MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
STRATEGIC
Performance
[GRAPHIC OMITTED]
Semi-Annual Report
February 28, 1999
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Merrill Lynch California Municipal Bond Fund February 28, 1999
TO OUR SHAREHOLDERS
The Municipal Market Environment
During most of the six months ended February 28, 1999, fixed-income investors
concentrated on the positive elements within the current economic framework. On
an annual basis, US economic growth remained modest, although it strengthened
somewhat in recent months. More important, continued weak foreign economic
growth has been seen as preventing US growth from overheating and generating
increased inflationary pressures. World commodity prices continued to decline to
their lowest level in over a decade, reinforcing the extremely positive
inflationary environment in the United States. Additionally, the Federal Reserve
Board lowered short-term interest rates in September, October and November.
These actions were taken both to ensure that US domestic economic growth would
not be negatively impacted by weak foreign demand and that US financial markets
would have adequate liquidity to offset deteriorating financial conditions in
Asia, Russia and Brazil. Despite considerable volatility, such positive factors
allowed long-term fixed-income interest rates to modestly decline into late
January 1999. During the six-month period ended February 28, 1999, US Treasury
bond yields declined almost 20 basis points (0.20%) to 5.09%, and long-term
tax-exempt revenue bond yields fell approximately 10 basis points to 5.17%, as
measured by the Bond Buyer Bond Revenue Index.
However, during February investors developed a more negative bias toward both
the prospects for US economic growth and long-term bond yields. Economic
indicators released during February did not suggest that the US economy was
materially stronger in February than it had been in January or even in late
1998. Inflationary measures, such as the consumer price index and the gross
domestic product price deflator, have continued to suggest that domestic price
pressures are nearly non-existent. The consensus among economists was that
Federal Reserve Board Chairman Alan Greenspan's Humphrey-Hawkins testimony
emphasized that the balance between moderate economic growth and low inflation
seen in recent quarters remains in place and that it was unlikely that the
Federal Reserve Board would lower or raise short-term interest rates during
1999. However, investors largely chose to ignore these interpretations and began
to anticipate that the Federal Reserve Board was likely to raise short-term
interest rates sometime during 1999. Subsequently, fixed-income bond yields rose
for the remainder of the month. In February, US Treasury bond yields rose almost
50 basis points to 5.57%, and long-term uninsured municipal revenue bond yields
rose less than 15 basis points to end the month at 5.29%. During the February
quarter, US Treasury bond yields rose 30 basis points, while long-term municipal
bond yields rose less than 5 basis points, as measured by the Bond Buyer Revenue
Index.
Throughout most of 1998, the municipal bond market's performance was impeded by
a significant increase in annual new-issue supply. However, in recent months,
the technical position of the tax-exempt market improved. This has led to the
outperformance by long-term municipal bonds seen thus far in 1999. Over the last
12 months, more than $275 billion in new long-term tax-exempt bonds was
underwritten, an increase of almost 16% compared to the same period a year ago.
As municipal bond yields declined in recent years, it has taken increasingly
lower bond yields to generate the cost savings necessary to refinance remaining
higher-couponed debt. Consequently, the rate of increases in municipal bond
issuance slowed dramatically in recent quarters. During the last six months,
over $120 billion in new tax-exempt bonds was issued, a decrease of
approximately 7% compared to the same period a year ago. During the quarter
ended February 28, 1999, less than $60 billion in new long-term municipal bonds
was underwritten, representing a decline of nearly 10% compared to the quarter
ended February 28, 1998.
The pace of tax-exempt issuance slowed further in 1999. Year-to-date issuance
was less than $33 billion, representing a decline of almost 25% compared to
January 1998's volume. Additionally, investors
1
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
received over $40 billion in coupon payments, maturities and proceeds from early
redemptions in January and February. Consequently, investor demand has been
strong in recent months, easily matching, if not at times exceeding, available
supply. We will monitor this situation closely in the coming months to determine
if the supply pressures exerted in 1998 are abating and fostering a more
balanced supply/demand environment for 1999. Such an environment should allow
the tax-exempt market's performance to more closely mirror that of its taxable
counterpart.
Foreign investors have rarely been active investors in the tax-exempt bond
market since they are unable to benefit from the inherent tax advantage of
municipal securities. Consequently, the municipal bond market has not been able
to benefit from the strong "flight to quality" demand enjoyed by US Treasury
securities since late 1997. This inability has in large part resulted in
significantly smaller declines in municipal bond yields compared to US Treasury
securities. However, this has resulted in the opportunity to purchase tax-exempt
securities with yields very close to or, in some instances, exceeding those of
comparable US Treasury bonds. By February 28, 1999, long-term tax-exempt bond
yields were at 95% of US Treasury bond yields. Municipal bond yield ratios have
averaged approximately 92% for the last 12 months. During 1997, tax-exempt bond
yield ratios averaged 84%. It is likely that the combination of the annual
increase in new-issue volume and the "safe-haven" status of US Treasury
securities drove municipal bond yield ratios to their present attractive levels.
Should new volume decline and/or foreign financial markets regain stability in
1999, tax-exempt bond yield ratios could quickly return to their more historic
levels (85%-88%).
Looking ahead, the expected combination of moderate economic growth in the
United States and continued negligible inflation suggests a relatively stable
interest rate environment into early 1999. However, it is likely that foreign
financial markets will again be a critical factor in determining US bond yields.
While some Pacific Rim economies are expected to improve somewhat in 1999, the
economies of Japan and much of Europe are unlikely to show much growth in the
coming months. Also, economic problems in Russia and Brazil remain unresolved
suggesting that additional shocks to the world's financial system are possible.
On the other hand, the continued robustness of the US economy has led to some
back up in interest rates. However, at present these factors suggest that there
is little immediate risk of sustained significant increases in long-term bond
yields.
Portfolio Strategy
For the most part, the past six months have been supportive of fixed-income
investments, with interest rates remaining low in response to a positive
domestic and global inflationary picture. However, strong domestic growth
threatens to upset this scenario. As interest rates on municipal bonds attained
levels where traditional investors became less interested, we scaled back the
Fund's exposure to long-term holdings. We believe this will make the Fund less
sensitive to negative market movement should interest rates start to rise.
However, we do not expect a drastic rise in municipal rates, since municipal
securities are currently extremely attractive as a percentage of their taxable
counterparts, in our view.
The Fund's assets are concentrated in higher-quality municipal holdings in
response to the tight credit quality spreads existing in the marketplace.
Currently, securities rated AA and AAA by at least one of the major rating
agencies do not yield significantly less than lower-rated bonds. Therefore, at
February 28, 1999, 88% of the Fund's assets were rated AA/Aa or better by
Standard & Poor's Corp./Moody's Investors Service, Inc., respectively. Going
forward, we plan to monitor the market and signs of domestic economic slowing
for indications that it is safer to re-commit to the long-term end of the
municipal marketplace.
2
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
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/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/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 30, 1999
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After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Merrill Lynch California Municipal Bond Fund's Board of
Trustees. We are pleased to announce that Terry K. Glenn has been elected
President and Trustee of the Fund. Mr. Glenn has held the position of Executive
Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Trustees in wishing him
well in his retirement from Merrill Lynch and are pleased that he will continue
as a member of the Fund's Board of Trustees.
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OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Arthur Zeikel, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and
Treasurer
Robert E. Putney, III, Secretary
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Gerald M. Richard, Treasurer of Merrill Lynch California Municipal Bond Fund has
recently retired. His colleagues at Merrill Lynch Asset Management, L.P. join
the Fund's Board of Trustees in wishing Mr. Richard well in his retirement.
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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
3
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
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 2/28/99
===============================================================================================================
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares +5.78% +0.71% +107.84% 4.15%
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ML California Municipal Bond Fund Class B Shares +5.33 +0.58 + 97.71 3.81
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ML California Municipal Bond Fund Class C Shares +5.23 +0.64 + 36.63 3.70
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ML California Municipal Bond Fund Class D Shares +5.76 +0.68 + 39.67 4.05
===============================================================================================================
</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/since inception periods are
Class A & Class B Shares, for the ten years ended 2/28/99 and Class C &
Class D Shares, from 10/21/94 to 2/28/99.
4
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 12/31/98 +6.03% +1.79%
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Five Years Ended 12/31/98 +5.65 +4.79
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Ten Years Ended 12/31/98 +7.64 +7.20
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* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 12/31/98 +5.41% +1.47%
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Five Years Ended 12/31/98 +5.11 +5.11
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Ten Years Ended 12/31/98 +7.09 +7.09
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* 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 12/31/98 +5.39% +4.41%
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Inception (10/21/94)
through 12/31/98 +7.55 +7.55
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* 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 12/31/98 +5.93% +1.69%
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Inception (10/21/94)
through 12/31/98 +8.10 +7.05
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* Maximum sales charge is 4%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
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California--96.5%
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NR* NR* $ 3,750 Alameda, California, Public Financing
Authority, Local Agency Special Tax
Revenue Bonds (Community Facility 1),
Series A, 7% due 8/01/2019 $ 4,131
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AAA Aaa 5,000 Alameda County, California, COP (Alameda
County Medical Center Project), 5.30%
due 6/01/2026 (h) 5,071
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AAA Aaa 3,000 Anaheim, California, Public Financing
Authority, Tax Allocation Revenue
Refunding Bonds, RITES, 9.48% due
12/28/2018 (h)(j) 3,892
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AAA Aaa 5,000 Beverly Hills, California, Public
Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5.125% due
6/01/2016 (h) 5,141
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California HFA, Home Mortgage Revenue
Bonds (d):
AA- Aa2 3,345 AMT, Series A, 7.70% due 8/01/2030 3,462
AA- Aa2 360 AMT, Series B, 8% due 8/01/2029 370
AA- Aa2 8,965 AMT, Series F-1, 7% due 8/01/2026 9,701
AA- Aa2 495 AMT, Series G, 8.15% due 8/01/2019 506
NR* Aa2 915 Series D, 7.25% due 8/01/2017 961
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California HFA, Revenue Bonds, AMT:
A+ Aa2 4,000 RIB, Series B-2, 9.621% due 8/01/2023
(d)(j) 4,580
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (h) 1,044
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AAA Aaa 5,000 California, Alameda Corridor
Transportation Authority Revenue Bonds,
Senior Lien, Series A, 5% due
10/01/2029 (h) 4,961
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California Health Facilities Financing
Authority Revenue Bonds:
NR* Aaa 12,285 RITR, Series 14, 7.47% due 8/15/2030 (j) 12,951
NR* A1 5,780 (Scripps Research Institute), Series A,
6.625% due 7/01/2014 6,452
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A1+ VMIG1+ 3,300 California Health Facilities Financing
Authority, Revenue Refunding Bonds (St.
Joseph Health System), VRDN, Series A,
3% due 7/01/2013 (k) 3,300
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California Pollution Control Financing
Authority, PCR, Refunding, VRDN, Series
C (k):
A1+ NR* 6,800 (Pacific Gas & Electric), 3.05% due
11/01/2026 6,800
A1 P1 1,100 (Southern California Edison), 3.55% due
2/28/2008 1,100
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A1+ VMIG1+ 1,000 California Pollution Control Financing
Authority, Solid Waste Disposal Revenue
Bonds (Shell Oil Company Martinez
Project), VRDN, Series A, 3% due
10/01/2024 (k) 1,000
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AAA Aaa 10,000 California State, Department of Water
Resources, Water Systems Revenue
Refunding Bonds (Central Valley
Project), Series Q, 5.375% due
12/01/2027 (h) 10,334
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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
VRDN Variable Rate Demand Notes
6
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
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California (continued)
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California State Economic Development
Financing Authority Revenue Bonds
(California Independent Systems
Project), VRDN (k):
A1+ VMIG1+ $ 1,800 Series A, 3.10% due 4/01/2008 $ 1,800
A1+ VMIG1+ 3,350 Series D, 3.10% due 4/01/2008 3,350
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AAA Aaa 10,350 California State, GO, 5.375% due
6/01/2026 (c) 10,696
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California State, GO, Refunding:
AAA Aaa 5,000 5% due 2/01/2023 (c) 4,965
A+ Aa3 4,875 5.625% due 9/01/2024 5,186
AAA Aaa 15,000 4.25% due 10/01/2026 (h) 13,305
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California State Public Works Board,
Lease Revenue Bonds:
A Aaa 10,125 (Department of Corrections), Series A,
7% due 11/01/2004 (i) 12,021
A A 3,555 High Technology Facilities (San Jose
Facilities), Series A, 7.75% due
8/01/2006 4,065
A Aaa 7,000 (Various Community College Projects),
7% due (i) 8,196
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California State Public Works Board,
Lease Revenue Refunding Bonds:
A A2 7,550 (California Community Colleges),
Series A, 5.25% due 12/01/2011 8,085
A A2 8,455 (California Community Colleges),
Series A, 5.25% due 12/01/2012 8,992
A A2 5,190 (Department of Corrections),
Series D, 5.375% due 11/01/2014 5,468
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California Statewide Communities
Development Authority, COP:
NR* Aaa 12,000 RIB, Series 24, 7.455% due 12/01/2015
(f)(j) 13,075
AA Aa3 4,750 (Saint Joseph Health System Group),
6.625% due 7/01/2004 (i) 5,491
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BBB NR* 1,000 Contra Costa County, California, Public
Financing Authority, Tax Allocation
Revenue Bonds, Series A, 7.10%
due 8/01/2022 1,091
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Corona, California, COP, Refunding Bonds
(Corona Community):
AAA Aaa 1,915 8% due 3/01/2009 (i) 2,508
AAA Aaa 2,065 8% due 3/01/2010 (i) 2,734
AAA Aaa 2,230 8% due 3/01/2011 (i) 2,975
AAA Aaa 2,410 8% due 3/01/2012 (i) 3,234
AAA Aaa 2,605 8% due 3/01/2013 (i) 3,512
AAA Aaa 2,810 8% due 3/01/2014 (i) 3,790
AAA Aaa 3,035 8% due 3/01/2015 (b) 4,107
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AAA Aaa 17,000 East Bay, California, Municipal
Utilities District, Water System Revenue
Bonds, 4.75% due 6/01/2028 (h) 16,299
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AAA Aaa 10,000 Fresno, California, Sewer Revenue Bonds,
Series A, 5% due 9/01/2023 (h) 9,930
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AAA Aaa 1,640 Fresno, California, Water System Revenue
Bonds (Water Remediation Project),
Series A, 5.875% due 6/01/2004 (c)(i) 1,828
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Long Beach, California, Improvement Bond
Act 1915 (Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 485
NR* NR* 495 7.05% due 9/02/2002 516
NR* NR* 530 7.10% due 9/02/2003 552
NR* NR* 570 7.15% due 9/02/2004 594
NR* NR* 610 7.20% due 9/02/2005 635
NR* NR* 655 7.25% due 9/02/2006 682
NR* NR* 4,065 7.50% due 9/02/2011 4,233
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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 3,146
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NR* NR* 1,000 Long Beach, California, Special Tax
Community Facilities Bonds (District
No.3--Pine Avenue), 6.375% due 9/01/2023 1,064
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7
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
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California (continued)
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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) $ 5,791
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AAA Aaa 17,050 Los Angeles, California, Convention and
Exhibition Center Authority, COP, 9% due
12/01/2005 (i) 22,340
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NR* Aaa 8,950 Los Angeles, California, Convention and
Exhibition Center Authority, Lease
Revenue Bonds, RITR, Series 21, 7.47%
due 8/15/2018 (j) 9,405
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A+ Aa3 20,000 Los Angeles, California, Department of
Water and Power, Electric Plant Revenue
Refunding Bonds, 6.375% due 2/01/2020 21,657
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AAA Aaa 5,000 Los Angeles, California, Department of
Water and Power, Waterworks Revenue
Bonds, 6.30% due 7/01/2024 (h) 5,658
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AAA Aa3 25,000 Los Angeles, California, Department of
Water and Power, Waterworks Revenue
Refunding Bonds, 4.25% due 10/15/2030 (c) 21,999
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AAA Aaa 5,000 Los Angeles, California, GO, Refunding,
Series A, 5.25% due 9/01/2010 (c) 5,437
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Los Angeles, California, Harbor
Department Revenue Bonds:
NR* VMIG1+ 5,000 RITR, Series 7, 9.145% due 11/01/2026
(j) 6,091
AAA NR* 5,000 Refunding, 7.60% due 10/01/2018 (b) 6,523
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AAA Aaa 10,000 Los Angeles, California, Unified School
District, GO, Series A, 5% due 7/01/2021
(c) 9,933
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AAA Aaa 5,000 Los Angeles, California, Wastewater
System Revenue Refunding Bonds, Series
C, 4% due 6/01/2016 (h) 4,506
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NR* NR* 5,860 Los Angeles County, California,
Metropolitan Transportation Authority,
Sales Tax Revenue Bonds, RITR, Series
30, 7.22% due 7/01/2023 (j) 6,004
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AAA Aaa 13,075 Los Angeles County, California,
Metropolitan Transportation Authority,
Sales Tax Revenue Bonds, Second Series,
Series A, 4.75% due 7/01/2026 (f) 12,590
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AAA Aaa 5,000 Metropolitan Water District of Southern
California, GO, Refunding, Series A,
5.25% due 3/01/2013 5,309
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Metropolitan Water District of Southern
California, Waterworks Revenue Bonds:
AA Aa2 11,650 RIB, 8.483% due 2/07/2003 (i)(j) 13,587
AA Aa2 24,500 Series A, 5% due 7/01/2026 24,210
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AA Aa2 4,775 Metropolitan Water District of Southern
California, Waterworks Revenue Refunding
Bonds, Series A, 5.25% due 7/01/2007 5,181
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NR* VMIG1+ 10,000 Northern California, Transmission
Revenue Bonds, RITR, Series 16, 7.22%
due 5/01/2020 (h)(j) 10,250
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AAA Aaa 5,635 Ontario, California, Redevelopment
Financing Authority, Revenue Refunding
Bonds (Cimarron Project No. 1--Center
City), 6.375% due 8/01/2020 (h) 6,120
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NR* NR* 11,620 Pittsburg, California, Redevelopment
Agency, Residential Mortgage Revenue
Bonds, 9.60% due 6/01/2016 (b) 17,766
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NR* NR* 7,870 Pleasanton, California, Joint Powers
Financing Authority, Revenue Refunding
Reassessment Bonds Sub-Series B, 6.75%
due 9/02/2017 8,431
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Sacramento, California, Municipal
Utility District, Electric Revenue
Refunding Bonds: 8,295
AAA Aaa 7,000 INFLOS, 9.477% due 8/15/2018 (c)(j)
AAA Aaa 5,000 Series L, 5.125% due 7/01/2015 (h) 5,165
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San Francisco, California, City and
County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa 6,500 AMT, Issue 6, 6.60% due 5/01/2020 (a) 7,311
AAA Aaa 10,000 Issue 15-B, 4.50% due 5/01/2028 (h) 9,222
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AAA Aaa 5,000 San Francisco, California, City and
County, GO, Refunding, Series 1, 5.125%
due 6/15/2013 (c) 5,239
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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
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8
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
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California (continued)
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AAA Aaa $10,000 San Jose, California, Redevelopment
Agency Tax Allocation (Merged Area
Redevelopment Project), 5% due
8/01/2026(a) $ 9,926
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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)(i) 11,755
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AAA Aaa 10,000 Santa Rosa, California, Wastewater
Revenue Refunding Bonds (Subregional
Wastewater Project), Series A, 5% due
9/01/2022 (c) 9,932
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Southern California Home Financing
Authority, S/F Mortgage Revenue Bonds,
AMT:
AAA NR* 2,510 (Mortgage-Backed Securities Program),
Series A, 7.625% due 10/01/2023 (g) 2,619
AAA NR* 2,010 (Mortgage-Backed Securities Program),
Series A, 7.35% due 9/01/2024 (d)(e) 2,109
AAA NR* 750 Series B, 7.75% due 3/01/2024 (e) 784
- --------------------------------------------------------------------------------
BBB+ NR* 9,785 Stanislaus, California, Waste-to-Energy
Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin
System Inc. Project), 7.625% due
1/01/2010 10,190
- --------------------------------------------------------------------------------
NR* A2 2,500 West Covina, California, COP (Queen of
the Valley Hospital), 6.95% due
8/15/2004 (i) 2,943
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Puerto Rico--1.0%
- --------------------------------------------------------------------------------
AAA Aaa 5,000 Puerto Rico Commonwealth, GO, 6.45% due
7/01/2004 (i) 5,707
- --------------------------------------------------------------------------------
Total Investments (Cost--$541,528)--97.5% 575,662
Other Assets Less Liabilities--2.5% 14,481
--------
Net Assets--100.0% $590,143
========
- --------------------------------------------------------------------------------
(a) AMBAC Insured.
(b) Escrowed to Maturity.
(c) FGIC Insured.
(d) FHA Insured.
(e) FNMA/GNMA Collateralized.
(f) FSA Insured.
(g) GNMA Collateralized.
(h) MBIA Insured.
(i) Prerefunded.
(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, 1999.
(k) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at February
28, 1999.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of February 28, 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$541,528,299) (Note 1a) ......... $575,662,399
Cash .................................................................... 36,264
Receivables:
Securities sold ....................................................... $ 12,434,810
Interest .............................................................. 8,197,021
Beneficial interest sold .............................................. 590,4622 1,222,293
------------
Prepaid registration fees and other assets (Note 1e) .................... 86,512
------------
Total assets ............................................................ 597,007,468
------------
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased .................................................. 5,162,924
Beneficial interest redeemed .......................................... 680,603
Dividends to shareholders (Note 1f) ................................... 454,120
Investment adviser (Note 2) ........................................... 248,358
Distributor (Note 2) .................................................. 145,757 6,691,762
------------
Accrued expenses and other liabilities .................................. 172,271
------------
Total liabilities ....................................................... 6,864,033
------------
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .............................................................. $590,143,435
============
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ....................................................... $ 385,166
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ....................................................... 2,693,471
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ....................................................... 118,521
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ....................................................... 1,779,910
Paid-in capital in excess of par ........................................ 548,806,754
Undistributed realized capital gains on investments--net ................ 2,225,513
Unrealized appreciation on investments--net ............................. 34,134,100
------------
Net assets .............................................................. $590,143,435
============
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $45,658,251 and 3,851,661 shares of
beneficial interest outstanding ......................................... $ 11.85
============
Class B--Based on net assets of $319,392,069 and 26,934,706 shares of
beneficial interest outstanding ......................................... $ 11.86
============
Class C--Based on net assets of $14,051,660 and 1,185,209 shares of
beneficial interest outstanding ......................................... $ 11.86
============
Class D--Based on net assets of $211,041,455 and 17,799,104 shares of
beneficial interest outstanding ......................................... $ 11.86
============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended
February 28, 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned .... $ 16,883,448
(Note 1d):
- ---------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ........................... $ 1,641,473
Account maintenance and distribution fees--Class B (Note 2) . 824,861
Account maintenance fees--Class D (Note 2) .................. 104,130
Transfer agent fees--Class B (Note 2) ....................... 53,443
Accounting services (Note 2) ................................ 50,953
Account maintenance and distribution fees--Class C (Note 2) . 40,850
Professional fees ........................................... 36,087
Printing and shareholder reports ............................ 32,809
Registration fees (Note 1e) ................................. 30,255
Custodian fees .............................................. 29,683
Transfer agent fees--Class D (Note 2) ....................... 27,327
Trustees' fees and expenses ................................. 18,824
Pricing fees ................................................ 7,591
Transfer agent fees--Class A (Note 2) ....................... 5,914
Transfer agent fees--Class C (Note 2) ....................... 2,306
Other ....................................................... 6,369
-----------
Total expenses before reimbursement ......................... 2,912,875
Reimbursement of expenses (Note 2) .......................... (12,627)
-----------
Total expenses after reimbursement .......................... 2,900,248
------------
Investment income--net ...................................... 13,983,200
------------
- ---------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net ........................... 9,882,067
Unrealized Gain on Change in unrealized appreciation on investments--net ....... (12,009,861)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ........ $ 11,855,406
============
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net ..................................... $ 13,983,200 $ 29,727,439
Realized gain on investments--net .......................... 9,882,067 17,029,420
Change in unrealized appreciation on investments--net ...... (12,009,861) 110,393
------------ ------------
Net increase in net assets resulting from operations ....... 11,855,406 46,867,252
------------ ------------
- ---------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Class A .................................................. (1,130,126) (2,340,837)
Shareholders Class B .................................................. (7,436,485) (16,812,983)
(Note 1f): Class C .................................................. (299,924) (556,750)
Class D .................................................. (5,116,665) (10,016,869)
Realized gain on investments--net:
Class A .................................................. (950,752) --
Class B .................................................. (7,010,408) --
Class C .................................................. (300,919) --
Class D .................................................. (4,511,269) --
------------ ------------
Net decrease in net assets from dividends and distributions
to shareholders ............................................ (26,756,548) (29,727,439)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions ...................................... 236,423 (29,206,031)
(Note 4): ------------ ------------
- ---------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ............................... (14,664,719) (12,066,218)
Beginning of period ........................................ 604,808,154 616,874,372
------------ ------------
End of period .............................................. $590,143,435 $604,808,154
============ ============
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended August 31,
Feb. 28, ---------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ................. $ 12.15 $ 11.81 $ 11.49 $ 11.40 $ 11.32
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............................... .30 .63 .64 .64 .64
Realized and unrealized gain (loss) on
investments--net ..................................... (.04) .34 .32 .09 .08
-------- -------- -------- -------- --------
Total from investment operations ..................... .26 .97 .96 .73 .72
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............................. (.30) (.63) (.64) (.64) (.64)
Realized gain on investments--net .................. (.26) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.56) (.63) (.64) (.64) (.64)
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 11.85 $ 12.15 $ 11.81 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ................... 2.14%+ 8.39% 8.55% 6.53% 6.75%
Return:** ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement ....................... .64%* -- -- -- --
Net Assets: ======== ======== ======== ======== ========
Expenses ............................................. .65%* .65% .63% .65% .65%
======== ======== ======== ======== ========
Investment income--net ............................... 5.01%* 5.25% 5.49% 5.51% 5.83%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ............. $ 45,658 $ 45,544 $ 44,652 $ 42,668 $ 44,228
Data: ======== ======== ======== ======== ========
Portfolio turnover ................................... 47.95% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Aggregate total investment return.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<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 For the Year Ended August 31,
Feb. 28, -------------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .... $ 12.16 $ 11.82 $ 11.49 $ 11.40 $ 11.32
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................. .27 .57 .58 .58 .59
Realized and unrealized gain (loss) on
investments--net ........................ (.04) .34 .33 .09 .08
-------- -------- -------- -------- --------
Total from investment operations ........ .23 .91 .91 .67 .67
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ (.27) (.57) (.58) (.58) (.59)
Realized gain on investments--net ..... (.26) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ....... (.53) (.57) (.58) (.58) (.59)
-------- -------- -------- -------- --------
Net asset value, end of period .......... $ 11.86 $ 12.16 $ 11.82 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 1.89%+ 7.84% 8.09% 5.99% 6.25%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement .......... 1.15%* -- -- -- --
Net Assets: ======== ======== ======== ======== ========
Expenses ................................ 1.15%* 1.16% 1.14% 1.16% 1.16%
======== ======== ======== ======== ========
Investment income--net .................. 4.51%* 4.75% 4.98% 5.01% 5.32%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $319,392 $341,111 $376,018 $480,668 $616,199
Data: ======== ======== ======== ======== ========
Portfolio turnover ...................... 47.95% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Aggregate total investment return.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
For the For the
Six For the Period
The following per share data and ratios have been derived Months Year Ended Oct. 21,
from information provided in the financial statements. Ended August 31, 1994+ to
Feb. 28, ------------------------------ Aug. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .... $ 12.15 $ 11.82 $ 11.49 $11.40 $10.94
Operating ------- ------- ------- ------ ------
Performance: Investment income--net .................. .26 .55 .57 .57 .49
Realized and unrealized gain (loss) on
investments--net ........................ (.03) .33 .33 .09 .46
------- ------- ------- ------ ------
Total from investment operations ........ .23 .88 .90 .66 .95
------- ------- ------- ------ ------
Less dividends and distributions:
Investment income--net ................ (.26) (.55) (.57) (.57) (.49)
Realized gain on investments--net ..... (.26) -- -- -- --
------- ------- ------- ------ ------
Total dividends and distributions ....... (.52) (.55) (.57) (.57) (.49)
------- ------- ------- ------ ------
Net asset value, end of period .......... $ 11.86 $ 12.15 $ 11.82 $11.49 $11.40
======= ======= ======= ====== ======
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 1.92%++ 7.65% 7.98% 5.88% 8.91%++
Return:** ======= ======= ======= ====== ======
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement .......... 1.25%* -- -- -- --
Net Assets: ======= ======= ======= ====== ======
Expenses ................................ 1.26%* 1.26% 1.24% 1.26% 1.27%*
======= ======= ======= ====== ======
Investment income--net .................. 4.41%* 4.64% 4.87% 4.91% 5.04%*
======= ======= ======= ====== ======
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $14,052 $12,646 $10,904 $8,112 $3,131
Data: ======= ======= ======= ====== ======
Portfolio turnover ...................... 47.95% 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 February 28, 1999
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
------------------------------------------------------
For the For the
Six For the Period
The following per share data and ratios have been derived Months Year Ended Oct. 21,
from information provided in the financial statements. Ended August 31, 1994+ to
Feb. 28, ------------------------------ Aug. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .... $ 12.16 $ 11.82 $ 11.49 $ 11.40 $ 10.94
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .................. .29 .62 .63 .63 .54
Realized and unrealized gain (loss) on
investments--net ........................ (.04) .34 .33 .09 .46
------- ------- ------- ------- -------
Total from investment operations ........ .25 .96 .96 .72 1.00
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net ................ (.29) (.62) (.63) (.63) (.54)
Realized gain on investments--net ..... (.26) -- -- -- --
------- ------- ------- ------- -------
Total dividends and distributions ....... (.55) (.62) (.63) (.63) (.54)
------- ------- ------- ------- -------
Net asset value, end of period .......... $ 11.86 $ 12.16 $ 11.82 $ 11.49 $ 11.40
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 2.09%++ 8.28% 8.53% 6.43% 9.39%++
Return:** ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement .......... .74%* -- -- -- --
Net Assets: ======= ======= ======= ======= =======
Expenses ................................ .75%* .75% .73% .75% .76%*
======= ======= ======= ======= =======
Investment income--net .................. 4.91%* 5.15% 5.39% 5.42% 5.59%*
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $211,041 $205,507 $185,300 $111,817 $ 3,846
Data: ======= ======= ======= ======= =======
Portfolio turnover ...................... 47.95% 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.
16
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
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's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. 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.
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
17
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 ("MLFD" or the "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 is required to pay a
monthly fee based upon the average daily value of the Fund's net assets at an
annual rate of 0.55%. FAM has agreed to waive a portion of its fee payable by
the Fund so that such fee is 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. For the six months ended February 28, 1999, FAM
earned fees of $1,641,473, of which $12,627 was voluntarily waived.
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, 1999, 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 $ 350 $ 3,597
Class D $ 1,497 $62,016
- --------------------------------------------------------------------------------
For the six months ended February 28, 1999, MLPF&S received contingent deferred
sales charges of $97,008 and $2,578 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 six
months ended February 28, 1999 were $280,717,454 and $306,060,004, respectively.
Net realized gains for the six months ended February 28, 1999 and net unrealized
gains as of February 28, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................. $ 9,882,067 $34,134,100
----------- -----------
Total .................................. $ 9,882,067 $34,134,100
=========== ===========
- --------------------------------------------------------------------------------
As of February 28, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $34,134,100, of which $37,897,903 related to appreciated
securities and $3,763,803 related to depreciated securities. The aggregate cost
of investments at February 28, 1999 for Federal income tax purposes was
$541,528,299.
18
<PAGE>
Merrill Lynch California Municipal Bond Fund February 28, 1999
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $236,423 and $(29,206,031) for the six months ended February
28, 1999 and for the year ended August 31, 1998, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended February 28, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 390,608 $ 4,684,855
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 79,845 953,880
----------- ------------
Total issued ............................. 470,453 5,638,735
Shares redeemed .......................... (366,400) (4,416,620)
----------- ------------
Net increase ............................. 104,053 $ 1,222,115
=========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 B Shares for the Six Months Dollar
Ended February 28, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,629,101 $ 19,699,119
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 565,156 6,748,714
----------- ------------
Total issued ............................. 2,194,257 26,447,833
Automatic conversion
of shares ................................ (999,771) (12,025,648)
Shares redeemed .......................... (2,319,050) (27,945,504)
----------- ------------
Net decrease ............................. (1,124,564) $(13,523,319)
=========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 C Shares for the Six Months Dollar
Ended February 28, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 247,713 $ 2,999,032
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 30,175 360,118
----------- ------------
Total issued ............................. 277,888 3,359,150
Shares redeemed .......................... (133,065) (1,596,201)
----------- ------------
Net increase ............................. 144,823 $ 1,762,949
=========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 D Shares for the Six Months Dollar
Ended February 28, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 859,547 $ 10,345,957
Automatic conversion
of shares ................................ 999,909 12,025,648
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 350,555 4,187,391
----------- ------------
Total issued ............................. 2,210,011 26,558,996
Shares redeemed .......................... (1,317,187) (15,784,318)
----------- ------------
Net increase ............................. 892,824 $ 10,774,678
=========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
=========== ============
- --------------------------------------------------------------------------------
19
<PAGE>
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--2/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
