MERRILL LYNCH
ARKANSAS
MUNICIPAL
BOND FUND
[FUND LOGO]
STRATEGIC
Performance
Annual Report
July 31, 1997
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Robert D. Sneeden, Vice President
Gerald M. Richard, Treasurer
Robert E. Putney III, Secretary
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 #20058 -- 7/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch Arkansas Municipal Bond Fund July 31, 1997
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended July 31, 1997, a number of very favorable
factors combined to push both tax-exempt and taxable bond yields to
recent historic lows. A slowing domestic economy, a continued benign, if
not improving, inflationary environment, a declining Federal budget
deficit with resultant reduced Treasury borrowing needs, and a
successful Congressional budget accord all resulted in significant
declines in fixed-income yields. By the end of July, 30-year US Treasury
bond yields had declined approximately 50 basis points (0.50%) to 6.30%,
their lowest level in over a year. Similarly, as measured by the Bond
Buyer Revenue Bond Index, long-term municipal revenue bond yields fell
over 50 basis points to end the July 31, 1997 quarter at 5.49%, their
lowest level since early 1994.
The decline in tax-exempt yields in recent months has been even more
impressive given that the municipal market has lost much of the
technical support it had enjoyed for over a year. In previous quarters,
new tax-exempt bond issuance declined or remained stable. During the six
months ended July 31, 1997, approximately $100 billion in new long-term
municipal securities was underwritten, an increase of over 7.5% versus
the comparable period in 1996. As tax-exempt bond yields declined, many
municipal bond issuers have taken this opportunity to both issue new
debt and refinance older, higher-couponed debt with new, lower-yielding
issues. This refinancing has led to a surge in tax-exempt issuance in
recent months. Over the three months ended July 31, 1997, new
long-term tax-exempt bond issuance totaled approximately $55 billion, an
increase of over 15% versus the July 31, 1996 quarter.
The decline in municipal bond yields has also resulted in some reduction
in retail investor demand. In earlier episodes of rapidly declining
interest rates, individual investor demand initially fell until
investors became more acclimated to the current levels. Should interest
rates stabilize, we expect investor demand to return to earlier levels.
Also, this past June and July, municipal bond investors received over
$50 billion in assets from coupon income payments, bond maturities, and
the proceeds from early bond redemptions. Despite the continued allure
of the US equity market, it is likely that much of these assets will be
reallocated to the municipal bond market as investors adjust to the new
investment environment.
Looking forward, given the extent of the recent bond market rally, some
retrenchment or at least a period of consolidation is likely. However,
the positive backdrop of modest economic growth and low inflation
suggests that any such adjustment is not likely to be excessive. Despite
recent increases in new bond issuance, supply for all of 1997 is not
expected to be materially different than earlier estimates of
approximately $175 billion. It is likely that the recent increase in
issuance has largely borrowed from that originally scheduled for later
this year. Additionally, any significant increase in tax-exempt bond
yields will prevent any further bond refinancings, reducing future
supply. Unless the current positive economic fundamentals undergo
immediate and significant deterioration, any increase in municipal bond
yields is likely to be viewed as an opportunity to purchase more
attractively priced tax-exempt securities.
Fiscal Year in Review
During the past 12 months, the municipal bond market was characterized
by tremendous price volatility within a narrow trading range. We focused
on purchasing long-term insured bonds as yields approached 6.00% and
selling these securities as yields rallied to 5.50%. The Fund was fully
invested in long-term securities during most of the fiscal year to seek
to achieve an above industry average current yield. The Fund's cash
equivalent reserves fluctuated between 5% -- 10% of total assets, and a
large position of assets committed to longer-term maturities currently
have coupons structured for income rather than price appreciation. This
strategy served the Fund well during this particularly volatile period
for the fixed-income markets in general, generating total return
performance comparable to the industry average as well as an above-
average yield.
Portfolio Matters
During the six months ended July 31, 1997, we maintained a slightly
constructive posture on interest rates. We believed that the strong
economic growth that prevailed in the first quarter of 1997 would
slow considerably in the second quarter. Slow growth combined with
continued low inflation and a balanced budget accord provided a
significant decline in long-term interest rates.
The Arkansas municipal market continued to experience very little
activity during the past six months. This was a result of the small
amount of new issuance, just over $400 million in municipal bonds,
coming to the Arkansas tax-exempt market. This represents a decline in
issuance of 16% as compared to the same period in 1996. During the past
three months, just under $200 million in bonds was issued in Arkansas, a
decline of 37% versus the comparable period a year ago. Additionally,
the majority of new issuance in Arkansas had been dominated by current
coupons and poor call protection features, which we believe would not
have enhanced the Fund's overall structure.
In Conclusion
We have adopted a slightly defensive posture for the second half of
1997. We believe that economic growth will reappear and that there will
be an increase in long-term interest rates. Our strategy will be to
favor higher-couponed issues over interest rate-sensitive securities
that have greater potential for capital appreciation. As new issuance in
the Arkansas tax-exempt market remains at low levels, we expect to
continue to remain fully invested in the coming months.
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,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/ROBERT D. SNEEDEN
Robert D. Sneeden
Vice President and Portfolio Manager
September 3, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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.
[bullet] 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.)
[bullet] 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.
[bullet] Class D Shares incur a maximum initial sales charge of
4% and an account maintenance fee of 0.10% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the payable date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer
agency fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
7/31/97 4/30/97 7/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.72 $10.36 $10.34 +3.68% +3.47%
Class B Shares* 10.71 10.36 10.34 +3.58 +3.38
Class C Shares* 10.72 10.37 10.34 +3.68 +3.38
Class D Shares* 10.71 10.36 10.34 +3.58 +3.38
Class A Shares -- Total Return* +8.94(1) +4.69(2)
Class B Shares -- Total Return* +8.29(3) +4.46(4)
Class C Shares -- Total Return* +8.29(5) +4.43(6)
Class D Shares -- Total Return* +8.73(7) +4.57(8)
Class A Shares -- Standardized 30-day Yield 4.04%
Class B Shares -- Standardized 30-day Yield 3.71%
Class C Shares -- Standardized 30-day Yield 3.61%
Class D Shares -- Standardized 30-day Yield 3.95%
* 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 $0.518 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.123 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.465 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.109 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.455 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.107 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.508 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.120 per share ordinary income dividends.
</TABLE>
Total Return Based on a $10,000 Investment--Class A Shares and Class
B Shares
A line graph depicting the growth of an investment in the Fund's Class
A Shares and Class B Shares compared to growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
9/30/94** 7/97
ML Arkansas Municipal Bond Fund+--
Class A Shares* $9,600 $11,980
ML Arkansas Municipal Bond Fund+--
Class B Shares* $10,000 $12,089
Lehman Brothers Municipal Bond
Index++ $10,000 $12,822
Total Return Based on a $10,000 Investment--Class C Shares 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** 7/97
ML Arkansas Municipal Bond Fund+--
Class C Shares* $10,000 $12,316
ML Arkansas Municipal Bond Fund+--
Class D Shares* $9,600 $11,991
Lehman Brothers Municipal Bond
Index++ $10,000 $13,054
* 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, prerefunded
bonds, general obligation bonds and insured bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +7.28% +2.99%
Inception (9/30/94)
through 6/30/97 +7.47 +5.88
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +6.73% +2.73%
Inception (9/30/94) through 6/30/97 +6.92 +6.27
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 +6.53% +5.53%
Inception (10/21/94)
through 6/30/97 +7.13 +7.13
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/97 +7.17% +2.89%
Inception (10/21/94) through 6/30/97 +7.71 +6.08
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
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
1996 10.64 10.46 -- 0.543 + 3.57
1/1/97 -- 7/31/97 10.46 10.72 -- 0.280 + 5.39
Total $1.554
Cumulative total return as of 7/31/97: +24.80%**
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
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
1996 10.64 10.46 -- 0.490 + 3.04
1/1/97 -- 7/31/97 10.46 10.71 -- 0.250 + 4.98
Total $1.406
Cumulative total return as of 7/31/97: +22.89%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
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
1996 10.65 10.47 -- 0.480 + 2.95
1/1/97 -- 7/31/97 10.47 10.72 -- 0.245 + 4.93
Total $1.339
Cumulative total return as of 7/31/97: +23.16%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
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
1996 10.64 10.46 -- 0.533 + 3.47
1/1/97 -- 7/31/97 10.46 10.71 -- 0.274 + 5.23
Total $1.492
Cumulative total return as of 7/31/97: +24.90%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
*** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
Arkansas -- 83.6%
Arkansas State Development Finance Authority, S/F Mortgage
Revenue Bonds (b):
AAA NR* $705 AMT, Series A, 7.30% due 3/01/2013 $751
AAA NR* 500 (Mortgage-Backed Securities Program), Series H, 6.15% due 7/01/2016 (f) 524
AA NR* 500 Arkansas State Development Finance Authority, Wastewater System Revenue
Bonds (Revolving Loan Fund), Series A, 5.85% due 12/01/2019 530
AA Aa3 350 Arkansas State Refunding Bonds (Waste Disposal and Pollution), Series B,
6.25% due 7/01/2020 374
NR* A 350 Arkansas State Student Loan Authority Revenue Bonds, AMT, Sub-Series B,
7.25% due 6/01/2009 399
BBB+ Baa2 275 Baxter County, Arkansas, IDR, Refunding (Aeroquip-Trinova Corp. Project),
5.80% due 10/01/2013 288
A- A3 1,000 Camden, Arkansas, Environmental Improvement Revenue Bonds (International
Paper Co. Project), AMT, Series A, 7.625% due 11/01/2018 1,196
A+ NR* 500 Conway, Arkansas, Public Facilities Board, Capital Improvement Revenue Bonds
(Hendrix College Project), 6% due 10/01/2026 526
NR* P1 100 Crosset, Arkansas, PCR (Georgia-Pacific Corp. Project), VRDN, 3.65% due
10/01/2007 (a) 100
AAA Aaa 350 Fort Smith, Arkansas, Water, Sewer and Construction Revenue Refunding Bonds,
6% due 10/01/2012 (c) 375
AAA Aaa 250 Independence County, Arkansas, PCR, Refunding (Arkansas Power and Light Co.
Project), 6.25% due 1/01/2021 (d) 273
BBB Baa2 200 Jefferson County, Arkansas, PCR, Refunding (Arkansas Power and Light Co.
Project), 6.30% due 6/01/2018 213
AAA Aaa 375 Little Rock, Arkansas, Municipal Airport Revenue Refunding Bonds, 6% due
11/01/2014 (c) 393
AA+ Aa 500 Little Rock, Arkansas, Refunding (Capital Improvement), 6.25% due 2/01/2008 521
AAA Aaa 400 North Little Rock, Arkansas, Electric Revenue Refunding Bonds, Series A,
6.50% due 7/01/2015 (c) 473
BBB Baa2 300 Pope County, Arkansas, PCR, Refunding (Arkansas Power and Light Co. Project),
6.30% due 12/01/2016 319
A- NR* 500 Pulaski County, Arkansas, Hospital Revenue Bonds (Arkansas Children's Hospital
Project), Series A, 6.20% due 3/01/2022 524
AA A1 500 Rogers, Arkansas, Sales and Use Tax Revenue Bonds, 5.35% due 11/01/2011 509
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) 534
AAA Aaa 500 West Memphis, Arkansas, Public Utility System, Revenue Refunding Bonds,
Series A, 5.25% due 12/01/2004 (c) 527
Puerto Rico -- 15.4%
Puerto Rico Commonwealth, GO, UT:
A Baa1 325 6.50% due 7/01/2023 360
AAA Aaa 500 Refunding, 5.375% due 7/01/2022 (c) 504
AAA Aaa 320 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2002 (g) 360
A Baa1 250 Puerto Rico Public Buildings Authority Revenue Bonds (GTO Government
Facilities), Series B, 5.25% due 7/01/2021 246
AAA Aaa 250 University of Puerto Rico Revenue Bonds, Series M, 5.25% due 6/01/2025 (c) 250
Total Investments (Cost -- $10,268) -- 99.0% 11,069
Other Assets Less Liabilities -- 1.0% 109
--------
Net Assets -- 100.0% $11,178
========
(a) The interest rate is subject to change periodically based upon prevailing market rates.
The interest rate shown is the rate in effect at July 31, 1997.
(b) 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.
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>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $10,267,900) (Note 1a) $11,069,327
Cash 40,919
Receivables:
Interest $145,734
Beneficial interest sold 11,010 156,744
------------
Deferred organization expenses (Note 1e) 26,757
Prepaid registration fees and other assets (Note 1e) 17,334
------------
Total assets 11,311,081
------------
Liabilities: Payables:
Beneficial interest redeemed 38,324
Dividends to shareholders (Note 1f) 12,828
Distributor (Note 2) 3,684
Investment adviser (Note 2) 243 55,079
------------
Accrued expenses and other liabilities 78,179
------------
Total liabilities 133,258
------------
Net Assets: Net assets $11,177,823
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $16,618
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 70,261
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 7,861
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 9,587
Paid-in capital in excess of par 10,316,983
Accumulated realized capital losses on investments -- net (44,914)
Unrealized appreciation on investments -- net 801,427
------------
Net assets $11,177,823
============
Net Asset Value: Class A -- Based on net assets of $1,780,678 and 166,184 shares of
beneficial interest outstanding $10.72
============
Class B -- Based on net assets of $7,527,400 and 702,608 shares of
beneficial interest outstanding $10.71
============
Class C -- Based on net assets of $842,575 and 78,612 shares of
beneficial interest outstanding $10.72
============
Class D -- Based on net assets of $1,027,170 and 95,865 shares of
beneficial interest outstanding $10.71
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
July 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $635,388
(Note 1d):
Expenses: Investment advisory fees (Note 2) $60,286
Professional fees 50,581
Account maintenance and distribution fees -- Class B (Note 2) 37,764
Accounting services (Note 2) 33,241
Printing and shareholder reports 29,236
Amortization of organization expenses (Note 1e) 12,362
Registration fees (Note 1e) 5,568
Transfer agent fees -- Class B (Note 2) 5,124
Account maintenance and distribution fees -- Class C (Note 2) 4,729
Pricing fees 3,008
Custodian fees 1,223
Account maintenance fees -- Class D (Note 2) 1,029
Transfer agent fees -- Class A (Note 2) 886
Transfer agent fees -- Class D (Note 2) 578
Trustees' fees and expenses 556
Transfer agent fees -- Class C (Note 2) 478
Other 8,814
----------
Total expenses before reimbursement 255,463
Reimbursement of expenses (Note 2) (120,366)
----------
Total expenses after reimbursement 135,097
----------
Investment income -- net 500,291
----------
Realized & Realized gain on investments -- net 89,647
Unrealized Gain on Change in unrealized appreciation on investments -- net 304,799
Investments -- Net ----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $894,737
==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $500,291 $566,413
Realized gain on investments -- net 89,647 28,686
Change in unrealized appreciation on investments -- net 304,799 46,904
------------ ------------
Net increase in net assets resulting from operations 894,737 642,003
------------ ------------
Dividends to Investment income -- net:
Shareholders Class A (78,970) (107,159)
(Note 1f): Class B (336,828) (381,400)
Class C (34,323) (32,661)
Class D (50,170) (45,193)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (500,291) (566,413)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (261,170) (708,130)
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 133,276 (632,540)
Beginning of year 11,044,547 11,677,087
------------ ------------
End of year $11,177,823 $11,044,547
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A Class B
For the For the
Period Period
For the Year Sept. 30, For the Year Sept. 30,
The following per share data and ratios have been derived Ended 1994+ to Ended 1994+ to
from information provided in the financial statements. July 31, July 31, July 31, July 31,
1997 1996 1995 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $10.34 $10.29 $10.00 $10.34 $10.29 $10.00
Performance: --------- --------- --------- --------- --------- ---------
Investment income -- net .52 .55 .50 .46 .50 .46
Realized and unrealized gain
on investments -- net .38 .05 .29 .37 .05 .29
--------- --------- --------- --------- --------- ---------
Total from investment operations .90 .60 .79 .83 .55 .75
--------- --------- --------- --------- --------- ---------
Less dividends from investment
income -- net (.52) (.55) (.50) (.46) (.50) (.46)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period $10.72 $10.34 $10.29 $10.71 $10.34 $10.29
========= ========= ========= ========= ========= =========
Total Investment Based on net asset value per
Return:** share 8.94% 5.94% 8.13%++ 8.29% 5.39% 7.68%++
========= ========= ========= ========= ========= =========
Ratios to Expenses, net of reimbursement .83% .49% .11%* 1.34% 1.00% .63%*
Average ========= ========= ========= ========= ========= =========
Net Assets: Expenses 1.92% 3.17% 2.32%* 2.44% 3.69% 2.83%*
========= ========= ========= ========= ========= =========
Investment income -- net 4.96% 5.28% 5.94%* 4.46% 4.77% 5.41%*
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $1,781 $1,710 $2,251 $7,527 $7,573 $8,145
========= ========= ========= ========= ========= =========
Portfolio turnover 41.07% 28.82% 28.64% 41.07% 28.82% 28.64%
========= ========= ========= ========= ========= =========
<CAPTION>
Class C Class D
For the For the
Period Period
For the Year Oct. 21, For the Year Oct. 21,
The following per share data and ratios have been derived Ended 1994+ to Ended 1994+ to
from information provided in the financial statements. July 31, July 31, July 31, July 31,
1997 1996 1995 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $10.34 $10.30 $9.92 $10.34 $10.29 $9.92
Performance: --------- --------- --------- --------- --------- ---------
Investment income -- net .46 .49 .41 .51 .54 .46
Realized and unrealized gain
on investments -- net .38 .04 .38 .37 .05 .37
--------- --------- --------- --------- --------- ---------
Total from investment operations .84 .53 .79 .88 .59 .83
--------- --------- --------- --------- --------- ---------
Less dividends from investment
income -- net (.46) (.49) (.41) (.51) (.54) (.46)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period $10.72 $10.34 $10.30 $10.71 $10.34 $10.29
========= ========= ========= ========= ========= =========
Total Investment Based on net asset value per 8.29% 5.19% 8.13%++ 8.73% 5.84% 8.54%++
Return:** share ========= ========= ========= ========= ========= =========
Ratios to Expenses, net of reimbursement 1.44% 1.11% .85%* .92% .60% .29%*
Average ========= ========= ========= ========= ========= =========
Net Assets: Expenses 2.51% 3.81% 2.90%* 2.03% 3.31% 2.37%*
========= ========= ========= ========= ========= =========
Investment income -- net 4.36% 4.68% 5.00%* 4.87% 5.18% 5.64%*
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $843 $681 $558 $1,027 $1,081 $723
========= ========= ========= ========= ========= =========
Portfolio turnover 41.07% 28.82% 28.64% 41.07% 28.82% 28.64%
========= ========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund July 31, 1997
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 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 a remaining maturity of sixty days or less
are valued on an amortized cost basis, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust, which
may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the
Trust under the general supervision of the Trustees.
(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.
[bullet] 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.
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, 1997, FAM earned fees of $60,286, all of
which was voluntarily waived. FAM also reimbursed the Fund additional
expenses of $60,080.
Pursuant to the distribution plans (the "Distribution Plans") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company Act
of 1940, the Fund pays the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at annual
rates based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the year ended July 31, 1997, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $128 $1,718
Class D $91 $1,464
For the year ended July 31, 1997, MLPF&S received contingent deferred
sales charges of $22,801 and $4 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended July 31, 1997 were $4,483,740 and $4,260,146,
respectively.
Net realized and unrealized gains as of July 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $89,647 $801,427
-------- --------
Total $89,647 $801,427
======== ========
As of July 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $801,427, all of which related to appreciated
securities. The aggregate cost of investments at July 31, 1997 for
Federal income tax purposes was $10,267,900.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions
was $261,170 and $708,130 for the years ended July 31, 1997 and July 31,
1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 35,203 $367,600
Shares issued to shareholders
in reinvestment of dividends 1,402 14,641
--------- ---------
Total issued 36,605 382,241
Shares redeemed (35,841) (373,351)
--------- ---------
Net increase 764 $8,890
========= =========
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 23,482 $245,432
Shares issued to shareholders
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)
========= =========
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 74,005 $772,339
Shares issued to shareholders
in reinvestment of dividends 9,799 102,192
--------- ---------
Total issued 83,804 874,531
Shares redeemed (113,809) (1,184,832)
--------- ---------
Net decrease (30,005) $(310,301)
========= =========
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 149,969 $1,564,033
Shares issued to shareholders
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)
========= =========
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 13,218 $136,944
Shares issued to shareholders
in reinvestment of dividends 2,985 31,157
--------- ---------
Total issued 16,203 168,101
Shares redeemed (3,473) (36,684)
--------- ---------
Net increase 12,730 $131,417
========= =========
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 30,852 $320,788
Shares issued to shareholders
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 D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 3,819 $39,700
Shares issued to shareholders
in reinvestment of dividends 2,932 30,581
--------- ---------
Total issued 6,751 70,281
Shares redeemed (15,461) (161,457)
--------- ---------
Net decrease (8,710) $(91,176)
========= =========
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 41,074 $427,275
Shares issued to shareholders
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
========= =========
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch Arkansas 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 Arkansas
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 1997, the related statements of operations for the year
then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the two-year period 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, 1997 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, 1997, the results of its
operations, the changes in its net assets, and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 5, 1997
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, 1997 qualify as tax-exempt interest dividends for Federal income tax
purposes.
Additionally, there were no capital gains distributions made by the Fund
during the year.
Please retain this information for your records.
