MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
FUND LOGO
Annual Report
August 31, 1996
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
<PAGE>
The Municipal Market Environment
Municipal bond yields rose over the six-month period ended August
31, 1996. Investors became increasingly alarmed that earlier
forecasts of continued moderate growth were overly optimistic. As
indications of stronger growth were released, particularly the
strong employment reports released beginning in March, fears of
associated inflationary pressures mounted and yields rose in
response. By May and June, long-term municipal bond yields rose into
the 6.25%--6.30% range.
However, in early July the combination of the Federal Reserve Board
suggesting that growth was expected to slow later in 1996 and a
temporary stock market correction allowed municipal bond yields to
fall as investors scrambled to purchase relatively scarce
securities. As measured by the Bond Buyer Revenue Bond Index,
long-term, A-rated uninsured tax-exempt bonds yielded 6.09% at
August 31, 1996, an increase of over 20 basis points (0.20%) in the
last six months. Long-term US Treasury bond yields rose
significantly higher over the same period. By August 31, 1996,
yields on US Treasury bonds increased almost 65 basis points to end
the six-month period at 7.11%.
The municipal bond market's recent outperformance as compared to its
taxable counterpart was largely the result of two principal factors.
First, much of the concern in the tax-exempt market regarding the
potential loss of the inherent tax-advantage of the municipal bonds
dissipated. For much of 1995, various tax proposals, such as the
flat tax or national sales tax, were put forward either to reduce
the national debt or reform the current tax system. Most of these
proposals would have severely limited the tax advantages enjoyed by
the municipal bond market. However, in February 1996, the Kemp Com-
mission released its findings regarding various tax reform
proposals. While noting that numerous changes should be made, no
mention of curtailing or stopping municipal bonds' current favored
tax status was made.
The second major factor leading to the municipal bond market's
recent outperformance was the return of a more favorable technical
environment. The rate of increase in new bond issuance recently
slowed. Over the last 12 months, approximately $175 billion in
long-term municipal securities were issued, an increase of over 25%
as compared to the same period a year earlier. Much of this increase
was the result of issuers seeking to refinance their existing
higher-coupon debt as interest rates declined in 1995 and early
1996. As interest rates rose, these financings became increasingly
economically impractical and issuance declined. Over the last six
months, less than $90 billion in long-term tax-exempt securities
were underwritten, an increase of 12% versus the comparable period a
year earlier. Only $43 billion in tax-exempt securities were issued
in the last three months, a 6% decline in issuance compared to the
August 31, 1995 quarter.
<PAGE>
At the same time investor demand remained consistently strong. With
nominal new-issue yields above 6%, retail investor interest was
steady. Additionally, investors received over $50 billion this June
and July in assets derived from coupon income, bond maturities, and
proceeds from early redemptions. Annual new bond issuance declined
in recent years and is expected to remain below levels seen in the
early 1990s. Consequently, as the higher-coupon bonds issued in the
early-to-mid 1980s were redeemed at their first optional call dates,
the total number of outstanding tax-exempt bonds has declined. This
combination of a declining net supply and significant amounts of
assets helped maintain investor demand in recent months.
It is unlikely that the municipal bond market will continue to
significantly outperform US Treasury securities in the near future.
The tax-exempt bond market's recent performance led to the yield
ratio between long-term taxable and tax-exempt securities falling
from in excess of 90% to approximately 85%. While historically still
very attractive, some institutional investors, particularly
short-term traders, began to view the tax-exempt bond market's
recent outperformance as an opportunity to sell a relatively
expensive asset. However, to the long-term investor, such a sale
would represent the loss of an attractively priced asset which may
not be easily replaced given the relative scarcity of municipal
bonds under present supply conditions.
Looking ahead, no clear consensus for the direction of interest
rates currently exists. Perhaps, the primary focus going forward
will be the extent to which the increase in interest rates seen thus
far in 1996 will negatively impact future economic growth. Should
growth slow in the interest rate-sensitive sectors of the economy,
like housing, auto, and consumer spending, as many economists assert
is likely, then bond yields are likely to decline. Under such a
scenario, the municipal bond market's performance is likely to
closely mirror that of the US Treasury bond market.
Fiscal Year in Review
Our investment strategy for Merrill Lynch California Municipal Bond
Fund focuses on seeking to provide current yield while being mindful
of capital appreciation. The portfolio is positioned with a core of
securities that provide an attractive current yield because they
originate in a higher interest rate environment. In our ongoing
attempt to bolster the Fund's total return, we follow a research-
intensive investment process in order to identify new municipal
issues that could be purchased to achieve a greater current yield
within the quality parameters set forth by the Fund's prospectus and
our internal policies.
<PAGE>
During the 12-month period ended August 31, 1996, the municipal bond
market was characterized by tremendous price volatility as slow
growth and low inflation forecasts gave way to fears of an
accelerating economy. We negotiated these turbulent market swings by
initiating a defensively oriented investment strategy earlier in the
year seeking to stress an above-average industry current yield while
maintaining a lower level of sensitivity to the general rising
direction of interest rates. Cash equivalent reserves in the
portfolio fluctuated between 5% and 10% of total assets. A large
portion of assets committed to longer maturities currently have
coupons structured for income rather than price appreciation. This
strategy served the portfolio well during this particularly volatile
period for the fixed-income markets. However, the market's recent
volatility creates opportunities. Therefore, we are monitoring the
US economic backdrop and the overall valuation of municipal rates to
find a re-entry point at which time we would take a more aggressive
approach. We are seeking higher-yielding investment opportunities
for the Fund within the credit limits detailed by the prospectus.
In Conclusion
We appreciate your investment in Merrill Lynch California Municipal
Bond Fund, and we look forward to assisting you with your financial
needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Walter C. O'Connor)
Walter C. O'Connor
Vice President and Portfolio Manager
<PAGE>
October 1, 1996
IMPORTANT TAX INFORMATION
All of the net investment income distributions paid monthly by
Merrill Lynch California Municipal Bond Fund during its taxable year
ended August 31, 1996 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, there were no capital gains distributed by the Fund
during the year.
Please retain this information for your records.
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.35% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.10% (but no distribution fee).
<PAGE>
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/96 5/31/96 8/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $11.49 $11.36 $11.40 +0.79% +1.14%
Class B Shares* 11.49 11.36 11.40 +0.79 +1.14
Class C Shares* 11.49 11.36 11.40 +0.79 +1.14
Class D Shares* 11.49 11.36 11.40 +0.79 +1.14
Class A Shares--Total Return* +6.53(1) +2.56(2)
Class B Shares--Total Return* +5.99(3) +2.43(4)
Class C Shares--Total Return* +5.88(5) +2.40(6)
Class D Shares--Total Return* +6.43(7) +2.54(8)
Class A Shares--Standardized 30-day Yield 4.94%
Class B Shares--Standardized 30-day Yield 4.63%
Class C Shares--Standardized 30-day Yield 4.53%
Class D Shares--Standardized 30-day Yield 4.84%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.648 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.156 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.588 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.142 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.576 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.636 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.154 per share ordinary
income dividends.
</TABLE>
<PAGE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A Shares
A line graph depicting the growth of an investement in the Fund's
Class A Shares compared to growth of an investment in the Lehman
Brothers Muncipal Bond Index. Beginning and ending values are:
10/25/88** 8/96
ML California Municipal Bond
Fund++--Class A Shares* $ 9,600 $16,974
Lehman Brothers Municipal Bond
Index++++ $10,000 $18,236
Total Return Based on a $10,000 Investment--Class B Shares
A line graph depicting the growth of an investment in the Fund's
Class B Shares compared to growth of an investment in the Lehman
Brothers Municipal Bond Index. Beginning and ending values are:
10/25/88** 8/96
ML California Municipal Bond
Fund++--Class B Shares* $10,000 $18,713
Lehman Brothers Municipal Bond
Index++++ $10,000 $21,128
Total Return Based on a $10,000 Investment--Class C Shares and Class D Shares
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the Lehman Brothers Municipal Bond Index. Beginning
and ending values are:
10/21/94** 8/96
ML California Municipal Bond
Fund++--Class C Shares* $10,000 $11,532
<PAGE>
ML California Municipal Bond
Fund++--Class D Shares* $ 9,600 $11,177
Lehman Brothers Municipal Bond
Index++++ $10,000 $11,837
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++ML California Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the State of
California, it's political subdivisions, agencies and
instumentalities and obligations of other qualifying issuers.
++++This unmanaged Index consists of long-term revenue bonds,
prerefunded bonds, general obligation bonds and insured bonds.
Past Performance is not predictive of future performance.
PERFORMANCE DATA (continued)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/96 +6.60% +2.34%
Five Years Ended 6/30/96 +7.29 +6.41
Inception (10/25/88)
through 6/30/96 +7.49 +6.92
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +6.15% +2.15%
Five Years Ended 6/30/96 +6.76 +6.76
Ten Years Ended 6/30/96 +7.95 +7.95
[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>
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +6.04% +5.04%
Inception (10/21/94)
through 6/30/96 +7.96 +7.96
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 +6.58% +2.31%
Inception (10/21/94)
through 6/30/96 +8.51 +5.92
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
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 + 8.58
1993 11.64 12.13 0.158 0.808 + 12.78
1994 12.13 10.62 -- 0.662 - 7.08
1995 10.62 11.83 -- 0.636 + 17.77
1/1/96--8/31/96 11.83 11.49 -- 0.415 + 0.78
------ ------
Total $0.314 Total $5.743
Cumulative total return as of 8/31/96: +76.82%**
<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>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
9/30/85--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 + 7.94
1993 11.64 12.13 0.158 0.747 + 12.22
1994 12.13 10.63 -- 0.606 - 7.50
1995 10.63 11.83 -- 0.578 + 17.07
1/1/96--8/31/96 11.83 11.49 -- 0.377 + 0.44
------ ------
Total $0.360 Total $7.543
Cumulative total return as of 8/31/96: +130.53%**
<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>
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.94 $10.63 -- $0.116 - 1.76%
1995 10.63 11.83 -- 0.566 + 16.95
1/1/96--8/31/96 11.83 11.49 -- 0.369 + 0.37
------
Total $1.051
Cumulative total return as of 8/31/96: +15.32%**
<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>
<PAGE>
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.94 $10.63 -- $0.127 - 1.65%
1995 10.63 11.83 -- 0.623 + 17.53
1/1/96--8/31/96 11.83 11.49 -- 0.407 + 0.72
------
Total $1.157
Cumulative total return as of 8/31/96: +16.42%**
<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>
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 Agency
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
RITR Residual Interest Trust Receipts
S/F Single Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--97.5%
<S> <S> <C> <S> <C>
NR* NR* $ 3,750 Alameda, California, Public Financing Authority, Local Agency Special Tax Revenue
Refunding Bonds (Community Facility #1), Series A, 7% due 8/01/2019 $ 3,804
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Bonds,
Registered RITES, 9.03% due 12/28/2018 (c)(j) 3,352
Antioch, California, Improvement Bonds (1915 Assessment District No.27-Lone Tree):
NR* NR* 665 Series D, 6.40% due 9/02/2003 679
NR* NR* 4,955 Series D, 7.30% due 9/02/2013 5,123
NR* NR* 4,000 Series E, 7.125% due 9/02/2016 4,126
AAA Aaa 3,140 Brea, California, Public Financing Authority, Tax Allocation Revenue Bonds
(Redevelopment Project AB), Series A, 6.75% due 8/01/2022 (c) 3,407
AAA Aaa 2,025 Brentwood, California, GO, Unified School District, 6.85% due 8/01/2016 (d)(k) 2,151
California Health Facilities Financing Authority Revenue Bonds, Series A:
AAA Aaa 4,350 (Kaiser Permanente), 7% due 10/01/2018 (c) 4,677
BB Aaa 5,150 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (a) 5,754
AAA Aaa 4,000 (Scripps Memorial Hospital), 6.25% due 10/01/2013 (c) 4,162
A1+ VMIG1++ 1,580 (Scripps Memorial Hospital), VRDN, 3.35% due 12/01/2005 (b)(c) 1,580
NR* A 5,780 (Scripps Research Institute), 6.625% due 7/01/2014 6,071
A1+ VMIG1++ 5,500 California Health Facilities Financing Authority, Revenue Refunding Bonds
(Catholic West), Series C, VRDN, 3.25% due 7/01/2011 (b)(c) 5,500
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,620 AMT, Series A, 7.70% due 8/01/2030 3,795
AA- Aa 470 AMT, Series B, 8% due 8/01/2029 491
AA- Aa 10,115 AMT, Series F-1, 7% due 8/01/2026 10,626
AA- Aa 790 AMT, Series G, 8.15% due 8/01/2019 823
AA- Aa 2,110 Series A, 8.125% due 8/01/2019 2,220
AA- Aa 2,850 Series D, 7.25% due 8/01/2017 3,001
California HFA, Revenue Bonds, AMT:
AA- Aa 4,150 RIB, 8.856% due 8/01/2023 (j) 4,186
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,025
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<PAGE>
California (continued)
<S> <S> <C> <S> <C>
California Pollution Control Financing Authority, PCR, Refunding, VRDN (b):
A1+ P1 $ 3,000 (Exxon Project), 3.50% due 12/01/2012 $ 3,000
A1 NR* 4,700 (Pacific Gas and Electric Co.), AMT, Series G, 3.45% due 2/01/2016 4,700
California Pollution Control Financing Authority, Resource Recovery Revenue Bonds,
VRDN, AMT (b):
NR* NR* 3,200 (Delano Project), 3.50% due 8/01/2019 3,200
NR* P1 2,800 (Delano Project), 3.50% due 8/01/2019 2,800
NR* P1 2,500 (Delano Project), Series 1991, 3.50% due 8/01/2029 2,500
NR* P1 2,400 Refunding (Ultra Power Malaga Project), Series A, 3.55% due 4/01/2017 2,400
NR* P1 3,600 Refunding (Ultra Power Rocklin Project), Series A, 3.55% due 6/01/2017 3,600
A1+ VMIG1++ 8,300 California Pollution Control Financing Authority, Solid Waste Disposal Revenue Bonds
(Shell Oil Co.-Martinez Project), VRDN, AMT, Series A, 3.50% due 10/01/2024 (b) 8,300
AA Aa 10,000 California State Department of Water Resources, Central Valley Project Revenue Bonds
(Water Systems), Series M, 5% due 12/01/2019 8,754
California State Public Works Board, Lease Revenue Bonds:
A A 10,675 (Department of Corrections-Monterey County Soledad II), Series A, 7% due 11/01/2019 11,735
A A 3,555 High Technology Facilities (San Jose Facilities), Series A, 7.75% due 8/01/2006 4,018
A A 7,000 (Various Community College Projects), Series B, 7% due 3/01/2019 7,682
AAA Aaa 10,775 (Various University of California Projects), Series A, 6.40% due 12/01/2016 (d) 11,410
A A1 1,475 (Various University of California Projects), Series B, 6.625% due 12/01/2019 1,567
California State, Veterans' Bonds, AMT, UT:
A+ A 16,300 Series AW, 7.70% due 4/01/2009 17,372
AAA Aaa 13,250 Series BD, BE, BF, 6.375% due 2/01/2027 (d) 13,401
AA Aa 4,750 California Statewide Communities Development Authority Revenue Bonds (Saint Joseph
Health System Group), COP, 6.625% due 7/01/2021 4,993
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds (State Water Project
Regional Facilities), 6.60% due 10/01/2022 (d) 5,396
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 7.10% due 8/01/2022 1,055
Corona, California, COP, Corona Community:
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,375
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,573
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,792
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,030
AAA Aaa 2,605 8% due 3/01/2013 (a) 3,286
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,553
AAA Aaa 3,035 8% due 3/01/2015 (i) 3,843
<PAGE>
NR* Aaa 4,635 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds, Series A,
7.10% due 1/01/2011 (i) 5,270
AAA Aaa 5,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (d) 5,349
BBB+ NR* 4,600 Fontana, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Jurupa Hills Redevelopment Project), Series A, 7.20% due 10/01/2024 4,927
AAA Aaa 2,230 Irvine, California, Unified School District, Special Tax Community Facilities Bonds
(District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,436
</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 $ 481
NR* NR* 495 7.05% due 9/02/2002 512
NR* NR* 530 7.10% due 9/02/2003 548
NR* NR* 570 7.15% due 9/02/2004 589
NR* NR* 610 7.20% due 9/02/2005 629
NR* NR* 655 7.25% due 9/02/2006 676
NR* NR* 4,065 7.50% due 9/02/2011 4,219
NR* NR* 5,695 Long Beach, California, M/F Housing Redevelopment Agency Revenue Bonds
(Pacific Court Apartments), Issue B, AMT, 6.95% due 9/01/2023 4,516
NR* NR* 4,545 Long Beach, California, Special Tax Community Facilities Bonds (District No.3-Pine
Avenue), 6.375% due 9/01/2023 4,255
AAA Aaa 5,150 Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Bunker Hill), Series H, 6.50% due 12/01/2016 (f) 5,523
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (a) 22,124
Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue
Refunding Bonds, Series A (c):
AAA Aaa 8,000 5.125% due 8/15/2013 7,447
AAA Aaa 12,000 5.125% due 8/15/2021 10,707
<PAGE>
AA- Aa 10,000 Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Bonds, Registered RITR, 8.327% due 2/01/2020 (j) 10,687
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power, Waterworks Revenue Bonds,
6.30% due 7/01/2024 (c) 5,166
Los Angeles, California, Harbor Department Revenue Bonds:
AAA NR* 10,000 7.60% due 10/01/2018 (i) 12,056
AA Aa 1,000 AMT, Series B, 6.625% due 8/01/2025 1,043
AAA Aaa 7,890 Los Angeles, California, Wastewater System Revenue Bonds, Series D,
6.625% due 12/01/2012 (c) 8,519
AAA Aaa 10,000 Los Angeles County, California, COP (Correctional Facilities Project),
6.50% due 9/01/2000 (a)(c) 10,908
AAA Aaa 10,000 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax
Revenue Refunding Bonds (Proposition A), Series A, 5% due 7/01/2021 (e) 8,763
AAA Aaa 12,070 Los Angeles County, California, Public Works Financing Authority, Lease Revenue
Refunding Bonds, Series A, 6% due 9/01/2005 (c) 12,891
AAA Aaa 10,000 Los Angeles County, California, Sanitation Districts, Financing Authority Revenue
Bonds(Capital Projects), Series A, 5.25% due 10/01/2019 (c) 9,115
AAA Aaa 6,250 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout Health Group),
Series A, 6.30% due 1/01/2022 (d) 6,420
AA Aa 11,650 Metropolitan Water District, Southern California, Waterworks Revenue Bonds, RIB,
7.811% due 8/05/2022 (j) 11,038
A- A 3,570 Northern California Power Agency, Public Power Revenue Bonds (Hydroelectric Project
#1), Series E, 7.15% due 7/01/2024 3,742
</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>
AAA Aaa $ 5,635 Ontario, California, Redevelopment Financing Authority Revenue Bonds (Cimarron
Project No. 1-Center City), 6.375% due 8/01/2020 (c) $ 5,879
AAA Aaa 20,300 Orange County, California, Local Transportation Authority, Sales Tax Revenue Bonds,
Second Series, 6.10% due 2/14/2011 (e) 20,778
<PAGE>
A NR* 3,000 Palmdale, California, Civic Authority Revenue Refunding Bonds (Merged Redevelopment
Project), Series A, 6.60% due 9/01/2034 3,166
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (i) 16,882
NR* NR* 8,680 Pleasanton, California, Joint Powers Financing Authority, Revenue Reassessment Bonds,
Sub-Series B, 6.75% due 9/02/2017 8,804
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds, RITES,
9.024% due 9/11/2001 (a)(d)(j) 4,088
Redwood City, California, Public Financing Authority, Local Agency Revenue Bonds:
AAA Aaa 1,500 Refunding, Series A, 6.50% due 7/15/2011 (d) 1,586
A- NR* 2,500 Series B, 7.25% due 7/15/2011 2,707
BBB NR* 2,430 Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project No. 4), Series A, 7.50% due 10/01/2026 2,616
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) 3,180
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
AAA Aaa 7,000 INFLOS, 8.717% due 8/15/2018 (e)(j) 7,332
AAA Aaa 5,000 Series B, 6.375% due 8/15/2022 (c) 5,230
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds (Sisters of Charity),
Series A, 7% due 7/01/2001 (a) 2,789
AAA Aaa 5,000 San Diego, California, Public Facilities Financing Authority, Sewer Revenue Bonds,
5% due 5/15/2020 (e) 4,452
San Francisco, California, City and County Airport Commission, International Airport
Revenue Bonds, Second Series (d):
AAA Aaa 3,240 AMT, Issue 6, 6.50% due 5/01/2018 3,384
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 8,450
AAA Aaa 8,500 Refunding, Issue 1, 6.30% due 5/01/2011 8,925
NR* NR* 1,280 San Francisco, California, City and County Redevelopment Agency, Community Facilities
District Special Tax No. 1 Bonds (South Beach), 8.20% due 8/01/2013 1,372
AAA Aaa 4,150 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due 7/01/2021 (c) 4,415
AAA Aaa 10,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.75% due 11/15/2020 (d) 10,937
AA A1 1,000 Santa Clara County, California, Transportation District, Sales Tax Revenue Bonds,
Series A, 6.75% due 6/01/2011 1,082
</TABLE>
<PAGE>
<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>
AAA Aaa $ 2,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Bonds
(Consolidated Redevelopment Project), Series A, 6.40% due 9/01/2022 (c) $ 2,102
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT (h):
AAA NR* 3,905 (Mortgage Backed Security), Series A, 7.625% due 10/01/2023 4,105
AAA NR* 2,450 (Mortgage Backed Security), Series A, 7.35% due 9/01/2024 (g) 2,547
AAA NR* 1,040 Series B, 7.75% due 3/01/2024 (g) 1,098
BBB+ NR* 20,590 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Certificates (Ogden Martin System Inc. Project), 7.625%
due 1/01/2010 22,121
AAA Aaa 6,500 Stockton, California, Revenue Bonds (Wastewater Treatment Plant Expansion), COP,
Series A, 6.80% due 9/01/2024 (e) 7,121
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital),
8.97% due 2/01/2002 (a)(c) 4,603
University of California Revenue Bonds (Multiple Purpose Projects):
A NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002 (a) 16,578
AAA Aaa 3,000 Refunding, Series C, 5% due 9/01/2023 (d) 2,616
AAA Aaa 8,000 Series D, 6.25% due 9/01/2012 (c) 8,368
AAA Aaa 6,000 Series D, 6.375% due 9/01/2019 (c) 6,277
AAA Aaa 11,845 Series D, 6.375% due 9/01/2024 (c) 12,392
A A 6,000 West Covina, California, COP (Queen of the Valley Hospital), 6.95% due 8/15/2023 6,483
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Bonds
(West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,294
Puerto Rico--1.2%
A Baa1 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 5,260
AAA Baa1 2,000 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds, Series T, 6.625% due 7/01/2002 (a) 2,222
Total Investments (Cost--$598,690)--98.7% 634,685
Other Assets Less Liabilities--1.3% 8,580
--------
Net Assets--100.0% $643,265
========
<PAGE>
<FN>
(a)Prerefunded.
(b)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at August 31, 1996.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FGIC Insured.
(f)FSA Insured.
(g)FNMA Collateralized.
(h)GNMA Collateralized.
(i)Escrowed to Maturity.
(j)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 August 31, 1996.
(k)Bank Qualified.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$598,689,871) (Note 1a) $634,685,255
Cash 82,858
Receivables:
Interest $ 10,813,406
Beneficial interest sold 408,759 11,222,165
------------
Prepaid registration fees and other assets (Note 1e) 117,848
------------
Total assets 646,108,126
------------
Liabilities: Payables:
Beneficial interest redeemed 1,430,109
Dividends to shareholders (Note 1f) 633,611
Investment adviser (Note 2) 319,670
Distributor (Note 2) 234,874 2,618,264
------------
Accrued expenses and other liabilities 225,088
------------
Total liabilities 2,843,352
------------
Net Assets: Net assets $643,264,774
============
<PAGE>
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 371,370
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 4,182,252
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 70,595
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 972,997
Paid-in capital in excess of par 620,910,864
Accumulated realized capital losses on investments--net (Note 5) (16,973,057)
Accumulated distributions in excess of realized capital gains--net
(Note 1f) (2,265,631)
Unrealized appreciation on investments--net 35,995,384
------------
Net assets $643,264,774
============
Net Asset Value: Class A--Based on net assets of $42,668,594 and 3,713,704 shares
of beneficial interest outstanding $ 11.49
============
Class B--Based on net assets of $480,667,799 and 41,822,524 shares
of beneficial interest outstanding $ 11.49
============
Class C--Based on net assets of $8,111,647 and 705,950 shares
of beneficial interest outstanding $ 11.49
============
Class D--Based on net assets of $111,816,734 and 9,729,971 shares
of beneficial interest outstanding $ 11.49
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
August 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 41,044,550
(Note 1d):
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 3,611,875
Account maintenance and distribution fees--Class B (Note 2) 2,723,756
Transfer agent fees--Class B (Note 2) 216,676
Accounting services (Note 2) 118,709
Printing and shareholders reports 77,586
Professional fees 73,696
Account maintenance fees--Class D (Note 2) 68,985
Custodian fees 66,467
Registration fees (Note 1e) 66,297
Trustees' fees and expenses 40,129
Account maintenance and distribution fees--Class C (Note 2) 35,107
Transfer agent fees--Class D (Note 2) 22,807
Pricing fees 18,621
Transfer agent fees--Class A (Note 2) 14,677
Transfer agent fees--Class C (Note 2) 2,582
Other 43,874
------------
Total expenses 7,201,844
------------
Investment income--net 33,842,706
------------
Realized & Realized gain on investments--net 4,306,220
Unrealized Change in unrealized appreciation on investments--net 1,206,892
Gain on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 39,355,818
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 33,842,706 $ 37,800,235
Realized gain (loss) on investments--net 4,306,220 (16,973,155)
Change in unrealized appreciation on investments--net 1,206,892 17,518,587
------------ ------------
Net increase in net assets resulting from operations 39,355,818 38,345,667
------------ ------------
<PAGE>
Dividends to Investment income--net:
Shareholders Class A (2,457,264) (3,035,857)
(Note 1f): Class B (27,350,656) (34,575,842)
Class C (287,834) (69,364)
Class D (3,746,952) (119,172)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (33,842,706) (37,800,235)
------------ ------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (29,652,521) (120,046,349)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (24,139,409) (119,500,917)
Beginning of year 667,404,183 786,905,100
------------ ------------
End of year $643,264,774 $667,404,183
============ ============
</TABLE>
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .64 .64 .68 .70 .72
Realized and unrealized gain (loss) on
investments--net .09 .08 (.78) .78 .41
-------- -------- -------- -------- --------
Total from investment operations .73 .72 (.10) 1.48 1.13
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.64) (.64) (.68) (.70) (.72)
Realized gain on investments--net -- -- (.19) (.20) (.05)
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.64) (.64) (.96) (.90) (.77)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.49 $ 11.40 $ 11.32 $ 12.38 $ 11.80
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 6.53% 6.77% (.92%) 13.19% 10.23%
Return:* ======== ======== ======== ======== ========
Ratios to Expenses .65% .65% .62% .63% .63%
Average ======== ======== ======== ======== ========
Net Assets Investment income--net 5.51% 5.83% 5.65% 5.87% 6.26%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 42,668 $ 44,228 $ 60,017 $ 64,526 $ 46,556
Data: ======== ======== ======== ======== ========
Portfolio turnover 53.79% 53.40% 75.66% 61.24% 52.31%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of
sales loads.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .58 .59 .61 .64 .67
Realized and unrealized gain (loss) on
investments--net .09 .08 (.78) .78 .41
-------- -------- -------- -------- --------
Total from investment operations .67 .67 (.17) 1.42 1.08
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.58) (.59) (.61) (.64) (.67)
Realized gain on investments--net -- -- (.19) (.20) (.05)
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.58) (.59) (.89) (.84) (.72)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.49 $ 11.40 $ 11.32 $ 12.38 $ 11.80
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 5.99% 6.28% (1.50%) 12.62% 9.68%
Return:** ======== ======== ======== ======== ========
<PAGE>
Ratios to Expenses 1.16% 1.16% 1.13% 1.13% 1.13%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net 5.01% 5.32% 5.15% 5.38% 5.76%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands). $480,668 $616,199 $726,888 $821,220 $729,569
Data: ======== ======== ======== ======== ========
Portfolio turnover 53.79% 53.40% 75.66% 61.24% 52.31%
======== ======== ======== ======== ========
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
August 31, August 31, August 31, August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.40 $ 10.94 $ 11.40 $ 10.94
Operating -------- -------- --------- --------
Performance: Investment income--net .57 .49 .63 .54
Realized and unrealized gain on investments--net .09 .46 .09 .46
-------- -------- --------- --------
Total from investment operations .66 .95 .72 1.00
-------- -------- --------- --------
Less dividends from investment income--net (.57) (.49) (.63) (.54)
-------- -------- --------- --------
Net asset value, end of period $ 11.49 $ 11.40 $ 11.49 $ 11.40
======== ======== ========= ========
Total Investment Based on net asset value per share 5.88% 8.96%+++ 6.43% 9.42%+++
Return:** ======== ======== ========= ========
Ratios to Expenses 1.26% 1.27%* .75% .76%*
Average Net ======== ======== ========= ========
Assets: Investment income--net 4.91% 5.04%* 5.42% 5.59%*
======== ======== ========= ========
Supplemental Net assets, end of period (in thousands) $ 8,112 $ 3,131 $ 111,817 $ 3,846
Data: ======== ======== ========= ========
Portfolio turnover 53.79% 53.40% 53.79% 53.40%
======== ======== ========= ========
<FN>
*Annualized.
**Total investment returns exclude the effects
of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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 management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities 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 strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
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 transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) 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. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $98 have been reclassified from paid-in capital in excess of par
to accumulated net realized capital losses. These reclassifications
have no effect on net assets or net asset values per share.
<PAGE>
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average
daily value of the Fund's net assets at the following annual rates:
0.55% of the Fund's average daily net assets not exceeding $500
million; 0.525% of average daily net assets in excess of $500
million but not exceeding $1 billion; and 0.50% of average daily net
assets in excess of $1 billion. 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
remaining average net assets. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made during any fiscal year which will cause such expenses to
exceed expense limitations at the time of such payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
<PAGE>
For the year ended August 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $2,185 $18,776
Class D $2,960 $28,248
For the year ended August 31, 1996, MLPF&S received contingent
deferred sales charges of $427,650 and $4,398 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1996 were $336,637,182 and
$422,327,530, respectively.
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of August 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 5,618,244 $ 35,995,384
Short-term investments (1,868) --
Financial futures
contracts (1,310,156) --
------------ ------------
Total $ 4,306,220 $ 35,995,384
============ ============
<PAGE>
As of August 31, 1996, net unrealized depreciation for Federal
income tax purposes aggregated $35,995,384, of which $38,074,511
related to appreciated securities and $2,079,127 related to
depreciated securities. The aggregate cost of investments at August
31, 1996 for Federal income tax purposes was $598,689,871.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $29,652,521 and $120,046,349 for the years ended
August 31, 1996 and August 31, 1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 343,484 $ 3,993,921
Shares issued to share-
holders in reinvestment
of dividends 91,475 1,056,965
------------- -------------
Total issued 434,959 5,050,886
Shares redeemed (602,254) (6,955,693)
------------- -------------
Net decrease (167,295) $ (1,904,807)
============= =============
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 356,036 $ 3,948,528
Shares issued to share-
holders in reinvestment
of dividends 110,995 1,224,562
------------- -------------
Total issued 467,031 5,173,090
Shares redeemed (1,889,907) (20,801,528)
------------- -------------
Net decrease (1,422,876) $ (15,628,438)
============= =============
<PAGE>
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 3,684,831 $ 42,602,905
Shares issued to share-
holders in reinvestment
of dividends 1,050,882 12,150,317
------------- -------------
Total issued 4,735,713 54,753,222
Shares redeemed (7,544,434) (87,132,865)
Automatic conversion
of shares (9,424,309) (109,009,248)
------------- -------------
Net decrease (12,233,030) $(141,388,891)
============= =============
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 4,055,625 $ 44,759,130
Shares issued to share-
holders in reinvestment
of dividends 1,364,078 15,067,056
------------- -------------
Total issued 5,419,703 59,826,186
Shares redeemed (15,559,912) (170,703,755)
Automatic conversion
of shares (22,131) (248,360)
------------- -------------
Net decrease (10,162,340) $(111,125,929)
============= =============
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 544,866 $ 6,303,679
Shares issued to share-
holders in reinvestment
of dividends 12,095 139,565
------------- -------------
Total issued 556,961 6,443,244
Shares redeemed (125,720) (1,452,025)
------------- -------------
Net increase 431,241 $ 4,991,219
============= =============
<PAGE>
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 343,686 $ 3,830,307
Shares issued to share-
holders in reinvestment
of dividends 3,078 34,747
------------- -------------
Total issued 346,764 3,865,054
Shares redeemed (72,055) (813,364)
------------- -------------
Net increase 274,709 $ 3,051,690
============= =============
[FN]
++Commencement of Operations.
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 623,197 $ 7,211,474
Automatic conversion
of shares 9,424,309 109,009,248
Shares issued to share-
holders in reinvestment
of dividends 142,594 1,645,562
------------- -------------
Total issued 10,190,100 117,866,284
Shares redeemed (797,598) (9,216,326)
------------- -------------
Net increase 9,392,502 $ 108,649,958
============= =============
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 383,812 $ 4,170,592
Automatic conversion
of shares 22,131 248,360
Shares issued to share-
holders in reinvestment
of dividends 7,710 86,300
------------- -------------
Total issued 413,653 4,505,252
Shares redeemed (76,184) (848,924)
------------- -------------
Net increase 337,469 $ 3,656,328
============= =============
[FN]
++Commencement of Operations.
<PAGE>
5. Capital Loss Carryforward:
At August 31, 1996, the Fund had a net capital loss carryforward of
approximately $16,951,000, of which $9,806,000 expires in 2003 and
$7,145,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch California Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
California Municipal Bond Fund of Merrill Lynch California Municipal
Series Trust as of August 31, 1996, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1996 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch California Municipal Bond Fund of Merrill Lynch
California Municipal Series Trust as of August 31, 1996, the results
of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
<PAGE>
Deloitte & Touche LLP
Princeton, New Jersey
October 1, 1996
</AUDIT-REPORT>
