Merrill Lynch
California
Municipal
Bond Fund
[FUND LOGO]
STRATEGIC
Performance
Semi-Annual Report
February 28, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless accompanied
or preceded by the Fund's current prospectus. Past performance results
shown in this report should not be considered a representation of
future performance. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Statements and other information herein
are as dated and are subject to change.
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011 10329 -- 2/98
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch California Municipal Bond Fund February 28, 1998
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended February 28, 1998, bond yields declined to
recent historic lows. Prior to late October, the ongoing positive
combination of moderate economic growth and low inflation had allowed
interest rates to gradually move lower. More recently, however, the
decline in interest rates was driven more by the continued turmoil in
Asian equity markets than by fundamental concerns. A significant
"flight to quality" has benefited the US Treasury bond market,
particularly longer-maturity US Treasury bonds, as foreign investors
have sought safe haven in the relative stability of US financial
markets. Over the six months ended February 28, 1998, US Treasury bond
yields declined approximately 70 basis points (0.70%) to 5.92%. Long-
term municipal revenue bonds, as measured by the Bond Buyer Revenue
Bond Index, declined over 30 basis points to end the February period
at 5.36%. Tax-exempt bond yields have not been at these levels since
the mid-1970s.
Without the ability to benefit from the tax advantage inherent in
municipal bonds, foreign investors have not participated to any
significant extent in the tax-exempt market. Consequently, municipal
bond yields have not declined dramatically as have taxable US Treasury
securities. The increase in new municipal bond issuance over the past
six months has also prevented the tax-exempt bond market from more
closely mirroring the yield declines exhibited by its taxable
counterpart. Over the last six months, over $125 billion in new long-
term municipal bonds were underwritten, an increase of over 35%
compared to the same six-month period one year ago. As interest rates
have continued to decline in recent months, new tax-exempt bond
issuance has remained strong. Over $60 billion in new long-term
municipal securities were issued during the last three months, an
increase of over 40% compared to the same three-month period ended
February 28, 1997. During the past month, over $20 billion in new
long-term municipal securities were underwritten, representing an
increase of over 50% compared to the February 1997 level and the
largest February issuance ever.
In our opinion, the recent correction in world equity markets has
enhanced the near-term prospects for continued low, if not declining,
interest rates in the United States. It is likely that the recent
correction will result in slower US domestic growth in the coming
months. This decline should be generated in part by reduced US export
growth. Going forward, Asian consumer demand for US products is likely
to decline in response to diminished Asian economic growth. Perhaps
more importantly, it is likely that, barring a dramatic and unexpected
resurgence in domestic growth and inflation, the Federal Reserve Board
will be unwilling to raise interest rates until the full impact of the
recent Asian market turmoil can be established.
All of these factors suggest that over the near term, interest rates,
including tax-exempt bond yields, are unlikely to rise by any
appreciable amount. It is probable that municipal bond yields will
remain under some relative pressure because of continued strong new-
issue supply. However, the recent pace of municipal bond issuance is
likely to be unsustainable. Continued increases in bond issuance will
require lower and lower tax-exempt bond yields to generate the
economic savings necessary for additional municipal bond refinancings.
Preliminary estimates of 1998 total municipal bond issuance are
presently in the $200 billion -- $225 billion range. These estimates
suggest that recent supply pressures are likely to abate somewhat next
year, or at least exert only minimal technical pressure during 1998.
Additionally, municipal bond investors received approximately $30
billion in January and February coupon payments, bond maturities and
proceeds from early redemptions, which should serve to intensify
investor demand in the near future. With tax-exempt bond yields at
already attractive yield ratios relative to US Treasury bonds
(approximately 90% at the end of February 1998), any further pressure
on the municipal market may well represent an attractive investment
opportunity.
Portfolio Strategy
During the six months ended February 28, 1998, we slightly
restructured Merrill Lynch California Municipal Bond Fund's portfolio.
Throughout the period, the municipal bond market continued to be
characterized by severe volatility within a fairly tight trading
range. Although the Fund has consistently generated an attractive
yield, our investment strategy was not as aggressive as it could have
been to take advantage of the price appreciation of bonds in the
recent environment of declining interest rates. We have used recent
market volatility to adopt a more aggressive strategy, in line with a
slow growth, low inflation scenario that could lead to price gains for
fixed-income securities in the months ahead.
As the US Treasury market has traded back toward the 6% level, we
increased the Fund's investments in discount securities. These
purchases were financed through the sale of more market-neutral
holdings such as prerefunded holdings or shorter maturity bonds. This
strategy should allow the Fund to participate more fully in the
further decline in interest rates that we expect later in 1998. This
restructuring is designed to enhance the Fund's total return with
little or no impact on the Fund's yield. We remain committed to
seeking to provide as high a level of current income as possible while
looking to enhance net asset values. By February 28, 1998, the Fund
had a very high credit quality mix with approximately 80% of Fund
assets rated AA or higher by at least one of the major rating
agencies.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch California
Municipal Bond Fund, and we look forward to serving your investment
needs in the months and years to come.
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
March 31, 1998
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 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*
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 2/28/98
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares +8.88% +2.34% +100.88% 4.18%
ML California Municipal Bond Fund Class B Shares +8.34 +2.21 +159.93 3.84
ML California Municipal Bond Fund Class C Shares +8.23 +2.18 + 29.84 3.74
ML California Municipal Bond Fund Class D Shares +8.77 +2.31 + 32.07 4.08
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was
included. Total investment returns are based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset value on the payable date. The
Fund's inception dates are: Class A Shares, 10/25/88; Class B Shares, 9/30/85; and Class C and Class D Shares,
10/21/94.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/97 +8.66% +4.32%
Five Years Ended 12/31/97 +6.96 +6.09
Inception (10/25/88)
through 12/31/97 +7.78 +7.30
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/97 +8.21% +4.21%
Five Years Ended 12/31/97 +6.43 +6.43
Ten Years Ended 12/31/97 +7.48 +7.48
* 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*
Five Years Ended 12/31/97 +8.01% +7.01%
Inception (10/21/94)
through 12/31/97 +8.24 +8.24
* 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*
Five Years Ended 12/31/97 +8.56% +4.21%
Inception (10/21/94)
through 12/31/97 +8.79 +7.40
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Merrill Lynch California Municipal Bond Fund February 28, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
California -- 99.1%
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 $4,140
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation
Revenue Bonds, RITES, 9.02% due 12/28/2018 (c)(j) 3,791
Antioch, California, Improvement Bond Act (1915 Assessment
District No.27 - Lone Tree):
NR* NR* 4,955 Series D, 7.30% due 9/02/2013 5,154
NR* NR* 3,995 Series E, 7.125% due 9/02/2016 4,148
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
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,620 AMT, Series A, 7.70% due 8/01/2030 3,790
AA- Aa 445 AMT, Series B, 8% due 8/01/2029 463
AA- Aa 10,115 AMT, Series F-1, 7% due 8/01/2026 10,923
AA- Aa 655 AMT, Series G, 8.15% due 8/01/2019 672
AA- Aa2 1,965 Series A, 8.125% due 8/01/2019 2,022
AA- Aa 1,720 Series D, 7.25% due 8/01/2017 1,818
California HFA, Revenue Bonds, AMT:
AA- Aa 4,000 RIB, 9.162% due 8/01/2023 (j) 4,575
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,042
California Health Facilities Financing Authority Revenue Bonds:
Series A:
AAA Aaa 4,350 (Kaiser Permanente), Series A, 7% due 10/01/2018 (c) 4,623
AAA Aaa 12,285 RITR, Series 17, 5.375% due 8/15/2030 (c)(j) 12,915
AAA Aaa 13,030 Refunding (Sutter Health), Series C, 5% due 8/15/2017 (f) 12,823
NR* A 5,780 (Scripps Research Institute), Series A, 6.625% due 7/01/2014 6,416
NR* NR* 5,000 California Pollution Control Financing Authority, PCR, Refunding
(Laidlaw Environmental), AMT, Series A, 6.70% due 7/01/2007 5,255
California State Department of Water Resources, Water System
Revenue Bonds (Central Valley Project):
AA Aa2 8,780 Refunding, Series S, 5% due 12/01/2029 8,548
AAA Aaa 10,000 Series O, 4.75% due 12/01/2029 (c) 9,347
AAA Aaa 3,500 California State, GO, 5% due 10/01/2023 (e) 3,416
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) 12,595
A A 3,555 High Technology Facilities (San Jose Facilities), Series A,
7.75% due 8/01/2006 4,133
A Aaa 7,000 (Various Community College Projects), Series B, 7%
due 3/01/2004 (a) 8,177
A+ A1 4,875 California State, Refunding, UT, 5.625% due 9/01/2024 5,109
California State, Veterans' Bonds, AMT:
A+ A1 16,300 Series AW, UT, 7.70% due 4/01/2009 16,677
AAA Aaa 3,000 Series BH, 5.50% due 12/01/2024 (f) 3,037
AA Aa 4,750 California Statewide Communities Development Authority
Revenue Bonds (Saint Joseph Health System Group), COP, 6.625%
due 7/01/2004 (a) 5,458
Central Coast, California, Water Authority Revenue Bonds
(State Water Project Regional Facilities) (d):
AAA Aaa 5,000 6.60% due 10/01/2002 (a) 5,628
AAA Aaa 5,000 Refunding, Series A, 5% due 10/01/2016 5,008
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority,
Tax Allocation Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,098
Corona, California, COP, Corona Community:
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,502
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,723
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,964
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,217
AAA Aaa 2,605 8% due 3/01/2013 (a) 3,500
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,791
AAA Aaa 3,035 8% due 3/01/2015 (i) 4,117
AAA Aaa 2,905 Corona, California, Special Tax Community Facilities
Refunding Bonds (District No. 90-1), Series A, 4.70%
due 9/01/2020 (c) 2,732
AAA Aaa 8,375 East Bay, California, Municipal Utility District, Water System
Subordinated Revenue Refunding Bonds, 5% due 6/01/2026 (e) 8,164
Long Beach, California, Improvement Bond Act (1915 Assessment
District 90-2):
NR* NR* 465 7% due 9/02/2001 486
NR* NR* 495 7.05% due 9/02/2002 517
NR* NR* 530 7.10% due 9/02/2003 554
NR* NR* 570 7.15% due 9/02/2004 590
NR* NR* 610 7.20% due 9/02/2005 633
NR* NR* 655 7.25% due 9/02/2006 680
NR* NR* 4,065 7.50% due 9/02/2011 4,244
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 (b) 3,132
NR* NR* 1,220 Long Beach, California, Special Tax Community Facilities and
Public Improvement Bonds (District No. 3 - Pine Avenue),
6.375% due 9/01/2023 1,297
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) 5,764
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center
Authority, COP, 9% due 12/01/2005 (a) 22,421
AAA Aaa 8,950 Los Angeles, California, Convention and Exhibition Center Authority,
Lease Revenue Bonds, RITR, Series 21, 5.375% due 8/15/2018 (c)(j) 9,207
Los Angeles, California, Department of Water and Power:
A+ Aa3 20,000 Electric Plant Revenue Refunding Bonds, RIB, 6.375%
due 2/01/2020 (j) 21,581
AAA Aaa 5,000 Waterworks Revenue Bonds, 6.30% due 7/01/2024 (c) 5,549
Los Angeles, California, Harbor Department Revenue Bonds:
AAA NR* 5,000 7.60% due 10/01/2018 (i) 6,355
AAA Aaa 5,000 AMT, RITR, Series 7, 8.595% due 11/01/2026 (c)(j) 6,269
AAA Aaa 14,000 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C),
Second Senior Series B, 5.25% due 7/01/2023 (d) 14,016
AAA Aaa 6,250 Marysville, California, Hospital Revenue Bonds (Fremont -
Rideout Health Group), Series A, 6.30% due 1/01/2022 (d) 6,824
Metropolitan Water District, Southern California,
Waterworks Revenue Bonds:
AA Aa2 11,650 RIB, 7.907% due 8/05/2022 (j) 13,194
AA Aa2 25,650 Series A, 5% due 7/01/2026 24,929
AA Aa2 9,800 Series C, 5% due 7/01/2027 9,535
AAA Aaa 4,285 Modesto, California, Irrigation District Financing Authority,
Revenue Refunding Bonds (Domestic Water Project), Series D,
4.75% due 9/01/2022 (d) 4,048
AAA Aaa 10,000 Northern California, Transmission Revenue Bonds, RITR, Series 16,
7.12% due 5/01/2020 (c)(j) 10,037
AAA Aaa 5,635 Ontario, California, Redevelopment Financing Authority
Revenue Bonds (Cimarron Project No. 1 - Center City), 6.375%
due 8/01/2020 (c) 6,140
A NR* 1,000 Palmdale, California, Civic Authority, Revenue Refunding Bonds
(Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 1,139
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential
Mortgage Revenue Bonds, 9.60% due 6/01/2016 (i) 17,933
NR* NR* 8,315 Pleasanton, California, Joint Powers Financing Authority,
Revenue Reassessment Bonds, Sub-Series B, 6.75% due 9/02/2017 8,994
AAA Aaa 3,450 Rancho, California, Water District Financing Authority
Revenue Bonds, RITES, 9.084% due 9/11/2001 (a)(d)(j) 4,118
A- NR* 2,000 Redwood City, California, Public Financing Authority,
Local Agency Revenue Bonds, Series B, 7.25% due 7/15/2001 (a) 2,241
BBB NR* 2,430 Riverside County, California, Redevelopment Agency Bonds
(Tax Allocation Redevelopment Project No. 4), Series A,
7.50% due 10/01/2001 (a) 2,755
Sacramento, California, Municipal Utility District,
Electric Revenue Bonds:
AAA Aaa 7,000 INFLOS, 9.02% due 8/15/2018 (e)(j) 8,251
AAA Aaa 5,000 Series B, 6.375% due 8/15/2002 (a)(c) 5,569
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds
(Sisters of Charity), Series A, 7% due 7/01/2001 (a) 2,777
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) 3,567
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 (d) 8,849
AAA Aaa 20,000 Issue 15B, 4.50% due 5/01/2028 (c) 18,019
San Francisco, California, City and County, Public Utilities
Commission, Water Revenue Refunding Bonds, Series A:
AA- Aa 8,870 5% due 11/01/2021 8,653
AA- Aa 5,000 5% due 11/01/2026 4,844
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 1,327
AAA Aaa 4,150 Santa Clara, California, Electric Revenue Bonds, Series A,
6.50% due 7/01/2021 (c) 4,505
Santa Clara County, California, Financing Authority,
Lease Revenue Bonds, Series A (d):
AAA Aaa 5,000 Refunding, 5% due 11/15/2022 4,882
AAA Aaa 10,000 (VMC Facility Replacement Project), 6.75% due 11/15/2004 (a) 11,674
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) 2,213
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds
(Subregional Wastewater Project), Series A, 5% due 9/01/2022 (e) 9,765
Southern California Home Financing Authority, S/F
Mortgage Revenue Bonds, AMT (h):
AAA NR* 3,040 (Mortgage-Backed Securities), Series A, 7.625% due 10/01/2023 3,201
AAA NR* 2,450 (Mortgage-Backed Securities), Series A, 7.35% due 9/01/2024 (g) 2,591
AAA NR* 1,000 Series B, 7.75% due 3/01/2024 (g) 1,056
BBB+ NR* 10,000 Stanislaus, California, Waste-to-Energy Financing Agency,
Solid Waste Facility Revenue Refunding Bonds
(Ogden Martin System Inc. Project), 7.625% due 1/01/2010 10,718
AAA Aaa 6,500 Stockton, California, Revenue Bonds (Wastewater Treatment
Plant Expansion), COP, Series A, 6.80% due 9/01/2004 (a)(e) 7,580
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds
(Tri-City Hospital), 7.50% due 2/01/2002 (a)(c) 4,566
University of California Revenue Bonds (Multiple Purpose
Projects) (a):
A NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002 16,635
AAA Aaa 8,000 Series D, 6.25% due 9/01/2002 (c) 8,877
AAA Aaa 11,845 Series D, 6.375% due 9/01/2002 (c) 13,204
AAA Aaa 2,940 University of California Revenue Bonds, RITR, Series 13,
8.97% due 9/01/2019 (c)(j) 3,609
A A2 6,000 West Covina, California, COP (Queen of the Valley Hospital),
6.95% due 8/15/2023 6,823
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency,
Tax Allocation Bonds (West Sacramento Redevelopment Project),
6.25% due 9/01/2010 (c) 6,489
Puerto Rico -- 0.9%
AAA Baa1 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2004 (a) 5,663
Total Investments (Cost -- $564,004) -- 100.0% 611,038
Other Assets Less Liabilities -- 0.0% 141
----------
Net Assets -- 100.0% $611,179
==========
(a) Prerefunded.
(b) Non-income producing security.
(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 February 28, 1998.
* Not Rated.
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
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of February 28, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $564,003,668) (Note 1a) $611,038,456
Cash 1,182,009
Receivables:
Securities sold $37,297,391
Interest 9,543,103
Beneficial interest sold 1,987,653 48,828,147
-------------
Prepaid registration fees and other assets (Note 1e) 114,190
-------------
Total assets 661,162,802
-------------
Liabilities: Payables:
Securities purchased 47,874,938
Beneficial interest redeemed 1,004,603
Dividends to shareholders (Note 1f) 495,342
Investment adviser (Note 2) 257,439
Distributor (Note 2) 159,427 49,791,749
-------------
Accrued expenses and other liabilities 192,466
-------------
Total liabilities 49,984,215
-------------
Net Assets: Net assets $611,178,587
=============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $373,587
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 2,966,944
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 100,537
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 1,635,931
Paid-in capital in excess of par 560,611,924
Accumulated realized capital losses on investments -- net (Note 5) (1,545,124)
Unrealized appreciation on investments -- net 47,034,788
-------------
Net assets $611,178,587
=============
Net Asset Value: Class A -- Based on net assets of $44,961,314 and 3,735,867 shares of
beneficial interest outstanding $12.04
=============
Class B -- Based on net assets of $357,187,187 and 29,669,441 shares of
beneficial interest outstanding $12.04
=============
Class C -- Based on net assets of $12,101,388 and 1,005,365 shares of
beneficial interest outstanding $12.04
=============
Class D -- Based on net assets of $196,928,698 and 16,359,311 shares of
beneficial interest outstanding $12.04
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended
February 28, 1998
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $18,164,890
(Note 1d):
Expenses: Investment advisory fees (Note 2) $1,657,624
Account maintenance and distribution fees -- Class B (Note 2) 909,102
Account maintenance fees -- Class D (Note 2) 94,247
Transfer agent fees -- Class B (Note 2) 69,790
Professional fees 68,867
Accounting services (Note 2) 54,809
Account maintenance and distribution fees -- Class C (Note 2) 33,800
Custodian fees 30,478
Transfer agent fees -- Class D (Note 2) 30,123
Printing and shareholder reports 23,558
Registration fees (Note 1e) 23,151
Trustees' fees and expenses 19,158
Pricing fees 8,396
Transfer agent fees -- Class A (Note 2) 7,103
Transfer agent fees -- Class C (Note 2) 2,214
Other 4,501
----------
Total expenses 3,036,921
-------------
Investment income -- net 15,127,969
-------------
Realized & Realized gain on investments -- net 10,367,502
Unrealized Gain on Change in unrealized appreciation on investments -- net 1,001,220
Investments -- Net -------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $26,496,691
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C> <C>
Operations: Investment income -- net $15,127,969 $32,122,705
Realized gain on investments -- net 10,367,502 7,326,062
Change in unrealized appreciation on investments -- net 1,001,220 10,038,184
------------- -------------
Net increase in net assets resulting from operations 26,496,691 49,486,951
------------- -------------
Dividends to Investment income -- net:
Shareholders Class A (1,183,229) (2,365,153)
(Note 1f): Class B (8,757,837) (20,956,944)
Class C (265,511) (442,724)
Class D (4,921,392) (8,357,884)
------------- -------------
Net decrease in net assets from dividends to shareholders (15,127,969) (32,122,705)
------------- -------------
Beneficial Interest Net decrease in net assets derived from
Transactions beneficial interest transactions (17,064,507) (43,754,648)
(Note 4): ------------- -------------
Net Assets: Total decrease in net assets (5,695,785) (26,390,402)
Beginning of period 616,874,372 643,264,774
------------- -------------
End of period $611,178,587 $616,874,372
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.81 $11.49 $11.40 $11.32 $12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .32 .64 .64 .64 .68
Realized and unrealized gain (loss) on
investments -- net .23 .32 .09 .08 (.78)
--------- --------- --------- --------- ---------
Total from investment operations .55 .96 .73 .72 (.10)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.32) (.64) (.64) (.64) (.68)
Realized gain on investments -- net -- -- -- -- (.19)
In excess of realized gain on
investments -- net -- -- -- -- (.09)
--------- --------- --------- --------- ---------
Total dividends and distributions (.32) (.64) (.64) (.64) (.96)
--------- --------- --------- --------- ---------
Net asset value, end of period $12.04 $11.81 $11.49 $11.40 $11.32
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.66%++++ 8.55% 6.53% 6.75% (.92%)
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .65%* .63% .65% .65% .62%
Net Assets: ========= ========= ========= ========= =========
Investment income -- net 5.32%* 5.49% 5.51% 5.83% 5.65%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $44,961 $44,652 $42,668 $44,228 $60,017
Data: ========= ========= ========= ========= =========
Portfolio turnover 52.41% 73.60% 53.79% 53.40% 75.66%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class B
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.82 $11.49 $11.40 $11.32 $12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .29 .58 .58 .59 .61
Realized and unrealized gain (loss) on
investments -- net .22 .33 .09 .08 (.78)
--------- --------- --------- --------- ---------
Total from investment operations .51 .91 .67 .67 (.17)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.29) (.58) (.58) (.59) (.61)
Realized gain on investments -- net -- -- -- -- (.19)
In excess of realized gain on
investments -- net -- -- -- -- (.09)
--------- --------- --------- --------- ---------
Total dividends and distributions (.29) (.58) (.58) (.59) (.89)
--------- --------- --------- --------- ---------
Net asset value, end of period $12.04 $11.82 $11.49 $11.40 $11.32
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.31%++++ 8.09% 5.99% 6.25% (1.50%)
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.16%* 1.14% 1.16% 1.16% 1.13%
Net Assets: ========= ========= ========= ========= =========
Investment income -- net 4.82%* 4.98% 5.01% 5.32% 5.15%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $357,187 $376,018 $480,668 $616,199 $726,888
Data: ========= ========= ========= ========= =========
Portfolio turnover 52.41% 73.60% 53.79% 53.40% 75.66%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class C
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.82 $11.49 $11.40 $10.94
Operating --------- --------- --------- ---------
Performance: Investment income -- net .28 .57 .57 .49
Realized and unrealized gain on investments -- net .22 .33 .09 .46
--------- --------- --------- ---------
Total from investment operations .50 .90 .66 .95
--------- --------- --------- ---------
Less dividends from investment income -- net (.28) (.57) (.57) (.49)
--------- --------- --------- ---------
Net asset value, end of period $12.04 $11.82 $11.49 $11.40
========= ========= ========= =========
Total Investment Based on net asset value per share 4.26%++++ 7.98% 5.88% 8.91%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses 1.26%* 1.24% 1.26% 1.27%*
Net Assets: ========= ========= ========= =========
Investment income -- net 4.71%* 4.87% 4.91% 5.04%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $12,102 $10,904 $8,112 $3,131
Data: ========= ========= ========= =========
Portfolio turnover 52.41% 73.60% 53.79% 53.40%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Class D
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.82 $11.49 $11.40 $10.94
Operating --------- --------- --------- ---------
Performance: Investment income -- net .31 .63 .63 .54
Realized and unrealized gain on investments -- net .22 .33 .09 .46
--------- --------- --------- ---------
Total from investment operations .53 .96 .72 1.00
--------- --------- --------- ---------
Less dividends from investment income -- net (.31) (.63) (.63) (.54)
--------- --------- --------- ---------
Net asset value, end of period $12.04 $11.82 $11.49 $11.40
========= ========= ========= =========
Total Investment Based on net asset value per share 4.52%++++ 8.53% 6.43% 9.39%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses .75%* .73% .75% .76%*
Net Assets: ========= ========= ========= =========
Investment income -- net 5.22%* 5.39% 5.42% 5.59%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $196,929 $185,300 $111,817 $3,846
Data: ========= ========= ========= =========
Portfolio turnover 52.41% 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.
</TABLE>
Merrill Lynch California Municipal Bond Fund February 28, 1998
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. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. 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.
[bullet] Financial futures contracts -- The Fund may purchase or
sell financial futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income -- Security
transactions are recorded on the dates the 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 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 six months ended February 28, 1998, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $727 $6,417
Class D $3,425 $33,533
For the six months ended February 28, 1998, MLPF&S received
contingent deferred sales charges of $100,191 and $2,624 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 six months ended February 28, 1998 were $316,943,672 and
$328,880,264, respectively.
Net realized gains for the six months ended February 28, 1998 and
net unrealized gains as of February 28, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $10,336,546 $47,034,788
Financial futures contracts 30,956 --
------------ ------------
Total $10,367,502 $47,034,788
============ ============
As of February 28, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $47,034,788, of which $50,618,364
related to appreciated securities and $3,583,576 related to
depreciated securities. The aggregate cost of investments at
February 28, 1998 for Federal income tax purposes was $564,003,668.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $17,064,507 and $43,754,648 for the six months
ended February 28, 1998 and for the year ended August 31, 1997,
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 234,576 $2,810,093
Shares issued to shareholders
in reinvestment of dividends 44,469 532,401
------------ ------------
Total issued 279,045 3,342,494
Shares redeemed (323,017) (3,861,649)
------------ ------------
Net decrease (43,972) $(519,155)
============ ============
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 B Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 1,612,810 $19,325,167
Shares issued to shareholders
in reinvestment of dividends 327,474 3,921,938
------------ ------------
Total issued 1,940,284 23,247,105
Automatic conversion
of shares (1,083,327) (12,979,935)
Shares redeemed (3,007,320) (35,969,393)
------------ ------------
Net decrease (2,150,363) $(25,702,223)
============ ============
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 C Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 223,555 $2,686,676
Shares issued to shareholders
in reinvestment of dividends 13,983 167,471
------------ ------------
Total issued 237,538 2,854,147
Shares redeemed (155,011) (1,857,522)
------------ ------------
Net increase 82,527 $996,625
============ ============
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 D Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 530,613 $6,147,874
Automatic conversion
of shares 1,083,538 12,979,935
Shares issed to shareholders
in reinvestment of
dividends 156,382 2,101,181
------------ ------------
Total issued 1,770,533 21,228,990
Shares redeemed (1,093,524) (13,068,744)
------------ ------------
Net increase 677,009 $8,160,246
============ ============
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
============ ============
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.
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
