<DOCUMENT>
<TYPE>EX-99.17R
<SEQUENCE>31
<FILENAME>dex9917r.txt
<DESCRIPTION>A/R TO SHAREHOLDERS OF ML MINNESOTA AS OF 7/31/01
<TEXT>
<PAGE>
EXHIBIT 17(r)
[LOGO] Merrill Lynch Investment Managers
Annual Report
July 31, 2001
Merrill Lynch
Minnesota
Municipal
Bond Fund
www.mlim.ml.com
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
DEAR SHAREHOLDER
The Municipal Market Environment
In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.
Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.
Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.
However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.
During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five
1
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
basis point decline in long-term municipal bond yields from January 2001 levels.
The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.
Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.
Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.
Fiscal Year in Review
We entered the fiscal year ended July 31, 2001 fully invested in Minnesota
municipal bonds, with a relatively neutral market position. We adopted this
strategy to maintain a high level of tax-exempt income, anticipating clearer
signs of future economic growth and inflation expectations. During the first six
months of the fiscal year, municipal bond prices generally increased in
anticipation of a weakening economy. To better participate in a declining
interest rate environment, we restructured a portion of the Fund. However,
toward the end of the first six months of the fiscal year, the Federal Reserve
Board reversed its course and began aggressively easing monetary policy.
Simultaneously, the Federal Government began considering a significant reduction
in Federal income taxes. In response to these developments, we began to reduce
the Fund's exposure to highly interest rate-sensitive securities.
During the last six months of the fiscal year, we maintained a fully invested
position but also continued to
2
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
reduce the Fund's exposure to highly interest rate-sensitive securities. We
pursued this strategy in response to the Federal Reserve Board's 275 basis point
reduction in the Federal Funds rate and enactment of a relatively large
reduction in Federal taxes, including a tax rebate. Additionally, the absolute
yield levels available on municipal bonds approached multi-year lows. During the
fiscal year, we also improved the Fund's credit quality in response to the
deterioration in creditworthiness of certain holdings. At the end of the fiscal
year, approximately 90% of the Fund's net assets were invested in securities
rated A or better by at least one of the major rating agencies.
For the fiscal year ended July 31, 2001, the Fund's Class A, Class B, Class C
and Class D Shares had returns of +8.95%, +8.30%, +8.19% and +8.84%,
respectively. These results were slightly below the Lipper, Inc. average of
other Minnesota municipal bond funds and the Fund's unmanaged benchmark Lehman
Brothers Municipal Bond Index, which had a return of +10.08% for the same
period. (Fund results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be found on
pages 4 and 5 of this report to shareholders.)
Going forward, we intend to remain fully invested to seek to provide a high
level of tax-exempt income, looking for opportunities in both new-issue and
secondary markets to improve the Fund's structure and to enhance performance.
In Conclusion
We appreciate your ongoing interest in the Merrill Lynch Minnesota Municipal
Bond Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Michael Kalinoski
Michael Kalinoski
Vice President and Portfolio Manager
September 5, 2001
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
3
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
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 ten 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. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption
of fund shares. 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/01 +8.91% +4.55%
--------------------------------------------------------------------------------
Five Years Ended 6/30/01 +5.86 +5.00
--------------------------------------------------------------------------------
Inception (3/27/92)
through 6/30/01 +6.20 +5.73
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/01 +8.46% +4.46%
--------------------------------------------------------------------------------
Five Years Ended 6/30/01 +5.34 +5.34
--------------------------------------------------------------------------------
Inception (3/27/92)
through 6/30/01 +5.67 +5.67
--------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/01 +8.35% +7.35%
--------------------------------------------------------------------------------
Five Years Ended 6/30/01 +5.24 +5.24
--------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01 +5.53 +5.53
--------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/01 +8.79% +4.44%
--------------------------------------------------------------------------------
Five Years Ended 6/30/01 +5.75 +4.89
--------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01 +6.07 +5.42
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
4
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
PERFORMANCE DATA (concluded)
Merrill Lynch Minnesota Municipal Bond Fund--Edgar
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. Values are from March 27, 1992 to July 2001:
<TABLE>
<CAPTION>
3/27/92** 7/92 7/93 7/94 7/95 7/96
<S> <C> <C> <C> <C> <C> <C>
ML Minnesota Municipal
Bond Fund+--Class A Shares* $ 9,600 $10,356 $11,258 $11,469 $12,093 $12,695
ML Minnesota Municipal
Bond Fund+--Class B Shares* $10,000 $10,769 $11,648 $11,805 $12,385 $12,935
Lehman Brothers Municipal
Bond Index++ $10,000 $10,690 $11,635 $11,853 $12,786 $13,630
<CAPTION>
7/97 7/98 7/99 7/00 7/01
<S> <C> <C> <C> <C> <C>
ML Minnesota Municipal
Bond Fund+--Class A Shares* $13,928 $14,743 $15,050 $15,569 $16,962
ML Minnesota Municipal
Bond Fund+--Class B Shares* $14,911 $14,869 $15,101 $15,559 $16,850
Lehman Brothers Municipal
Bond Index++ $15,028 $15,929 $16,387 $17,093 $18,815
</TABLE>
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. Values are from October 21, 1994 to July 2001:
<TABLE>
<CAPTION>
10/21/94** 7/95 7/96 7/97 7/98 7/99
<S> <C> <C> <C> <C> <C> <C>
ML Minnesota Municipal
Bond Fund+--Class C Shares $10,000 $10,713 $11,177 $12,187 $12,833 $13,009
ML Minnesota Municipal
Bond Fund+--Class D Shares $ 9,600 $10,327 $10,831 $11,882 $12,564 $12,800
Lehman Brothers Municipal
Bond Index++ $10,000 $11,107 $11,840 $13,054 $13,836 $14,234
<CAPTION>
7/00 7/01
<S> <C> <C>
ML Minnesota Municipal
Bond Fund+--Class C Shares $13,389 $14,486
ML Minnesota Municipal
Bond Fund+--Class D Shares $13,242 $14,413
Lehman Brothers Municipal
Bond Index++ $14,848 $16,344
</TABLE>
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Minnesota Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the state of
Minnesota, 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 A & Class B Shares' graph is from 3/31/92 and in
the Class C & Class D Shares' graph is from 10/31/94.
Past performance is not predictive of future performance.
Recent Performance Results*
<TABLE>
<CAPTION>
6-Month 12-Month Since Inception Standardized
As of July 31, 2001 Total Return Total Return Total Return 30-Day Yield
====================================================================================================================
<S> <C> <C> <C> <C>
ML Minnesota Municipal Bond Fund Class A Shares +2.82% +8.95% +76.68% 3.79%
--------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class B Shares +2.56 +8.30 +68.50 3.45
--------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class C Shares +2.51 +8.19 +44.86 3.35
--------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class D Shares +2.77 +8.84 +50.12 3.70
====================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Total investment returns are based
on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's since inception dates are from
3/27/92 for Class A & Class B Shares and from 10/21/94 for Class C & Class
D Shares.
5
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
-----------------------------------------------------------------------------------------------------------------------------
Minnesota -- 100.7%
<S> <C> <C> <C> <C>
AA- Aa3 $1,750 Anoka County, Minnesota, Solid Waste Disposal Revenue Bonds (Natural Rural Utilities),
AMT, Series A, 6.95% due 12/01/2008 $ 1,798
-----------------------------------------------------------------------------------------------------------------------------
A1+ NR* 1,100 Beltrami County, Minnesota, Environmental Control Revenue Bonds (Northwood
Panelboard Co. Project), VRDN, AMT, 2.80% due 7/01/2025 (h) 1,100
-----------------------------------------------------------------------------------------------------------------------------
AAA NR* 3,530 Coon Rapids, Minnesota, M/F Housing Revenue Refunding Bonds (Browns Meadow),
AMT, 6.85% due 8/01/2033 (c) 3,659
-----------------------------------------------------------------------------------------------------------------------------
AAA NR* 500 Dakota County, Minnesota, Community Development Agency, M/F Mortgage Housing
Revenue Refunding Bonds (Southfork Apartments), 5.625% due 2/01/2026 510
-----------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Eden Prairie, Minnesota, M/F Housing Revenue Refunding Bonds (Parkway Apartments
Project), Series A, 5.70% due 8/20/2022 (e) 1,033
-----------------------------------------------------------------------------------------------------------------------------
NR* Aaa 500 Elk River, Minnesota, Independent School District Number 728, GO, Series A,
5.50% due 2/01/2021 (f) 522
-----------------------------------------------------------------------------------------------------------------------------
AAA NR* 1,500 Minneapolis and Saint Paul, Minnesota, Metropolitan Airports Commission, Airport
Revenue Bonds, DRIVERS, AMT, Series 203, 8.44% due 1/01/2012 (b)(g) 1,732
-----------------------------------------------------------------------------------------------------------------------------
AA+ Aa1 1,000 Minneapolis, Minnesota, COP (Special School District Number 001), 5.75% due 2/01/2014 1,069
-----------------------------------------------------------------------------------------------------------------------------
A NR* 485 Minneapolis, Minnesota, Community Development Agency, M/F Housing Revenue Bonds
(Riverside Homes Project), AMT, 6.20% due 9/01/2029 496
-----------------------------------------------------------------------------------------------------------------------------
AAA Aa1 1,000 Minneapolis, Minnesota, GO, Tax Increment, Series E, 5% due 3/01/2026 996
-----------------------------------------------------------------------------------------------------------------------------
AAA NR* 1,300 Minneapolis, Minnesota, M/F Mortgage Revenue Refunding Bonds (Riverside Plaza),
AMT, 5.20% due 12/20/2030 (e) 1,263
-----------------------------------------------------------------------------------------------------------------------------
AAA Aa1 1,000 Minneapolis, Minnesota, Sales Tax Refunding Bonds, GO, 6.25% due 4/01/2012 1,040
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,025 Minnesota Agriculture and Economic Development Board, Health Care Revenue
Refunding Bonds (Benedictine Health), Series A, 5.25% due 2/15/2014 (f) 1,065
-----------------------------------------------------------------------------------------------------------------------------
Minnesota State, HFA, S/F Mortgage Revenue Bonds:
AA+ Aa1 210 AMT, Series C, 5.30% due 7/01/2025 213
AA+ Aa1 1,120 AMT, Series E, 6.85% due 1/01/2024 1,153
AA+ Aa1 975 AMT, Series L, 6.70% due 7/01/2020 1,021
AA+ Aa1 540 Series A, 6.95% due 7/01/2016 554
AA+ Aa1 1,255 Series D-1, 6.50% due 1/01/2017 1,299
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Northern Municipal Power Agency, Minnesota, Electric System Revenue Refunding Bonds,
Series B, 4.75% due 1/01/2020 (a) 957
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Minnesota Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
IRS Inverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
6
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
-----------------------------------------------------------------------------------------------------------------------------
Minnesota (concluded)
<S> <C> <C> <C> <C>
AAA A3 $ 750 Northfield, Minnesota, College Facility Revenue Refunding Bonds (Saint Olaf College
Project), 6.40% due 10/01/2021 $ 784
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 500 Ramsey County, Minnesota, GO (Capital Improvement Plan), Series A,
6.25% due 2/01/2010 560
-----------------------------------------------------------------------------------------------------------------------------
NR* Aa3 1,110 Ramsey County, Minnesota, Housing and Redevelopment Authority, M/F Housing
Revenue Bonds (Hanover Townhouses Project), AMT, 6% due 7/01/2031 1,122
-----------------------------------------------------------------------------------------------------------------------------
AA+ NR* 2,450 Rochester, Minnesota, Health Care Facilities Revenue Bonds, IRS, Series H,
9.091% due 11/15/2015 (g) 2,640
-----------------------------------------------------------------------------------------------------------------------------
Saint Cloud, Minnesota, Health Care Revenue Refunding Bonds (Saint Cloud Hospital
Obligation Group), Series A (d):
NR* Aaa 1,000 6.25% due 5/01/2020 1,116
NR* Aaa 500 5.75% due 5/01/2026 530
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Saint Francis, Minnesota, Independent School District No. 015, GO, Series A,
6.35% due 2/01/2013 (d) 1,109
-----------------------------------------------------------------------------------------------------------------------------
AAA Aa2 1,000 Saint Paul, Minnesota, GO (Tax Increment -- Block 39 Project), Series A,
4.75% due 2/01/2019 969
-----------------------------------------------------------------------------------------------------------------------------
Saint Paul, Minnesota, Housing and Redevelopment Authority, Revenue Refunding Bonds:
AA NR* 1,000 (District Cooling of Saint Paul), Series J, 5.125% due 3/01/2012 1,032
AAA Aaa 500 (Downtown Tax Increment District), 6.45% due 8/01/2008 (a) 565
-----------------------------------------------------------------------------------------------------------------------------
AA+ Aa1 805 Saint Paul, Minnesota, Independent School District Number 625, GO, Series B,
6% due 2/01/2015 848
-----------------------------------------------------------------------------------------------------------------------------
Sartell, Minnesota, Refunding (Champion International Corporation):
BBB Baa1 990 IDR, 6.95% due 7/01/2012 1,029
BBB Baa1 665 PCR, 6.95% due 10/01/2012 691
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,215 Scott County, Minnesota, Housing and Redevelopment Authority, Facility Lease Revenue
Bonds (Justice Center Project), 5.50% due 12/01/2015 (a) 1,260
-----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Southern Minnesota, Municipal Power Agency, Power Supply System Revenue Refunding
Bonds, 5% due 1/01/2009 (a) 1,041
-----------------------------------------------------------------------------------------------------------------------------
AA Aa2 1,200 University of Minnesota Revenue Refunding Bonds, Series A, 5.75% due 7/01/2016 1,338
-----------------------------------------------------------------------------------------------------------------------------
AA NR* 1,500 Waconia, Minnesota, Health Care Facilities Revenue Bonds (Ridgeview Medical Center
Project), Series A, 6.125% due 1/01/2029 1,593
-----------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,400 Windom, Minnesota, Independent School District No. 177, GO, 4.75% due 2/01/2024 (d) 1,323
-----------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $39,140) -- 100.7% 41,030
Liabilities in Excess of Other Assets -- (0.7%) (267)
-------
Net Assets -- 100.0% $40,763
=======
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured
(d) FSA Insured.
(e) GNMA Collateralized.
(f) MBIA Insured.
(g) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at July 31, 2001.
(h) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
2001.
* Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 2001
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $39,140,361) $ 41,030,113
Cash 71,823
Receivables:
Interest .................................................................. $ 646,388
Beneficial interest sold .................................................. 142,968 789,356
----------
Prepaid registration fees and other assets .................................. 10,455
------------
Total assets ................................................................ 41,901,747
------------
----------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ...................................................... 1,035,127
Dividends to shareholders ................................................. 36,517
Investment adviser ........................................................ 18,247
Distributor ............................................................... 14,375 1,104,266
----------
Accrued expenses and other liabilities ...................................... 34,550
------------
Total liabilities ........................................................... 1,138,816
------------
----------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................................. $ 40,762,931
============
----------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 38,333
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 299,669
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 22,468
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 19,651
Paid-in capital in excess of par ............................................ 38,549,995
Accumulated realized capital losses on investments -- net ................... (56,937)
Unrealized appreciation on investments -- net ............................... 1,889,752
------------
Net assets .................................................................. $ 40,762,931
============
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A -- Based on net assets of $4,109,721 and 383,332 shares
of beneficial interest outstanding .......................................... $ 10.72
============
Class B -- Based on net assets of $32,134,894 and 2,996,692 shares
of beneficial interest outstanding .......................................... $ 10.72
============
Class C -- Based on net assets of $2,409,689 and 224,680 shares
of beneficial interest outstanding .......................................... $ 10.72
============
Class D -- Based on net assets of $2,108,627 and 196,514 shares
of beneficial interest outstanding .......................................... $ 10.73
============
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
July 31, 2001
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 2,343,101
------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees ...................................... $ 221,646
Account maintenance and distribution fees -- Class B .......... 160,988
Professional fees ............................................. 73,755
Printing and shareholder reports .............................. 38,401
Accounting services ........................................... 27,002
Transfer agent fees -- Class B ................................ 18,585
Account maintenance and distribution fees -- Class C .......... 12,192
Trustees' fees and expenses ................................... 7,987
Registration fees ............................................. 7,024
Pricing fees .................................................. 6,236
Custodian fees ................................................ 3,986
Transfer agent fees -- Class A ................................ 2,083
Account maintenance fees -- Class D ........................... 1,893
Transfer agent fees -- Class C ................................ 1,195
Transfer agent fees -- Class D ................................ 951
Other ......................................................... 7,078
----------
Total expenses ................................................ 591,002
-----------
Investment income -- net ...................................... 1,752,099
------------
------------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments -- net ........................... 277,750
Unrealized Gain on Change in unrealized appreciation on investments -- net ....... 1,241,761
Investments -- Net: ------------
Net Increase in Net Assets Resulting from Operations .......... $ 3,271,610
============
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
July 31,
---------------------------
Increase (Decrease) in Net Assets: 2001 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income -- net ............................................... $ 1,752,099 $ 1,970,869
Realized gain on investments -- net .................................... 277,750 182,532
Change in unrealized appreciation on investments -- net ................ 1,241,761 (1,036,596)
------------ ------------
Net increase in net assets resulting from operations ................... 3,271,610 1,116,805
------------ ------------
----------------------------------------------------------------------------------------------------------------------------
Dividends to Investment income -- net:
Shareholders: Class A .............................................................. (200,025) (232,332)
Class B .............................................................. (1,378,694) (1,572,900)
Class C .............................................................. (84,766) (75,069)
Class D .............................................................. (88,614) (90,568)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders .... (1,752,099) (1,970,869)
------------ ------------
----------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial
Transactions: interest transactions .................................................. (692,050) (6,455,015)
------------ ------------
----------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets ................................ 827,461 (7,309,079)
Beginning of year ...................................................... 39,935,470 47,244,549
------------ ------------
End of year ............................................................ $ 40,762,931 $ 39,935,470
============ ============
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended July 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 10.32 $ 10.50 $ 10.79 $ 10.72 $ 10.28
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ..................... .51 .52 .52 .54 .53
Realized and unrealized gain (loss) on
investments -- net ........................... .40 (.18) (.29) .07 .44
-------- -------- -------- -------- --------
Total from investment operations ............. .91 .34 .23 .61 .97
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ................... (.51) (.52) (.52) (.54) (.53)
In excess of realized gain on
investments -- net ......................... -- -- -- --+ --
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.51) (.52) (.52) (.54) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 10.72 $ 10.32 $ 10.50 $ 10.79 $ 10.72
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........... 8.95% 3.45% 2.08% 5.85% 9.71%
Return:* ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ..................................... 1.03% .97% 1.02% .91% .92%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net ..................... 4.79% 5.12% 4.80% 4.98% 5.09%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) ....... $ 4,110 $ 4,141 $ 6,067 $ 6,993 $ 5,390
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 45.63% 43.42% 26.09% 56.43% 28.42%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended July 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 10.33 $ 10.50 $ 10.79 $ 10.72 $ 10.28
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ..................... .45 .47 .46 .48 .48
Realized and unrealized gain (loss) on
investments -- net ........................... .39 (.17) (.29) .07 .44
-------- -------- -------- -------- --------
Total from investment operations ............. .84 .30 .17 .55 .92
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ................... (.45) (.47) (.46) (.48) (.48)
In excess of realized gain on
investments -- net ......................... -- -- -- --+ --
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.45) (.47) (.46) (.48) (.48)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 10.72 $ 10.33 $ 10.50 $ 10.79 $ 10.72
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........... 8.30% 3.03% 1.56% 5.31% 9.15%
Return:* ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ..................................... 1.53% 1.47% 1.53% 1.42% 1.43%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net ..................... 4.28% 4.61% 4.29% 4.47% 4.58%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) ....... $ 32,135 $ 32,524 $ 37,507 $ 38,585 $ 41,274
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 45.63% 43.42% 26.09% 56.43% 28.42%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended July 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 10.33 $ 10.50 $ 10.80 $ 10.72 $ 10.28
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ..................... .44 .46 .45 .47 .47
Realized and unrealized gain (loss) on
investments -- net ........................... .39 (.17) (.30) .08 .44
-------- -------- -------- -------- --------
Total from investment operations ............. .83 .29 .15 .55 .91
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ................... (.44) (.46) (.45) (.47) (.47)
In excess of realized gain on
investments -- net ......................... -- -- -- --+ --
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.44) (.46) (.45) (.47) (.47)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 10.72 $ 10.33 $ 10.50 $ 10.80 $ 10.72
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........... 8.19% 2.92% 1.37% 5.30% 9.04%
Return:* ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ..................................... 1.64% 1.57% 1.63% 1.52% 1.53%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net ..................... 4.17% 4.52% 4.19% 4.37% 4.48%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) ....... $ 2,410 $ 1,672 $ 1,721 $ 1,437 $ 1,201
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 45.63% 43.42% 26.09% 56.43% 28.42%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
--------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended July 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 10.33 $ 10.50 $ 10.80 $ 10.73 $ 10.28
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ..................... .50 .51 .51 .53 .52
Realized and unrealized gain (loss) on
investments -- net ........................... .40 (.17) (.30) .07 .45
-------- -------- -------- -------- --------
Total from investment operations ............. .90 .34 .21 .60 .97
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ................... (.50) (.51) (.51) (.53) (.52)
In excess of realized gain on
investments -- net ......................... -- -- -- --+ --
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.50) (.51) (.51) (.53) (.52)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 10.73 $ 10.33 $ 10.50 $ 10.80 $ 10.73
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........... 8.84% 3.45% 1.88% 5.74% 9.70%
Return:* ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ..................................... 1.13% 1.07% 1.13% 1.01% 1.02%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net ..................... 4.68% 5.02% 4.69% 4.88% 4.99%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) ....... $ 2,108 $ 1,598 $ 1,950 $ 1,141 $ 924
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 45.63% 43.42% 26.09% 56.43% 28.42%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Minnesota Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM)
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
. Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the
15
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
NOTES TO FINANCIAL STATEMENTS (continued)
transactions are entered into (the trade dates). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recognized on the accrual basis. The Fund will adopt the provisions to
amortize all premiums and discounts on debt securities effective August 1, 2001,
as now required under the new AICPA Audit and Accounting Guide for Investment
Companies. The cumulative effect of this accounting change will have no impact
on the total net assets of the Fund, but will result in a $10,884 increase to
the cost of securities and a corresponding $10,884 decrease to net unrealized
appreciation, based on debt securities held as of July 31, 2001.
(e) Prepaid registration fees -- 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.
(g) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
--------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
--------------------------------------------------------------------------------
Class B ..................................... .25% .25%
Class C ..................................... .25% .35%
Class D ..................................... .10% --
--------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class A ..................................... $ 41 $ 438
Class D ..................................... $133 $2,061
--------------------------------------------------------------------------------
16
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $7,255 relating to transactions in Class B Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $3,123 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $17,839,662 and $18,315,117, respectively.
Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
--------------------------------------------------------------------------------
Long-term investments .................... $277,750 $ 1,889,752
-------- -----------
Total .................................... $277,750 $ 1,889,752
======== ===========
--------------------------------------------------------------------------------
As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $1,889,752, of which $1,933,205 related to appreciated securities and
$43,453 related to depreciated securities. The aggregate cost of investments at
July 31, 2001 for Federal income tax purposes was $39,140,361.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$692,050 and $6,455,015 for the years ended July 31, 2001 and July 31, 2000,
respectively.
Transactions in shares of beneficial interest for each class were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2001 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 41,648 $ 444,268
Shares issued to shareholders
in reinvestment of dividends ............. 9,475 100,091
--------- -----------
Total issued ............................. 51,123 544,359
Shares redeemed .......................... (68,892) (730,225)
--------- -----------
Net decrease ............................. (17,769) $ (185,866)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 26,372 $ 268,604
Shares issued to shareholders
in reinvestment of dividends ............. 11,752 119,534
--------- -----------
Total issued ............................. 38,124 388,138
Shares redeemed .......................... (215,094) (2,208,086)
--------- -----------
Net decrease ............................. (176,970) $(1,819,948)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2001 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 248,427 $ 2,629,696
Shares issued to shareholders
in reinvestment of dividends ............. 64,656 683,268
--------- -----------
Total issued ............................. 313,083 3,312,964
Automatic conversion
of shares ................................ (30,716) (322,428)
Shares redeemed .......................... (435,151) (4,598,895)
--------- -----------
Net decrease ............................. (152,784) $(1,608,359)
========= ===========
--------------------------------------------------------------------------------
17
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
NOTES TO FINANCIAL STATEMENTS (concluded)
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 216,963 $ 2,207,654
Shares issued to shareholders
in reinvestment of dividends ............. 78,027 793,481
--------- -----------
Total issued ............................. 294,990 3,001,135
Automatic conversion
of shares ................................ (6,875) (69,500)
Shares redeemed .......................... (711,692) (7,232,241)
--------- -----------
Net decrease ............................. (423,577) $(4,300,606)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2001 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 78,788 $ 830,960
Shares issued to shareholders
in reinvestment of dividends ............. 5,927 62,722
--------- -----------
Total issued ............................. 84,715 893,682
Shares redeemed .......................... (21,930) (232,455)
--------- -----------
Net increase ............................. 62,785 $ 661,227
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 38,107 $ 386,695
Shares issued to shareholders
in reinvestment of dividends ............. 5,190 52,780
--------- -----------
Total issued ............................. 43,297 439,475
Shares redeemed .......................... (45,261) (460,819)
--------- -----------
Net decrease ............................. (1,964) $ (21,344)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 2001 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 21,091 $ 223,736
Automatic conversion
of shares ................................ 30,695 322,428
Shares issued to shareholders
in reinvestment of dividends ............. 3,904 41,321
--------- -----------
Total issued ............................. 55,690 587,485
Shares redeemed .......................... (13,873) (146,537)
--------- -----------
Net increase ............................. 41,817 $ 440,948
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 116,085 $ 1,182,236
Automatic conversion
of shares ................................ 6,874 69,500
Shares issued to shareholders
in reinvestment of dividends ............. 3,582 36,457
--------- -----------
Total issued ............................. 126,541 1,288,193
Shares redeemed .......................... (157,469) (1,601,310)
--------- -----------
Net decrease ............................. (30,928) $ (313,117)
========= ===========
--------------------------------------------------------------------------------
5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.
18
<PAGE>
Merrill Lynch Minnesota Municipal Bond Fund July 31, 2001
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch Minnesota 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 Minnesota Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, 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 presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
broker; where replies were not received from the broker, we performed other
auditing procedures. 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
Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
New York, New York
September 10, 2001
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by Merrill Lynch
Minnesota Municipal Bond Fund during its taxable year ended July 31, 2001
qualify as tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
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[LOGO] Merrill Lynch Investment Managers
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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 Minnesota
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
[RECYCLE LOGO] Printed on post-consumer recycled paper #16187 -- 7/01
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