MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 1999
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended August 31, 1999, long-term bond yields rose
significantly. Steady US economic growth combined with improvement in foreign
economies and inflation concerns put upward pressure on bond yields throughout
the period. Continued strong US employment growth, particularly the decline in
the US unemployment rate to 4.2% in early June, was among the reasons the
Federal Reserve Board cited for raising short-term interest rates in late June
and again in late August. US Treasury bond yields reacted by climbing above
6.25% by mid-August before improving somewhat to 6.06% by August 31, 1999.
During the last six months, yields on long-term US Treasury securities increased
approximately 50 basis points (0.50%).
Long-term tax-exempt bond yields also rose during the last six months. Until
early May, the municipal bond market had been able to withstand much of the
upward pressure on bond yields. However, investor concerns regarding ongoing US
economic strength and the fear of additional moves by the Federal Reserve Board
eventually pushed municipal bond yields higher throughout June, July and August.
During the period, yields on long-term tax-exempt revenue bonds rose almost 55
basis points to 5.83%, as measured by the Bond Buyer Revenue Bond Index.
While the tax-exempt market has slightly underperformed its taxable counterpart
in recent months, technical conditions are helping to support municipal bond
prices. During the last six months, more than $115 billion in long-term
municipal bonds was underwritten, a decrease of more than 20% compared to the
same period a year ago. During the past three months, almost $60 billion in
municipal bonds was underwritten. This quarterly issuance represents a decline
of approximately 20% compared to the same three-month period in 1998.
Recently, the supply of new municipal bonds slowed even further. Total issuance
in August 1999 of $14 billion was nearly 40% lower than August 1998 levels.
Additionally, in June and July, investors received more than $40 billion in
coupon income and proceeds from bond maturities and early bond redemptions.
These proceeds have generated significant retail investor interest, easily
absorbing the recent diminished supply.
The recent relative underperformance of the municipal bond market has generated
very attractive tax-exempt bond yield ratios, similar to those that were
available at the end of 1998. In December 1998, long-term, uninsured municipal
bond yields were higher than those of their taxable counterparts. Historically,
long-term tax-exempt bond yields have been approximately 82% - 85% of long-term
US Treasury bond yields. Municipal bond yields rose at a faster rate in recent
months than US Treasury bond yields, causing the yield ratio to increase. At May
31, 1999, long-term municipal bond yields were approximately 92% of their
taxable counterparts. At August 31, 1999, long-term uninsured tax-exempt bond
yields were approximately 96% of US Treasury bonds. Current ratios, while lower
than those available at the end of 1998, still represent historically attractive
levels.
Looking ahead, it appears to us that long-term municipal bond yields will trade
in a relatively tight range near current levels. Strong US economic performance
is being balanced by nearly negligible inflation readings, as well as
improvements in productivity in both manufacturing and service industries. We
believe that future moves by the Federal Reserve Board have largely been
discounted by bond investors and are to a great extent reflected in present bond
yields.
Any improvement in bond prices is likely to be contingent upon weakening in both
US employment growth and consumer spending. The 100 basis point rise in US
Treasury bond yields seen thus far this year is likely to negatively affect US
economic growth. The US housing market will be among the first sectors likely to
be affected, as some declines have already been evidenced because of higher
mortgage rates. We believe it is also unrealistic to expect double-digit returns
in US equity markets to continue indefinitely. Much of the US consumer's wealth
is tied to recent stock market appreciation. Any slowing in these incredible
growth rates is likely to reduce consumer spending. We believe that these
factors suggest that the worst of the recent increase in bond yields has passed
and stable, if not slightly improving, bond prices may be expected.
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
Fiscal Year in Review
We generally strive to provide shareholders with both components of a
competitive total return. That is, we try to achieve an above-industry average
level of tax-exempt income while seeking to enhance the Fund's net asset
valuations. During the 12 months ended August 31, 1999, the volatility
experienced in the fixed-income market made it difficult to avoid losses for the
portfolio's underlying holdings as a result of the drastic rise in general
market interest rates. We took measures to try to limit the degree of
vulnerability the portfolio would experience as interest rates rose, but those
steps fell short in completely cushioning the Fund and its net asset values
declined.
The California municipal marketplace generally offers attractive yields to
investors because it is normally one of strong retail demand that typically gets
even firmer as interest rates rise. This steady demand was evident throughout
1999. However, the speed and degree to which interest rates on municipal bonds
rose hampered this demand's ability to support the market as it had in past
periods of rising interest rates. The Fund's exposure to the long-term end of
the California market resulted in its net asset valuations suffering.
At August 31, 1999, portfolio investments remained focused on high-quality
California issues, with over 85% of total assets rated AA or better by at least
one of the major rating agencies. This strategy helped performance during the
fiscal year since rising interest rates tended to widen credit quality spreads.
The volatility that characterized the fiscal year ended August 31, 1999 made it
difficult to restructure the portfolio in a sense of direction and timing. In
hindsight, we should have adopted a purely defensive approach as we have done in
past periods when it was clear that interest rates were in a definite uptrend.
This year's volatility confused the situation, making the overall trend appear
as a series of trading ranges. Municipal bonds, especially California municipal
bonds, were originally well supported by attractive valuations. However, later
in the year their price deteriorated further, despite their relative value in
response to excess corporate and agency supply coming to market prematurely to
avoid year-end Year 2000 concerns.
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/ Terry K. Glenn
Terry K. Glenn
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
September 29, 1999
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 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/
12 Month 3 Month Since Inception Standardized
As of August 31, 1999 Total Return Total Return Total Return 30-Day Yield
==============================================================================================================================
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares -1.80% -3.26% +89.22% 4.81%
- ------------------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class B Shares -2.38 -3.38 +79.68 4.51
- ------------------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class C Shares -2.40 -3.41 +30.84 4.40
- ------------------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class D Shares -1.98 -3.28 +34.10 4.72
==============================================================================================================================
</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
ten years for Class A & Class B Shares and from 10/21/94 for Class C &
Class D Shares.
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A and
Class B Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index.
Beginning and ending values are:
8/89 8/99
ML California Municipal Bond
Fund+--Class A Shares* $ 9,600 $18,166
ML California Municipal Bond
Fund+--Class B Shares* $10,000 $17,966
Lehman Brothers Municipal Bond
Index++ $10,000 $20,307
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** 8/99
ML California Municipal Bond
Fund+--Class C Shares* $10,000 $13,084
ML California Municipal Bond
Fund+--Class D Shares* $ 9,600 $12,874
Lehman Brothers Municipal Bond
Index++ $10,000 $14,120
* 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 C & Class D Shares' graph is 10/31/94.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 6/30/99 +1.78% -2.29%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +6.42 +5.56
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +6.73 +6.29
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/99 +1.28% -2.50%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +5.90 +5.90
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +6.20 +6.20
- --------------------------------------------------------------------------------
* 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 6/30/99 +1.09% +0.14%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/99 +6.24 +6.24
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Year Ended 6/30/99 +1.69% -2.38%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/99 +6.80 +5.87
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
California -- 96.6%
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
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 $ 4,011
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Alameda Corridor Transportation Authority, California, Revenue Bonds, Senior Lien,
Series A (h):
AAA Aaa 2,845 5.25% due 10/01/2021 2,695
AAA Aaa 4,500 4.75% due 10/01/2025 3,901
AAA Aaa 20,210 5% due 10/01/2029 18,185
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AAA Aaa 5,000 Alameda County, California, COP (Alameda County Medical Center Project),
5.30% due 6/01/2026 (h) 4,733
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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) 3,502
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California HFA, Home Mortgage Revenue Bonds, AMT (d):
AA- Aa2 3,235 Series A, 7.70% due 8/01/2030 3,316
AA- Aa2 5,960 Series F-1, 7% due 8/01/2026 6,258
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California HFA, Revenue Bonds, AMT:
A+ Aa2 4,000 RIB, Series B-2, 8.879% due 8/01/2023 (d)(j) 4,355
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (h) 1,027
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California Health Facilities Financing Authority Revenue Bonds:
NR* Aaa 12,285 RITR, Series 17, 6.90% due 8/15/2030 (h)(j) 11,232
NR* A1 5,780 (Scripps Research Institute), Series A, 6.625% due 7/01/2014 6,206
- ------------------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding, VRDN (k):
NR* NR* 4,000 (Pacific Gas and Electric), Series E, 2.55% due 11/02/2026 4,000
A1 P1 600 (Southern California Edison), Series C, 2.85% due 2/28/2008 600
- ------------------------------------------------------------------------------------------------------------------------------------
California State Department of Water Resources, Water System Revenue Refunding
Bonds (Central Valley Project):
AAA Aaa 10,000 Series Q, 5.375% due 12/01/2027 (h) 9,586
AA Aa2 6,000 Series S, 5% due 12/01/2022 5,484
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A1+ VMIG1+ 1,695 California State Economic Development Financing Authority Revenue Bonds
(California Independent Systems Project), VRDN, Series C, 2.80% due 4/01/2008 (k) 1,695
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,350 California State, GO, 5.375% due 6/01/2026 (c) 9,917
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</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
VRDN Variable Rate Demand Notes
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
California (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
California State, GO, Refunding Bonds:
AA- Aa3 $ 4,875 5.625% due 9/01/2024 $ 4,827
AAA Aaa 20,000 4.25% due 10/01/2026 (h) 15,790
AA- Aa3 4,000 4.75% due 4/01/2029 3,424
- ------------------------------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds:
A+ Aaa 10,125 (Department of Corrections), Series A, 7% due 11/01/2004 (i) 11,567
A+ A 3,200 High Technology Facilities (San Jose Facilities), Series A, 7.75% due 8/01/2006 3,559
A+ Aaa 7,000 (Various Community College Projects), 7% due 3/01/2004 (i) 7,897
- ------------------------------------------------------------------------------------------------------------------------------------
A+ A1 3,000 California State Public Works Board, Lease Revenue Refunding Bonds
(Department of Corrections), Series D, 5.375% due 11/01/2014 2,986
- ------------------------------------------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority, COP:
NR* NR* 12,000 RIB, Series 24, 7.255% due 12/01/2015 (f)(j) 11,781
AA Aa3 4,750 (Saint Joseph Health System Group), 6.625% due 7/01/2004 (i) 5,307
- ------------------------------------------------------------------------------------------------------------------------------------
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Bonds, Series A, 7.10% due 8/01/2022 (i) 1,075
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Corona, California, COP, Refunding Bonds (Corona Community):
AAA Aaa 1,915 8% due 3/01/2009 (i) 2,367
AAA Aaa 2,065 8% due 3/01/2010 (i) 2,572
AAA Aaa 2,230 8% due 3/01/2011 (i) 2,790
AAA Aaa 2,410 8% due 3/01/2012 (i) 3,035
AAA Aaa 2,605 8% due 3/01/2013 (i) 3,300
AAA Aaa 2,810 8% due 3/01/2014 (i) 3,581
AAA Aaa 3,035 8% due 3/01/2015 (b) 3,886
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 El Monte, California, COP, Department of Public Social Services Facility,
4.75% due 6/01/2030 (a) 1,713
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AAA Aaa 5,000 Fairfield, California, Public Financing Authority, Revenue Refunding Bonds
(Municipal Park Improvement District Number 1), Series A, 5% due 7/01/2023 (f) 4,559
- ------------------------------------------------------------------------------------------------------------------------------------
Long Beach, California, Improvement Bond Act 1915 (Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 482
NR* NR* 495 7.05% due 9/02/2002 514
NR* NR* 530 7.10% due 9/02/2003 550
NR* NR* 570 7.15% due 9/02/2004 591
NR* NR* 610 7.20% due 9/02/2005 633
NR* NR* 655 7.25% due 9/02/2006 679
NR* NR* 4,065 7.50% due 9/02/2011 4,216
- ------------------------------------------------------------------------------------------------------------------------------------
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 3,531
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Long Beach, California, Special Tax Community Facilities Bonds (District No. 3 --
Pine Avenue), 6.375% due 9/01/2023 1,019
- ------------------------------------------------------------------------------------------------------------------------------------
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) 5,548
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 16,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (i) 20,014
- ------------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 8,950 Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue
Refunding Bonds, RITR, Series 21, 7.32% due 8/15/2018 (h)(j) 8,647
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
California (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
A+ Aa3 $11,600 Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds, 6.375% due 2/01/2020 $ 12,232
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aa3 10,815 Los Angeles, California, Department of Water and Power, Waterworks Revenue Crossover
Refunding Bonds, 4.25% due 10/15/2030 (c) 8,386
- ------------------------------------------------------------------------------------------------------------------------------------
NR* VMIG1+ 5,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, RITR, Series RI-7,
8.995% due 11/01/2026 (h)(j) 5,470
- ------------------------------------------------------------------------------------------------------------------------------------
AAA NR* 5,000 Los Angeles, California, Harbor Department Revenue Refunding Bonds, 7.60%
due 10/01/2018 (b) 6,137
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Los Angeles, California, Unified School District, GO, Series A, 5% due 7/01/2021 (c) 9,178
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 5,860 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue
Bonds, RITR, Series 30, 7.07% due 7/01/2023 (a)(j) 5,235
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,805 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue
Refunding Bonds, First Tier, Senior Series B, 4.75% due 7/01/2024 (f) 4,173
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,305 Los Angeles County, California, Public Works Financing Authority, Lease Revenue
Bonds (Multiple Capital Facilities Project V), Series B, 5.125% due 12/01/2029 (a) 3,041
- ------------------------------------------------------------------------------------------------------------------------------------
AA Aa2 11,150 Metropolitan Water District of Southern California, Waterworks Revenue Bonds,
RIB, 8.483% due 2/07/2003 (i)(j) 12,544
- ------------------------------------------------------------------------------------------------------------------------------------
AA Aa2 5,000 Metropolitan Water District of Southern California, Waterworks Revenue Refunding Bonds,
Series A, 4.75% due 7/01/2022 4,374
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,300 Modesto, California, Irrigation District, COP, Refunding and Capital Improvements,
Series A, 4.75% due 7/01/2026 (a) 4,566
- ------------------------------------------------------------------------------------------------------------------------------------
NR* VMIG1+ 10,000 Northern California, Transmission Revenue Refunding Bonds, RITR, Series 16, 7.07%
due 5/01/2020 (h)(j) 9,077
- ------------------------------------------------------------------------------------------------------------------------------------
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) 5,929
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Pasadena, California, Electric Revenue Refunding Bonds, 4.75% due 8/01/2024 (h) 3,474
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (b) 16,819
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 7,835 Pleasanton, California, Joint Powers Financing Authority, Revenue Refunding
Reassessment Bonds, Sub-Series B, 6.75% due 9/02/2017 8,128
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,870 Riverside, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Casa Blanca Redevelopment), Series A, 5% due 8/01/2025 (a) 2,600
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Sacramento, California, Municipal Utility District, Electric Revenue Refunding Bonds,
INFLOS, 9.477% due 8/15/2018 (c)(j) 7,814
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 12,000 San Diego, California, Certificates of Undivided Interest Revenue Bonds (Water Utility Fund),
4.75% due 8/01/2028 (c) 10,333
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 San Diego, California, Convention Center Expansion Financing Authority, Lease Revenue
Bonds, Series A, 4.75% due 4/01/2028 (a) 5,163
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 16,600 San Francisco, California, Bay Area Rapid Transit District, Sales Tax Revenue Refunding
Bonds, 5% due 7/01/2028 (a) 14,963
- ------------------------------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airport Commission, International Airport
Revenue Bonds, AMT, Second Series:
AAA Aaa 6,500 Issue 6, 6.60% due 5/01/2020 (a) 6,947
AAA Aaa 3,245 Issue 13-B, 5.625% due 5/01/2021 (h) 3,203
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
California (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
AAA Aaa $10,000 San Jose, California, Redevelopment Agency Tax Allocation (Merged Area Redevelopment
Project), 5% due 8/01/2026 (a) $ 9,055
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Mateo-Foster City, California, School District, GO, 5.30% due 8/01/2029 (c) 4,721
- ------------------------------------------------------------------------------------------------------------------------------------
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) 11,316
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 25,000 Santa Clara County, California, Financing Authority, Lease Revenue Refunding Bonds,
Series A, 5% due 11/15/2022 (a) 22,881
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 3,000 Santa Margarita, California, Water District, Special Tax Refunding Bonds (Community
Facilities District Number 99), Series 1, 6.25% due 9/01/2029 3,010
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional Wastewater
Project), Series A, 5% due 9/01/2022 (c) 9,133
- ------------------------------------------------------------------------------------------------------------------------------------
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT:
AAA NR* 2,045 Series A, 7.625% due 10/01/2023 (g) 2,111
AAA NR* 1,670 Series A, 7.35% due 9/01/2024 (e) 1,731
AAA NR* 675 Series B, 7.75% due 3/01/2024 (e) 697
- ------------------------------------------------------------------------------------------------------------------------------------
A- 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 10,043
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 University of California, Revenue Refunding Bonds (Multiple Purpose Projects),
Series E, 5.125% due 9/01/2020 (h) 4,697
- ------------------------------------------------------------------------------------------------------------------------------------
NR* A2 2,500 West Covina, California, COP (Queen of the Valley Hospital), 6.95% due 8/15/2004 (i) 2,835
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 1.1%
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Puerto Rico Commonwealth, GO, 6.45% due 7/01/2004 (i) 5,516
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $496,962) -- 97.7% 500,675
Other Assets Less Liabilities -- 2.3% 11,955
--------
Net Assets -- 100.0% $512,630
========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 August 31, 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 August 31,
1999.
* 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.
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8
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1999
<TABLE>
<C> <S> <C> <C>
Assets: Investments, at value (identified cost -- $496,962,336) (Note 1a) ........... $500,674,633
Cash ........................................................................ 66,543
Receivables:
Securities sold ........................................................... $ 12,318,698
Interest .................................................................. 7,900,149
Beneficial interest sold .................................................. 86,666 20,305,513
------------
Prepaid registration fees and other assets (Note 1e) ........................ 58,762
------------
Total assets ................................................................ 521,105,451
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ...................................................... 5,556,075
Beneficial interest redeemed .............................................. 1,761,629
Dividends to shareholders (Note 1f) ....................................... 602,503
Investment adviser (Note 2) ............................................... 235,105
Distributor (Note 2) ...................................................... 134,569 8,289,881
------------
Accrued expenses and other liabilities ...................................... 185,152
------------
Total liabilities ........................................................... 8,475,033
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................................. $512,630,418
============
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 339,098
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 2,424,286
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 106,009
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 1,747,558
Paid-in capital in excess of par ............................................ 508,076,287
Accumulated distributions in excess of realized capital gains -- net
(Note 1f) ................................................................... (3,775,117)
Unrealized appreciation on investments -- net ............................... 3,712,297
------------
Net assets .................................................................. $512,630,418
============
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A -- Based on net assets of $37,641,196 and 3,390,982 shares
of beneficial interest outstanding .......................................... $ 11.10
============
Class B -- Based on net assets of $269,191,558 and 24,242,864 shares
of beneficial interest outstanding .......................................... $ 11.10
============
Class C -- Based on net assets of $11,768,898 and 1,060,094 shares
of beneficial interest outstanding .......................................... $ 11.10
============
Class D -- Based on net assets of $194,028,766 and 17,475,577 shares
of beneficial interest outstanding .......................................... $ 11.10
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- -------
9
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned .................... $ 33,275,526
(Note 1d):
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ........................................... $ 3,176,269
Account maintenance and distribution fees -- Class B (Note 2) ............... 1,580,404
Account maintenance fees -- Class D (Note 2) ................................ 208,037
Transfer agent fees -- Class B (Note 2) ..................................... 110,261
Accounting services (Note 2) ................................................ 96,166
Professional fees ........................................................... 86,421
Printing and shareholder reports ............................................ 82,347
Account maintenance and distribution fees -- Class C (Note 2) ............... 79,999
Transfer agent fees -- Class D (Note 2) ..................................... 59,760
Custodian fees .............................................................. 59,052
Registration fees (Note 1e) ................................................. 56,236
Trustees' fees and expenses ................................................. 39,314
Pricing fees ................................................................ 14,390
Transfer agent fees -- Class A (Note 2) ..................................... 12,532
Transfer agent fees -- Class C (Note 2) ..................................... 4,884
Other ....................................................................... 10,976
------------
Total expenses .............................................................. 5,677,048
------------
Investment income -- net .................................................... 27,598,478
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized gain on investments -- net ......................................... 3,881,437
ized Gain (Loss) on Change in unrealized appreciation on investments -- net ..................... (42,431,664)
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations ........................ $(10,951,749)
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- -------
10
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
August 31,
-----------------------------
Increase (Decrease) in Net Assets: 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Operations: Investment income -- net .................................................... $ 27,598,478 $ 29,727,439
Realized gain on investments -- net ......................................... 3,881,437 17,029,420
Change in unrealized appreciation on investments -- net ..................... (42,431,664) 110,393
------------ ------------
Net increase (decrease) in net assets resulting from operations ............. (10,951,749) 46,867,252
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends & Investment income -- net:
Distributions to Class A ................................................................... (2,218,488) (2,340,837)
Shareholders Class B ................................................................... (14,430,329) (16,812,983)
(Note 1f): Class C ................................................................... (595,163) (556,750)
Class D ................................................................... (10,354,498) (10,016,869)
Realized gain on investments -- net:
Class A ................................................................... (669,761) --
Class B ................................................................... (4,938,507) --
Class C ................................................................... (211,983) --
Class D ................................................................... (3,177,980) --
In excess of realized gain on investments -- net:
Class A ................................................................... (280,991) --
Class B ................................................................... (2,071,901) --
Class C ................................................................... (88,936) --
Class D ................................................................... (1,333,289) --
------------ ------------
Net decrease in net assets from dividends and distributions to shareholders . (40,371,826) (29,727,439)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions .... (40,854,161) (29,206,031)
Transactions ------------ ------------
(Note 4):
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ................................................ (92,177,736) (12,066,218)
Beginning of year ........................................................... 604,808,154 616,874,372
------------ ------------
End of year ................................................................. $512,630,418 $604,808,154
============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- -------
11
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. ---------------------------------------------------------
For the Year Ended August 31,
---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .............. $ 12.15 $ 11.81 $ 11.49 $ 11.40 $ 11.32
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .60 .63 .64 .64 .64
Realized and unrealized gain (loss) on
investments -- net .............................. (.79) .34 .32 .09 .08
-------- -------- -------- -------- --------
Total from investment operations ................ (.19) .97 .96 .73 .72
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (.60) (.63) (.64) (.64) (.64)
Realized gain on investments -- net ........... (.18) -- -- -- --
In excess of realized gain on
investments -- net ............................ (.08) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.86) (.63) (.64) (.64) (.64)
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 11.10 $ 12.15 $ 11.81 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (1.80%) 8.39% 8.55% 6.53% 6.75%
Return:* ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ........................................ .65% .65% .63% .65% .65%
Average ======== ======== ======== ======== ========
Net Assets: Investment income -- net ........................ 5.07% 5.25% 5.49% 5.51% 5.83%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .......... $ 37,641 $ 45,544 $ 44,652 $ 42,668 $ 44,228
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 106.84% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. ---------------------------------------------------------
For the Year Ended August 31,
---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .............. $ 12.16 $ 11.82 $ 11.49 $ 11.40 $ 11.32
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .54 .57 .58 .58 .59
Realized and unrealized gain (loss) on
investments -- net .............................. (.80) .34 .33 .09 .08
-------- -------- -------- -------- --------
Total from investment operations ................ (.26) .91 .91 .67 .67
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (.54) (.57) (.58) (.58) (.59)
Realized gain on investments -- net ........... (.18) -- -- -- --
In excess of realized gain on
investments -- net ............................ (.08) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.80) (.57) (.58) (.58) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (2.38%) 7.84% 8.09% 5.99% 6.25%
Return:* ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ........................................ 1.16% 1.16% 1.14% 1.16% 1.16%
Average ======== ======== ======== ======== ========
Net Assets: Investment income -- net ........................ 4.57% 4.75% 4.98% 5.01% 5.32%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .......... $269,191 $341,111 $376,018 $480,668 $616,199
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 106.84% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of
sales charges.
See Notes to Financial Statements.
- -------
12
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<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: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <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 .................... .53 .55 .57 .57 .49
Realized and unrealized gain (loss) on
investments -- net .......................... (.79) .33 .33 .09 .46
-------- -------- -------- -------- --------
Total from investment operations ............ (.26) .88 .90 .66 .95
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net .................. (.53) (.55) (.57) (.57) (.49)
Realized gain on investments -- net ....... (.18) -- -- -- --
In excess of realized gain on
investments -- net ........................ (.08) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ........... (.79) (.55) (.57) (.57) (.49)
-------- -------- -------- -------- --------
Net asset value, end of period .............. $ 11.10 $ 12.15 $ 11.82 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .......... (2.40%) 7.65% 7.98% 5.88% 8.91%++
Return:** ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Average Expenses .................................... 1.26% 1.26% 1.24% 1.26% 1.27%*
Net Assets: ======== ======== ======== ======== ========
Investment income -- net .................... 4.46% 4.64% 4.87% 4.91% 5.04%*
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) .... $ 11,769 $ 12,646 $ 10,904 $ 8,112 $ 3,131
Data: ======== ======== ======== ======== ========
Portfolio turnover .......................... 106.84% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of
sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
- -------
13
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<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: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <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 .................... .59 .62 .63 .63 .54
Realized and unrealized gain (loss) on
investments -- net .......................... (.80) .34 .33 .09 .46
-------- -------- -------- -------- --------
Total from investment operations ............ (.21) .96 .96 .72 1.00
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net .................. (.59) (.62) (.63) (.63) (.54)
Realized gain on investments -- net ....... (.18) -- -- -- --
In excess of realized gain on
investments -- net ........................ (.08)
-------- -------- -------- -------- --------
Total dividends and distributions ........... (.85) (.62) (.63) (.63) (.54)
-------- -------- -------- -------- --------
Net asset value, end of period .............. $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .......... (1.98%) 8.28% 8.53% 6.43% 9.39%++
Return:** ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Average Net Expenses .................................... .75% .75% .73% .75% .76%*
Assets: ======== ======== ======== ======== ========
Investment income -- net .................... 4.98% 5.15% 5.39% 5.42% 5.59%*
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) .... $194,029 $205,507 $185,300 $111,817 $ 3,846
Data: ======== ======== ======== ======== ========
Portfolio turnover .......................... 106.84% 90.92% 73.60% 53.79% 53.40%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of
sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
- -------
14
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 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. 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 monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.
- -------
15
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 the
following annual rates: .55% of the Fund's average daily net assets not
exceeding $500 million; .525% of average daily net assets in excess of $500
million but not exceeding $1 billion; and .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 .......................... .25% .25%
Class C .......................... .25% .35%
Class D .......................... .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, 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 .............................. $ 1,171 $10,359
Class D .............................. $ 2,461 $70,934
- --------------------------------------------------------------------------------
For the year ended August 31, 1999, MLPF&S received contingent deferred sales
charges of $262,836 and $4,739 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 the
year ended August 31, 1999 were $600,859,589 and $653,387,872, respectively.
Net realized gains for the year ended August 31, 1999 and net unrealized gains
as of August 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................... $3,709,162 $3,712,297
Financial futures contracts .............. 172,275 --
---------- ----------
Total .................................... $3,881,437 $3,712,297
========== ==========
- --------------------------------------------------------------------------------
As of August 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $3,712,297, of which $22,300,807 related to appreciated
securities and $18,588,510 related to depreciated securities. The aggregate cost
of investments at August 31, 1999 for Federal income tax purposes was
$496,962,336.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$40,854,161 and $29,206,031 for the years ended August 31, 1999 and August 31,
1998, respectively.
- -------
16
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 609,106 $ 7,227,365
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 122,428 1,444,553
------------ ------------
Total issued ........................... 731,534 8,671,918
Shares redeemed ........................ (1,088,160) (12,745,430)
------------ ------------
Net decrease ........................... (356,626) $ (4,073,512)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,830,125 $ 33,703,724
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 833,279 9,839,025
------------ ------------
Total issued ........................... 3,663,404 43,542,749
Automatic conversion
of shares .............................. (2,200,888) (25,897,609)
Shares redeemed ........................ (5,278,922) (61,926,061)
------------ ------------
Net decrease ........................... (3,816,406) $(44,280,921)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 382,150 $ 4,543,942
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 45,017 531,121
------------ ------------
Total issued ........................... 427,167 5,075,063
Shares redeemed ........................ (407,459) (4,766,401)
------------ ------------
Net increase ........................... 19,708 $ 308,662
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended August 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,021,741 $ 12,244,084
Automatic conversion
of shares .............................. 2,201,185 25,897,609
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 541,373 6,385,449
------------ ------------
Total issued ........................... 3,764,299 44,527,142
Shares redeemed ........................ (3,195,002) (37,335,532)
------------ ------------
Net increase ........................... 569,297 $ 7,191,610
============ ============
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- --------------------------------------------------------------------------------
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
============ ============
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17
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
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, 1999, 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, 1999 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, 1999, 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 4, 1999
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, 1999
qualify as tax-exempt interest dividends for Federal income tax purposes.
Additionally, the following table summarizes the taxable distributions paid by
the Fund during the year.
- --------------------------------------------------------------------------------
Record Payable Ordinary Long-Term
Date Date Income Capital Gains*
- --------------------------------------------------------------------------------
12/22/98 12/31/98 $.041712 $.214439
- --------------------------------------------------------------------------------
* This entire distribution is subject to the 20% tax rate.
Please retain this information for your records.
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18
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 1999
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
Alice A. Pellegrino, 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
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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 -- 8/99
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