MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 2000
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended August 31, 2000, US domestic economic growth
remained robust. After growing at a 4.2% annual rate in 1999, US domestic
economic growth expanded at a 4.8% rate during the first quarter of 2000 and at
a 5.2% rate during the second quarter. However, despite these significant growth
rates and the lowest unemployment rates since 1970, few price measure indicators
have shown any meaningful signs of future price pressures at the consumer level.
With few signs of any economic slowdown, the Federal Reserve Board continued to
raise short-term interest rates in February, March and May 2000. The Federal
Reserve Board cited both the continued growth of US employment and the continued
strength of US equity markets as reasons for attempting to moderate US economic
growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong economic
fundamentals and concentrated upon very positive technical supply factors.
Declining bond issuance--both current, and more importantly, expected future
issuance--helped push bond yields lower into mid-April 2000. In late January and
early February 2000, the US Treasury announced its intention to reduce the
amounts to be auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to repurchase
outstanding, higher-couponed Treasury issues, primarily in the 15-year and
longer maturity sector. Both these actions resulted in significant reduction in
the outstanding supply of longer-dated maturity US Treasury debt. Domestic and
international investors soon began to accumulate what was expected to become a
scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined nearly 50 basis points
(0.50%) to 5.67%. During the remainder of the period, US Treasury bond prices
were volatile as strong economic reports and investors' concerns of additional
moves by the Federal Reserve Board occasionally overshadowed the positive
technical position of the long-term Treasury bond market. By mid-June, long-term
US Treasury bond yields rose to more than 6.00%.
Recently a number of economic indicators have begun to suggest that the actions
taken by the Federal Reserve Board in 1999 and early 2000 have started to affect
US economic growth. Both new home sales and consumer spending have slowed,
suggesting that economic growth may subside into a 4%-4.5% range by late 2000.
In our opinion, this range of growth was targeted by the Federal Reserve Board
as being sustainable, given current productivity measures, without endangering
the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-term US
Treasury securities and bond prices generally rose for the remainder of the
period. The decline in long-term US Treasury bond yields resulted in an inverted
yield curve as short-term and intermediate-term interest rates did not fall
proportionately to long-term interest rates as the Federal Reserve Board was
expected to continue to raise short-term interest rates. The current inversion
has had as much to do with debt reduction and Treasury buybacks as with investor
expectations of slower economic growth.
Tax-exempt bond yields have also declined in recent months. The decline has
largely been in response to the rally in US Treasury securities, as well as a
continued positive technical supply environment. States such as California and
Maryland have announced that their large current and anticipated future budget
surpluses will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers also have initiated tenders to repurchase
existing debt, reducing the supply of tax-exempt bonds in the secondary market
as well. Given the decline in available long-term Treasury securities, some
investors who need longer maturity investment vehicles have begun to consider
long-term municipal bonds as potential substitutes. This has further
strengthened the overall positive technical position of the tax-exempt market.
During the last six months, long-term revenue bond yields have declined more
than 50 basis points to 5.72%, their lowest level since late August 1999, as
measured by the Bond Buyer Revenue Bond Index.
August 2000 was one of the few months in recent years in which the tax-exempt
bond market outperformed its taxable counterpart. This has largely been
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
a reflection of the continuing reduction in new municipal bond issuance and a
moderate increase in investor demand. During the last six months, approximately
$100 billion in long-term tax-exempt bonds was issued, a decline of almost 15%
compared to the same period in 1999. During the last three months, more than $50
billion in new long-term municipal bonds was underwritten, a decline of nearly
10% compared to the same three-month period in 1999.
Recently, investor demand has been stronger, particularly among individual
retail investors. Investors received more than $45 billion in coupon payments,
bond maturities and the proceeds from early redemptions during June and July.
Traditional institutional investors, such as mutual funds, have not played a
major role during recent months as fund flows, although slowing, remained
negative. However, non-traditional buyers, hedge funds and arbitrageurs have
noticeably increased their activity as may be expected when tax-exempt bond
yield ratios exceed 100% of their taxable counterparts as they have in recent
weeks. Property/casualty insurers, after being unprofitable for a number of
years, have also begun to return to the tax-exempt bond market.
However, tax-exempt bond yields have generally declined throughout most of this
year. Much of the resulting price appreciation has been triggered by the
significant improvement in the long-term US Treasury market. While the technical
position of the municipal bond market has been very positive this year, it was
also positive for most of 1999 when tax-exempt bond yields rose dramatically.
From that perspective, it may be too early to become overly positive about the
extent to which the municipal bond market can continue to improve. The US
Treasury bond market has demonstrated on a number of occasions this year that
its positive technical backdrop can quickly be subordinated by resurgent
domestic economic growth.
Fiscal Year in Review
During the fiscal year ended August 31, 2000, our portfolio strategy was to seek
to provide a generous tax-exempt yield to shareholders. We normally maintain a
relatively fully invested position for the Fund, as we did throughout the
12-month period ended August 31, 2000. Occasionally, cash equivalent reserves
were raised to 5% of total assets (although we still consider this level to be
fully invested) if there were short-term concerns on the immediate direction of
interest rates. Credit quality was a focus throughout this year, and it was a
factor in achieving better overall performance. Credit quality spreads have been
wide, and only recently, as the rally in municipal securities has become quite
advanced, has there been any improvement (tightening) in these spreads. We
purposely underutilized the basket of assets permitted to be committed to
uninsured securities.
Recently, we have closely monitored retail demand for California municipal
bonds. The improvement in bond prices has brought municipal yields to a level
where retail demand usually slows. Consequently, we have concentrated new
purchases in shorter maturity, higher-couponed securities. These purchases were
financed through the sale of longer maturity, more interest rate-sensitive
discount bonds. A combination of this restructuring and the general decline in
interest rates lowered the Fund's portfolio duration from a high of nearly 10
years in mid-1999 to 8 years at August 31, 2000, which we consider to be a
neutral position. By August 31, 2000, the Fund had 88% of its assets in
securities rated AA or higher by at least one of the major rating agencies.
The past 12 months encompassed two very distinct trends in the fixed-income
markets. The second half of 1999 witnessed a steady rise in interest rates and a
subsequent deterioration in municipal bond prices. As a result, the Fund's fully
invested position left it vulnerable to market volatility. As the backdrop for
interest rates improved in 2000, we maintained our investment approach and
performance recovered. Our emphasis on credit quality benefited the Fund's
performance, as spreads have remained wide. We believe it is important to
closely monitor the demand/supply technicals of the California municipal market
in an effort to protect the recovery of the Fund's net asset values made so far
this year.
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
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 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
September 27, 2000
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
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. The Fund's Investment Adviser voluntarily waived
a portion of its management fee. Without such waiver the Fund's
performance would have been lower.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/00 +1.88% -2.20%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.25 +4.39
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +6.32 +5.89
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/00 +1.36% -2.50%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.73 +4.73
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +5.79 +5.79
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 +1.35% +0.38%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +4.63 +4.63
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +5.36 +5.36
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 +1.78% -2.29%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.16 +4.30
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +5.89 +5.14
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
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 Shares
compared to growth of an investment in the Lehman Brothers Municipal Bond Index.
Beginning and ending values are:
8/90 8/00
ML California Municipal Bond
Fund+--Class A Shares* $9,600 $18,478
Lehman Brothers Municipal Bond
Index++ $10,000 $20,377
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the Lehman Brothers Municipal Bond Index.
Beginning and ending values are:
8/90 8/00
ML California Municipal Bond
Fund+--Class B Shares* $10,000 $18,291
Lehman Brothers Municipal Bond
Index++ $10,000 $20,377
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** 8/00
ML California Municipal Bond
Fund+--Class C Shares* $10,000 $13,918
ML California Municipal Bond
Fund+--Class D Shares* $9,600 $13,764
Lehman Brothers Municipal Bond
Index++ $10,000 $15,078
* 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.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/
6 Month 12 Month Since Inception Standardized
As of August 31, 2000 Total Return Total Return Total Return 30-Day Yield
======================================================================================================================
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares +8.13% +7.02% +92.47% 4.46%
----------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class B Shares +7.86 +6.48 +82.94 4.15
----------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class C Shares +7.81 +6.37 +39.18 4.05
----------------------------------------------------------------------------------------------------------------------
ML California Municipal Bond Fund Class D Shares +8.08 +6.91 +43.37 4.37
======================================================================================================================
</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, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
------------------------------------------------------------------------------------------------------------------------------------
California--97.6%
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA Aaa $ 2,625 ABAG Finance Authority for Nonprofit Corporations, California, COP (Children's Hospital
Medical Center), 6% due 12/01/2029 (a) $ 2,770
------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 3,750 Alameda, California, Public Financing Authority, Local Agency Special Tax Revenue Bonds
(Community Facility No. 1), Series A, 7% due 8/01/2019 4,055
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,880 Alameda County, California, COP (Financing Project), 6% due 9/01/2021 (h) 5,171
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Refunding Bonds,
RITES, 8.42% due 12/28/2018 (h)(j) 3,551
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Bay Area Government Association, California, Revenue Refunding Bonds (California
Redevelopment Agency Pool), Series A, 6% due 12/15/2024 (f) 6,241
------------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,025 California Educational Facilities Authority, Revenue Refunding Bonds (University of the
Pacific), 5.875% due 11/01/2020 (h) 1,084
------------------------------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds:
AA- Aa2 3,260 AMT, Series F-1, 7% due 8/01/2026 (d) 3,373
AA- Aa2 6,900 Series D, 5.85% due 8/01/2017 7,201
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 980 California HFA, Housing Revenue Bonds, AMT, Series A, 7.20% due 2/01/2026 (h) 1,012
------------------------------------------------------------------------------------------------------------------------------------
A+ Aa2 3,900 California HFA, Revenue Bonds, RIB, AMT, Series B-2, 8.351% due 8/01/2023 (d)(j) 4,178
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 California Health Facilities Finance Authority, Insured Health Facility Revenue Refunding
Bonds (Catholic Healthcare West), Series A, 6% due 7/01/2017 (h) 3,198
------------------------------------------------------------------------------------------------------------------------------------
NR* A1 5,780 California Health Facilities Finance Authority Revenue Bonds (Scripps Research Institute),
Series A, 6.625% due 7/01/2014 6,179
------------------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 6,500 California Health Facilities Finance Authority, Revenue Refunding Bonds (Adventist Hospital),
VRDN, Series B, 3.30% due 9/01/2028 (h)(k) 6,500
------------------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas and
Electric), VRDN (k):
A1+ NR* 1,900 Series C, 3.40% due 11/01/2026 1,900
A1+ NR* 200 Series D, 3.35% due 11/01/2026 200
A1+ VMIG1+ 100 Series E, 3.55% due 11/01/2026 100
A1 VMIG1+ 200 Series G, 3.45% due 2/01/2016 200
------------------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding (Southern
California Edison Company), VRDN (k):
A1 VMIG1+ 1,000 Series B, 3.60% due 2/28/2008 1,000
A1 P1 800 Series D, 3.60% due 2/28/2008 800
------------------------------------------------------------------------------------------------------------------------------------
AA- Aa3 5,970 California State Department of Veteran Affairs, Home Purpose Revenue Refunding Bonds,
Series C, 5.875% due 12/01/2015 6,213
------------------------------------------------------------------------------------------------------------------------------------
</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, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
------------------------------------------------------------------------------------------------------------------------------------
California (continued)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California State, GO, Refunding (h):
AAA Aaa $ 5,000 5% due 8/01/2024 $ 4,752
AAA Aaa 15,000 4.25% due 10/01/2026 12,418
------------------------------------------------------------------------------------------------------------------------------------
A+ A 2,840 California State Public Works Board, High Technology Facilities, Lease Revenue Bonds
(San Jose Facilities), Series A, 7.75% due 8/01/2006 3,145
------------------------------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds (Department of Corrections),
Series A:
A+ AAA 8,000 7% due 11/01/2004 (i) 9,035
AAA Aaa 5,000 5.50% due 1/01/2017 (a) 5,152
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California State Public Works Board, Lease Revenue Refunding Bonds (Various University of
California Projects), Series A, 5.40% due 12/01/2016 (a) 2,064
------------------------------------------------------------------------------------------------------------------------------------
AAA NR* 6,000 California Statewide Communities Development Authority, COP, Refunding (Huntington
Memorial Hospital), 5.80% due 7/01/2026 (l) 6,143
------------------------------------------------------------------------------------------------------------------------------------
Contra Costa County, California, Public Financing Authority, Tax Allocation Revenue Bonds,
Series A:
AAA NR* 660 7.10% due 8/01/2002 (i) 710
BBB NR* 340 7.10% due 8/01/2022 353
------------------------------------------------------------------------------------------------------------------------------------
Corona, California, COP, Refunding (Corona Community):
AAA AAA 1,915 8% due 3/01/2009 (i) 2,418
AAA AAA 2,230 8% due 3/01/2010 (i) 2,875
AAA AAA 2,065 8% due 3/01/2011 (i) 2,643
AAA AAA 2,810 8% due 3/01/2012 (i) 3,647
AAA AAA 2,605 8% due 3/01/2013 (i) 3,373
AAA AAA 2,410 8% due 3/01/2014 (i) 3,115
AAA AAA 3,035 8% due 3/01/2015 (b) 3,959
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Fairfield, California, Public Financing Authority, Revenue Refunding Bonds (Municipal Park
Improvement District No. 1), Series A, 5% due 7/01/2023 (f) 4,764
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Hawthorne, California, School District, GO, Series A, 5.50% due 5/01/2022 (c) 2,790
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,080 Irvine, California, Unified School District, Special Tax Refunding Bonds (Community
Facilities District No. 86-1), 5.50% due 11/01/2017 (a) 5,268
------------------------------------------------------------------------------------------------------------------------------------
Long Beach, California, Improvement Bond Act 1915 (Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 475
NR* NR* 495 7.05% due 9/02/2002 515
NR* NR* 530 7.10% due 9/02/2003 551
NR* NR* 570 7.15% due 9/02/2004 593
NR* NR* 610 7.20% due 9/02/2005 634
NR* NR* 650 7.25% due 9/02/2006 676
NR* NR* 4,040 7.50% due 9/02/2011 4,202
------------------------------------------------------------------------------------------------------------------------------------
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 (m) 3,531
------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Long Beach, California, Special Tax Bonds (Community Facilities District No. 3--Pine Ave.),
6.375% due 9/01/2023 1,021
------------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 4,000 Los Angeles, California, COP (Sonnenblick Del Rio West Los Angeles),
6.20% due 11/01/2031 (a) 4,345
------------------------------------------------------------------------------------------------------------------------------------
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) 5,573
------------------------------------------------------------------------------------------------------------------------------------
AAA AAA 10,000 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (i) 12,314
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
------------------------------------------------------------------------------------------------------------------------------------
California (continued)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds:
A+ Aa3 $ 1,750 5.875% due 2/15/2020 $ 1,805
NR* Aa3 10,000 RIB, Series 370, 7.74% due 2/15/2024 (j) 10,680
------------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Los Angeles, California, Harbor Department Revenue Bonds, RITR, AMT, Series RI-7,
8.095% due 11/01/2026 (h)(j) 5,604
------------------------------------------------------------------------------------------------------------------------------------
AAA NR* 5,000 Los Angeles, California, Harbor Department Revenue Refunding Bonds,
7.60% due 10/01/2018 (b) 6,276
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue
Refunding Bonds, Proposition A, First Tier, Senior Series C, 5% due 7/01/2021 (a) 2,891
------------------------------------------------------------------------------------------------------------------------------------
AA Aa2 4,000 Metropolitan Water District of Southern California, Waterworks Revenue Bonds, Series A,
5% due 7/01/2026 3,778
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 Northern California, Transmission Revenue Refunding Bonds (California--Oregon
Transmission Project), Series A, 5.25% due 5/01/2020 (h) 19,926
------------------------------------------------------------------------------------------------------------------------------------
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) 5,900
------------------------------------------------------------------------------------------------------------------------------------
AAA NR* 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (b) 17,112
------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 7,835 Pleasanton, California, Joint Powers Financing Authority, Revenue Refunding Reassessment
Bonds, Sub-Series B, 6.75% due 9/02/2017 8,200
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Port Oakland, California, Port Revenue Refunding Bonds, Series I, 5.60% due 11/01/2019 (h) 1,033
------------------------------------------------------------------------------------------------------------------------------------
AAAr Aaa 6,295 Port Oakland, California, RITR, AMT, Class R, Series 5, 5.85% due 11/01/2012 (c)(j) 7,116
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,360 Roseville, California, Finance Authority, Local Agency Revenue Refunding Bonds (Northeast
Certified Bond Refinancing), Series A, 5% due 9/01/2021 (f) 2,274
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,865 Sacramento, California, City Financing Authority, Capital Improvement Revenue Bonds
(Solid Waste and Redevelopment Project), 5.75% due 12/01/2022 (a) 4,007
------------------------------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric Revenue Refunding Bonds:
AAA Aaa 7,000 INFLOS, 8.564% due 8/15/2018 (c)(j) 7,682
AAA Aaa 9,000 Series L, 5.125% due 7/01/2022 (h) 8,763
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Sacramento County, California, Airport System Revenue Refunding Bonds, Sub-Series B,
5% due 7/01/2026 (c) 9,445
------------------------------------------------------------------------------------------------------------------------------------
AA Aa3 3,690 Sacramento County, California, Sanitation District Financing Authority, Revenue Refunding
Bonds, Series A, 5.75% due 12/01/2018 3,835
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Saddleback Valley, California, Unified School District, Public Financing Authority, Special
Tax Revenue Refunding Bonds, Series A, 5.65% due 9/01/2017 (f) 3,638
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 San Bernardino, California, Joint Powers Financing Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 5.75% due 10/01/2015 (f) 4,223
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Diego, California, Certificates of Undivided Interest, Water Utility Fund, Net System
Revenue Bonds, 5% due 8/01/2021 (c) 9,635
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 9,000 San Francisco, California, Bay Area Rapid Transit District, Sales Tax Revenue Refunding
Bonds, 4.75% due 7/01/2023 (a) 8,171
------------------------------------------------------------------------------------------------------------------------------------
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) 6,969
AAA Aaa 3,000 Issue 11, 6.25% due 5/01/2026 (c) 3,144
------------------------------------------------------------------------------------------------------------------------------------
AA Aa3 1,720 San Francisco, California, City and County Educational Facilities, GO (Community College),
Series A, 5.75% due 6/15/2019 1,805
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
------------------------------------------------------------------------------------------------------------------------------------
California (concluded)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AA Aa3 $ 1,310 San Francisco, California, City and County Zoo Facilities, GO, Series B, 5.75% due 6/15/2019 $ 1,375
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Jose, California, Redevelopment Agency Tax Allocation Bonds (Merged Area
Redevelopment Project), 5% due 8/01/2026 (a) 9,445
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,420 San Jose--Evergreen, California, Community College District, GO, Series B,
5.50% due 9/01/2021 (c) 1,445
------------------------------------------------------------------------------------------------------------------------------------
San Juan, California, Unified School District, GO:
AAA Aaa 3,740 5.625% due 8/01/2017 (c) 3,950
AAA Aaa 2,000 5.70% due 8/01/2019 (f) 2,096
AAA Aaa 4,345 5.625% due 8/01/2020 (c) 4,492
------------------------------------------------------------------------------------------------------------------------------------
AA Aa2 1,250 San Mateo, California, GO (Library Improvement Project), 5.625% due 8/01/2025 1,275
------------------------------------------------------------------------------------------------------------------------------------
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) 11,211
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 15,000 Santa Clara County, California, Financing Authority, Lease Revenue Refunding Bonds,
Series A, 5% due 11/15/2022 (a) 14,359
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 8,750 Santa Clara Valley, California, Water District, COP, Refunding and Improvement Bonds,
Series A, 6% due 2/01/2024 (c) 9,072
------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 3,000 Santa Margarita, California, Water District, Special Tax Refunding Bonds (Community
Facilities District No. 99), Series 1, 6.25% due 9/01/2029 3,048
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Santa Monica, California, Redevelopment Agency, Tax Allocation Bonds (Earthquake
Recovery Redevelopment Project), 6% due 7/01/2029 (a) 4,231
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional Wastewater
Project), Series A, 5% due 9/01/2022 (c) 9,563
------------------------------------------------------------------------------------------------------------------------------------
Southern California Home Finance Authority, S/F Mortgage Revenue Bonds (Mortgage-Backed
Securities Program), AMT, Series A:
AAA NR* 1,775 7.625% due 10/01/2023 (g) 1,812
AAA NR* 1,290 7.35% due 9/01/2024 (e) 1,322
------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 University of California, Revenue Refunding Bonds (Multiple Purpose Projects), Series E,
5.125% due 9/01/2020 (h) 4,923
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--1.0%
------------------------------------------------------------------------------------------------------------------------------------
AAAr Aaa 4,000 Puerto Rico Commonwealth, GO, Refunding, RITR, Class R, Series 3,
5.80% due 7/01/2016 (h)(j) 4,370
------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$401,875)--98.6% 429,881
Other Assets Less Liabilities--1.4% 6,155
--------
Net Assets--100.0% $436,036
========
------------------------------------------------------------------------------------------------------------------------------------
</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, 2000.
(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,
2000.
(l) Connie Lee Insured.
(m) Non-income producing security.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
--------
9
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 2000
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$401,874,907) ....................... $429,881,078
Cash ........................................................................ 60,801
Receivables:
Interest .................................................................. $ 6,439,190
Securities sold ........................................................... 902,700
Beneficial interest sold .................................................. 439,990 7,781,880
------------
Prepaid registration fees and other assets .................................. 89,131
------------
Total assets ................................................................ 437,812,890
------------
------------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Beneficial interest redeemed .............................................. 734,674
Dividends to shareholders ................................................. 563,544
Investment adviser ........................................................ 163,376
Distributor ............................................................... 106,391 1,567,985
------------
Accrued expenses and other liabilities ...................................... 208,890
------------
Total liabilities ........................................................... 1,776,875
------------
------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets $436,036,015
============
------------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 283,017
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 1,779,226
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 91,122
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 1,718,042
Paid-in capital in excess of par ............................................ 428,218,871
Accumulated realized capital losses--net .................................... (20,285,317)
Accumulated distributions in excess of realized capital gains--net .......... (3,775,117)
Unrealized appreciation on investments--net ................................. 28,006,171
------------
Net assets .................................................................. $436,036,015
============
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $31,868,647 and 2,830,174 shares
of beneficial interest outstanding .......................................... $ 11.26
============
Class B--Based on net assets of $200,408,704 and 17,792,261 shares
of beneficial interest outstanding .......................................... $ 11.26
============
Class C--Based on net assets of $10,261,949 and 911,220 shares
of beneficial interest outstanding .......................................... $ 11.26
============
Class D--Based on net assets of $193,496,715 and 17,180,419 shares
of beneficial interest outstanding .......................................... $ 11.26
============
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------
10
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
August 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 27,619,333
------------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees .................................................... $ 2,521,529
Account maintenance and distribution fees--Class B .......................... 1,128,785
Account maintenance fees--Class D ........................................... 188,172
Accounting services ......................................................... 134,600
Transfer agent fees--Class B ................................................ 83,174
Professional fees ........................................................... 79,459
Account maintenance and distribution fees--Class C .......................... 61,680
Printing and shareholder reports ............................................ 56,874
Transfer agent fees--Class D ................................................ 56,518
Custodian fees .............................................................. 47,859
Trustees' fees and expenses ................................................. 32,997
Registration fees ........................................................... 23,624
Pricing fees ................................................................ 15,307
Transfer agent fees--Class A ................................................ 9,896
Transfer agent fees--Class C ................................................ 4,008
Other ....................................................................... 29,280
------------
Total expenses before reimbursement ......................................... 4,473,762
Reimbursement of expenses ................................................... (7,088)
------------
Total expenses after reimbursement .......................................... 4,466,674
------------
Investment income--net ...................................................... 23,152,659
------------
------------------------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized loss on investments--net ........................................... (20,285,317)
ized Gain (Loss) on Change in unrealized appreciation on investments--net ....................... 24,293,874
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations ........................ $ 27,161,216
============
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------
11
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
August 31,
-----------------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets: 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Operations: Investment income--net ...................................................... $ 23,152,659 $ 27,598,478
Realized gain (loss) on investments--net .................................... (20,285,317) 3,881,437
Change in unrealized appreciation on investments--net ....................... 24,293,874 (42,431,664)
------------ ------------
Net increase (decrease) in net assets resulting from operations ............. 27,161,216 (10,951,749)
------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Class A ................................................................... (1,771,827) (2,218,488)
Shareholders: Class B ................................................................... (10,985,694) (14,430,329)
Class C ................................................................... (489,378) (595,163)
Class D ................................................................... (9,905,760) (10,354,498)
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 . (23,152,659) (40,371,826)
------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions .... (80,602,960) (40,854,161)
Transactions: ------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ................................................ (76,594,403) (92,177,736)
Beginning of year ........................................................... 512,630,418 604,808,154
------------ ------------
End of year ................................................................. $436,036,015 $512,630,418
============ ============
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------
12
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ...... $ 11.10 $ 12.15 $ 11.81 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................. .58 .60 .63 .64 .64
Realized and unrealized gain (loss) on
investments--net ........................ .16 (.79) .34 .32 .09
-------- -------- -------- -------- --------
Total from investment operations ........ .74 (.19) .97 .96 .73
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ (.58) (.60) (.63) (.64) (.64)
Realized gain on investments--net ..... -- (.18) -- -- --
In excess of realized gain on
investments--net ...................... -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ....... (.58) (.86) (.63) (.64) (.64)
-------- -------- -------- -------- --------
Net asset value, end of year ............ $ 11.26 $ 11.10 $ 12.15 $ 11.81 $ 11.49
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 7.02% (1.80%) 8.39% 8.55% 6.53%
Return:* ======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement .......... .67% .65% .65% .63% .65%
Average ======== ======== ======== ======== ========
Net Assets: Expenses ................................ .67% .65% .65% .63% .65%
======== ======== ======== ======== ========
Investment income--net .................. 5.35% 5.07% 5.25% 5.49% 5.51%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .. $ 31,868 $ 37,641 $ 45,544 $ 44,652 $ 42,668
Data: ======== ======== ======== ======== ========
Portfolio turnover ...................... 84.36% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Class B
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of year ...... $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................. .53 .54 .57 .58 .58
Realized and unrealized gain (loss) on
investments--net ........................ .16 (.80) .34 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ........ .69 (.26) .91 .91 .67
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ (.53) (.54) (.57) (.58) (.58)
Realized gain on investments--net ..... -- (.18) -- -- --
In excess of realized gain on
investments--net ...................... -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ....... (.53) (.80) (.57) (.58) (.58)
-------- -------- -------- -------- --------
Net asset value, end of year ............ $ 11.26 $ 11.10 $ 12.16 $ 11.82 $ 11.49
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 6.48% (2.38%) 7.84% 8.09% 5.99%
Return:* ======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement .......... 1.18% 1.16% 1.16% 1.14% 1.16%
Average ======== ======== ======== ======== ========
Net Assets: Expenses ................................ 1.18% 1.16% 1.16% 1.14% 1.16%
======== ======== ======== ======== ========
Investment income--net .................. 4.85% 4.57% 4.75% 4.98% 5.01%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .. $200,409 $269,191 $341,111 $376,018 $480,668
Data: ======== ======== ======== ======== ========
Portfolio turnover ...................... 84.36% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
See Notes to Financial Statements.
--------
13
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ...... $ 11.10 $ 12.15 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................. .52 .53 .55 .57 .57
Realized and unrealized gain (loss) on
investments--net ........................ .16 (.79) .33 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ........ .68 (.26) .88 .90 .66
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ (.52) (.53) (.55) (.57) (.57)
Realized gain on investments--net ..... -- (.18) -- -- --
In excess of realized gain on
investments--net ...................... -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ....... (.52) (.79) (.55) (.57) (.57)
-------- -------- -------- -------- --------
Net asset value, end of year ............ $ 11.26 $ 11.10 $ 12.15 $ 11.82 $ 11.49
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 6.37% (2.40%) 7.65% 7.98% 5.88%
Return:* ======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Average Expenses, net of reimbursement .......... 1.28% 1.26% 1.26% 1.24% 1.26%
Net Assets: ======== ======== ======== ======== ========
Expenses ................................ 1.28% 1.26% 1.26% 1.24% 1.26%
======== ======== ======== ======== ========
Investment income--net .................. 4.75% 4.46% 4.64% 4.87% 4.91%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .. $ 10,262 $ 11,769 $ 12,646 $ 10,904 $ 8,112
Data: ======== ======== ======== ======== ========
Portfolio turnover ...................... 84.36% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Class D
The following per share data and ratios have been derived -------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of year ...... $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................. .57 .59 .62 .63 .63
Realized and unrealized gain (loss) on
investments--net ........................ .16 (.80) .34 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ........ .73 (.21) .96 .96 .72
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ (.57) (.59) (.62) (.63) (.63)
Realized gain on investments--net ..... -- (.18) -- -- --
In excess of realized gain on
investments--net ...................... -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ....... (.57) (.85) (.62) (.63) (.63)
-------- -------- -------- -------- --------
Net asset value, end of year ............ $ 11.26 $ 11.10 $ 12.16 $ 11.82 $ 11.49
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ...... 6.91% (1.98%) 8.28% 8.53% 6.43%
Return:* ======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Average Net Expenses, net of reimbursement .......... .77% .75% .75% .73% .75%
Assets: ======== ======== ======== ======== ========
Expenses ................................ .77% .75% .75% .73% .75%
======== ======== ======== ======== ========
Investment income--net .................. 5.25% 4.98% 5.15% 5.39% 5.42%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .. $193,497 $194,029 $205,507 $185,300 $111,817
Data: ======== ======== ======== ======== ========
Portfolio turnover ...................... 84.36% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
See Notes to Financial Statements.
--------
14
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
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 accounting principles generally accepted in the United States of America,
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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
--------
15
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
(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 futures transactions and post-October
losses.
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 FAM Distributors, Inc.
("FAMD" or the "Distributor"), 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. For the year ended August 31, 2000, FAM earned fees of
$2,521,529, of which $7,088 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 ....................... .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, 2000, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
Shares as follows:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class A ....................... $ 180 $ 1,843
Class D ....................... $3,315 $23,975
--------------------------------------------------------------------------------
For the year ended August 31, 2000, MLPF&S received contingent deferred sales
charges of $243,711 and $3,268 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $3,460 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
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, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 2000 were $371,751,043 and $450,824,363, respectively.
Net realized gains (losses) for the year ended August 31, 2000 and net
unrealized gains as of August 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
--------------------------------------------------------------------------------
Long-term investments ......... $(20,455,398) $ 28,006,171
Financial futures contracts ... 170,081 --
------------ ------------
Total ......................... $(20,285,317) $ 28,006,171
============ ============
--------------------------------------------------------------------------------
--------
16
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
As of August 31, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $25,733,166, of which $29,017,750 related to appreciated
securities and $3,284,584 related to depreciated securities. The aggregate cost
of investments at August 31, 2000 for Federal income tax purposes was
$4,147,912.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$80,602,960 and $40,854,161 for the years ended August 31, 2000 and August 31,
1999, respectively.
Transactions in shares of beneficial interest for each class were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................... 271,703 $ 2,948,594
Shares issued to shareholders
in reinvestment of dividends .............. 69,523 752,791
-------- -----------
Total issued .............................. 341,226 3,701,385
Shares redeemed ........................... (902,034) (9,789,698)
-------- -----------
Net decrease .............................. (560,808) $(6,088,313)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 1,627,358 $ 17,700,189
Shares issued to shareholders
in reinvestment of dividends ............. 438,770 4,751,640
---------- ------------
Total issued ............................. 2,066,128 22,451,829
Automatic conversion
of shares ................................ (2,357,561) (25,642,543)
Shares redeemed .......................... (6,159,170) (66,667,277)
---------- ------------
Net decrease ............................. (6,450,603) $(69,857,991)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................... 236,784 $ 2,578,590
Shares issued to shareholders
in reinvestment of dividends .............. 24,482 265,078
-------- -----------
Total issued .............................. 261,266 2,843,668
Shares redeemed ........................... (410,140) (4,431,524)
-------- -----------
Net decrease .............................. (148,874) $(1,587,856)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 399,431 $ 4,340,658
Automatic conversion
of shares ................................ 2,358,345 25,642,543
Shares issued to shareholders
in reinvestment of dividends ............. 368,042 3,987,609
---------- ------------
Total issued ............................. 3,125,818 33,970,810
Shares redeemed .......................... (3,420,976) (37,039,610)
---------- ------------
Net decrease ............................. (295,158) $ (3,068,800)
========== ============
--------------------------------------------------------------------------------
--------
17
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
--------------------------------------------------------------------------------
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
========== ============
--------------------------------------------------------------------------------
5. Short-Term Borrowings:
On December 3, 1999, the Fund, along with certain other funds managed by FAM and
its affiliates, entered into a one-year, unsecured $1,000,000,000 credit
agreement with Bank of America and other lenders. The funds may borrow money for
temporary or emergency purposes to meet shareholder redemptions. Each fund may
borrow up to the maximum amount allowable under the fund's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The funds collectively pay a commitment fee of
.09% per annum on the available portion of the facility. Amounts borrowed under
the facility bear interest at the Federal Funds rate plus .50%. The Fund did not
borrow from the facility during the year ended August 31, 2000.
6. Capital Loss Carryforward:
At August 31, 2000, the Fund had a net capital loss carryforward of
approximately $3,190,000, all of which expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch California Municipal Bond
Fund of Merrill Lynch California Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch California Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust as of August 31, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000 by correspondence with the custodian. 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, 2000, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 2000
--------
18
<PAGE>
Merrill Lynch California Municipal Bond Fund August 31, 2000
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, 2000
qualify as tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributions paid by the Fund during
the year.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, 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
<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--8/00
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