MERRILL LYNCH
ARKANSAS
MUNICIPAL
BOND FUND
FUND LOGO
Annual Report
July 31, 1996
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
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, 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 Arkansas
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
The Municipal Market Environment
Municipal bond yields rose dramatically during the six-month period
ended July 31, 1996. Investors became increasingly alarmed that
earlier forecasts of continued moderate growth were overly
optimistic. As indications of stronger growth were released,
particularly the strong employment reports released beginning in
March, fears of associated inflationary pressures mounted and yields
rose in response. By May and June, long-term municipal bond yields
rose into the 6.25%-6.30% range.
<PAGE>
However, in early July the combination of the Federal Reserve Board
suggesting that growth was expected to slow later in 1996 and a
temporary stock market correction allowed municipal bond yields to
fall as investors scrambled to purchase relatively scarce
securities. As measured by the Bond Buyer Revenue Bond Index, long-
term, A-rated uninsured tax-exempt bonds yielded 6.02% at July 31,
1996, an increase of over 30 basis points (0.30%) in the last six
months. Long-term US Treasury bond yields rose significantly over
the same period. By July 31, 1996, yields on US Treasury bonds
increased almost 100 basis points to end the six-month period at
6.97%.
The municipal bond market's recent outperformance as compared to its
taxable counterpart was largely the result of two principal factors.
First, much of the concern in the tax-exempt market regarding the
potential loss of the inherent tax-advantage of the municipal bonds
dissipated. For much of 1995, various tax proposals, such as the
flat tax or national sales tax, were put forward either to reduce
the national debt or reform the current tax system. Most of these
proposals would have severely limited the tax advantages enjoyed by
the municipal bond market. However, in February 1996, the Kemp
Commission released its findings regarding various tax reform
proposals. While noting that numerous changes should be made, no
mention of curtailing or stopping municipal bonds' current favored
tax status was made.
The second major factor leading to the municipal bond market's
recent outperformance was the return of a more favorable technical
environment. The rate of increase in new bond issuance recently
slowed. Over the last 12 months, approximately $175 billion in long-
term municipal securities were issued, an increase of over 27% as
compared to the same period a year earlier. Much of this increase
was the result of issuers seeking to refinance their existing higher-
couponed debt as interest rates declined in 1995 and early 1996. As
interest rates rose, these financings became increasingly
economically impractical and issuance declined. Over the last six
months, less than $70 billion in long-term tax-exempt securities
were underwritten, an increase of 20% versus the comparable period a
year earlier. Only $43 billion in tax-exempt securities were issued
in the last three months, a total essentially unchanged from the
comparable quarter in 1995. In July 1996, less than $10 billion in
long-term municipal bonds were issued, representing the lowest
issuance for the month of July since 1990.
At the same time investor demand remained consistently strong. With
nominal new-issue yields above 6%, retail investor interest was
steady. Additionally, investors received over $50 billion this June
and July in assets derived from coupon income, bond maturities and
proceeds from early redemptions. Annual new bond issuance has
declined in recent years and is expected to remain below levels seen
in the early 1990s. Consequently, as the higher-coupon bonds issued
in the early-to-mid 1980s were redeemed at their first optional call
dates, the total number of outstanding tax-exempt bonds has
declined. This combination of a declining net supply and significant
amounts of assets helped maintain investor demand in recent months.
<PAGE>
It is unlikely that the municipal bond market will continue to
significantly outperform US Treasury securities in the near future.
The tax-exempt bond market's recent performance led to the yield
ratio between long-term taxable and tax-exempt securities falling
from in excess of 90% to approximately 85%. While historically still
very attractive, some institutional investors, particularly short-
term traders, began to view the tax-exempt bond market's recent
outperformance as an opportunity to sell a relatively expensive
asset. However, to the long-term investor, such a sale would
represent the loss of an attractively priced asset which may not be
easily replaced given the relative scarcity of municipal bonds under
present supply conditions.
Looking ahead, no clear consensus for the direction of interest
rates currently exists. Perhaps, the primary focus going forward
will be the extent to which the increase in interest rates seen thus
far in 1996 will negatively impact future economic growth. Should
growth slow in the interest rate-sensitive sectors of the economy,
like housing, auto, and consumer spending, as many economists assert
is likely, then bond yields are likely to decline. Under such a
scenario, the municipal bond market's performance is likely to
closely mirror that of the US Treasury bond market.
Fiscal Year in Review
Over the fiscal year, Merrill Lynch Arkansas Municipal Bond Fund
slowly shifted away from the neutral posture adopted in late 1995
and early 1996 toward a more defensive structuring. This shift
largely involved the sale of interest rate-sensitive issues and the
corresponding purchase of higher-couponed, more income-oriented
securities. We also periodically increased the Fund's cash reserve
position to help preserve its principal valuation during periods of
significant interest rate volatility. However, we were reluctant to
raise significant cash reserves or to maintain these reserves for an
extended period of time. While tax-exempt interest rates generally
rose over the past six months, there were a number of episodes of
declining rates. Continuously held large cash reserves would impede
the Fund from recouping the short-term price appreciation associated
with these episodes. More important, raising large cash reserves
would have a significant negative impact upon the Fund's yields.
New-issue supply in Arkansas was similar to the national issuance
over the past six months. Approximately $500 million in long-term
municipal securities were issued by Arkansas municipalities during
the six months ended July 31, 1996. However, much of this issuance
was concentrated in a few larger issues which has somewhat inhibited
our ability to diversify the Fund's holdings. In addition, given the
strong investor demand as we noted, much of the Arkansas new bond
issuance was structured in favor of individual retail investors. The
resultant current coupon issues were unattractive given the Fund's
current defensive strategy. The Fund's present strategy, as well as
the more aggressive posture it maintained in late 1995 and early
1996, generated attractive total returns. Despite its present higher-
than-normal cash reserve position, the Fund continued to provide
shareholders with attractive yields for the 12 months ended July 31,
1996.
<PAGE>
Looking forward for the remainder of 1996, the Fund expects to
maintain its present defensive posture until a more clear consensus
regarding the near-term direction of interest rates can be
established. This strategy could result in some potential limiting
of capital appreciation should tax-exempt bond yields fall suddenly
and dramatically. However, the Fund's present posture should enable
us to better preserve much of its principal valuation and maintain
its attractive current dividend should municipal bond yields either
remain stable or resume their decline.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Arkansas
Municipal Bond Fund, and we look forward to assisting you with your
financial needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and Portfolio Manager
September 5, 1996
<PAGE>
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.)
*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. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
7/31/96 4/30/96 7/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.34 $10.24 $10.29 +0.49% +0.98%
Class B Shares* 10.34 10.24 10.29 +0.49 +0.98
Class C Shares* 10.34 10.25 10.30 +0.39 +0.88
Class D Shares* 10.34 10.25 10.29 +0.49 +0.88
Class A Shares--Total Return* +5.94(1) +2.31(2)
Class B Shares--Total Return* +5.39(3) +2.18(4)
Class C Shares--Total Return* +5.19(5) +2.06(6)
Class D Shares--Total Return* +5.84(7) +2.19(8)
Class A Shares--Standardized 30-day Yield 4.85%
Class B Shares--Standardized 30-day Yield 4.54%
Class C Shares--Standardized 30-day Yield 4.45%
Class D Shares--Standardized 30-day Yield 4.75%
<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 $0.549 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.134 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.496 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.121 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.486 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.119 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.539 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.132 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A 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:
<PAGE>
9/30/94** 7/96
ML Arkansas Municipal Bond Fund++--
Class A Shares* $ 9,600 $10,997
ML Arkansas Municipal Bond Fund++--
Class B Shares* $10,000 $11,049
Lehman Brothers Municipal Bond Fund
Index++++ $10,000 $11,630
Total Return Based on a $10,000 Investment--Class C and Class D Shares
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** 7/96
ML Arkansas Municipal Bond Fund++--
Class C Shares* $10,000 $11,374
ML Arkansas Municipal Bond Fund++--
Class D Shares* $ 9,600 $11,028
Lehman Brothers Municipal Bond
Index++++ $10,000 $11,840
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++ML Arkansas Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the State
of Arkansas, its political subdivisions, agencies, and
instrumentalities and obligations of other qualifying issuers.
++++This unmanaged Index consists of long-term revenue bonds,
prefunded 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 6/30/96 +5.72% +1.49%
Inception (9/30/94)
through 6/30/96 +7.56 +5.08
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +5.18% +1.18%
Inception (9/30/94)
through 6/30/96 +7.01 +5.38
[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 6/30/96 +5.18% +4.18%
Inception (10/21/94)
through 6/30/96 +7.47 +7.47
[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 6/30/96 +5.62% +1.39%
Inception (10/21/94)
through 6/30/96 +8.01 +5.44
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<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>
9/30/94--12/31/94 $10.00 $ 9.71 -- $0.157 - 1.31%
1995 9.71 10.64 -- 0.574 +15.85
1/1/96--7/31/96 10.64 10.34 -- 0.305 + 0.20
------
Total $1.036
<PAGE>
Cumulative total return as of 7/31/96: +14.55%**
</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>
9/30/94--12/31/94 $10.00 $ 9.71 -- $0.144 - 1.44%
1995 9.71 10.64 -- 0.522 +15.26
1/1/96--7/31/96 10.64 10.34 -- 0.275 - 0.10
------
Total $0.941
Cumulative total return as of 7/31/96: +13.49%***
</TABLE>
<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 $ 9.92 $ 9.72 -- $0.102 - 0.97%
1995 9.72 10.65 -- 0.512 +15.14
1/1/96--7/31/96 10.65 10.34 -- 0.270 - 0.25
------
Total $0.884
Cumulative total return as of 7/31/96: +13.74%***
</TABLE>
<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 $ 9.92 $ 9.71 -- $0.121 - 0.88%
1995 9.71 10.64 -- 0.564 +15.73
1/1/96--7/31/96 10.64 10.34 -- 0.299 + 0.14
------
Total $0.984
Cumulative total return as of 7/31/96: +14.87%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
***Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Arkansas Municipal Bond
Fund's portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arkansas--91.1%
<S> <S> <C> <S> <C>
Arkansas State Development Finance Authority, S/F, Mortgage Revenue Bonds (b):
AAA NR* $1,300 AMT, Series A, 7.30% due 3/01/2013 $ 1,369
AAA NR* 500 (Mortgage Backed Securities Program), Series H, 6.15% due 7/01/2016 (f) 505
AA NR* 250 Arkansas State Development Finance Authority, Wastewater System Revenue Bonds
(Revolving Loan Fund), Series A, 5.85% due 12/01/2019 253
AA Aa 350 Arkansas State Refunding Bonds (Waste Disposal and Pollution), Series B,
6.25% due 7/01/2020 360
NR* A 350 Arkansas State Student Loan Authority Revenue Bonds, AMT, Sub-Series B,
7.25% due 6/01/2009 383
BBB Baa2 275 Baxter County, Arkansas, IDR, Refunding (Aeroquip-Trinova Corp. Project),
5.80% due 10/01/2013 269
AA- A1 350 Blytheville, Arkansas, Solid Waste Recycling and Sewer Treatment Revenue Bonds
(Nucor Corp. Project), AMT, 6.375% due 1/01/2023 358
A- A3 1,000 Camden, Arkansas, Environmental Improvement Revenue Bonds (International
Paper Co. Project), AMT, Series A, 7.625% due 11/01/2018 1,160
A1+ P1 200 Clark County, Arkansas, Solid Waste Disposal Revenue Bonds (Reynolds Metals
Co. Project),VRDN, AMT, 3.65% due 8/01/2022 (a) 200
<PAGE>
NR* P1 200 Crosset, Arkansas, PCR (Georgia-Pacific Corp. Project), VRDN, 3.60%
due 10/01/2007 (a) 200
AAA Aaa 350 Fort Smith, Arkansas, Water, Sewer and Construction Revenue Refunding Bonds,
6% due 10/01/2012 (c) 363
AAA Aaa 250 Independence County, Arkansas, PCR, Refunding (Arkansas Power and Light
Co. Project),6.25% due 1/01/2021 (d) 258
BBB Baa2 200 Jefferson County, Arkansas, PCR, Refunding (Arkansas Power and Light Co.
Project), 6.30% due 6/01/2018 201
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arkansas (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $ 460 Jonesboro, Arkansas, Residential Housing and Health Care Facilities Board,
Hospital Revenue Refunding Bonds (Saint Bernard's Regional Medical Center),
Series B, 4.60% due 7/01/1999 (e) $ 463
AAA Aaa 375 Little Rock, Arkansas, Municipal Airport Revenue Refunding Bonds, 6%
due 11/01/2014 (c) 383
AA+ Aa 500 Little Rock, Arkansas, Refunding (Capital Improvement), 6.25% due 2/01/2008 513
NR* A1 500 Little Rock, Arkansas, Sewer and Construction Revenue Refunding Bonds,
5.50% due 8/01/2014 489
AAA Aaa 400 North Little Rock, Arkansas, Electric Revenue Refunding Bonds, Series A,
6.50% due 7/01/2015 (c) 442
Pope County, Arkansas, PCR, Refunding (Arkansas Power and Light Co. Project):
BBB Baa2 300 6.30% due 12/01/2016 302
BBB- Baa3 250 6.30% due 11/01/2020 251
A- NR* 500 Pulaski County, Arkansas, Hospital Revenue Bonds (Arkansas Children's
Hospital Project),Series A, 6.20% due 3/01/2022 503
AAA Aaa 350 Pulaski County, Arkansas, Special School District, Refunding Bonds,
5.25% due 2/01/2019 (d) 323
AAA Aaa 500 Saline County, Arkansas, Retirement Housing and Healthcare Facilities Board,
Revenue Refunding Bonds (Evangelist Lutheran Project), 5.80% due 6/01/2011 (e) 510
<PAGE>
Puerto Rico--6.3%
A Baa1 325 Puerto Rico Commonwealth, GO, UT, 6.50% due 7/01/2023 340
AAA NR* 320 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2002 (g) 357
Total Investments (Cost--$10,258)--97.4% 10,755
Other Assets Less Liabilities--2.6% 290
-------
Net Assets--100.0% $11,045
=======
<FN>
(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, 1996.
(b)GNMA Collateralized.
(c)MBIA Insured.
(d)FSA Insured.
(e)AMBAC Insured.
(f)FNMA Collateralized.
(g)Prerefunded.
*Not Rated.
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, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$10,257,902) (Note 1a) $ 10,754,530
Cash 120,789
Receivables:
Interest $ 167,235
Investment adviser (Note 2) 60,235
Beneficial interest sold 620 228,090
------------
Deferred organization expenses (Note 1e) 39,120
Prepaid registration fees and other assets (Note 1e) 11,082
------------
Total assets 11,153,611
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 12,889
Distributor (Note 2) 3,609 16,498
------------
Accrued expenses and other liabilities 92,566
------------
Total liabilities 109,064
------------
Net Assets: Net assets $ 11,044,547
============
<PAGE>
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 16,542
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 73,261
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 6,588
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 10,458
Paid-in capital in excess of par 10,575,631
Accumulated realized capital losses on investments--net (Note 5) (134,561)
Unrealized appreciation on investments--net 496,628
------------
Net assets $ 11,044,547
============
Net Asset Value: Class A--Based on net assets of $1,709,869 and 165,420 shares
of beneficial interest outstanding $ 10.34
============
Class B--Based on net assets of $7,572,377 and 732,613 shares
of beneficial interest outstanding $ 10.34
============
Class C--Based on net assets of $681,271 and 65,882 shares
of beneficial interest outstanding $ 10.34
============
Class D--Based on net assets of $1,081,030 and 104,575 shares
of beneficial interest outstanding $ 10.34
============
<FN>
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
July 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 669,579
(Note 1d):
<PAGE>
Expenses: Printing and shareholder reports $ 143,070
Investment advisory fees (Note 2) 63,612
Professional fees 52,397
Accounting services (Note 2) 45,183
Account maintenance and distribution fees--Class B (Note 2) 39,878
Registration fees (Note 1e) 13,543
Amortization of organization expenses (Note 1e) 12,396
Transfer agent fees--Class B (Note 2) 5,965
Account maintenance and distribution fees--Class C (Note 2) 4,175
Pricing fees 3,994
Custodian fees 1,436
Transfer agent fees--Class A (Note 2) 1,246
Account maintenance fees--Class D (Note 2) 871
Trustees' fees and expenses 629
Transfer agent fees--Class D (Note 2) 544
Transfer agent fees--Class C (Note 2) 476
Other 25,768
------------
Total expenses before reimbursement 415,183
Reimbursement of expenses (Note 2) (312,017)
------------
Total expenses after reimbursement 103,166
------------
Investment income--net 566,413
------------
Realized & Realized gain on investments--net 28,686
Unrealized Change in unrealized appreciation on investments--net 46,904
Gain on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 642,003
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the
For the Period
Year Sept. 30,
Ended 1994++ to
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 566,413 $ 435,928
Realized gain (loss) on investments--net 28,686 (163,247)
Change in unrealized appreciation on investments--net 46,904 449,724
------------ ------------
Net increase in net assets resulting from operations 642,003 722,405
------------ ------------
<PAGE>
Dividends to Investment income--net:
Shareholders Class A (107,159) (103,823)
(Note 1f): Class B (381,400) (309,723)
Class C (32,661) (6,757)
Class D (45,193) (15,625)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (566,413) (435,928)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from
Interest beneficial interest transactions (708,130) 11,290,610
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (632,540) 11,577,087
Beginning of period 11,677,087 100,000
------------ ------------
End of period $ 11,044,547 $ 11,677,087
============ ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Sept. 30, Year Sept. 30,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.29 $ 10.00 $ 10.29 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .55 .50 .50 .46
Realized and unrealized gain on investments--net .05 .29 .05 .29
-------- -------- -------- --------
Total from investment operations .60 .79 .55 .75
-------- -------- -------- --------
Less dividends from investment income--net (.55) (.50) (.50) (.46)
-------- -------- -------- --------
Net asset value, end of period $ 10.34 $ 10.29 $ 10.34 $ 10.29
======== ======== ======== ========
Total Investment Based on net asset value per share 5.94% 8.13%+++ 5.39% 7.68%+++
Return:** ======== ======== ======== ========
<PAGE>
Ratios to Expenses, net of reimbursement .49% .11%* 1.00% .63%*
Average ======== ======== ======== ========
Net Assets: Expenses 3.17% 2.32%* 3.69% 2.83%*
======== ======== ======== ========
Investment income--net 5.28% 5.94%* 4.77% 5.41%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,710 $ 2,251 $ 7,573 $ 8,145
Data: ======== ======== ======== ========
Portfolio turnover 28.82% 28.64% 28.82% 28.64%
======== ======== ======== ========
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.30 $ 9.92 $ 10.29 $ 9.92
Operating -------- -------- -------- --------
Performance: Investment income--net .49 .41 .54 .46
Realized and unrealized gain on investments--net .04 .38 .05 .37
-------- -------- -------- --------
Total from investment operations .53 .79 .59 .83
-------- -------- -------- --------
Less dividends from investment income--net (.49) (.41) (.54) (.46)
-------- -------- -------- --------
Net asset value, end of period $ 10.34 $ 10.30 $ 10.34 $ 10.29
======== ======== ======== ========
Total Investment Based on net asset value per share 5.19% 8.13%+++ 5.84% 8.54%+++
Return:** ======== ======== ======== ========
Ratios to Expenses, net of reimbursement 1.11% .85%* .60% .29%*
Average ======== ======== ======== ========
Net Assets: Expenses 3.81% 2.90%* 3.31% 2.37%*
======== ======== ======== ========
Investment income--net 4.68% 5.00%* 5.18% 5.64%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 681 $ 558 $ 1,081 $ 723
Data: ======== ======== ======== ========
Portfolio turnover 28.82% 28.64% 28.82% 28.64%
======== ======== ======== ========
<FN>
*Annualized.
++Commencement of Operations.
**Total investment returns exclude the effects of
sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Arkansas Municipal Bond Fund (the "Fund") is part of
the Merrill Lynch Multi-State Municipal Series Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. 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 are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid
price or yield equivalents as obtained by the Fund's pricing service
from one or more dealers that make markets in such securities.
Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale price as of the close of
such exchanges. Short-term investments with a remaining maturity of
sixty days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Trustees of the Trust, 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 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.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing portfolio holdings or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in 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 and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). 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.
<PAGE>
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. For the year ended July 31, 1996, FAM earned
fees of $63,612, all of which was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $248,405.
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, 1996, MLFD earned underwriting discounts
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 $615 $7,454
Class D $618 $7,347
For the year ended July 31, 1996, MLPF&S received contingent
deferred sales charges of $57,163 and $520 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, MLFD, MLFDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1996 were $3,108,935 and $3,251,548,
respectively.
Net realized and unrealized gains (losses) as of July 31, 1996 were
as follows:
Realized Gains Unrealized
(Losses) Gains
Long-term investments $ 72,253 $ 496,628
Financial futures contracts (43,567) --
----------- -----------
Total $ 28,686 $ 496,628
=========== ===========
As of July 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $496,628, of which $498,738 related to
appreciated securities and $2,110 related to depreciated securities.
The aggregate cost of investments at July 31, 1996 for Federal
income tax purposes was $10,257,902.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(708,130) and $11,290,610 for the year
ended July 31, 1996 and the period ended July 31, 1995,
respectively.
<PAGE>
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares
for the Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 23,482 $ 245,432
Shares issued to share-
holders in reinvestment
of dividends 2,036 21,214
----------- -----------
Total issued 25,518 266,646
Shares redeemed (78,808) (826,776)
----------- -----------
Net decrease (53,290) $ (560,130)
=========== ===========
NOTES TO FINANCIAL STATEMENTS (concluded)
Class A Shares for the Period Dollar
Sept. 30, 1994++ to July 31, 1995 Shares Amount
Shares sold 236,456 $ 2,367,098
Shares issued to share-
holders in reinvestment
of dividends 1,254 12,677
----------- -----------
Total issued 237,710 2,379,775
Shares redeemed (24,000) (237,008)
----------- -----------
Net increase 213,710 $ 2,142,767
=========== ===========
[FN]
++Prior to September 30,1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 149,969 $ 1,564,033
Shares issued to share-
holders in reinvestment
of dividends 10,248 106,689
----------- -----------
Total issued 160,217 1,670,722
Shares redeemed (219,063) (2,297,703)
----------- -----------
Net decrease (58,846) $ (626,981)
=========== ===========
<PAGE>
Class B Shares for the Period Dollar
Sept. 30, 1994++ to July 31, 1995 Shares Amount
Shares sold 855,458 $ 8,567,269
Shares issued to share-
holders in reinvestment
of dividends 5,048 51,093
----------- -----------
Total issued 860,506 8,618,362
Shares redeemed (74,047) (736,801)
----------- -----------
Net increase 786,459 $ 7,881,561
=========== ===========
++Prior to September 30, 1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 30,852 $ 320,788
Shares issued to share-
holders in reinvestment
of dividends 2,708 28,200
----------- -----------
Total issued 33,560 348,988
Shares redeemed (21,858) (225,645)
----------- -----------
Net increase 11,702 $ 123,343
=========== ===========
Class C Shares for the Period
October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 54,363 $ 556,059
Shares issued to share-
holders in reinvestment
of dividends 670 6,902
----------- -----------
Total issued 55,033 562,961
Shares redeemed (853) (8,722)
----------- -----------
Net increase 54,180 $ 554,239
=========== ===========
[FN]
++Commencement of Operations.
<PAGE>
Class D Shares
for the Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 41,074 $ 427,275
Shares issued to share-
holders in reinvestment
of dividends 3,011 31,367
----------- -----------
Total issued 44,085 458,642
Shares redeemed (9,749) (103,004)
----------- -----------
Net increase 34,336 $ 355,638
=========== ===========
Class D Shares for the Period
October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 74,178 $ 748,590
Shares issued to share-
holders in reinvestment
of dividends 958 9,831
----------- -----------
Total issued 75,136 758,421
Shares redeemed (4,897) (46,378)
----------- -----------
Net increase 70,239 $ 712,043
=========== ===========
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At July 31, 1996, the Fund had a capital loss carryforward of
approximately $40,000, of which $6,000 expires in 2003 and $34,000
expires in 2004. 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 Arkansas 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
Arkansas Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of July 31, 1996, the related statements of
operations for the year then ended and changes in net assets for the
year then ended and for the period September 30, 1994 (commencement
of operations) to July 31, 1995, and the financial highlights for
the year then ended and for the period September 30, 1994
(commencement of operations) to July 31, 1995. 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,
1996 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 Arkansas Municipal Bond Fund of Merrill Lynch Multi-
State Municipal Series Trust as of July 31, 1996, 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 5, 1996
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by
Merrill Lynch Arkansas Municipal Bond Fund during its taxable year
ended July 31, 1996 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, there were no capital gains distributions during the
period.
Please retain this information for your records.
<PAGE>
