MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 1998
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
TO OUR SHAREHOLDERS
The Municipal Market Environment
Long-term tax-exempt bond yields declined slightly during the six months ended
August 31, 1998. Throughout most of this year, foreign economic factors have
continued to outweigh US domestic fundamentals. Thus far this year, the near
absence of inflationary pressures in the United States continued to support low
interest rates. Consistently strong domestic economic growth has caused some
investors to fear that the Federal Reserve Board would be forced eventually to
raise short-term interest rates. Such action would be taken to ensure that the
US economy's present rate of growth would decelerate before any inflationary
pressures could develop. However, the weakening financial conditions in many
Asian countries, combined with the currency devaluation in Russia, calmed
investor concerns of Federal Reserve Board intervention, and fixed-income bond
prices again moved higher. As measured by the Bond Buyer Revenue Bond Index,
long-term uninsured municipal bond yields fell approximately 10 basis points
(0.10%) to end the August quarter at 5.26%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Additionally,
the sharp US equity market correction at the end of August triggered an
additional flight into US Treasury securities. Long-term US Treasury bond yields
declined approximately 70 basis points to end the August quarter at 5.21%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. To a large extent, these supply pressures have prevented
tax-exempt bond yields from declining as much as US Treasury bond yields. During
the first six months of 1998, nearly $150 billion in new tax-exempt bonds were
underwritten, an increase of about 40% compared to the same period a year ago.
During the most recent three months, municipalities issued almost $75 billion in
new securities, an increase of nearly 25% compared to the same three-month
period in 1997.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. 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 for 1998 total municipal bond
issuance are in the $200 bil- lion-$225 billion range. These estimates suggest
that recent supply pressures, which have lessened recently, are likely to abate
later in the year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries might have lowered US economic growth in the first half of 1998
by as much as 2%. Since further trade deterioration is likely in the coming
months, we do not believe that the Federal Reserve Board will be willing to
raise interest rates, barring a dramatic and unexpected resurgence of domestic
inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At
August 31, 1998, long-term tax-exempt bond yields were at attractive yield
ratios relative to US Treasury securities of comparable maturities (over 90%),
well in excess of their expected range of 85%-88%. Tax-exempt bond yield ratios
rarely exceeded 90% in the 1980s and 1990s. Previous instances have usually been
associated with potential changes in Federal tax codes that would have adversely
affected the tax-favored status of municipal bonds. The present situation has
developed largely because of a temporary supply imbalance. These imbalances
should soon be corrected as tax-exempt bond issuance slows from its current
rapid pace later this year. Any further pressure on the municipal market may
well represent a very attractive investment opportunity.
Fiscal Year in Review
During the fiscal year ended August 31, 1998, the municipal marketplace was
characterized by rather restricted price movements within certain identifiable
trading ranges. A combination of several positive technical and economic factors
contributed to an environment where the fixed-income markets,
1
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
particularly the tax-exempt market, reached historically low nominal interest
rate levels.
Our strategy during the fiscal year was to strive to remain fully invested,
taking advantage of any dips in market price to position the Fund more
aggressively. The challenge over the past 12 months has been to identify which
periods constituted market retracements in an effort to concentrate the Fund's
buying power during these events, whether through the rather ample 1997-1998
new-issue calendar, or through the secondary marketplace. During April and May
of 1998, when such a period did arise, we utilized a temporary backup in
interest rates to position the Fund more aggressively.
Throughout the 12-month period ended August 31, 1998, we invested in
higher-yielding municipal securities that were within the Fund's credit
standards to seek to maintain an attractive level of tax-exempt income. By
fiscal year-end, with long-term municipal yields nearing 5%, we sold some of the
Fund's more aggressively structured discount securities. Proceeds of these sales
were concentrated in cash reserves or used to purchase less interest
rate-sensitive, income-oriented holdings. Although the fundamental economic
backdrop for the marketplace is still quite supportive, we would expect the
municipal market to participate only marginally in any further price gains. As a
result of these strategies, total return for the Fund's Class A, Class B, Class
C and Class D Shares was +8.39%, +7.84%, +7.65% and +8.28%, respectively, for
the 12-month period ended August 31, 1998.
Looking ahead, we anticipate following a slightly less aggressive strategy,
since substantial future price gains are unlikely, barring a drastic change in
investor expectations regarding the performance of fixed-income securities in
the current low interest rate environment. Consequently, we expect to remain
focused on seeking to deliver a high level of current income without sacrificing
credit quality.
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 O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
September 25, 1998
2
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:
o 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.
o 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.)
o 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.
o 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 "Recent Performance Results" and
"Average Annual Total Return" tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the payable date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to
be paid to shareholders.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 8/31/98
=================================================================================================================
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares +8.39% +2.48% +108.03% 4.27%
- -----------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class B Shares +7.84 +2.43 +104.55 3.95
- -----------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class C Shares +7.65 +2.32 + 34.05 3.85
- -----------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class D Shares +8.28 +2.54 + 36.81 4.17
=================================================================================================================
</TABLE>
* 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 ten-year/inception dates are: Class
A Shares, 10/25/88; Class B Shares, ten years ended 8/31/98; and Class C &
Class D Shares, 10/21/94.
3
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Lehman Brothers Municipal Bond Index.
Beginning and ending values are:
10/25/88** 8/98
ML California Municipal Bond Fund+--Class A Shares* $9,600 $19,971
Lehman Brothers Municipal Bond Index++ $10,000 $21,645
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the Lehman Brothers Municipal Bond Index.
Beginning and ending values are:
10/25/88** 8/98
ML California Municipal Bond Fund+--Class B Shares* $10,000 $20,453
Lehman Brothers Municipal Bond Index++ $10,000 $22,426
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Beginning and ending values are:
10/21/94** 8/98
ML California Municipal Bond Fund+--Class C Shares* $10,000 $13,405
ML California Municipal Bond Fund+--Class D Shares* $9,600 $13,134
Lehman Brothers Municipal Bond Index++ $10,000 $14,050
* 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. The starting date for
the Index in the Class A Shares graph is 10/31/88 and in the Class C &
Class D Shares graph is 10/31/94.
Past performance is not predictive of future performance.
4
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 6/30/98 +8.02% +3.70%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +5.85 +4.99
- --------------------------------------------------------------------------------
Inception (10/25/88)
through 6/30/98 +7.62 +7.16
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/98 +7.47% +3.47%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +5.31 +5.31
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +7.25 +7.25
- --------------------------------------------------------------------------------
* 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 6/30/98 +7.36% +6.36%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/98 +7.68 +7.68
- --------------------------------------------------------------------------------
* 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 6/30/98 +7.91% +3.59%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/98 +8.22 +7.03
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C>
California--97.3%
=================================================================================================================================
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 $ 4,168
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Alameda County, California, COP (Alameda County Medical Center Project),
5.30% due 6/01/2026 (c) 5,087
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Bonds, RITES,
8.97% due 12/28/2018 (c)(j) 3,904
- ---------------------------------------------------------------------------------------------------------------------------------
Antioch, California, Improvement Bond Act (1915 Assessment District No. 27--Lone Tree):
NR* NR* 4,850 Series D, 7.30% due 9/02/2013 5,048
NR* NR* 3,985 Series E, 7.125% due 9/02/2016 4,141
- ---------------------------------------------------------------------------------------------------------------------------------
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) 3,435
- ---------------------------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,620 AMT, Series A, 7.70% due 8/01/2030 3,773
AA- Aa 440 AMT, Series B, 8% due 8/01/2029 457
AA- Aa 10,115 AMT, Series F-1, 7% due 8/01/2026 10,982
AA- Aa 655 AMT, Series G, 8.15% due 8/01/2019 669
AA- Aa 1,720 Series D, 7.25% due 8/01/2017 1,816
- ---------------------------------------------------------------------------------------------------------------------------------
California HFA, Revenue Bonds, AMT:
AA- Aa 4,000 RIB, 9.061% due 8/01/2023 (j) 4,605
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,045
- ---------------------------------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority Revenue Bonds:
AAA Aaa 4,350 (Kaiser Permanente), Series A, 7% due 10/01/2018 (c) 4,577
AAA Aaa 12,285 RITR, Series 17, 6.87% due 8/15/2030 (c)(j) 13,173
NR* A1 5,780 (Scripps Research Institute), Series A, 6.625% due 7/01/2014 6,455
- ---------------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas and
Electric Co.), VRDN (k):
NR* NR* 4,900 AMT, Series B, 3.60% due 11/01/2026 4,900
A1 NR* 2,300 AMT, Series G, 3.60% due 2/01/2016 2,300
A1+ NR* 600 Series C, 3.55% due 11/01/2026 600
- ---------------------------------------------------------------------------------------------------------------------------------
A1 VMIG1+ 600 California Pollution Control Financing Authority, PCR (Southern California Edison), VRDN,
Series A, 3.25% due 2/28/2008 (k) 600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch California Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
6
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C>
California (continued)
=================================================================================================================================
California State Department of Water Resources, Water System Revenue Bonds
(Central Valley Project) (c):
AAA Aaa $10,000 Refunding, Series Q, 5.375% due 12/01/2027 $ 10,364
AAA Aaa 25,000 Series O, 4.75% due 12/01/2029 23,920
- ---------------------------------------------------------------------------------------------------------------------------------
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) 12,660
A A 3,555 High Technology Facilities (San Jose Facilities), Series A, 7.75% due 8/01/2006 4,087
A Aaa 7,000 (Various Community College Projects), Series B, 7% due 3/01/2004 (a) 8,201
- ---------------------------------------------------------------------------------------------------------------------------------
California State, Refunding:
AAA Aaa 10,350 5.375% due 6/01/2026 (e) 10,727
A+ A1 4,875 UT, 5.625% due 9/01/2024 5,140
- ---------------------------------------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority, COP:
NR* Aaa 12,000 RITR, Series 24, 6.935% due 12/01/2015 (f)(j) 12,935
AA Aa 4,750 Revenue Bonds (Saint Joseph Health System Group), 6.625% due 7/01/2004 (a) 5,484
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds (State Water Project Regional
Facilities), 6.60% due 10/01/2002 (a)(d) 5,629
- ---------------------------------------------------------------------------------------------------------------------------------
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 7.10% due 8/01/2022 1,100
- ---------------------------------------------------------------------------------------------------------------------------------
Corona, California, COP, Corona Community:
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,507
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,724
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,965
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,230
AAA Aaa 2,605 8% due 3/01/2013 (a) 3,518
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,823
AAA Aaa 3,035 8% due 3/01/2015 (i) 4,146
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 East Bay, California, Municipal Utility District, Water System Subordinated Revenue Bonds,
4.75% due 6/01/2028 (c) 19,259
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,120 Fontana, California, Redevelopment Agency, Tax Allocation Refunding Bonds (Southwest
Industrial Park Project), 4.75% due 9/01/2026 (c) 3,960
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Fresno County, California, Transportation Authority, Sales Tax Revenue Bonds, Second
Senior Series, 5.25% due 4/01/2007 (d) 5,394
- ---------------------------------------------------------------------------------------------------------------------------------
Long Beach, California, Improvement Bond Act (1915 Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 484
NR* NR* 495 7.05% due 9/02/2002 515
NR* NR* 530 7.10% due 9/02/2003 551
NR* NR* 570 7.15% due 9/02/2004 593
NR* NR* 610 7.20% due 9/02/2005 634
NR* NR* 655 7.25% due 9/02/2006 681
NR* NR* 4,065 7.50% due 9/02/2011 4,228
- ---------------------------------------------------------------------------------------------------------------------------------
NR* NR* 5,695 Long Beach, California, M/F Housing Redevelopment Agency Revenue Bonds (Pacific Court
Apartments), AMT, Issue B, 6.95% due 9/01/2023 (b) 3,132
- ---------------------------------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Long Beach, California, Special Tax Community Facilities and Public Improvements Bonds
(District No. 3--Pine Avenue), 6.375% due 9/01/2023 1,078
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C>
California (continued)
=================================================================================================================================
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) $ 5,811
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (a) 22,430
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 8,950 Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue Bonds,
RITR, Series 21, 6.87% due 8/15/2018 (j) 9,435
- ---------------------------------------------------------------------------------------------------------------------------------
Los Angeles, California, Department of Water and Power:
A+ Aa3 20,000 Electric Plant Revenue Refunding Bonds, 6.375% due 2/01/2020 21,677
AAA Aaa 5,000 Waterworks Revenue Bonds, 6.30% due 7/01/2024 (c) 5,614
- ---------------------------------------------------------------------------------------------------------------------------------
Los Angeles, California, Harbor Department Revenue Bonds:
AAA NR* 5,000 7.60% due 10/01/2018 (i) 6,480
AAA Aaa 5,000 AMT, RITR, Series 7, 8.495% due 11/01/2026 (c)(j) 6,202
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Los Angeles, California, Unified School District, UT, Series A, 5% due 7/01/2021 (e) 9,932
- ---------------------------------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue
Bonds (d):
AAA Aaa 5,860 RITR, Series 30, 6.62% due 7/01/2023 (j) 6,054
AAA Aaa 5,500 Refunding, Property C, Second Senior Series A, 5% due 7/01/2023 5,457
- ---------------------------------------------------------------------------------------------------------------------------------
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA Aa2 11,650 RIB, 7.864% due 8/05/2022 (j) 13,135
AA Aa2 30,000 Series A, 5% due 7/01/2026 29,775
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,400 Northern California, Power Agency, Public Power Revenue Refunding Bonds
(Hydroelectric Project), Series A, 5% due 7/01/2028 (c) 1,389
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Northern California, Transmission Revenue Bonds, RITR, Series 16, 6.62% due
5/01/2020 (c)(j) 10,324
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,635 Ontario, California, Redevelopment Financing Authority Revenue Bonds (Cimarron Project
No. 1--Center City), 6.375% due 8/01/2020 (c) 6,145
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (i) 18,063
- ---------------------------------------------------------------------------------------------------------------------------------
NR* NR* 8,015 Pleasanton, California, Joint Powers Financing Authority, Revenue Reassessment Bonds,
Sub-Series B, 6.75% due 9/02/2017 8,696
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Sacramento, California, Municipal Utility District, Electric Revenue Bonds, INFLOS,
9.071% due 8/15/2018 (e)(j) 8,339
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,850 San Francisco, California, Bay Area Rapid Transportation District, Sales Tax Revenue
Refunding Bonds, 5% due 7/01/2028 (d) 1,836
- ---------------------------------------------------------------------------------------------------------------------------------
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) 3,613
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 (d) 8,900
AAA Aaa 20,000 Issue 15B, 4.50% due 5/01/2028 (c) 18,519
- ---------------------------------------------------------------------------------------------------------------------------------
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 1,310
- ---------------------------------------------------------------------------------------------------------------------------------
Santa Clara, California, Electric Revenue Bonds, Series A:
AAA Aaa 4,150 6.50% due 7/01/2001 (a)(c) 4,544
AAA Aaa 15,000 Refunding, 5% due 7/01/2027 (d) 14,886
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C>
California (concluded)
=================================================================================================================================
AAA Aaa $10,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC Facility
Replacement Project), Series A, 6.75% due 11/15/2004 (a)(d) $ 11,732
- ---------------------------------------------------------------------------------------------------------------------------------
Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Bonds (Consolidated
Redevelopment Project), Series A (c):
AAA Aaa 1,240 6.40% due 9/01/2002 (a) 1,383
AAA Aaa 760 6.40% due 9/01/2022 838
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional Wastewater
Project), Series A, 5% due 9/01/2022 (e) 9,931
- ---------------------------------------------------------------------------------------------------------------------------------
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT (h):
AAA NR* 2,760 (Mortgage-Backed Securities), Series A, 7.625% due 10/01/2023 2,898
AAA NR* 2,355 (Mortgage-Backed Securities), Series A, 7.35% due 9/01/2024 (g) 2,486
AAA NR* 890 Series B, 7.75% due 3/01/2024 (g) 936
- ---------------------------------------------------------------------------------------------------------------------------------
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 10,563
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital), 7.50% due
2/01/2002 (a)(c) 4,546
- ---------------------------------------------------------------------------------------------------------------------------------
University of California Revenue Bonds (Multiple Purpose Projects) (a):
AA- NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002 16,651
AAA Aaa 8,000 Series D, 6.25% due 9/01/2002 (c) 8,887
AAA Aaa 6,000 Series D, 6.375% due 9/01/2002 (c) 6,693
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,940 University of California Revenue Bonds, RITR, Series 13, 8.87% due 9/01/2019 (c)(j) 3,616
- ---------------------------------------------------------------------------------------------------------------------------------
NR* A2 6,000 West Covina, California, COP (Queen of the Valley Hospital), 6.95% due 8/15/2004 (a)(c) 7,045
- ---------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Bonds
(West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,483
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
Puerto Rico--1.5%
=================================================================================================================================
AAA Aaa 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2004 (a) 5,711
- ---------------------------------------------------------------------------------------------------------------------------------
A- VMIG1+ 3,200 Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Revenue Bonds (Ana G. Mendez University Systems Project), VRDN, Series A,
3.15% due 1/01/2015 (k) 3,200
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$551,425)--98.8% 597,569
Other Assets Less Liabilities--1.2% 7,239
--------
Net Assets--100.0% $604,808
========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 August 31, 1998.
(k) 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,
1998.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1998
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$551,425,207) (Note 1a) ............. $597,569,168
Cash ........................................................................ 29,220
Receivables:
Securities sold ........................................................... $16,648,552
Interest .................................................................. 8,988,815
Beneficial interest sold .................................................. 822,007 26,459,374
-----------
Prepaid registration fees and other assets (Note 1e) ........................ 86,512
------------
Total assets ................................................................ 624,144,274
------------
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ...................................................... 17,109,545
Beneficial interest redeemed .............................................. 1,092,341
Dividends to shareholders (Note 1f) ....................................... 545,221
Investment adviser (Note 2) ............................................... 259,516
Distributor (Note 2) ...................................................... 156,294 19,162,917
-----------
Accrued expenses and other liabilities ...................................... 173,203
------------
Total liabilities ........................................................... 19,336,120
------------
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................................. $604,808,154
============
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 374,761
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 2,805,927
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 104,039
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 1,690,628
Paid-in capital in excess of par ............................................ 548,572,044
Undistributed realized capital gains on investments--net .................... 5,116,794
Unrealized appreciation on investments--net ................................. 46,143,961
------------
Net assets .................................................................. $604,808,154
============
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $45,544,443 and 3,747,608 shares
of beneficial interest outstanding .......................................... $ 12.15
============
Class B--Based on net assets of $341,111,427 and 28,059,270 shares
of beneficial interest outstanding .......................................... $ 12.16
============
Class C--Based on net assets of $12,645,617 and 1,040,386 shares
of beneficial interest outstanding .......................................... $ 12.15
============
Class D--Based on net assets of $205,506,667 and 16,906,280 shares
of beneficial interest outstanding .......................................... $ 12.16
============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned .................... $ 35,748,275
(Note 1d):
- -------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ........................................... $ 3,301,460
Account maintenance and distribution fees--Class B (Note 2) ................. 1,770,179
Account maintenance fees--Class D (Note 2) .................................. 194,504
Professional fees ........................................................... 142,063
Transfer agent fees--Class B (Note 2) ....................................... 123,989
Accounting services (Note 2) ................................................ 116,211
Account maintenance and distribution fees--Class C (Note 2) ................. 71,998
Registration fees (Note 1e) ................................................. 64,632
Custodian fees .............................................................. 60,995
Transfer agent fees--Class D (Note 2) ....................................... 55,687
Printing and shareholder reports ............................................ 40,398
Trustees' fees and expenses ................................................. 39,319
Pricing fees ................................................................ 16,084
Transfer agent fees--Class A (Note 2) ....................................... 12,758
Transfer agent fees--Class C (Note 2) ....................................... 4,303
Other ....................................................................... 6,256
-----------
Total expenses .............................................................. 6,020,836
------------
Investment income--net ...................................................... 29,727,439
------------
- -------------------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized gain on investments--net ........................................... 17,029,420
ized Gain on Change in unrealized appreciation on investments--net ....................... 110,393
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ........................ $ 46,867,252
============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
August 31,
--------------------------
Increase (Decrease) in Net Assets: 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net ....................................................... $ 29,727,439 $ 32,122,705
Realized gain on investments--net ............................................ 17,029,420 7,326,062
Change in unrealized appreciation on investments--net ........................ 110,393 10,038,184
------------ ------------
Net increase in net assets resulting from operations ......................... 46,867,252 49,486,951
------------ ------------
- -------------------------------------------------------------------------------------------------------------------------------
Dividends to Investment income--net:
Shareholders Class A .................................................................... (2,340,837) (2,365,153)
(Note 1f): Class B .................................................................... (16,812,983) (20,956,944)
Class C .................................................................... (556,750) (442,724)
Class D .................................................................... (10,016,869) (8,357,884)
------------ ------------
Net decrease in net assets from dividends to shareholders .................... (29,727,439) (32,122,705)
------------ ------------
- -------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions ..... (29,206,031) (43,754,648)
Transactions ------------ ------------
(Note 4):
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ................................................. (12,066,218) (26,390,402)
Beginning of year ............................................................ 616,874,372 643,264,774
------------ ------------
End of year .................................................................. $604,808,154 $616,874,372
============ ============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended 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 year .... $ 11.81 $ 11.49 $ 11.40 $ 11.32 $ 12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net ................ .63 .64 .64 .64 .68
Realized and unrealized gain (loss) on
investments--net ...................... .34 .32 .09 .08 (.78)
--------- --------- --------- --------- ---------
Total from investment operations ...... .97 .96 .73 .72 (.10)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net .............. (.63) (.64) (.64) (.64) (.68)
Realized gain on investments--net ... -- -- -- -- (.19)
In excess of realized gain on
investments--net .................... -- -- -- -- (.09)
--------- --------- --------- --------- ---------
Total dividends and distributions ..... (.63) (.64) (.64) (.64) (.96)
--------- --------- --------- --------- ---------
Net asset value, end of year .......... $ 12.15 $ 11.81 $ 11.49 $ 11.40 $ 11.32
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .... 8.39% 8.55% 6.53% 6.75% (.92%)
Return:* ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses .............................. .65% .63% .65% .65% .62%
Net Assets: ========= ========= ========= ========= =========
Investment income--net ................ 5.25% 5.49% 5.51% 5.83% 5.65%
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 45,544 $ 44,652 $ 42,668 $ 44,228 $ 60,017
Data: ========= ========= ========= ========= =========
Portfolio turnover .................... 90.92% 73.60% 53.79% 53.40% 75.66%
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended 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 year .... $ 11.82 $ 11.49 $ 11.40 $ 11.32 $ 12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net ................ .57 .58 .58 .59 .61
Realized and unrealized gain (loss) on
investments--net ...................... .34 .33 .09 .08 (.78)
--------- --------- --------- --------- ---------
Total from investment operations ...... .91 .91 .67 .67 (.17)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net .............. (.57) (.58) (.58) (.59) (.61)
Realized gain on investments--net ... -- -- -- -- (.19)
In excess of realized gain on
investments--net .................... -- -- -- -- (.09)
--------- --------- --------- --------- ---------
Total dividends and distributions ..... (.57) (.58) (.58) (.59) (.89)
--------- --------- --------- --------- ---------
Net asset value, end of year .......... $ 12.16 $ 11.82 $ 11.49 $ 11.40 $ 11.32
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .... 7.84% 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 ................ 4.75% 4.98% 5.01% 5.32% 5.15%
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 341,111 $ 376,018 $ 480,668 $ 616,199 $ 726,888
Data: ========= ========= ========= ========= =========
Portfolio turnover .................... 90.92% 73.60% 53.79% 53.40% 75.66%
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C
------------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended August 31, 1994+ to
----------------------------------- August 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 ..................... .55 .57 .57 .49
Realized and unrealized gain on
investments--net ......................... .33 .33 .09 .46
--------- --------- --------- ---------
Total from investment operations ........... .88 .90 .66 .95
--------- --------- --------- ---------
Less dividends from investment income--net . (.55) (.57) (.57) (.49)
--------- --------- --------- ---------
Net asset value, end of period ............. $ 12.15 $ 11.82 $ 11.49 $ 11.40
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ......... 7.65% 7.98% 5.88% 8.91%++
Return:** ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ................................... 1.26% 1.24% 1.26% 1.27%*
Net Assets: ========= ========= ========= =========
Investment income--net ..................... 4.64% 4.87% 4.91% 5.04%*
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ... $ 12,646 $ 10,904 $ 8,112 $ 3,131
Data: ========= ========= ========= =========
Portfolio turnover ......................... 90.92% 73.60% 53.79% 53.40%
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class D
------------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended August 31, 1994+ to
----------------------------------- August 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 ..................... .62 .63 .63 .54
Realized and unrealized gain on
investments--net ......................... .34 .33 .09 .46
--------- --------- --------- ---------
Total from investment operations ........... .96 .96 .72 1.00
--------- --------- --------- ---------
Less dividends from investment income--net . (.62) (.63) (.63) (.54)
--------- --------- --------- ---------
Net asset value, end of period ............. $ 12.16 $ 11.82 $ 11.49 $ 11.40
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ......... 8.28% 8.53% 6.43% 9.39%++
Return:** ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ................................... .75% .73% .75% .76%*
Net Assets: ========= ========= ========= =========
Investment income--net ..................... 5.15% 5.39% 5.42% 5.59%*
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ... $ 205,507 $ 185,300 $ 111,817 $ 3,846
Data: ========= ========= ========= =========
Portfolio turnover ......................... 90.92% 73.60% 53.79% 53.40%
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
15
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 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. 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.
o 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.
16
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: 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 year ended August 31, 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 ................................... $1,294 $10,157
Class D ................................... $7,401 $64,966
- --------------------------------------------------------------------------------
For the year ended August 31, 1998, MLPF&S received contingent deferred sales
charges of $184,769 and $10,718 relating to transactions in Class B and Class C
Shares, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for year
ended August 31, 1998 were $538,280,861 and $581,064,810, respectively.
Net realized gains for the year ended August 31, 1998 and net unrealized gains
as of August 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments ..................... $16,998,464 $46,143,961
Financial futures contracts ............... 30,956 --
----------- -----------
Total ..................................... $17,029,420 $46,143,961
=========== ===========
- --------------------------------------------------------------------------------
As of August 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $46,143,961, of which $48,736,505 related to appreciated
securities and $2,592,544 related to depreciated securities. The aggregate cost
of investments at August 31, 1998 for Federal income tax purposes was
$551,425,207.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$29,206,031 and $43,754,648 for the years ended August 31, 1998 and August 31,
1997, respectively.
17
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
NOTES TO FINANCIAL STATEMENTS (Concluded)
Transactions in shares of beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ................................. 506,818 $ 6,071,649
Shares issued to shareholders
in reinvestment of dividends ................ 87,865 1,052,882
---------- -------------
Total issued ................................ 594,683 7,124,531
Shares redeemed ............................. (626,914) (7,499,701)
---------- -------------
Net decrease ................................ (32,231) $ (375,170)
========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ................................. 3,238,613 $ 38,815,462
Shares issued to shareholders
in reinvestment of dividends ................ 623,290 7,470,574
---------- -------------
Total issued ................................ 3,861,903 46,286,036
Automatic conversion
of shares ................................... (2,328,829) (27,891,779)
Shares redeemed ............................. (5,293,608) (63,357,826)
---------- -------------
Net decrease ................................ (3,760,534) $ (44,963,569)
========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ................................. 500,733 $ 6,006,963
Shares issued to shareholders
in reinvestment of dividends ................ 27,819 333,408
---------- -------------
Total issued ................................ 528,552 6,340,371
Shares redeemed ............................. (411,004) (4,925,274)
---------- -------------
Net increase ................................ 117,548 $ 1,415,097
========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ................................. 767,331 $ 8,979,713
Automatic conversion
of shares ................................... 2,329,040 27,891,779
Shares issued to shareholders
in reinvestment of dividends ................ 334,888 4,242,629
---------- -------------
Total issued ................................ 3,431,259 41,114,121
Shares redeemed ............................. (2,207,281) (26,396,510)
---------- -------------
Net increase ................................ 1,223,978 $ 14,717,611
========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
========== =============
- -------------------------------------------------------------------------------
18
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1998
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, 1998, 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, 1998 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, 1998, 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 7, 1998
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, 1998
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.
19
<PAGE>
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
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--8/98
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