MERRILL
LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
FUND LOGO
Semi-Annual Report February 28, 1994
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.
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, New Jersey
08543-9011
TO OUR SHAREHOLDERS
Inflationary expectations changed sharply during the February
quarter. Following better-than-expected economic results, Federal
Reserve Board Chairman Alan Greenspan indicated in Congressional
testimony in January that continued strong expansion of the
economy would lead the central bank to tighten monetary policy in
an effort to control inflation. On February 4, 1994, the central
bank broke with tradition and publicly announced a modest
increase in short-term interest rates.
Rather than view the Federal Reserve Board's action as a
preemptive strike against inflation, fixed-income investors
focused on Chairman Greenspan's implicit promise of further
tightening should the rate of inflation accelerate, and bond
prices declined sharply. The setback in the bond market was also
reflected in greater stock market volatility.
<PAGE>
In the weeks ahead, investors will continue to gauge the pace of
the economic expansion and watch for signs of an overheating
economy that could prompt successive Federal Reserve Board
actions to raise short-term interest rates. At this time, there
is little evidence that the rate of inflation will increase
rapidly. Job growth is sluggish, and new claims for unemployment
insurance have trended higher since the beginning of the year.
Commodity prices have risen somewhat, but in many cases these
increases are occurring from very depressed levels. Therefore,
although the secular long-term trend toward lower interest rates
may be over, it is not yet certain whether the pace of economic
activity will accelerate to the point where extensive Federal
Reserve Board tightening will be necessary to contain inflation.
The Municipal Market
Yields on long-term tax-exempt securities exhibited considerable
volatility during the three months ended February 28, 1994.
Initially, municipal bond yields resumed their earlier decline
and in mid-December reached 5.53% as measured by the Bond Buyer
Revenue Bond Index. Tax-exempt yields rose slightly for the
remainder of 1993 before increasing more substantially in 1994.
During the February quarter, long-term municipal bond yields
increased by approximately 15 basis points (0.15%) to 5.88%. Over
the same period, however, US Treasury bond yields rose
approximately 30 basis points to 6.70% at the end of February.
This outperformance by municipal bonds is likely to be the
dominant theme of much of 1994.
During the recent months, taxable yields have become volatile in
reaction to the inherent conflicts between the strong economic
recovery seen in late 1993 and early 1994 and continued low
inflationary pressures. While tax-exempt yields have reacted to
these conflicts, the municipal bond market has also focused on
the very strong technical factors supporting lower municipal bond
yields. During the past 12 months, municipalities issued over
$284 billion in bonds, an increase of over 17% versus a year ago.
Much of this increase has been the result of municipalities
refinancing existing higher-couponed debt. At current yield
levels, few of these issues will remain to be refunded. This has
led to estimates of municipal bond issuance declining to
approximately $175 billion for all of 1994. Over $290 billion in
long-term tax-exempt bonds were issued during 1993. Thus far this
year, this expected decline in issuance has occurred. So far in
1994, new-issue supply has fallen approximately 20% compared to
the same period last year.
<PAGE>
In addition to this dramatic decline in issuance, investor demand
is expected to increase in the coming year. This demand should be
generated by a number of factors, with recent increases in
marginal Federal income tax rates perhaps the immediate dominant
factor. Also, bond calls and early redemptions are expected to
increase significantly in the coming quarters and last at least
into early 1995. The combination of declining new-issue volume
and increasing numbers of bonds being redeemed prior to their
stated maturities will eventually lead to a net decline in the
number of bonds outstanding. In such a scenario, investor demand
rises as bondholders are forced to continually purchase new
municipal bonds to replace their previous holdings.
The outlook for the municipal market is positive. While the
historic declines in yields seen last year are unlikely to be
repeated, the strong technical structure within the tax-exempt
market would easily support the retracing of much of the recent
increase on bond yields. At the very least, should interest rates
continue to rise in response to continued strong economic growth
and a resurgence in inflationary pressures, municipal bond price
deterioration should continue to be minimal in comparison to
taxable investment alternatives.
Portfolio Strategy
Merrill Lynch California Municipal Bond Fund has remained
committed to maintaining a low cash reserve position in order to
generate a certain degree of current return to its shareholders.
Maturity distribution was shifted slightly to take advantage of a
generally flat yield curve on new California bond issuance. We
reduced the Fund's exposure to bonds with maturities greater than
20 years, since these securities would be most affected by any
negative price action. Concurrently, the position of holdings
maturing in the 15-year maturity sector was raised to supplant
any yield forfeited by the sale of holdings with longer
maturities. Another characteristic of the California bond market
was the tightness of credit quality spreads. For this reason we
placed the majority of our holdings in insured or AAA-rated
municipal bonds. In fact, approximately 70% of the Fund's assets
are currently rated AA or Aa or better by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, respectively.
We appreciate your ongoing interest in Merrill Lynch California
Municipal Bond Fund, and we look forward to serving your
investment needs and objectives in the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
March 28, 1994
<PAGE>
PERFORMANCE DATA
None of the past results shown should be considered a
representation of future performance. Investment return and
principal value of Class A and Class B Shares will fluctuate so
that shares, when redeemed, may be worth more or less than their
original cost.
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
2/28/94 11/30/93 2/28/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $11.84 $12.20 $12.18 -1.53%(1) -1.69%(1)
Class B Shares 11.84 12.20 12.18 -1.53(1) -1.69(1)
Class A Shares--Total Return +5.17(2) +0.67(3)
Class B Shares--Total Return +4.64(4) +0.54(5)
Class A Shares--Standardized 30-day Yield 4.59%
Class B Shares--Standardized 30-day Yield 4.27%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1) Percent change includes reinvestment of $0.158 per share capital gains distributions.
(2) Percent change includes reinvestment of $0.804 per share ordinary income dividends and $0.158 per share
capital gains distributions.
(3) Percent change includes reinvestment of $0.291 per share ordinary income dividends and $0.158 per share
capital gains distributions.
(4) Percent change includes reinvestment of $0.743 per share ordinary income dividends and $0.158 per share
capital gains distributions.
(5) Percent change includes reinvestment of $0.275 per share ordinary income dividends and $0.158 per share
capital gains distributions.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/25/88--12/31/88 $11.02 $10.99 -- $0.148 + 1.08%
1989 10.99 11.31 -- 0.761 +10.14
1990 11.31 11.22 -- 0.755 + 6.14
1991 11.22 11.61 $0.031 0.751 +10.79
1992 11.61 11.64 0.125 0.807 + 8.60
1993 11.64 12.13 0.158 0.808 +12.78
1/1/94--2/28/94 12.13 11.84 -- 0.091 - 1.56
------ ------
Total $0.314 Total $4.121
Cumulative total return as of 2/28/94: +57.85%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset
value on the payable date, and do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
9/30/85--12/31/85 $10.00 $10.60 -- $0.175 + 8.00%
1986 10.60 11.63 $0.046 0.763 +17.80
1987 11.63 10.73 -- 0.745 - 1.45
1988 10.73 10.99 -- 0.707 + 9.28
1989 10.99 11.32 -- 0.705 + 9.69
1990 11.32 11.22 -- 0.698 + 5.51
1991 11.22 11.62 0.031 0.694 +10.33
1992 11.62 11.64 0.125 0.748 + 7.96
1993 11.64 12.13 0.158 0.747 +12.22
1/1/94--2/28/94 12.13 11.84 -- 0.083 - 1.63
------ ------
Total $0.360 Total $6.065
Cumulative total return as of 2/28/94: +108.51%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date,
and do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 +12.78% +8.27%
Five Years Ended 12/31/93 + 9.67 +8.78
Inception (10/25/88)
through 12/31/93 + 9.53 +8.67
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +12.22% +8.22%
Five Years Ended 12/31/93 + 9.12 +9.12
Inception (9/30/85)
through 12/31/93 + 9.52 +9.52
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch California
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
GO General Obligation Bonds
HFA Housing Finance Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
S/F Single-Family
TRAN Tax Revenue Anticipation Notes
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)
California--98.3%
<S> <S> <C> <S> <C>
AAA Aaa $ 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Bonds,
RITES, 10.27% due 12/28/2018 (c)(j) $ 3,506
A-1+ VMIG1 1,000 Anaheim, California, Refunding Bonds, COP, VRDN, 2.25% due 8/01/2019 (b)(d) 1,000
Antioch, California, Improvement Bonds (1915 Assessment District No. 27
Lone Tree), Series D:
NR NR 485 5% due 9/02/1997 497
NR NR 505 5.25% due 9/02/1998 515
NR NR 535 5.50% due 9/02/1999 536
NR NR 565 5.75% due 9/02/2000 569
NR NR 595 6% due 9/02/2001 600
NR NR 630 6.20% due 9/02/2002 636
NR NR 670 6.40% due 9/02/2003 677
NR NR 5,000 7.30% due 9/02/2013 5,152
Brea, California, Public Financing Authority, Tax Allocation Revenue Bonds
(Redevelopment Project), Series A (c):
AAA Aaa 3,145 6.75% due 8/01/2022 (a) 3,590
AAA Aaa 1,355 6.75% due 8/01/2022 1,505
AAA Aaa 5,155 Brea, California, Public Financing Authority, Water Revenue Bonds,
Series B, 6.25% due 7/01/2021 (e) 5,386
<PAGE>
Brea, California, Redevelopment Agency, Tax Allocation Revenue Refunding
Bonds (Redevelopment Project) (c):
AAA Aaa 14,000 6.125% due 8/01/2013 14,758
AAA Aaa 6,000 5.75% due 8/01/2023 6,005
AAA Aaa 2,025 Brentwood, California, Unified School District Revenue Bonds, 6.85% due 8/01/2016 (d) 2,216
California Educational Facilities Authority Revenue Bonds:
AA Aa 3,200 (Pomona College), 6% due 2/15/2017 3,291
AAA Aaa 14,430 (Stanford University), Series J, 6% due 11/01/2016 14,997
AA Aa 1,000 (University of Southern California Project), Series B, 6.75% due 10/01/2015 1,102
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
California Health Facilities Financing Authority Revenue Bonds:
AAA Aaa $ 3,210 (Catholic Health), Series A, 6% due 7/01/2013 (c) $ 3,335
A-1+ VMIG1 500 (Catholic Healthcare), VRDN, Series A, 2.30% due 7/01/2009 (b)(c) 500
A- A 6,000 (Health Dimensions), Series A, 7% due 5/01/2020 6,578
AA Aa2 4,350 (Kaiser Permanente), Series A, 7% due 10/01/2018 4,811
AAA Aaa 4,000 (Scripps Memorial Hospital), Series A, 6.25% due 10/01/2013 (c) 4,242
A-1+ VMIG1 300 (Sutter Health Facilities), VRDN, Series B, 2.10% due 3/01/2020 (b) 300
California Health Facilities Financing Authority, Revenue Refunding Bonds:
UR* Aa 1,000 (Cedars Sinai Medical Center), 7% due 11/01/2015 (a) 1,153
A-1+ VMIG1 600 (Saint Joseph Health Facilities), VRDN, Series A, 2.10% due 7/01/2013 (b) 600
California HFA, Home Mortgage Revenue Bonds:
A+ Aa 845 AMT, Series B, 8% due 8/01/2029 889
A+ Aa 1,835 AMT, Series C, 7.45% due 8/01/2011 1,956
A+ Aa 1,145 AMT, Series G, 8.15% due 8/01/2019 1,224
A+ Aa 3,210 Series A, 8.125% due 8/01/2019 3,327
A+ Aa 4,580 Series D, 7.25% due 8/01/2017 4,929
AA Aa 430 California HFA, Home Ownership Mortgage Revenue Bonds, Series A,
9.20% due 8/01/2015 (f) 447
AAA Aaa 1,000 California HFA, Revenue Bonds, AMT, Series A, 7.20% due 2/01/2026 (c) 1,060
A+ Aa 130 California HFA, S/F Home Mortgage Revenue Bonds, Series B, 10.375% due 2/01/2002 135
California Pollution Control Financing Authority, PCR (Pacific Gas and Electric Co.),
AMT, Series B:
A A1 3,000 8.875% due 1/01/2010 3,471
A A1 5,000 5.85% due 12/01/2023 5,025
NR P1 100 California Pollution Control Financing Authority, Resource Recovery Revenue
Refunding Bonds (Honey Lake Power Project), AMT, VRDN, 2.25% due 9/01/2018 (b) 100
<PAGE>
California State Department of Water Resources, Central Valley Project
Revenue Bonds (Water Systems):
AA Aa 3,000 Refunding, Series L, 5.70% due 12/01/2016 3,016
AA Aa 6,000 Refunding, Series L, 5.75% due 12/01/2019 6,033
AA Aa 3,000 Series J, 6% due 12/01/2020 3,055
California State, GO, UT:
A+ Aa 3,000 10.50% due 10/01/2000 3,946
A+ Aa 2,000 10% due 2/01/2010 2,963
California State, GO, Veterans' Revenue Bonds, Series AW, AMT, UT:
AA Aa 16,300 7.70% due 4/01/2009 18,317
AA Aa 4,500 7.70% due 4/01/2013 5,057
A- A1 3,555 California State, Public Works Board, High Technology Facilities, Lease Revenue
Bonds (San Jose Facilities), Series A, 7.75% due 8/01/2006 4,081
California State, Public Works Board, Lease Revenue Bonds, Series A:
AAA Aaa 9,700 (Regents of the University of California), 7% due 9/01/2015 (a) 11,172
AAA Aaa 3,500 (Secretary of State), 6.60% due 12/01/2009 (d) 3,854
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds (State Water Project
Regional Facilities), 6.60% due 10/01/2022 (d) 5,464
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
Contra Costa, California, Water District, Water Revenue Bonds (a):
A+ A $ 4,125 6.75% due 10/01/2020 $ 4,693
A+ A 6,140 Series A, 6.875% due 10/01/2020 7,029
BBB NR 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,078
AAA Aaa 3,000 Coronado, California, Community Development Agency, Tax Allocation Revenue
Bonds (Coronado Community Development Project), 6.30% due 9/01/2022 (c) 3,148
Corona, California, Corona Community COP:
AAA Aaa 14,035 8% due 3/01/2015 (a) 18,207
AAA Aaa 3,035 8% due 3/01/2015 (i) 4,043
Culver City, California, Redevelopment Finance Authority Revenue Refunding
Bonds (Tax Allocation) (d):
AAA Aaa 9,000 5.50% due 11/01/2014 8,901
AAA Aaa 4,175 4.60% due 11/01/2020 3,564
NR Aaa 4,635 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds,
Series A, 7.10% due 1/01/2011 (i) 5,442
<PAGE>
East Bay, California, Municipal Utilities District, Water System Subordinate
Revenue Refunding Bonds:
AA- A1 11,000 6% due 6/01/2012 11,478
AAA Aaa 5,000 5% due 6/01/2021 (c) 4,525
AA- Aa 1,950 East Bay, California, Regional Park District, GO, Series B, UT, 6.30% due 9/01/2009 2,088
AAA Aaa 2,805 Fontana, California, Public Financing Authority, Tax Allocation Revenue Refunding
Bonds (North Fontana Redevelopment Project), Series A, 5.625% due 9/01/2024 (c) 2,759
A-1+ VMIG1 900 Foothill, California, Eastern Transport Corridor Agency (California Toll Road),
Revenue Bonds, VRDN, 2.25% due 7/01/2023 (b) 900
NR Baa 3,565 Huntington Beach, California, Public Financing Authority, Revenue Refunding Bonds
(Huntington Beach Redevelopment Projects), 7% due 8/01/2024 3,787
A-1+ VMIG1 600 Irvine, California, Apartment Development Revenue Bonds (San Rafael Apartment Project),
Series A, AMT, VRDN, 2.15% due 4/01/2022 (b) 600
AAA Aaa 2,230 Irvine, California, GO, Unified School District, Special Tax Community
Facilities Bonds (District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,583
Irvine Ranch, California, Water District Joint Powers Agency, Pooled Revenue Bonds:
A NR 2,750 7.80% due 2/15/2008 3,015
A NR 4,875 7.875% due 2/15/2023 5,358
NR VMIG1 300 Kern County, California, COP (Kern Public Facilities Project), Series D, VRDN,
2.35% due 8/01/2006 (b) 300
NR NR 7,170 Lodi, California, Unified School District Revenue Bonds (Education Support
Center Project), 7.875% due 3/01/2020 (a) 8,495
NR NR 4,545 Long Beach, California, Community Facilities Revenue Bonds (District No. 3-Pine Avenue),
6.375% due 9/01/2023 4,356
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
Long Beach, California, Improvement Bonds (1915 Assessment District 90-2):
NR NR $ 465 7% due 9/02/2001 $ 479
NR NR 495 7.05% due 9/02/2002 510
NR NR 530 7.10% due 9/02/2003 546
NR NR 570 7.15% due 9/02/2004 587
NR NR 610 7.20% due 9/02/2005 628
NR NR 655 7.25% due 9/02/2006 675
NR NR 4,065 7.50% due 9/02/2011 4,189
NR NR 5,695 Long Beach, California, M/F Redevelopment Agency Revenue Bonds
(Housing-Pacific Court Apartments), Issue B, AMT, 6.95% due 9/01/2023 5,660
AAA Aaa 3,595 Los Angeles, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Bunker Hill Project), Series C, 9% due 12/01/2001 (c)(i) 4,568
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2020 (a) 22,969
<PAGE>
Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds:
AA Aa 5,000 Refunding, 5.75% due 9/01/2013 5,093
AA Aa 15,000 Refunding, Second Issue, 4.75% due 11/15/2019 13,033
AA Aa 6,610 Second Issue, 4.75% due 10/15/2020 5,730
AA Aa 1,000 Los Angeles, California, Department of Water and Power,
Waterworks Revenue Bonds, 6.875% due 4/01/2013 1,134
AAA NR 13,000 Los Angeles, California, Harbor Department Revenue Bonds, 7.60% due 10/01/2018 (j) 14,944
AAA NR 1,985 Los Angeles, California, M/F Housing Revenue Bonds (Mahal Apartments Project),
Series G, 9% due 3/20/2017 (f)(h) 2,084
Los Angeles, California, Wastewater System Revenue Bonds:
A A1 2,500 Refunding, Series C, 7.10% due 6/01/2018 2,781
AAA Aaa 5,800 Refunding, Series D, 4.70% due 11/01/2017 (e) 5,071
AAA Aaa 20,845 Refunding, Series D, 4.70% due 11/01/2019 (e) 18,305
AAA Aaa 7,890 Series D, 6.625% due 12/01/2012 (c) 8,597
AAA Aaa 1,000 Series D, 6.70% due 12/01/2021 (c) 1,137
Los Angeles County, California, COP (Marina Del Rey), Series A:
NR NR 2,000 6.25% due 7/01/2003 2,057
NR NR 8,000 6.50% due 7/01/2008 8,305
Los Angeles County, California, Public Works Financing Authority Revenue
Lease Bonds (Multiple Capital Facilities Project-IV) (c):
AAA Aaa 5,500 4.75% due 12/01/2010 5,035
AAA Aaa 10,000 4.75% due 12/01/2013 9,013
AA- Aa1 7,065 Los Angeles County, California, Public Works Financing Authority Revenue Refunding
Bonds (Capital Construction), 5% due 3/01/2017 6,495
SP-1++ MIG1++ 1,000 Los Angeles County, California, TRAN, Series A, 3% due 6/30/1994 1,000
AAA Aaa 5,000 Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Bonds (Proposition C-Second Senior), Series A, 6% due 7/01/2023 (c) 5,112
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Bonds, Series A (a):
AAA Aaa $ 6,850 6.75% due 7/01/2018 (e) $ 7,834
A+ Aaa 5,400 6.90% due 7/01/2021 6,226
AAA Aaa 3,000 M-S-R Public Power Agency, California, Revenue Refunding Bonds (San Juan Project),
Series F, 6% due 7/01/2020 (d) 3,072
AAA Aaa 4,750 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout Health Group),
Series A, 6.30% due 1/01/2022 (d) 4,970
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA Aa 2,000 6.625% due 7/01/2012 2,195
AA NR 4,650 6.75% due 7/01/2018 (a) 5,318
AA Aa 5,000 6% due 7/01/2021 5,079
AA Aa 5,000 Refunding, RIB, 8.028% due 10/30/2020 (j) 4,819
AA Aa 5,000 RIB, 8.774% due 8/05/2022 (j) 5,350
A- A 11,970 Northern California Power Agency, Public Power Revenue Bonds
(Hydroelectric Project #1), Series E, 7.15% due 7/01/2024 13,190
AAA Aaa 5,595 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6% due 5/01/2024 (c) 5,692
Ontario, California, Redevelopment Financing Authority Revenue Bonds
(Ontario Redevelopment Project No. 1) (c):
AAA Aaa 8,485 6% due 8/01/2015 8,718
AAA Aaa 7,575 5.50% due 8/01/2018 7,347
Ontario, California, Redevelopment Financing Authority Revenue Bonds,
Project No. 1 (Cimarron Project) (c):
AAA Aaa 3,000 6.25% due 8/01/2015 3,133
AAA Aaa 5,635 6.375% due 8/01/2020 5,942
AAA Aaa 3,000 Orange, California, Redevelopment Agency, Tax Allocation Revenue Refunding
Bonds (Southwest Redevelopment Project), Series A, 5.70% due 10/01/2023 (d) 2,979
Orange County, California, Community Facilities District No. 87-3, Special Tax
Revenue Bonds, Series A:
AAA Aaa 750 (Mission Viejo), 8.125% due 8/15/2013 (c) 865
NR A 2,485 (Mission Viejo), 8.125% due 8/15/2013 2,856
NR A 3,750 7.80% due 8/15/2015 4,320
<PAGE>
Orange County, California, Local Transportation Authority, Sales Tax
Revenue Bonds, RIB (j):
AA Aa 5,000 9.22% due 2/14/2011 5,763
AAA Aaa 10,150 Second Series, 9.023% due 2/14/2011 (e) 11,127
A+ A 2,000 Orange County, California, Public Facilities Corporation, COP (Solid Waste
Management), 7.875% due 12/01/2013 2,272
Palomar Pomerado, California, Health Systems Revenue Refunding Insured Bonds (c):
AAA Aaa 1,600 5% due 11/01/2013 1,477
AAA Aaa 4,115 4.75% due 11/01/2023 3,574
A+ A1 8,000 Pasadena, California, COP, Refunding Bonds (Old Pasadena Parking Facility Project),
6.25% due 1/01/2018 8,536
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AA- Aa $ 3,090 Pasadena, California, Water Revenue Bonds, 6% due 7/01/2013 $ 3,211
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (i) 18,021
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds, RITES,
10.214% due 8/15/2021 (d)(j) 4,308
AAA Aaa 1,500 Redding, California, Electric System Revenue Bonds, COP, RIB,
10.017% due 7/01/2022 (c)(j) 1,793
AAA Aaa 5,985 Redding, California, Redevelopment Agency, Tax Allocation Revenue Refunding Bonds
(Canby-Hilltop-Cypress), Series D, 5% due 9/01/2023 5,374
Redwood City, California, Public Financing Authority, Local Agency Revenue Bonds:
AAA Aaa 1,500 Refunding, Series A, 6.50% due 7/15/2011 (d) 1,626
A- NR 2,500 Series B, 7.25% due 7/15/2011 2,800
NR Baa 1,000 Riverside, California, M/F Redevelopment Agency Revenue Bonds
(First & Market Project), Series A, AMT, 7.75% due 9/01/2021 1,027
<PAGE>
Riverside, California, Water Revenue Bonds:
AA Aa 2,830 9% due 10/01/2001 3,599
AA Aa 3,100 9% due 10/01/2002 4,010
BBB NR 2,430 Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project No. 4), Series A, 7.50% due 10/01/2026 2,710
AAA Aaa 3,000 Rohnert Park, California, Community Development Agency, Tax Allocation
Refunding Bonds (Rohnert Park Redevelopment Project), 6.50% due 8/01/2020 (d) 3,237
A+ NR 5,385 Sacramento, California, City Financing Authority Revenue Bonds, 6.80%
due 11/01/2020 (a) 6,193
AAA Aaa 5,000 Sacramento, California, Municipal Utility District, Electric Revenue Bonds,
INFLOS, 9.781% due 8/15/2018 (e)(j) 5,506
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
AAA Aaa 14,650 Refunding, Series G, 4.75% due 9/01/2021 (c) 12,783
AAA Aaa 9,025 Series B, 6.375% due 8/15/2022 (c) 9,492
A- A 10,000 Series E, 5.75% due 5/15/2022 9,930
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds (Sisters of Charity),
Series A, 7% due 7/01/2021 2,786
A+ Aa3 5,000 San Diego, California, IDR, Refunding (San Diego Gas & Electric), Series C,
5.90% due 9/01/2018 5,054
AAA Aaa 1,200 San Diego County, California, COP, RITES, 10.023% due 11/18/2019 (c)(j) 1,315
AAA Aaa 5,000 San Francisco, California, City and County Airport Commission, International
Airport Revenue Refunding Bonds, Second Series, Issue 1, 6.30% due 5/01/2011 (d) 5,296
AA- A1 1,000 San Francisco, California, City and County Public Safety Improvement Project, UT,
Series F, 6.50% due 6/15/2011 1,064
NR NR 1,280 San Francisco, California, City and County Redevelopment Agency, Community
Facilities District, Special Tax No. 1 Revenue Bonds (South Beach), 8.20% due 8/01/2013 1,422
AAA Aaa 1,750 San Francisco, California, City and County Redevelopment Financing Authority,
Tax Allocation Revenue Refunding Bonds (San Francisco Redevelopment Project),
Series B, 4.75% due 8/01/2018 (e) 1,538
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AAA Aaa $ 7,010 San Joaquin County, California, COP, Capital Facilities Project,
Revenue Refunding Bonds, 4.75% due 11/15/2019 (c) $ 6,142
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue
Bonds (Senior Lien):
NR NR 2,965 7% due 1/01/2030 3,032
NR NR 27,000 6.75% due 1/01/2032 27,643
AAA Aaa 4,150 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due 7/01/2021 (c) 4,500
AA A1 1,000 Santa Clara County, California, Transportation District, Sales Tax Revenue Bonds,
Series A, 6.75% due 6/01/2011 1,104
Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(Construction Redevelopment Project), Series A (c):
AAA Aaa 1,900 6% due 9/01/2014 1,964
AAA Aaa 2,000 6.40% due 9/01/2022 2,139
AAA Aaa 2,750 South Coast Air Quality Management, District Building Corporation, California,
Institutional Sale Revenue Bonds, Series B, 9.75% due 8/01/1999 (d)(j) 3,436
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT (h):
AAA NR 5,300 Series A, 7.625% due 10/01/2023 5,711
AAA NR 2,805 Series A, 7.35% due 9/01/2024 (g) 2,993
AAA NR 1,485 Series B, 7.75% due 3/01/2024 (g) 1,604
Southern California Public Power Authority, Power Project Revenue Bonds, Series A:
AA Aa 5,415 Refunding, 5.50% due 7/01/2012 5,365
AAA Aaa 2,480 (San Juan Unit 3), 5% due 1/01/2020 (c) 2,247
AA- Aa 7,800 Southern California Public Power Authority, Transmission Project Revenue Bonds,
RIB, 8.925% due 7/01/2012 (j) 8,248
BBB+ NR 21,800 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc., Project), 7.625% due 1/01/2010 24,356
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital), 7.50%
due 2/01/2017 (c) 4,687
Turlock, California, COP, Health Facility Revenue Refunding Bonds
(Emanuel Medical Center Inc.):
BBB NR 3,600 5.625% due 10/15/2013 3,363
BBB NR 5,000 5.75% due 10/15/2023 4,626
BBB Baa1 4,790 Ukiah, California, Unified School District, COP, Refunding Bonds (Capital Projects),
Series A, 6% due 9/01/2010 4,797
<PAGE>
A NR 190 University of California, Facility Mortgage Revenue Bonds, 1985 Series,
9.20% due 1/01/2018 197
A- A 14,700 University of California, Revenue Refunding Bonds (Multi-Purpose Projects),
Series A, 6.875% due 9/01/2016 (a) 17,065
AAA Aaa 2,000 Vacaville, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds (Vacaville Redevelopment Projects), 6.35% due 9/01/2022 (c) 2,105
AAA Aaa 8,465 West and Central Basin, California, Financing Authority Revenue Bonds, 6.125%
due 8/01/2022 (d) 8,765
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
West Sacramento, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(West Sacramento Redevelopment Project) (c):
AAA Aaa $ 6,000 6.25% due 9/01/2010 $ 6,412
AAA Aaa 2,200 6.25% due 9/01/2021 2,291
Westminster, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(Commercial Redevelopment Project No. 1):
BBB+ Baa1 4,380 6.20% due 8/01/2023 4,410
BBB+ Baa1 4,000 Refunding, Series A, 7.30% due 8/01/2021 4,425
NR Aaa 1,850 Whittier, California, Educational Facilities Revenue Bonds (Whittier College),
Series A, 7% due 12/01/2009 (a) 1,880
Puerto Rico--0.3%
A NR 2,500 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2018 2,757
Total Investments (Cost--$806,462)--98.6% 854,677
Variation Margin on Futures Contracts--(0.1%)** (844)
Other Assets Less Liabilities--1.5% 13,005
--------
Net Assets--100.0% $866,838
<PAGE> ========
<FN>
(a) Prerefunded.
(b) The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rate shown is the rate in
effect at February 28, 1994.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) FGIC Insured.
(f) FHA Insured.
(g) FNMA Collateralized.
(h) GNMA Collateralized.
(i) Escrowed to Maturity.
(j) The interest rate is subject to change periodically and inversely
to the prevailing market rate. The interest rate shown is the rate
in effect at February 28, 1994.
++Highest short-term rating by Moody's Investors Service, Inc.
*Under Review.
**Futures contracts sold as of February 28, 1994 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1a)
3,000 US Treasury Notes June 1994 $(327,234,375)
Total Futures Contracts
(Total Contract Price--$328,673,750) $(327,234,375)
=============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of February 28, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$806,461,710)(Note 1a) $854,676,612
Cash 47,927
Receivables:
Securities sold $ 24,194,788
Interest 14,449,138
Beneficial interest sold 2,046,621 40,690,547
------------
Deferred organization expenses (Note 1e) 1,341
Prepaid registration fees and other assets (Note 1e) 92,626
------------
Total assets 895,509,053
<PAGE> ------------
Liabilities: Payables:
Securities purchased 24,368,480
Beneficial interest redeemed 1,839,846
Variation margin (Note 1b) 843,751
Dividends to shareholders (Note 1f) 728,701
Investment adviser (Note 2) 364,358
Distributor (Note 2) 311,986 28,457,122
------------
Accrued expenses and other liabilities 213,994
------------
Total liabilities 28,671,116
------------
Net Assets: Net assets $866,837,937
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 560,894
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 6,759,574
Paid-in capital in excess of par 810,548,405
Accumulated realized capital losses--net (685,213)
Unrealized appreciation on investments--net 49,654,277
------------
Net assets $866,837,937
============
Net Asset Value: Class A--Based on net assets of $66,398,352 and 5,608,936 shares of
beneficial interest outstanding $ 11.84
============
Class B--Based on net assets of $800,439,585 and 67,595,737 shares of
beneficial interest outstanding $ 11.84
============
See Notes to Financial Statements.
</TABLE>
FIANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statement of Operations
<CAPTION>
For the Six Months Ended
February 28, 1994
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 26,726,490
(Note 1d):
Expenses: Investment advisory fees (Note 2) 2,376,655
Distribution fees--Class B (Note 2) 2,038,361
Transfer agent fees--Class B (Note 2) 130,024
Printing and shareholder reports 49,768
Accounting services (Note 2) 48,039
Custodian fees 41,010
Professional fees 31,838
Registration fees (Note 1e) 27,515
Trustees' fees and expenses 19,659
Pricing fees 12,555
Transfer agent fees--Class A (Note 2) 9,243
Amortization of organization expenses (Note 1e) 677
Other 5,563
------------
Total expenses 4,790,907
------------
Investment income--net 21,935,583
------------
Realized & Realized gain on investments--net 9,996,521
Unrealized Gain Change in unrealized appreciation on investments--net (29,149,997)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 2,782,107
(Notes 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: Feb. 28, 1994 Aug. 31, 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 21,935,583 $ 43,990,556
Realized gain on investments--net 9,996,521 16,936,508
Change in unrealized appreciation on investments--net (29,149,997) 37,162,803
------------ ------------
Net increase in net assets resulting from operations 2,782,107 98,089,867
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (1,807,388) (3,035,522)
Shareholders Class B (20,128,195) (40,955,034)
(Note 1f): Realized gain on investments--net:
Class A (1,538,208) (770,830)
Class B (18,716,474) (12,593,158)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (42,190,265) (57,354,544)
------------ ------------
Beneficial Interest Net increase in net assets derived from beneficial
Transactions interest transactions 20,499,949 68,885,437
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (18,908,209) 109,620,760
Beginning of period 885,746,146 776,125,386
------------ ------------
End of period $866,837,937 $885,746,146
============ ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended,
February 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .33 .70 .72 .74 .77
Realized and unrealized gain (loss) on
investments--net (.26) .78 .41 .41 (.19)
-------- -------- -------- -------- --------
Total from investment operations .07 1.48 1.13 1.15 .58
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.33) (.70) (.72) (.74) (.77)
Realized gain on investments--net (.28) (.20) (.05) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.61) (.90) (.77) (.74) (.77)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.84 $ 12.38 $ 11.80 $ 11.44 $ 11.03
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 0.56%++ 13.21% 10.23% 10.73% 5.21%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses .62%* .63% .63% .64% .65%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.44%* 5.87% 6.26% 6.57% 6.77%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 66,398 $ 64,526 $ 46,556 $ 37,499 $ 29,558
Data: ======== ======== ======== ======== ========
Portfolio turnover 39.87% 61.24% 52.31% 116.09% 119.66%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class B
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended,
February 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.23
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .30 .64 .67 .68 .71
Realized and unrealized gain (loss) on
investments--net (.26) .78 .41 .41 (.20)
-------- -------- -------- -------- --------
Total from investment operations .04 1.42 1.08 1.09 .51
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.30) (.64) (.67) (.68) (.71)
Realized gain on investments--net (.28) (.20) (.05) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.58) (.84) (.72) (.68) (.71)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.84 $ 12.38 $ 11.80 $ 11.44 $ 11.03
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 0.31%++ 12.64% 9.68% 10.18% 4.58%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding distribution fees .62%* .63% .63% .65% .65%
Net Assets: ======== ======== ======== ======== ========
Expenses 1.12%* 1.13% 1.13% 1.15% 1.15%
======== ======== ======== ======== ========
Investment income--net 4.94%* 5.38% 5.76% 6.07% 6.27%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $800,440 $821,220 $729,569 $690,885 $663,551
Data: ======== ======== ======== ======== ========
Portfolio turnover 39.87% 61.24% 52.31% 116.09% 119.66%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch California Municipal Bond Fund (the "Fund") is part
of Merrill Lynch California Municipal Series Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940
as a diversified, open-end investment management company. The
Fund offers both Class A and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject
to a contingent deferred sales charge. Both classes of shares
have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B Shares bear
certain expenses related to the distribution of such shares and
have exclusive voting rights with respect to matters relating to
such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
<PAGE>
(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 or yield equivalent as obtained
by the Fund's pricing service from one or more dealers that make
markets in such securities. Financial futures contracts, which
are traded on exchanges, are valued at their last sale price
after the close of such exchanges. Options, which are traded on
exchanges, are valued at their last sale price as of the close of
such exchanges or, lacking any sales, at the last available bid
price. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates
market. 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 procedure of the pricing service and its
valuations are reviewed by the officers of the Trust under the
general supervision of the Trustees.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
portfolio holdings or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or
yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When
the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the date 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.
<PAGE>
(e) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Costs related to the
organization of the second class of shares are charged to expense
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.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994,
the investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch and Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co.
NOTES TO FINANCIAL STATEMENTS (concluded)
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. The Investment
Advisory Agreement obligates FAM to reimburse the Fund to the
extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the next $70 million of
average daily net assets, and 1.5% of the average daily net
assets in excess thereof. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payments
will be made to FAM during any fiscal year which will cause such
expenses to exceed the expense limitation at the time of such
payment.
<PAGE>
Pursuant to a Distribution Plan (the "Distribution Plan") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor an ongoing
account maintenance fee and distribution fee relating to Class B
Shares, which are accrued daily and paid monthly at the annual
rates of 0.25% and 0.25%, respectively, of the average daily net
assets of the Class B Shares of the Fund. Pursuant to a sub-
agreement with the Distributor, Merrill Lynch also provides
account maintenance and distribution services to the Fund. This
fee is to compensate the Distributor for services provided and
the expenses borne by it under the Plan. As authorized by the
Plan, the Distributor has entered into an agreement with Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of
MLIM, which provides for the compensation of MLPF&S for providing
distribution-related services to the Fund.
For the six months ended February 28, 1994, MLFD earned
underwriting discounts of $10,114, and MLPF&S earned dealer
concessions of $87,375 on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of
$291,664 relating to Class B transactions during the year.
Financial Data Service, 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, MLIM, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the six months ended February 28, 1994 were
$373,421,914 and $343,813,814, respectively.
Net realized and unrealized gains (losses) as of February 28,
1994 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 12,156,328 $ 48,215,199
Short-term investments (4,057) (297)
Financial futures contracts (2,155,750) 1,439,375
------------ ------------
Total $ 9,996,521 $ 49,654,277
============ ============
As of February 28, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $48,214,902, of which $54,504,102
related to appreciated securities and $6,289,200 related to
depreciated securities. The aggregate cost of investments at
February 28, 1994 for Federal income tax purposes was
$806,461,710.
<PAGE>
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $20,499,949 and $68,885,437 for the six months
ended February 28, 1994 and the year ended August 31, 1993,
respectively.
Transactions in shares of beneficial interest for Class A and
Class B Shares were as follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1994 Shares Amount
Shares sold 822,453 $ 10,117,004
Shares issued to share-
holders in reinvestment of
dividends and distributions 141,446 1,721,213
---------- ------------
Total issued 963,899 11,838,217
Shares redeemed (567,289) (6,936,386)
---------- ------------
Net increase 396,610 $ 4,901,831
========== ============
Class A Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 2,240,788 $ 26,776,133
Shares issued to share-
holders in reinvestment of
dividends and distributions 157,460 1,866,087
---------- ------------
Total issued 2,398,248 28,642,220
Shares redeemed (1,132,321) (13,376,681)
---------- -----------
Net increase 1,265,927 $ 15,265,539
========== ============
Class B Shares for the Six Months Dollar
Ended February 28, 1994 Shares Amount
Shares sold 4,016,327 $ 49,345,024
Shares issued to share-
holders in reinvestment of
dividends and distributions 1,447,069 17,612,953
---------- ------------
Total issued 5,463,396 66,957,977
Shares redeemed (4,185,103) (51,359,859)
---------- ------------
Net increase 1,278,293 $ 15,598,118
========== ============
<PAGE>
Class B Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 10,100,868 $120,680,105
Shares issued to share-
holders in reinvestment of
dividends and distributions 2,063,845 24,426,884
---------- ------------
Total issued 12,164,713 145,106,989
Shares redeemed (7,672,695) (91,487,091)
---------- ------------
Net increase 4,492,018 $ 53,619,898
========== ============
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Kenneth S. Axelson, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
