Assessment Bonds (Sewer Collection
System Roadway Repair), 7.90% due 1/01/2012 804
---------------------------------------------------------------------------------------------------------------------------------
AA Aa1 1,000 Scottsdale, Arizona, Water and Sewer Revenue Bonds (Project of 1989), Series E,
4.50% due 7/01/2023 850
---------------------------------------------------------------------------------------------------------------------------------
BBB+ NR* 1,600 Sedona, Arizona, Sewer Revenue Refunding Bonds, 7% due 7/01/2012 1,700
---------------------------------------------------------------------------------------------------------------------------------
A+ Aa3 1,250 Tucson, Arizona, Water Revenue Refunding Bonds, 6.50% due 7/01/2016 1,295
---------------------------------------------------------------------------------------------------------------------------------
AA A1 2,000 University of Arizona, University Revenue Refunding Bonds, Series A, 6.20% due 6/01/2016 2,184
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--15.9%
---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth, GO, Refunding (g):
AAA Aaa 2,000 RITR, Class R, Series 3, 7.131% due 7/01/2016 (e) 2,108
AAA Aaa 2,000 YCN, 7.434% due 7/01/2020 (d) 2,058
---------------------------------------------------------------------------------------------------------------------------------
A Baa1 1,000 Puerto Rico Commonwealth Highway and Transportation Authority, Transportation Revenue
Bonds, Series B, 6% due 7/01/2026 1,025
---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,900 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds, LEVRRS,
7.478% due 7/01/2002 (d)(f)(g) 2,052
---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Puerto Rico Industrial Tourist Educational, Medical and Environmental Control Facilities
Revenue Refunding Bonds (Inter-American University), Series A, 5% due 10/01/2022 (e) 938
---------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$48,509)--96.9% 50,155
Variation Margin on Financial Futures Contracts**--0.0% 15
Other Assets Less Liabilities--3.1% 1,570
-------
Net Assets--100.0% $51,740
=======
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) Connie Lee Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) MBIA Insured.
(f) Prerefunded.
(g) 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, 2000.
(h) 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,
2000.
(i) All or a portion of security held as collateral in connection with open
financial futures contracts.
* Not Rated.
** Financial futures contracts purchased as of July 31, 2000 were as follows:
--------------------------------------------------------------------------
(in Thousands)
--------------------------------------------------------------------------
Number of Expiration
Contracts Issue Date Value
--------------------------------------------------------------------------
50 US Treasury Notes September 2000 $4,945
--------------------------------------------------------------------------
Total Financial Futures Contracts Purchased
(Total Contract Price--$4,898) $4,945
======
--------------------------------------------------------------------------
@ Highest short-term rating by Moody's Investors Service, Inc.. Ratings of
issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 2000
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$48,508,655) ..................... $ 50,154,982
Cash ..................................................................... 213,297
Receivables:
Securities sold ........................................................ $ 1,066,863
Interest ............................................................... 400,283
Beneficial interest sold ............................................... 42,459
Variation margin ....................................................... 14,844 1,524,449
------------
Prepaid expenses and other assets ........................................ 1,601
------------
Total assets ............................................................. 51,894,329
------------
-----------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Dividends to shareholders .............................................. 46,300
Investment adviser ..................................................... 22,438
Beneficial interest redeemed ........................................... 21,571
Distributor ............................................................ 14,556 104,865
------------
Accrued expenses and other liabilities ................................... 49,755
------------
Total liabilities ........................................................ 154,620
------------
-----------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ............................................................... $ 51,739,709
============
-----------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................ $ 112,375
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................ 337,024
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................ 12,139
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................ 43,002
Paid-in capital in excess of par ......................................... 50,537,545
Accumulated realized capital losses on investments--net .................. (259,767)
Accumulated distributions in excess of realized capital gains--net ....... (735,421)
Unrealized appreciation on investments--net .............................. 1,692,812
------------
Net assets ............................................................... $ 51,739,709
============
-----------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $11,524,665 and 1,123,754 shares
of beneficial interest outstanding ....................................... $ 10.26
============
Class B--Based on net assets of $34,564,736 and 3,370,243 shares
of beneficial interest outstanding ....................................... $ 10.26
============
Class C--Based on net assets of $1,244,049 and 121,387 shares
of beneficial interest outstanding ....................................... $ 10.25
============
Class D--Based on net assets of $4,406,259 and 430,020 shares
of beneficial interest outstanding ....................................... $ 10.25
============
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended July 31, 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 3,364,085
---------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees ............................... $ 298,510
Account maintenance and distribution fees--Class B ..... 186,957
Professional fees ...................................... 73,611
Printing and shareholder reports ....................... 34,363
Accounting services .................................... 26,186
Transfer agent fees--Class B ........................... 11,158
Registration fees ...................................... 7,512
Account maintenance and distribution fees--Class C ..... 6,350
Trustees' fees and expenses ............................ 5,885
Pricing fees ........................................... 5,030
Custodian fees ......................................... 4,976
Account maintenance fees--Class D ...................... 3,841
Transfer agent fees--Class A ........................... 2,637
Transfer agent fees--Class D ........................... 847
Transfer agent fees--Class C ........................... 325
Other .................................................. 1,890
-----------
Total expenses ......................................... 670,078
-----------
Investment income--net ................................. 2,694,007
-----------
---------------------------------------------------------------------------------------------------------------
Realized & Realized loss on investments--net ...................... (246,381)
Unrealized Loss on Change in unrealized appreciation on investments--net .. (1,342,914)
Investments--Net: -----------
Net Increase in Net Assets Resulting from Operations ... $ 1,104,712
===========
---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended July 31,
-----------------------------
Increase (Decrease) in Net Assets: 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net ................................................. $ 2,694,007 $ 2,940,370
Realized gain (loss) on investments--net ............................... (246,381) 453,831
Change in unrealized appreciation on investments--net .................. (1,342,914) (1,858,041)
------------ ------------
Net increase in net assets resulting from operations ................... 1,104,712 1,536,160
------------ ------------
---------------------------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Class A .............................................................. (639,418) (656,919)
Shareholders: Class B .............................................................. (1,803,547) (2,061,958)
Class C .............................................................. (50,135) (51,880)
Class D .............................................................. (200,907) (169,613)
In excess of realized gain on investments--net:
Class A .............................................................. (7,114) (141,226)
Class B .............................................................. (23,230) (507,086)
Class C .............................................................. (534) (14,324)
Class D .............................................................. (2,189) (39,718)
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ........................................................ (2,727,074) (3,642,724)
------------ ------------
---------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (7,420,185) (6,462,362)
Transactions: ------------ ------------
---------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ........................................... (9,042,547) (8,568,926)
Beginning of year ...................................................... 60,782,256 69,351,182
------------ ------------
End of year ............................................................ $ 51,739,709 $ 60,782,256
============ ============
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
10
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
The following per share data and ratios have been derived ----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 10.53 $ 10.88 $ 10.87 $ 10.54 $ 10.46
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .54 .52 .55 .55 .54
Realized and unrealized gain (loss) on
investments--net ..................... (.26) (.24) .01 .33 .08
-------- -------- -------- -------- --------
Total from investment operations ..... .28 .28 .56 .88 .62
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.54) (.52) (.55) (.55) (.54)
Realized gain on investments--net .. -- -- -- -- --
In excess of realized gain on
investments--net ................... (.01) (.11) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.55) (.63) (.55) (.55) (.54)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.26 $ 10.53 $ 10.88 $ 10.87 $ 10.54
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 2.82% 2.52% 5.25% 8.63% 6.04%
Return:* ======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ............................. .86% .94% .82% .79% .79%
Average Net ======== ======== ======== ======== ========
Assets: Investment income--net ............... 5.31% 4.77% 5.01% 5.21% 5.09%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 11,525 $ 12,975 $ 13,875 $ 14,012 $ 14,988
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 41.15% 25.16% 53.75% 29.68% 36.39%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have been derived ----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 10.53 $ 10.88 $ 10.87 $ 10.54 $ 10.46
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .49 .46 .49 .50 .49
Realized and unrealized gain (loss) on
investments--net ..................... (.26) (.24) .01 .33 .08
-------- -------- -------- -------- --------
Total from investment operations ..... .23 .22 .50 .83 .57
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.49) (.46) (.49) (.50) (.49)
Realized gain on investments--net .. -- -- -- -- --
In excess of realized gain on
investments--net ................... (.01) (.11) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.50) (.57) (.49) (.50) (.49)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.26 $ 10.53 $ 10.88 $ 10.87 $ 10.54
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 2.30% 2.01% 4.71% 8.08% 5.49%
Return:* ======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ............................. 1.37% 1.44% 1.32% 1.30% 1.30%
Average Net ======== ======== ======== ======== ========
Assets: Investment income--net ............... 4.80% 4.26% 4.50% 4.70% 4.59%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 34,565 $ 42,758 $ 51,503 $ 58,282 $ 66,497
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 41.15% 25.16% 53.75% 29.68% 36.39%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
The following per share data and ratios have been derived ------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 10.52 $ 10.88 $ 10.87 $ 10.54 $ 10.46
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .48 .45 .48 .49 .48
Realized and unrealized gain (loss) on
investments--net ..................... (.26) (.25) .01 .33 .08
-------- -------- -------- -------- --------
Total from investment operations ..... .22 .20 .49 .82 .56
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.48) (.45) (.48) (.49) (.48)
Realized gain on investments--net .. -- -- -- -- --
In excess of realized gain on
investments--net ................... (.01) (.11) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.49) (.56) (.48) (.49) (.48)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.25 $ 10.52 $ 10.88 $ 10.87 $ 10.54
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 2.20% 1.81% 4.61% 7.97% 5.38%
Return:* ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ............................. 1.47% 1.54% 1.42% 1.40% 1.40%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net ............... 4.71% 4.16% 4.39% 4.59% 4.49%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 1,244 $ 996 $ 1,233 $ 957 $ 1,499
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 41.15% 25.16% 53.75% 29.68% 36.39%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
The following per share data and ratios have been derived ----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 10.52 $ 10.87 $ 10.86 $ 10.53 $ 10.45
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .53 .51 .54 .54 .53
Realized and unrealized gain (loss) on
investments--net ..................... (.26) (.24) .01 .33 .08
-------- -------- -------- -------- --------
Total from investment operations ..... .27 .27 .55 .87 .61
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.53) (.51) (.54) (.54) (.53)
Realized gain on investments--net .. -- -- -- -- --
In excess of realized gain on
investments--net ................... (.01) (.11) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.54) (.62) (.54) (.54) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.25 $ 10.52 $ 10.87 $ 10.86 $ 10.53
======== ======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 2.72% 2.42% 5.14% 8.52% 5.93%
Return:* ======== ======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ............................. .96% 1.05% .92% .89% .89%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net ............... 5.20% 4.67% 4.90% 5.11% 5.01%
======== ======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 4,406 $ 4,053 $ 2,740 $ 2,188 $ 1,871
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 41.15% 25.16% 53.75% 29.68% 36.39%
======== ======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
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's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. 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.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and 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) 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. Distributions in excess of realized capital gains are due
primarily to differing
15
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
tax treatments for futures transactions and post-October losses.
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 FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is 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: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.
Pursuant to 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 .......................... .25% .25%
Class C .......................... .25% .35%
Class D .......................... .10% --
--------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("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, 2000, FAMD 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:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class A........................... $182 $1,375
Class D........................... $138 $1,555
--------------------------------------------------------------------------------
For the year ended July 31, 2000, MLPF&S received contingent deferred sales
charges of $34,578 relating to transactions in Class B Shares.
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, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2000 were $21,305,445 and $33,419,289, respectively.
Net realized gains (losses) for the year ended July 31, 2000 and net unrealized
gains as of July 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
--------------------------------------------------------------------------------
Long-term investments ............ $ (256,977) $1,646,327
Financial futures contracts ...... 10,596 46,485
---------- ----------
Total ............................ $ (246,381) $1,692,812
========== ==========
--------------------------------------------------------------------------------
As of July 31, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $1,646,327, of which $2,104,423 related to appreciated securities and
$458,096 related to depreciated securities. The aggregate cost of investments at
July 31, 2000 for Federal income tax purposes was $48,508,655.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$7,420,185 and $6,462,362
16
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
for the years ended July 31, 2000 and July 31, 1999, respectively.
Transactions in shares of beneficial interest for each class were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 121,596 $ 1,219,526
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 32,916 333,211
-------- -----------
Total issued ........................... 154,512 1,552,737
Shares redeemed ........................ (263,317) (2,665,813)
-------- -----------
Net decrease ........................... (108,805) $(1,113,076)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 141,504 $ 1,545,495
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 40,747 442,486
------- -----------
Total issued ........................... 182,251 1,987,981
Shares redeemed ........................ (224,505) (2,437,621)
-------- -----------
Net decrease ........................... (42,254) $ (449,640)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 215,656 $ 2,179,133
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 70,640 715,305
-------- -----------
Total issued ........................... 286,296 2,894,438
Automatic conversion of
shares ................................. (13,688) (139,007)
Shares redeemed ........................ (964,126) (9,765,327)
-------- -----------
Net decrease ........................... (691,518) $(7,009,896)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 408,994 $ 4,460,737
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 97,485 1,059,041
---------- -----------
Total issued ........................... 506,479 5,519,778
Automatic conversion of
shares ................................. (23,300) (249,775)
Shares redeemed ........................ (1,153,120) (12,542,400)
---------- -----------
Net decrease ........................... (669,941) $(7,272,397)
========== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 46,999 $ 471,284
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 2,751 27,825
------- -----------
Total issued ........................... 49,750 499,109
Shares redeemed ........................ (23,061) (235,876)
------- -----------
Net increase ........................... 26,689 $ 263,233
======= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 21,966 $ 240,344
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 3,430 37,216
------- -----------
Total issued ........................... 25,396 277,560
Shares redeemed ........................ (44,016) (474,152)
------- -----------
Net decrease ........................... (18,620) $ (196,592)
======= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 123,728 $ 1,238,932
Automatic conversion
of shares .............................. 13,702 139,007
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 7,861 79,557
-------- -----------
Total issued ........................... 145,291 1,457,496
Shares redeemed ........................ (100,624) (1,017,942)
-------- -----------
Net increase ........................... 44,667 $ 439,554
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 133,894 $ 1,462,794
Automatic conversion
of shares .............................. 23,321 249,775
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 8,210 88,945
------- -----------
Total issued ........................... 165,425 1,801,514
Shares redeemed ........................ (32,047) (345,247)
------- -----------
Net increase ........................... 133,378 $ 1,456,267
======= ===========
--------------------------------------------------------------------------------
17
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
5. Short-Term Borrowings:
On December 3, 1999, the Fund, along with certain other funds managed by FAM and
its affiliates, entered into a one-year, unsecured $1,000,000,000 credit
agreement with The Bank of New York and other lenders. The funds may borrow
money for temporary or emergency purposes to meet shareholder redemptions. Each
fund may borrow up to the maximum amount allowable under the fund's current
prospectus and statement of additional information, subject to various other
legal, regulatory or contractual limits. The funds collectively pay a commitment
fee of .09% per annum on the available portion of the facility. Amounts borrowed
under the facility bear interest at the Federal Funds rate plus .50%. The Fund
did not borrow from the facility during the year ended July 31, 2000.
6. Capital Loss Carryforward:
At July 31, 2000, the Fund had a net capital loss carryforward of approximately
$248,000, all of which expires in 2008. This amount will be available to offset
like amounts of any future taxable gains.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch Arizona Municipal Bond
Fund of Merrill Lynch Multi-State Municipal Series Trust:
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, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000 by correspondence with the custodian. 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, 2000, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
Princeton, New Jersey
September 13, 2000
18
<PAGE>
Merrill Lynch Arizona Municipal Bond Fund July 31, 2000
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, 2000 qualify
as tax-exempt interest dividends for Federal income tax purposes.
Additionally, the Fund paid a long-term capital gains distribution in the amount
of $.006153 per share, payable on December 31, 1999 to shareholders as of
December 20, 1999. The entire distribution is subject to a maximum 20% tax rate.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Arthur Zeikel, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
19
<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. 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 #16238--7/00
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