MERRILL LYNCH
ARKANSAS
MUNICIPAL
BOND FUND
FUND LOGO
Annual Report
July 31, 1998
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
Printed on post-consumer recycled paper
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended July 31, 1998, long-term tax-exempt
revenue bond yields were little changed. Throughout the period, the
near absence of inflationary pressures continued to support low
interest rates. However, consistently strong domestic economic
growth has caused some investors to fear that the Federal Reserve
Board will be forced eventually to raise short-term interest rates.
Such action would be taken to ensure that the US economy's present
rate of growth would decelerate before any inflationary pressures
could develop. These concerns pushed bond yields modestly higher by
late April.
However, the weakening financial conditions in many Asian countries
subsequently calmed investor fears of Federal Reserve Board
intervention, and fixed-income prices again moved higher. Long-term
uninsured municipal bond yields, as measured by the Bond Buyer
Revenue Bond Index, rose less than 5 basis points (0.05%) to end the
July quarter at 5.36%. As in late 1997 and early 1998, US Treasury
bond yields benefited from a "flight to quality" as foreign
investors were drawn to the relative safe haven of US Government
securities. Long-term US Treasury bond yields declined approximately
10 basis points to end the July quarter at 5.71%.
Thus far in 1998, the municipal bond market has experienced
unexpectedly strong supply pressures. These supply pressures have
prevented tax-exempt bond yields from declining as much as US
Treasury bond yields. During the first six months of 1998, more than
$153 billion in new tax-exempt bonds were underwritten, an increase
of almost 50% compared to the same period a year ago. During the
quarter ended July 31, 1998, municipalities issued over $75 billion
in new securities, an increase of more than 35% compared to the same
three-month period in 1997. Additionally, corporate issuers have
also viewed current interest rate levels as an opportunity to issue
significant amounts of taxable securities. Thus far in 1998, over
$500 billion in investment-grade corporate bonds have been
underwritten, an increase of more than 70% compared to the same
period a year ago. This sizeable corporate bond issuance has tended
to both support generally higher fixed-income yields and reduce the
demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely
to be maintained. Continued increases in bond issuance will require
lower and lower tax-exempt bond yields to generate the economic
savings necessary for additional municipal bond refinancings.
Preliminary estimates for 1998 total municipal bond issuance are in
the $200 billion--$225 billion range. These estimates suggest that
recent supply pressures are likely to abate later in the year.
Earlier this year, municipal bond investors received approximately
$30 billion in coupon payments, bond maturities and proceeds from
early redemptions. The demand generated by these assets has helped
to offset the increase in supply seen thus far in 1998.
The continued impact of the Asian financial crisis on the US
domestic economy's future growth remains unclear. Current Asian
economic conditions continue to reflect ongoing weakness. Recent
trade data indicated that reduced US exports to these countries may
have lowered US economic growth by as much as 2% in the first
quarter of 1998. Since further trade deterioration is possible in
the coming months, we do not believe that the Federal Reserve Board
will be willing to raise interest rates, barring a dramatic and
unexpected resurgence of domestic inflation.
These factors suggest that over the near term, interest rates are
unlikely to rise by any appreciable amount. Recent supply pressures
have caused municipal bond yield ratios to rise relative to US
Treasury bond yields. At July 31, 1998, long-term tax-exempt bond
yields were at attractive yield ratios relative to US Treasury
securities of comparable maturities (over 90%), well in excess of
their expected range of 85%--88%. Tax-exempt bond yield ratios
rarely exceeded 90% in the 1980s and 1990s. Previous instances have
usually been associated with potential changes in Federal tax code
that would have adversely affected the tax-favored status of
municipal bonds. The present situation has developed largely because
of a temporary supply imbalance. These imbalances should soon be
corrected as tax-exempt bond issuance slows from its current rapid
pace later this year. Any further pressure on the municipal market
may well represent a very attractive investment opportunity.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
Portfolio Strategy
During the six months ended July 31, 1998, our investment outlook
for Merrill Lynch Arkansas Municipal Bond Fund was basically
constructive. The deterioration in the Asian economies helped keep
interest rates low, even in the face of strong domestic economic
growth. This combination of strong growth and low inflation has kept
bond yields within a rather narrow trading range over the past six
months.
Issuance of new Arkansas tax-exempt municipal bonds was just over
$600 million during the six-month period ended July 31, 1998. This
represents an increase of more than 10% compared to the same six-
month period a year ago. Additionally, the majority of new issuance
in Arkansas was dominated by current coupons and lesser call
protection. We do not view such securities as attractive additions
to the Fund's portfolio.
Looking ahead, we expect to continue to maintain our fully invested
position and our constructive portfolio strategy to seek to benefit
from a lower interest rate environment. However, anticipated lack of
new issuance in Arkansas may curtail our ability to execute this
strategy.
Fiscal Year in Review
During the fiscal year ended July 31, 1998, total municipal issuance
increased by more than 40% compared to the same period last year,
while Arkansas municipal issuance increased by more than 25% over
the same period. Both the tax-exempt and US Treasury markets
experienced a decline in yields, although the greater increase in
tax-exempt issuance resulted in municipal performance lagging that
of US Treasury securities.
Given the narrow trading range of the municipal bond market, we
maintained a slightly defensive strategy going into the second half
of 1997. We believed that economic growth would resurge and the
Federal Reserve Board would raise interest rates in order to keep
inflation under control. However, in late October 1997, the Asian
equity market turmoil created an increased demand for US Treasury
securities, causing a rally in the bond market. In response to the
Asian economic crisis and the continued domestic low inflation
environment, we shifted the Fund to a more aggressive position by
early November 1997. We remained constructive through July 31, 1998,
participating in the continued bond market rally, which brought
interest rates to their recent historic lows.
Throughout the fiscal year ended July 31, 1998, we maintained the
Fund's fully invested position. These strategies produced total
returns of +4.79%, +4.35%, +4.16% and +4.79% for the Fund's Class A,
Class B, Class C and Class D Shares, respectively, for the year
ended July 31, 1998.
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
(Hugh T. Hurley III)
Hugh T. Hurley III
Vice President and Portfolio Manager
September 8, 1998
We are pleased to announce that Hugh T. Hurley III is responsible
for the day-to-day management of Merrill Lynch Arkansas Municipal
Bond Fund. Mr. Hurley has been employed by Merrill Lynch Asset
Management, L.P. (an affiliate of the Fund's investment adviser)
since 1996 as Vice President and since 1993 as Assistant Vice
President.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
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. 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 shareholders.
<TABLE>
Recent Performance Results*
<CAPTION>
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 7/31/98
<S> <C> <C> <C> <C>
ML Arkansas Municipal Bond Fund Class A Shares +4.79% +1.69% +30.78% 3.50%
ML Arkansas Municipal Bond Fund Class B Shares +4.35 +1.56 +28.24 3.13
ML Arkansas Municipal Bond Fund Class C Shares +4.16 +1.53 +28.29 3.04
ML Arkansas Municipal Bond Fund Class D Shares +4.79 +1.66 +30.88 3.40
<FN>
*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
inception dates are Class A and Class B Shares, 9/30/94 and Class C
and Class D Shares, 10/21/94.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
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:
9/30/94** 7/98
ML Arkansas Municipal Bond Fund++--
Class A Shares* $ 9,600 $12,554
ML Arkansas Municipal Bond Fund++--
Class B Shares* $10,000 $12,724
Lehman Brothers Municipal Bond
Index++++ $10,000 $13,591
Total Return Based on a $10,000 Investment
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** 7/98
ML Arkansas Municipal Bond Fund++--
Class C Shares* $10,000 $12,829
ML Arkansas Municipal Bond Fund++--
Class D Shares* $ 9,600 $12,566
Lehman Brothers Municipal Bond
Index++++ $10,000 $13,837
[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,
prerefunded bonds, general obligation bonds and insured bonds The
starting date for the Index in the Class C & Class D Shares graph is
10/31/94.
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 6/30/98 +7.48% +3.18%
Inception (9/30/94)
through 6/30/98 +7.47 +6.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 +6.84% +2.84%
Inception (9/30/94)
through 6/30/98 +6.90 +6.67
[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 6/30/98 +6.84% +5.84%
Inception (10/21/94)
through 6/30/98 +7.05 +7.05
[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 6/30/98 +7.38% +3.08%
Inception (10/21/94)
through 6/30/98 +7.62 +6.43
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
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--80.4%
<S> <S> <C> <S> <C>
Arkansas State Development Finance Authority, S/F Mortgage Revenue
Bonds (b):
AAA NR* $ 635 AMT, Series A, 7.30% due 3/01/2013 $ 676
AAA NR* 485 (Mortgage-Backed Securities Program), Series H, 6.15% due
7/01/2016 (f) 514
AA NR* 500 Arkansas State Development Finance Authority, Wastewater System
Revenue Bonds (Revolving Loan Fund), Series A, 5.85% due 12/01/2019 531
AA Aa3 350 Arkansas State Refunding Bonds (Waste Disposal and Pollution), Series
B, 6.25% due 7/01/2020 372
NR* A 350 Arkansas State Student Loan Authority Revenue Bonds, AMT, Sub-Series B,
7.25% due 6/01/2009 401
BBB+ Baa2 275 Baxter County, Arkansas, IDR, Refunding (Aeroquip-Trinova Corp. Project),
5.80% due 10/01/2013 293
BBB+ A3 1,000 Camden, Arkansas, Environmental Improvement Revenue Bonds (International
Paper Co. Project), AMT, Series A, 7.625% due 11/01/2018 1,168
A+ NR* 500 Conway, Arkansas, Public Facilities Board, Capital Improvement Revenue
Bonds (Hendrix College Project), 6% due 10/01/2026 529
NR* P1 200 Crosset, Arkansas, PCR (Georgia-Pacific Corp. Project), VRDN, 3.55% 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) 378
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 215
AAA Aaa 375 Little Rock, Arkansas, Municipal Airport Revenue Refunding Bonds, 6% due
11/01/2014 (c) 398
AA+ Aa 500 Little Rock, Arkansas, Refunding (Capital Improvement), 6.25% due 2/01/2008 515
AAA Aaa 400 North Little Rock, Arkansas, Electric Revenue Refunding Bonds, Series A,
6.50% due 7/01/2015 (c) 471
BBB+ Baa2 300 Pope County, Arkansas, PCR, Refunding (Arkansas Power and Light Co. Project),
6.30% due 12/01/2016 323
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
<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>
AA Aa2 $1,000 Pulaski County, Arkansas, Health Facilities Board Revenue Bonds (Catholic
Health Initiatives), Series A, 5% due 12/01/2028 $ 959
A- NR* 500 Pulaski County, Arkansas, Hospital Revenue Bonds (Arkansas Children's
Hospital Project), Series A, 6.20% due 3/01/2022 526
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) 537
NR* A1 500 University of Arkansas, Various Facility Revenue Bonds (Fayetteville Campus),
5% due 11/01/2022 487
Puerto Rico--17.9%
AAA Aaa 325 Puerto Rico Commonwealth, GO, UT, 6.50% due 7/01/2004 (g) 368
A1+ VMIG1++ 500 Puerto Rico Commonwealth, Government Development Bank, Refunding, VRDN,
3.20% due 12/01/2015 (a)(c) 500
AAA Aaa 320 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2002 (g) 354
BBB+ Baa1 500 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds, Series EE,
4.75% due 7/01/2024 467
AAA Aaa 500 Puerto Rico Public Buildings Authority Revenue Bonds (Guaranteed Government
Facilities), Series B, 5% due 7/01/2027 (e) 489
Total Investments (Cost--$11,148)--98.3% 11,944
Other Assets Less Liabilities--1.7% 205
-------
Net Assets--100.0% $12,149
=======
<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, 1998.
(b)GNMA Collateralized.
(c)MBIA Insured.
(d)FSA Insured.
(e)AMBAC Insured.
(f)FNMA Collateralized.
(g)Prerefunded.
*Not Rated.
++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.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$11,147,798) (Note 1a) $ 11,944,219
Cash 72,399
Interest receivable 153,761
Deferred organization expenses (Note 1e) 14,395
Prepaid registration fees and other assets (Note 1e) 15,232
------------
Total assets 12,200,006
------------
Liabilities: Payables:
Beneficial interest redeemed $ 11,406
Dividends to shareholders (Note 1f) 7,980
Distributor (Note 2) 3,743
Investment adviser (Note 2) 1,104 24,233
------------
Accrued expenses and other liabilities 26,472
------------
Total liabilities 50,705
------------
Net Assets: Net assets $ 12,149,301
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 30,358
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 61,168
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 11,239
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 10,871
Paid-in capital in excess of par 11,306,543
Accumulated realized capital losses on investments--net (44,914)
Accumulated distributions in excess of realized capital gains on
investments--net (Note 1f) (22,385)
Unrealized appreciation on investments--net 796,421
------------
Net assets $ 12,149,301
============
Net Asset Value: Class A--Based on net assets of $3,246,262 and 303,581 shares of
beneficial interest outstanding $ 10.69
============
Class B--Based on net assets of $6,538,878 and 611,677 shares of
beneficial interest outstanding $ 10.69
============
Class C--Based on net assets of $1,201,922 and 112,390 shares of
beneficial interest outstanding $ 10.69
============
Class D--Based on net assets of $1,162,239 and 108,705 shares of
beneficial interest outstanding $ 10.69
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
July 31, 1998
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 640,706
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 63,127
Professional fees 54,624
Account maintenance and distribution fees--Class B (Note 2) 35,285
Printing and shareholder reports 27,282
Amortization of organization expenses (Note 1e) 12,362
Accounting services (Note 2) 10,963
Registration fees (Note 1e) 10,624
Account maintenance and distribution fees--Class C (Note 2) 6,694
Transfer agent fees--Class B (Note 2) 3,882
Pricing fees 2,600
Custodian fees 1,597
Account maintenance fees--Class D (Note 2) 1,069
Transfer agent fees--Class A (Note 2) 959
Trustees' fees and expenses 652
Transfer agent fees--Class C (Note 2) 545
Transfer agent fees--Class D (Note 2) 463
------------
Total expenses before reimbursement 232,728
Reimbursement of expenses (Note 2) (52,178)
------------
Total expenses after reimbursement 180,550
------------
Investment income--net 460,156
------------
Realized & Realized gain on investments--net 37,606
Unrealized Change in unrealized appreciation on investments--net (5,006)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 492,756
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 460,156 $ 500,291
Realized gain on investments--net 37,606 89,647
Change in unrealized appreciation on investments--net (5,006) 304,799
------------ ------------
Net increase in net assets resulting from operations 492,756 894,737
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (97,870) (78,970)
Shareholders Class B (274,166) (336,828)
(Note 1f): Class C (42,239) (34,323)
Class D (45,881) (50,170)
Realized gain on investments--net:
Class A (5,546) --
Class B (24,787) --
Class C (3,803) --
Class D (3,470) --
In excess of realized gain on investments--net:
Class A (3,301) --
Class B (14,755) --
Class C (2,264) --
Class D (2,065) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (520,147) (500,291)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions 998,869 (261,170)
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase in net assets 971,478 133,276
Beginning of year 11,177,823 11,044,547
------------ ------------
End of year $ 12,149,301 $ 11,177,823
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Sept. 30,
from information provided in the financial statements. 1994++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.72 $ 10.34 $ 10.29 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .47 .52 .55 .50
Realized and unrealized gain on investments--net .03 .38 .05 .29
-------- -------- -------- --------
Total from investment operations .50 .90 .60 .79
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.47) (.52) (.55) (.50)
Realized gain on investments--net (.04) -- -- --
In excess of realized gain on investments--net (.02) -- -- --
-------- -------- -------- --------
Total dividends and distributions (.53) (.52) (.55) (.50)
-------- -------- -------- --------
Net asset value, end of period $ 10.69 $ 10.72 $ 10.34 $ 10.29
======== ======== ======== ========
Total Investment Based on net asset value per share 4.79% 8.94% 5.94% 8.13%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.18% .83% .49% .11%*
Net Assets: ======== ======== ======== ========
Expenses 1.63% 1.92% 3.17% 2.32%*
======== ======== ======== ========
Investment income--net 4.38% 4.96% 5.28% 5.94%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 3,246 $ 1,781 $ 1,710 $ 2,251
Data: ======== ======== ======== ========
Portfolio turnover 61.45% 41.07% 28.82% 28.64%
======== ======== ======== ========
<FN>
*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, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived Sept. 30,
from information provided in the financial statements. 1994++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.71 $ 10.34 $ 10.29 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .42 .46 .50 .46
Realized and unrealized gain on investments--net .04 .37 .05 .29
-------- -------- -------- --------
Total from investment operations .46 .83 .55 .75
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.42) (.46) (.50) (.46)
Realized gain on investments--net (.04) -- -- --
In excess of realized gain on investments--net (.02) -- -- --
-------- -------- -------- --------
Total dividends and distributions (.48) (.46) (.50) (.46)
-------- -------- -------- --------
Net asset value, end of period $ 10.69 $ 10.71 $ 10.34 $ 10.29
======== ======== ======== ========
Total Investment Based on net asset value per share 4.35% 8.29% 5.39% 7.68%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.70% 1.34% 1.00% .63%*
Net Assets: ======== ======== ======== ========
Expenses 2.16% 2.44% 3.69% 2.83%*
======== ======== ======== ========
Investment income--net 3.89% 4.46% 4.77% 5.41%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,539 $ 7,527 $ 7,573 $ 8,145
Data: ======== ======== ======== ========
Portfolio turnover 61.45% 41.07% 28.82% 28.64%
======== ======== ======== ========
<FN>
*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, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.72 $ 10.34 $ 10.30 $ 9.92
Operating -------- -------- -------- --------
Performance: Investment income--net .41 .46 .49 .41
Realized and unrealized gain on investments--net .03 .38 .04 .38
-------- -------- -------- --------
Total from investment operations .44 .84 .53 .79
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.41) (.46) (.49) (.41)
Realized gain on investments--net (.04) -- -- --
In excess of realized gain on investments--net (.02) -- -- --
-------- -------- -------- --------
Total dividends and distributions (.47) (.46) (.49) (.41)
-------- -------- -------- --------
Net asset value, end of period $ 10.69 $ 10.72 $ 10.34 $ 10.30
======== ======== ======== ========
Total Investment Based on net asset value per share 4.16% 8.29% 5.19% 8.13%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.80% 1.44% 1.11% .85%*
Net Assets: ======== ======== ======== ========
Expenses 2.25% 2.51% 3.81% 2.90%*
======== ======== ======== ========
Investment income--net 3.79% 4.36% 4.68% 5.00%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,202 $ 843 $ 681 $ 558
Data: ======== ======== ======== ========
Portfolio turnover 61.45% 41.07% 28.82% 28.64%
======== ======== ======== ========
<FN>
*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, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.71 $ 10.34 $ 10.29 $ 9.92
Operating -------- -------- -------- --------
Performance: Investment income--net .46 .51 .54 .46
Realized and unrealized gain on investments--net .04 .37 .05 .37
-------- -------- -------- --------
Total from investment operations .50 .88 .59 .83
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.46) (.51) (.54) (.46)
Realized gain on investments--net (.04) -- -- --
In excess of realized gain on investments--net (.02) -- -- --
-------- -------- -------- --------
Total dividends and distributions (.52) (.51) (.54) (.46)
-------- -------- -------- --------
Net asset value, end of period $ 10.69 $ 10.71 $ 10.34 $ 10.29
======== ======== ======== ========
Total Investment Based on net asset value per share 4.79% 8.73% 5.84% 8.54%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.29% .92% .60% .29%*
Net Assets: ======== ======== ======== ========
Expenses 1.74% 2.03% 3.31% 2.37%*
======== ======== ======== ========
Investment income--net 4.29% 4.87% 5.18% 5.64%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,162 $ 1,027 $ 1,081 $ 723
Data: ======== ======== ======== ========
Portfolio turnover 61.45% 41.07% 28.82% 28.64%
======== ======== ======== ========
<FN>
*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, 1998
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.
* Financial futures contracts--The Fund may purchase or sell
financial 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 period not exceeding five years. 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. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions and post-October losses.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), 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: 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, 1998, FAM earned
fees of $63,127, of which $52,178 was voluntarily waived.
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 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, 1998, 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 $ 48 $ 611
Class D $420 $3,480
For the year ended July 31, 1998, MLPF&S received contingent
deferred sales charges of $18,160 and $1,286 relating to
transactions in Class B and Class C Shares, respectively.
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, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1998 were $7,011,891 and $6,769,670,
respectively.
Net realized gains for the year ended July 31, 1998 and net
unrealized gains as of July 31, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $37,606 $ 796,421
------- ---------
Total $37,606 $ 796,421
======= =========
As of July 31, 1998, net unrealized appreciation for Federal income
tax purposes aggregated $796,421, all of which related to
appreciated securities. The aggregate cost of investments at July
31, 1998 for Federal income tax purposes was $11,147,798.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $998,869 and $(261,170) for the years
ended July 31, 1998 and July 31, 1997, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
Shares sold 171,813 $ 1,840,104
Shares issued to shareholders
in reinvestment of dividends
and distributions 4,902 52,499
--------- -----------
Total issued 176,715 1,892,603
Shares redeemed (39,318) (419,167)
--------- -----------
Net increase 137,397 $ 1,473,436
========= ===========
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 B Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
Shares sold 41,745 $ 446,670
Shares issued to shareholders
in reinvestment of dividends
and distributions 9,094 97,266
--------- -----------
Total issued 50,839 543,936
Shares redeemed (141,770) (1,516,844)
--------- -----------
Net decrease (90,931) $ (972,908)
========= ===========
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 C Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
Shares sold 42,286 $ 450,449
Shares issued to shareholders
in reinvestment of dividends
and distributions 4,009 42,904
--------- -----------
Total issued 46,295 493,353
Shares redeemed (12,517) (133,300)
--------- -----------
Net increase 33,778 $ 360,053
========= ===========
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 D Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
Shares sold 15,871 $ 170,444
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,427 25,954
--------- -----------
Total issued 18,298 196,398
Shares redeemed (5,458) (58,110)
--------- -----------
Net increase 12,840 $ 138,288
========= ===========
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)
========= ===========
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
<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:
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, 1998, 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 three-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,
1998 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, 1998, 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 9, 1998
</AUDIT-REPORT>
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
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, 1998 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, the following table summarizes the taxable ordinary
income and capital gains distributions paid by the Fund during the
year:
Short-Term Long-Term
Record Payable Ordinary Capital Capital
Date Date Income Gains Gains
12/19/97 12/31/97 $.001141 $.007979 $.050391*
[FN]
*Of this long-term capital gain distribution, 100% is subject to the
28% tax rate.
Please retain this information for your records.
Merrill Lynch Arkansas Municipal Bond Fund
July 31, 1998
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Robert E. Putney, III, Secretary
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
