MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Robert E. Putney, III, Secretary
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 #10329 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch California Municipal Bond Fund August 31, 1997
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended August 31, 1997, a number of very
favorable factors combined to push both tax-exempt and taxable bond
yields lower. A slowing domestic economy, a continued benign, if not
improving, inflationary environment, a declining Federal budget
deficit with resultant reduced Treasury borrowing needs, and a
successful Congressional budget accord all resulted in significant
declines in fixed-income yields. By the end of July, 30-year US
Treasury bond yields had declined approximately 50 basis points
(0.50%) to 6.30%, their lowest level in over a year. Similarly, as
measured by the Bond Buyer Revenue Bond Index, long-term municipal
revenue bond yields fell over 50 basis points to 5.49%, their lowest
level since early 1994.
However, during August the fixed-income markets retraced a part of
their earlier gains. Investors and traders developed new fears that
domestic economic growth would reaccelerate during the remainder of
the calendar year and cause the Federal Reserve Board to raise
interest rates prior to 1998. During August, long-term US Treasury
bond yields increased by approximately 30 basis points to end the
period at 6.61%. Long-term, tax-exempt revenue bond yields rose by
approximately 20 basis points to end the August 31, 1997 period at
5.60%. Over the last six months, the overall positive combination of
moderate economic growth and minimal inflation fostered a decline in
long-term US Treasury bond yields of approximately 20 basis points,
while long-term municipal bond yields fell approximately 25 basis
points.
The decline in tax-exempt yields in recent months was even more
impressive given that the municipal market lost much of the technical
support it enjoyed for over a year. In previous quarters, new tax-
exempt bond issuance declined, or remained stable. During the six
months ended August 31, 1997, approximately $100 billion in new long-
term municipal securities was underwritten, an increase of over 12%
versus the comparable period in 1996. As tax-exempt bond yields
declined, many municipal bond issuers took this opportunity to both
issue new debt as well as refinance older, higher-couponed debt with
new, lower-yielding issues. This refinancing led to a surge in tax-
exempt issuance in recent months. Over the three months ended August
31, 1997, new long-term, tax-exempt bond issuance totaled
approximately $55 billion, an increase of over 25% versus the August
31, 1996 quarter.
The decline in municipal bond yields also resulted in some reduction
in retail investor demand. In earlier episodes of rapidly declining
interest rates, individual investor demand initially fell until
investors became more acclimated to the lower interest rate levels.
Should interest rates stabilize, we expect investor demand to increase
once again. Also, this past June and July, municipal bond investors
received over $50 billion in assets from coupon income payments, bond
maturities, and the proceeds from early bond redemptions. Despite the
continued attraction of the US equity market, much of these assets
should be reallocated to the municipal bond market as investors adjust
to the new investment environment.
Looking ahead, given the extent of the recent bond market rally, some
retrenchment or at least a period of consolidation is likely. However,
the positive backdrop of modest economic growth and low inflation
suggests that any such adjustment is not likely to be excessive.
Despite recent increases in new bond issuance, supply for all of 1997
is not expected to be materially different than earlier estimates of
approximately $175 billion. It is likely that the recent increase in
issuance is largely borrowed from financings that originally were
scheduled for later this year. Additionally, any significant increase
in tax-exempt bond yields will preclude further bond refinancings,
reducing future supply. Unless the current positive economic
fundamentals undergo immediate and meaningful deterioration, we are
likely to view any increase in municipal bond yields as an opportunity
to purchase more attractively priced tax-exempt securities.
Fiscal Year in Review
As 1997 began, Treasury bond yields rose in excess of 7% as an
improving economy caused inflationary concerns to mount. We identified
this level as the lower price end of the trading range, and began
buying long-term municipal bonds.
One interesting note during the fiscal year was that municipal bonds
outperformed Treasury issues. This was most likely caused by a
decreased amount of issuance in a year where many municipal bonds were
redeemed, or called from the marketplace.
A rally into the six months ended August 31, 1997 brought municipal
interest rates back down to levels where they historically lose retail
support. In our experience, professional traders and arbitrageurs
normally account for most trading activity at these prices. When this
occurred, we reduced the Fund's exposure to the long-term end of the
market, protecting net asset valuation. We presently expect to
maintain this position until the Federal Reserve Board completes its
tightening phase and a more sustained drop in yields can be forecast.
During the fiscal year, our strategy benefited the Fund's total
returns, enabling Class A Shares to closely match the California
municipal bond fund industry average of 8.90%. (Results shown do not
reflect sales charges and would be lower if sales charges were
included. Complete performance information, including average annual
total returns, can be found on pages 3 -- 6 of this report to
shareholders.)
Portfolio Strategy
During the past several months, the municipal market was characterized
by enormous volatility within an abnormally tight trading range. Lack
of significant primary supply, combined with an equally disinterested
demand side at low interest rates created a stagnant marketplace where
a low volume of activity fostered inefficient price movements. During
the six months ended August 31, 1997, our portfolio strategy was aimed
at identifying and capturing the relevant municipal bond trading range
that corresponds to Treasury bond yields ranging from 7% to 6.50%.
When Treasury yields are at these levels, municipal bonds tend to have
a corresponding range of 5.50% -- 5.90%. We presently aim to buy
municipal bonds when yields approach the 5.90% level and sell when
they reach the latter level. During the August period, this formula
worked well on several occasions. We remain focused on achieving as
high a level of income as possible. To this end, we seek to invest in
higher-yielding California bonds that comply with the Fund's credit
constraints. We are currently neutral on the prospects for the fixed-
income market, with a bias toward becoming more aggressively postured
as interest rates move higher in anticipation of another possible
Federal Funds rate increase this fall. Should this event provide us
with a buying opportunity, we would expect to reenter the California
bond market by extending the Fund's duration, since the municipal bond
market's prospects appear very favorable for 1998.
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,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/WALTER C. O'CONNOR
Walter C. O'Connor
Vice President and Portfolio Manager
October 3, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] Class A Shares incur a maximum initial sales charge (front-
end load) of 4% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1%
each year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to Class
D Shares after approximately 10 years. (There is no initial sales
charge for automatic share conversions.)
[bullet] Class C Shares are subject to a distribution fee of
0.35% and an account maintenance fee of 0.25%. In addition, Class C
Shares are subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of 4% and
an account maintenance fee of 0.10% (but no distribution fee.
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of all
dividends and capital gains distributions at net asset value on the
payable date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Dividends paid to each class of shares will
vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which
are deducted from the income available to be paid to shareholders.
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $11.81 $11.61 $11.49 +2.79% +1.72%
Class B Shares* 11.82 11.62 11.49 +2.87 +1.72
Class C Shares* 11.82 11.62 11.49 +2.87 +1.72
Class D Shares* 11.82 11.62 11.49 +2.87 +1.72
Class A Shares -- Total Return* +8.55(1) +3.11(2)
Class B Shares -- Total Return* +8.09(3) +2.98(4)
Class C Shares -- Total Return* +7.98(5) +2.95(6)
Class D Shares -- Total Return* +8.53(7) +3.08(8)
Class A Shares -- Standardized 30-day Yield 4.26%
Class B Shares -- Standardized 30-day Yield 3.93%
Class C Shares -- Standardized 30-day Yield 3.82%
Class D Shares -- Standardized 30-day Yield 4.16%
* 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 $0.638 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.158 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.579 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.143 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.567 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.140 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.626 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.155 per share ordinary income dividends.
</TABLE>
[GRAPHIC OMITTED: line chart Total Return Based on a $10,000 Investment]
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A, Class B, Class C and Class D Shares compared to growth of an
investment in the Lehman Brothers Municipal Bond Index. Beginning and
ending values are:
10/25/88** 8/97
ML California Municipal Bond
Fund+ -- Class A Shares* $9,600 $18,426
Lehman Brothers Municipal Bond Index++ $10,000 $19,921
8/87 8/97
ML California Municipal Bond
Fund+ -- Class B Shares* $10,000 $19,924
Lehman Brothers Municipal Bond Index++ $10,000 $22,059
10/21/94** 8/97
ML California Municipal Bond
Fund+ -- Class C Shares* $10,000 $12,453
ML California Municipal Bond
Fund+ -- Class D Shares* $9,600 $12,130
Lehman Brothers Municipal Bond Index++ $10,000 $12,932
* 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, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers.
++ This unmanaged Index consists of long-term revenue bonds,
prerefunded bonds, general obligation bonds and insured bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +8.15% +3.82%
Five Years Ended 6/30/97 +6.71 +5.84
Inception (10/25/88)
through 6/30/97 +7.57 +7.07
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +7.60% +3.60%
Five Years Ended 6/30/97 +6.18 +6.18
Ten Years Ended 6/30/97 +7.06 +7.06
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 +7.49% +6.49%
Inception (10/21/94)
through 6/30/97 +7.79 +7.79
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/97 +8.04% +3.72%
Inception (10/21/94)
through 6/30/97 +8.34 +6.71
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
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
1996 11.83 11.69 -- 0.637 + 4.39
1/1/97-- 8/31/97 11.69 11.81 -- 0.416 + 4.79
Total $0.314 Total $6.381
Cumulative total return as of 8/31/97: + 91.93%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
9/30/85 -- 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
1996 11.83 11.69 -- 0.578 + 3.87
1/1/97-- 8/31/97 11.69 11.82 -- 0.377 + 4.53
Total $0.360 Total $8.121
Cumulative total return as of 8/31/97: +149.18%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $10.94 $10.63 -- $0.116 - 1.76%
1995 10.63 11.83 -- 0.566 +16.95
1996 11.83 11.69 -- 0.566 + 3.76
1/1/97 -- 8/31/97 11.69 11.82 -- 0.370 + 4.46
Total $1.618
Cumulative total return as of 8/31/97: +24.53%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $10.94 $10.63 -- $0.127 - 1.65%
1995 10.63 11.83 -- 0.623 +17.53
1996 11.83 11.69 -- 0.625 + 4.29
1/1/97 -- 8/31/97 11.69 11.82 -- 0.408 + 4.81
Total $1.783
Cumulative total return as of 8/31/97: +26.35%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
*** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch California Municipal Bond Fund August 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California -- 100.6%
<S> <C> <C> <C> <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 $4,034
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Bonds,
RITES, 9.12% due 12/28/2018 (c)(j) 3,536
Antioch, California, Improvement Bonds (1915 Assessment District No. 27 -- Lone Tree):
NR* NR* 655 Series D, 6.40% due 9/02/2003 681
NR* NR* 4,955 Series D, 7.30% due 9/02/2013 5,142
NR* NR* 3,995 Series E, 7.125% due 9/02/2016 4,139
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) 3,438
AAA Aaa 2,025 Brentwood, California, GO, Unified School District, 6.85% due 2/01/1999 (a)(d) 2,149
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,620 AMT, Series A, 7.70% due 8/01/2030 3,802
AA- Aa 445 AMT, Series B, 8% due 8/01/2029 465
AA- Aa 10,115 AMT, Series F-1, 7% due 8/01/2026 10,819
AA- Aa 655 AMT, Series G, 8.15% due 8/01/2019 677
AA- Aa 2,035 Series A, 8.125% due 8/01/2019 2,113
AA- Aa 1,720 Series D, 7.25% due 8/01/2017 1,814
California HFA, Revenue Bonds, AMT:
AA- Aa 4,050 RIB, 8.945% due 8/01/2023 (j) 4,430
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,037
California Health Facilities Financing Authority Revenue Bonds, Series A:
AAA Aaa 4,350 (Kaiser Permanente), 7% due 10/01/2018 (c)(k) 4,652
BB Aaa 5,150 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (a) 5,681
AAA Aaa 4,000 Refunding (Sutter Health), 5.25% due 8/15/2027 (f) 3,843
NR* A 5,780 (Scripps Research Institute), 6.625% due 7/01/2014 6,323
NR* NR* 5,000 California Pollution Control Financing Authority, PCR, Refunding (Laidlaw
Environmental), AMT, Series A, 6.70% due 7/01/2007 5,092
California Pollution Control Financing Authority, Resource Recovery Revenue
Bonds, VRDN, AMT (b):
A1 VMIG1+ 3,000 (Atlantic Richfield Company Project), Series A, 3.55% due 12/01/2024 3,000
NR* Aa1 1,500 (Delano Project), 3.55% due 8/01/2019 1,500
NR* P1 1,400 Refunding (Ultra Power Rocklin Project), Series A, 3.55% due 6/01/2017 1,400
NR* P1 1,000 Refunding (Ultra Power Rocklin Project), Series B, 3.55% due 6/01/2017 1,000
A1+ VMIG1+ 2,200 California Pollution Control Financing Authority, Solid Waste Disposal Revenue
Bonds (Shell Oil Co. -- Martinez Project), VRDN, AMT, Series A, 3.45% due 10/01/2024 (b) 2,200
AA Aa2 10,000 California State Department of Water Resources, Water System Revenue Bonds
(Central Valley Project), Series O, 5% due 12/01/2022 9,425
A+ A1 5,000 California State, GO, Refunding, 6.75% due 6/01/2006 5,767
California State Public Works Board, Lease Revenue Bonds:
A Aaa 10,675 (Department of Corrections -- Monterey County Soledad II), Series A,
7% due 11/01/2004 (a) 12,515
A A 3,555 High Technology Facilities (San Jose Facilities), Series A, 7.75% due 8/01/2006 4,078
A Aaa 7,000 (Various Community College Projects), Series B, 7% due 3/01/2004 (a) 8,160
California State, Veterans' Bonds, AMT, UT:
A+ A1 16,300 Series AW, 7.70% due 4/01/2009 16,946
AAA Aaa 7,500 Series BD, BE and BF, 6.375% due 2/01/2027 (d) 7,711
AA Aa 4,750 California Statewide Communities Development Authority Revenue Bonds
(Saint Joseph Health System Group), COP, 6.625% due 7/01/2021 5,231
NR* Aa2 5,500 California Statewide Communities Development Authority, Solid Waste Facilities
Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 3.50% due 12/15/2024 (b) 5,500
Central Coast, California, Water Authority Revenue Bonds (State Water Project
Regional Facilities) (d):
AAA Aaa 5,000 6.60% due 10/01/2002 (a) 5,616
AAA Aaa 3,000 Refunding, Series A, 5% due 10/01/2022 2,824
AAA Aaa 6,420 Series A, 5% due 10/01/2016 6,146
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,088
Corona, California, COP (Corona Community):
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,430
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,636
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,863
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,106
AAA Aaa 2,605 8% due 3/01/2013 (a) 3,368
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,649
AAA Aaa 3,035 8% due 3/01/2015 (i) 3,958
AAA Aaa 5,000 East Bay, California, Municipal Utility District, Water System Subordinated,
Revenue Refunding Bonds, 5% due 6/01/2026 (e) 4,675
AAA Aaa 5,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (d) 5,461
AAA Aaa 5,000 El Dorado County, California, Public Agency Financing Authority, Revenue
Refunding Bonds, 5.50% due 2/15/2021 (e) 4,980
AAA Aaa 2,230 Irvine, California, Unified School District, Special Tax Community Facilities Bonds
(District No. 86-1), Series A, 8.10% due 11/15/1998 (a)(c) 2,383
Long Beach, California, Improvement Bonds (1915 Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 485
NR* NR* 495 7.05% due 9/02/2002 516
NR* NR* 530 7.10% due 9/02/2003 553
NR* NR* 570 7.15% due 9/02/2004 590
NR* NR* 610 7.20% due 9/02/2005 632
NR* NR* 655 7.25% due 9/02/2006 678
NR* NR* 4,065 7.50% due 9/02/2011 4,234
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 (l) 3,702
NR* NR* 4,545 Long Beach, California, Special Tax Community Facilities Bonds (District No. 3 -- Pine
Avenue), 6.375% due 9/01/2023 4,653
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) 5,694
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (a) 22,276
AAA Aaa 10,000 Los Angeles, California, Convention and Exhibition Center Authority, Lease
Revenue Refunding Bonds, Series A, 5.125% due 8/15/2021 (c) 9,478
A+ Aa3 20,000 Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds, 6.375% due 2/01/2020 21,383
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power, Waterworks Revenue
Bonds, 6.30% due 7/01/2024 (c) 5,398
Los Angeles, California, Harbor Department Revenue Bonds:
AAA NR* 10,000 7.60% due 10/01/2018 (i) 12,472
AAA Aaa 5,000 AMT, RITR, Series 7, 8.795% due 11/01/2026 (c)(j) 5,938
Los Angeles, California, Wastewater System Revenue Bonds, Series D (c):
AAA Aaa 8,000 6.70% due 12/01/2000 (a) 8,773
AAA Aaa 7,890 6.625% due 12/01/2012 8,543
Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax
Revenue Bonds:
AAA Aaa 18,000 (Proposition C), Second Series A, 5% due 7/01/2025 (d) 16,772
AAA Aaa 10,000 Refunding (Proposition A), Series A, 5% due 7/01/2021 (e) 9,352
AAA Aaa 6,250 Marysville, California, Hospital Revenue Bonds (Fremont -- Rideout Health Group),
Series A, 6.30% due 1/01/2022 (d) 6,680
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA Aa 11,650 RIB, 7.682% due 8/05/2022 (j) 12,451
AA Aa 5,500 Series C, 5% due 7/01/2027 5,144
AAA Aaa 5,635 Ontario, California, Redevelopment Financing Authority Revenue Bonds
(Cimarron Project No. 1 -- Center City), 6.375% due 8/01/2020 (c) 6,090
A NR* 2,500 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged
Redevelopment Project), Series A, 6.60% due 9/01/2034 2,816
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue
Bonds, 9.60% due 6/01/2016 (i) 16,634
NR* NR* 8,315 Pleasanton, California, Joint Powers Financing Authority, Revenue Reassessment
Bonds, Sub-Series B, 6.75% due 9/02/2017 8,839
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds, RITES,
8.974% 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) 1,628
A- NR* 2,500 Series B, 7.25% due 7/15/2001 (a) 2,816
BBB NR* 2,430 Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project No. 4), Series A, 7.50% due 10/01/2026 2,645
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) 3,220
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
AAA Aaa 7,000 INFLOS, 8.868% due 8/15/2018 (e)(j) 8,076
AAA Aaa 5,000 Series B, 6.375% due 8/15/2002 (a)(c) 5,554
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 2,245 San Diego, California, Public Facilities Financing Authority, Sewer Revenue Bonds,
5% due 5/15/2020 (e) 2,106
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa 3,240 AMT, Issue 6, 6.50% due 5/01/2018 (d) 3,513
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 (d) 8,719
AAA Aaa 2,000 AMT, Issue 10A, 5.70% due 5/01/2026 (c) 2,016
A+ A1 6,000 AMT, Issue 12A, 5.80% due 5/01/2021 6,066
AAA Aaa 8,500 Refunding, Issue 1, 6.30% due 5/01/2011 (d) 9,186
San Francisco, California, City and County, Public Utilities Commission, Water
Revenue Refunding Bonds, Series A:
AA- Aa 8,870 5% due 11/01/2021 8,394
AA- Aa 6,990 5% due 11/01/2026 6,581
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 1,346
AAA Aaa 5,000 San Francisco, California, State Building Authority, Lease Revenue Bonds (San
Francisco Civic Center Complex), Series A, 5.25% due 12/01/2021 (d) 4,833
AAA Aaa 4,150 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due 7/01/2021 (c) 4,502
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) 11,285
AA A1 1,000 Santa Clara County, California, Transportation District, Sales Tax Revenue Bonds,
Series A, 6.75% due 6/01/2011 1,090
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) 2,178
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional
Wastewater Project), 5% due 9/01/2022 (e) 9,390
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT (h):
AAA NR* 3,425 (Mortgage-Backed Security), Series A, 7.625% due 10/01/2023 3,612
AAA NR* 2,450 (Mortgage-Backed Security), Series A, 7.35% due 9/01/2024 (g) 2,591
AAA NR* 1,025 Series B, 7.75% due 3/01/2024 (g) 1,085
BBB+ NR* 19,300 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 20,698
AAA Aaa 6,500 Stockton, California, Revenue Bonds (Wastewater Treatment Plant Expansion),
COP, Series A, 6.80% due 9/01/2024 (e) 7,268
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital),
7.50% due 2/01/2002 (a)(c) 4,584
University of California Revenue Bonds (Multiple Purpose Projects):
A- NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002 (a) 16,633
AAA Aaa 8,000 Series D, 6.25% due 9/01/2012 (c) 8,659
AAA Aaa 11,845 Series D, 6.375% due 9/01/2024 (c) 12,886
AAA Aaa 2,940 University of California Revenue Bonds, RITR, Series 13, 9.17% due 9/01/2019 (c)(j) 3,429
A A2 6,000 West Covina, California, COP (Queen of the Valley Hospital), 6.95% due 8/15/2023 6,720
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Bonds
(West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,447
Puerto Rico -- 0.9%
A Baa1 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 5,481
Total Investments (Cost -- $580,294) -- 101.5% 626,373
Variation Margin on Financial Futures Contracts** -- 0.0% (45)
Liabilities in Excess of Other Assets -- (1.5%) (9,454)
---------
Net Assets -- 100.0% $616,874
=========
(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, 1997.
(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, 1997.
(k) All or portion of security held as collateral in connection with open financial futures contracts.
(l) Non-income producing security.
* Not Rated.
** Financial futures contracts purchased as of August 31, 1997
were as follows: (in Thousands)
Value
Number of Expiration (Notes
Contracts Issue Date 1a & 1b)
100 Municipal Bond Index December 1997 $11,781
Total Financial Futures Contracts Purchased
(Total Contract Price -- $11,826) $11,781
========
+ 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.
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.
PORTFOLIO ABBREVIATIONS
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
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $580,294,043) (Note 1a) $626,372,705
Cash 82,178
Receivables:
Interest $10,463,792
Securities sold 9,247,508
Beneficial interest sold 422,185 20,133,485
-----------
Prepaid registration fees and other assets (Note 1e) 114,190
------------
Total assets 646,702,558
------------
Liabilities: Payables:
Securities purchased 27,657,449
Beneficial interest redeemed 899,044
Dividends to shareholders (Note 1f) 590,865
Investment adviser (Note 2) 296,202
Distributor (Note 2) 188,018
Variation margin (Note 1b) 45,094 29,676,672
-----------
Accrued expenses and other liabilities 151,514
------------
Total liabilities 29,828,186
------------
Net Assets: Net assets $616,874,372
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $377,984
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 3,181,980
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 92,284
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 1,568,230
Paid-in capital in excess of par 577,532,952
Accumulated realized capital losses on investments -- net (Note 5) (11,912,626)
Unrealized appreciation on investments -- net 46,033,568
------------
Net assets $616,874,372
============
Net Asset Value: Class A -- Based on net assets of $44,652,364 and 3,779,839 shares of
beneficial interest outstanding $11.81
============
Class B -- Based on net assets of $376,018,231 and 31,819,804 shares of
beneficial interest outstanding $11.82
============
Class C -- Based on net assets of $10,903,527 and 922,838 shares of
beneficial interest outstanding $11.82
============
Class D -- Based on net assets of $185,300,250 and 15,682,302 shares of
beneficial interest outstanding $11.82
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended August 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $38,438,745
(Note 1d):
Expenses: Investment advisory fees (Note 2) $3,422,246
Account maintenance and distribution fees -- Class B (Note 2) 2,104,015
Transfer agent fees -- Class B (Note 2) 159,145
Account maintenance fees -- Class D (Note 2) 155,124
Registration fees (Note 1e) 90,645
Professional fees 69,545
Accounting services (Note 2) 64,769
Custodian fees 62,832
Account maintenance and distribution fees -- Class C (Note 2) 54,528
Transfer agent fees -- Class D (Note 2) 47,820
Trustees' fees and expenses 39,267
Printing and shareholder reports 25,413
Transfer agent fees -- Class A (Note 2) 13,348
Transfer agent fees -- Class C (Note 2) 3,680
Pricing fees 3,663
-----------
Total expenses 6,316,040
------------
Investment income -- net 32,122,705
------------
Realized & Realized gain on investments -- net 7,326,062
Unrealized Gain on Change in unrealized appreciation on investments -- net 10,038,184
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $49,486,951
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $32,122,705 $33,842,706
Realized gain on investments -- net 7,326,062 4,306,220
Change in unrealized appreciation on investments -- net 10,038,184 1,206,892
------------ ------------
Net increase in net assets resulting from operations 49,486,951 39,355,818
------------ ------------
Dividends to Investment income -- net:
Shareholders Class A (2,365,153) (2,457,264)
(Note 1f): Class B (20,956,944) (27,350,656)
Class C (442,724) (287,834)
Class D (8,357,884) (3,746,952)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (32,122,705) (33,842,706)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (43,754,648) (29,652,521)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (26,390,402) (24,139,409)
Beginning of year 643,264,774 667,404,183
------------ ------------
End of year $616,874,372 $643,264,774
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $11.49 $11.40 $11.32 $12.38 $11.80
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net .64 .64 .64 .68 .70
Realized and unrealized gain (loss) on
Investments -- net .32 .09 .08 (.78) .78
-------- -------- -------- -------- --------
Total from investment operations .96 .73 .72 (.10) 1.48
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net (.64) (.64) (.64) (.68) (.70)
Realized gain on investments -- net -- -- -- (.19) (.20)
In excess of realized gain on
investments -- net -- -- -- (.09) --
-------- -------- -------- -------- --------
Total dividends and distributions (.64) (.64) (.64) (.96) (.90)
-------- -------- -------- -------- --------
Net asset value, end of year $11.81 $11.49 $11.40 $11.32 $12.38
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 8.55% 6.53% 6.75% (.92%) 13.19%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .63% .65% .65% .62% .63%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net 5.49% 5.51% 5.83% 5.65% 5.87%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $44,652 $42,668 $44,228 $60,017 $64,526
Data: ======== ======== ======== ======== ========
Portfolio turnover 73.60% 53.79% 53.40% 75.66% 61.24%
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $11.49 $11.40 $11.32 $12.38 $11.80
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net .58 .58 .59 .61 .64
Realized and unrealized gain (loss) on
Investments -- net .33 .09 .08 (.78) .78
-------- -------- -------- -------- --------
Total from investment operations .91 .67 .67 (.17) 1.42
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net (.58) (.58) (.59) (.61) (.64)
Realized gain on investments -- net -- -- -- (.19) (.20)
In excess of realized gain on
investments -- net -- -- -- (.09) --
-------- -------- -------- -------- --------
Total dividends and distributions (.58) (.58) (.59) (.89) (.84)
-------- -------- -------- -------- --------
Net asset value, end of year $11.82 $11.49 $11.40 $11.32 $12.38
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 8.09% 5.99% 6.25% (1.50%) 12.62%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.14% 1.16% 1.16% 1.13% 1.13%
Net Assets: ======== ======== ======== ======== ========
Investment income -- net 4.98% 5.01% 5.32% 5.15% 5.38%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $376,018 $480,668 $616,199 $726,888 $821,220
Data: ======== ======== ======== ======== ========
Portfolio turnover 73.60% 53.79% 53.40% 75.66% 61.24%
======== ======== ======== ======== ========
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
Period Period
Oct. 21, Oct. 21,
The following per share data and ratios have been derived For the Year Ended 1994+ to For the Year Ended 1994+ to
from information provided in the financial statements. August 31, Aug. 31, August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.49 $11.40 $10.94 $11.49 $11.40 $10.94
Operating ------- ------- ------- -------- -------- -------
Performance: Investment income -- net .57 .57 .49 .63 .63 .54
Realized and unrealized gain on
investments -- net .33 .09 .46 .33 .09 .46
------- ------- ------- -------- -------- -------
Total from investment operations .90 .66 .95 .96 .72 1.00
------- ------- ------- -------- -------- -------
Less dividends from investment
income -- net (.57) (.57) (.49) (.63) (.63) (.54)
------- ------- ------- -------- -------- -------
Net asset value, end of period $11.82 $11.49 $11.40 $11.82 $11.49 $11.40
======= ======= ======= ======== ======== =======
Total Investment Based on net asset value per share 7.98% 5.88% 8.91%++++ 8.53% 6.43% 9.39%++++
Return:** ======= ======= ======= ======== ======== =======
Ratios to Average Expenses 1.24% 1.26% 1.27%* .73% .75% .76%*
Net Assets: ======= ======= ======= ======== ======== =======
Investment income -- net 4.87% 4.91% 5.04%* 5.39% 5.42% 5.59%*
======= ======= ======= ======== ======== =======
Supplemental Net assets, end of period
Data: (in thousands) $10,904 $8,112 $3,131 $185,300 $111,817 $3,846
======= ======= ======= ======== ======== =======
Portfolio turnover 73.60% 53.79% 53.40% 73.60% 53.79% 53.40%
======= ======= ======= ======== ======== =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch California Municipal Bond Fund August 31, 1997
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 PricingSM
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.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing 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.
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.
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 Incorporated ("MLPF&S"), a subsidiary of ML &
Co., also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C shareholders.
For the year ended August 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A $1,003 $10,677
Class D $4,949 $45,618
For the year ended August 31, 1997, MLPF&S received contingent
deferred sales charges of $367,638 and $5,077 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1997 were $446,440,270 and $466,703,274,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $9,399,671 $46,078,662
Short-term investments (3,046) --
Financial futures contracts (2,070,563) (45,094)
---------- -----------
Total $7,326,062 $46,033,568
========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $45,973,320, of which $48,037,058 related to
appreciated securities and $2,063,738 related to depreciated
securities. The aggregate cost of investments at August 31, 1997 for
Federal income tax purposes was $580,399,385.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $43,754,648 and $29,652,521 for the years ended
August 31, 1997 and August 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 784,082 $9,128,183
Shares issued to shareholders
in reinvestment of dividends 90,013 1,049,006
---------- -------------
Total issued 874,095 10,177,189
Shares redeemed (807,960) (9,396,731)
---------- -------------
Net increase 66,135 $780,458
=========== =============
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 343,484 $3,993,921
Shares issued to shareholders
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 B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 3,032,901 $35,356,868
Shares issued to shareholders
in reinvestment of dividends 801,637 9,343,192
---------- -------------
Total issued 3,834,538 44,700,060
Automatic conversion
of shares (6,809,790) (79,213,998)
Shares redeemed (7,027,468) (81,817,493)
---------- -------------
Net decrease (10,002,720) $(116,331,431)
=========== =============
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 3,684,831 $42,602,905
Shares issued to shareholders
in reinvestment of dividends 1,050,882 12,150,317
---------- -------------
Total issued 4,735,713 54,753,222
Automatic conversion
of shares (9,424,309) (109,009,248)
Shares redeemed (7,544,434) (87,132,865)
---------- -------------
Net decrease (12,233,030) $(141,388,891)
=========== =============
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 528,637 $6,169,836
Shares issued to shareholders
in reinvestment of dividends 21,632 252,331
---------- -------------
Total issued 550,269 6,422,167
Shares redeemed (333,381) (3,882,185)
---------- -------------
Net increase 216,888 $2,539,982
=========== =============
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 544,866 $6,303,679
Shares issued to shareholders
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
=========== =============
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 788,405 $9,195,140
Automatic conversion of shares 6,809,790 79,213,998
Shares issued to shareholders
in reinvestment of dividends 310,139 3,617,224
---------- -------------
Total issued 7,908,334 92,026,362
Shares redeemed (1,956,003) (22,770,019)
---------- -------------
Net increase 5,952,331 $69,256,343
=========== =============
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 shareholders
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
=========== =============
5. Capital Loss Carryforward:
At August 31, 1997, the Fund had a net capital loss carryforward of
approximately $9,723,000, of which $2,578,000 expires in 2003 and
$7,145,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
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, 1997, the related statements of operations for the
year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of
the years in the 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, 1997 by
correspondence with the custodian and brokers. 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, 1997, the results
of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 8, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions
paid monthly by Merrill Lynch California Municipal Bond Fund during
its taxable year ended August 31, 1997 qualify as tax-exempt interest
dividends for Federal income tax purposes.
Additionally, there were no capital gains distributions made by the
Fund during the year.
Please retain this information for your records.
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