MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
February 29, 2000
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
TO OUR SHAREHOLDERS
The Municipal Market Environment
Throughout most of the period ended February 29, 2000, US fixed-income interest
rates were under pressure as domestic economic growth remained robust and rising
commodity prices, especially oil, rekindled investor concerns regarding a
reemergence of inflationary pressures. US economic growth, in part intensified
by Year 2000 (Y2K) preparations, grew at a 6.9% rate in the fourth quarter of
1999 and at a 4.4% annual rate for all of 1999.
However, despite these significant growth rates, no price measure indicator has
shown any considerable signs of pressures at either the consumer level or from
labor, despite the lowest unemployment rates since January 1970. Given no signs
of an economic slowdown, the Federal Reserve Board continued to raise short-term
interest rates in August and November 1999 and again in early February 2000. In
each instance, the Federal Reserve Board cited both the continued growth of US
employment and the impressive strength of the US equity markets as reasons for
attempting to moderate US economic growth before inflationary price increases
are realized. In this environment, long-term US Treasury bond yields rose almost
60 basis points (0.60%) by mid-January 2000 to 6.75%, their highest yield level
since June 1997.
However, in late January and early February 2000, the US Treasury announced that
it intended to use present and future surpluses to purchase existing high-coupon
debt, as well as to limit future issuance of longer maturity debt. While
complete details have not been released, we expect the reduced supply of
long-term US Treasury bonds to be significant and easily exceed demand on the
part of the world's financial institutions and governments. US Treasury bond
prices began rising as investors began hoarding what is expected to become a
scarce commodity. While US Treasury yields have remained high through the past
ten years, the yield on 30-year US Treasury bonds fell dramatically, by
declining more than 50 basis points to end the period at 6.14%.
The municipal bond market has also been under pressure throughout the entire
period. By mid-January 2000, yields on long-term, uninsured revenue bonds rose
more than 50 basis points to 6.35%, as measured by the Bond Buyer Revenue Bond
Index. While some states such as California and Maryland have announced that
their present and expected budget surpluses will allow for the cancellation
and/or postponement of expected bond issuance, the municipal bond market has
been unable to match the sort of price improvement that US Treasury bonds have
shown in recent weeks. Municipal bond yields declined approximately 10 basis
points to 6.24% by February 29, 2000. During the last few months, long-term
tax-exempt bond yields rose more than 40 basis points to their highest level
since August 1995.
The relative underperformance of the municipal bond market in recent months has
been especially disappointing given the strong technical position the tax-exempt
bond market has enjoyed. The issuance of long-term tax-exempt securities has
dramatically declined. Over the last year, $212 billion in new long-term
municipal securities was issued, a decline of more than 20% compared to the same
period a year earlier. For the three months ended February 29, 2000, less than
$40 billion in new tax-exempt bonds was underwritten, a decline of more than 30%
compared to the February 28, 1999 quarter. Thus far in 2000, total bond issuance
volume is less than $20 billion, a decline of more than 40% compared to the
first two months of 1999.
Although investors received more than $30 billion in coupon payments, bond
maturities and the proceeds from early bond redemptions coupled with the highest
municipal bond yields in three years, overall investor demand has diminished.
Long-term municipal bond mutual funds have seen consistent outflows in recent
months as the yields of individual securities have risen faster than those of
larger, more diverse mutual funds. Over the last six months, tax-exempt mutual
funds have had net redemptions of approximately $9 billion. Also, the demand
from property and casualty insurance companies has weakened as a result of the
losses and anticipated losses incurred from a series of damaging storms across
much of the eastern United States. Additionally, many institutional investors
who have in recent years been attracted to the municipal bond market by
historically attractive tax-exempt bond yield ratios of over 90%, found other
asset classes even more attractive. Even with a reduced supply position,
tax-exempt issuers have
1
<PAGE>
been forced repeatedly to raise municipal bond yields in an attempt to attract
adequate demand.
However, the recent relative underperformance of the municipal bond market has
resulted in the opportunity for long-term investors to purchase tax-exempt
issues whose yields are in excess of taxable US Treasury securities. At February
29, 2000, long-term uninsured municipal revenue bond yields were 101.5% of
comparable US Treasury securities. In recent months, many taxable asset classes,
such as corporate bonds, mortgage-backed securities, and US Government agency
issues have all accelerated debt issuance. This acceleration occurred largely to
avoid issuing securities at year-end and thereby avoid any associated potential
Y2K problems. However, this increased issuance also resulted in higher yield
levels in the various asset classes as lower bond prices became necessary to
attract sufficient investor demand. Going forward, we believe that the pace of
non-US Government debt is likely to slow significantly. As the supply of this
debt declines, many institutional investors are likely to return to the
municipal bond market and the attractive yield ratios available. Furthermore,
with the potential scarcity of longer maturity debt, the attractiveness of the
US municipal bond market should be further enhanced.
Any significantly lower municipal bond yields are still likely to require weaker
US employment growth and consumer spending. The tightening actions taken in
recent months by the Federal Reserve Board, as well as those expected in March
and perhaps May 2000, should eventually slow US economic growth. The recent
decline in US home sales is perhaps the first sign that consumer spending is
being slowed by higher interest rates. Until further signs develop, it is likely
that the municipal bond market's current favorable technical position will
dampen significant tax-exempt interest rate volatility and provide a stable
environment for an eventual improvement in municipal bond prices.
Portfolio Strategy
During the six months ended February 29, 2000, our investment strategy focused
on seeking to provide an attractive level of income exempt from Federal and
California income taxes. During the period, we slightly restructured the Fund by
increasing the average level of coupon issues to seek to improve our current
return. We also shortened the Fund's average portfolio maturity in an effort to
reduce volatility. This restructuring has been a slow process and is ongoing,
largely because of a lack California issuance and a relatively illiquid
secondary market. However, this newer structure is less interest rate sensitive,
and we expect it should provide a higher current coupon income. We also
continued to emphasize credit quality. At the close of the six-month period, 88%
of the Fund's assets were rated AA or better by at least one of the major rating
agencies, which helped Fund performance as lower-rated credits did not perform
well in last year's rising interest rate environment.
In Conclusion
We appreciate your interest 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
March 30, 2000
2
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
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
- --------------------------------------------------------------------------------
Robert R. Martin, Trustee of Merrill Lynch California Municipal Bond Fund has
recently retired. The Fund's Board of Trustees wishes Mr. Martin well in his
retirement.
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Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
3
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select PricingSM System, which offers four pricing alternatives:
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.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/
6 Month 12 Month Since Inception Standardized
As of February 29, 2000 Total Return Total Return Total Return 30-Day Yield
=============================================================================================================
<S> <C> <C> <C> <C>
ML California Municipal Bond Fund Class A Shares -1.03% -4.85% +80.85% 5.10%
ML California Municipal Bond Fund Class B Shares -1.28 -5.41 +71.88 4.82
ML California Municipal Bond Fund Class C Shares -1.33 -5.51 +29.10 4.72
ML California Municipal Bond Fund Class D Shares -1.08 -5.03 +32.65 5.01
</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.
4
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
PERFORMANCE DATA (concluded)
Average Annual Total Return
- --------------------------------------------------------------------------------
% Return Without % Return With
Sales Charge Sales Charge**
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Class A Shares*
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -5.04% -8.84%
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Five Years Ended 12/31/99 +6.11 +5.25
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Ten Years Ended 12/31/99 +6.05 +5.62
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* Maximum sales charge is 4%.
** Assuming maximum sales charge.
- --------------------------------------------------------------------------------
% Return % Return
Without CDSC With CDSC**
- --------------------------------------------------------------------------------
Class C Shares*
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -5.62% -6.52%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +5.45 +5.45
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 12/31/99 +4.88 +4.88
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
% Return % Return
Without CDSC With CDSC**
- --------------------------------------------------------------------------------
Class B Shares*
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -5.43% -9.03%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +5.58 +5.58
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 +5.52 +5.52
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
% Return Without % Return With
Sales Charge Sales Charge**
- --------------------------------------------------------------------------------
Class D Shares*
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -5.05% -8.85%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +6.00 +5.14
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 12/31/99 +5.43 +4.61
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
- -----------------------------------------------------------------------------------------------------------------------------------
California -- 96.6%
<S> <C> <C> <C> <C>
AAA Aaa $ 3,125 ABAG Finance Authority for Nonprofit Corporations, California, COP (Children's
Hospital Medical Center), 6% due 12/01/2029 (a) $ 3,133
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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 3,870
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AAA Aaa 8,000 Alameda Corridor Transportation Authority, California, Revenue Bonds, Senior Lien,
Series A, 5% due 10/01/2029 (h) 6,830
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AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue Refunding
Bonds, RITES, 8.87% due 12/28/2018 (h)(j) 3,311
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AA- Aa2 4,365 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1, 7% due 8/01/2026 (d) 4,480
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 980 California HFA, Housing Revenue Bonds, AMT, Series A, 7.20% due 2/01/2026 (h) 1,015
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A+ Aa2 3,950 California HFA, Revenue Bonds, RIB, AMT, Series B-2, 8.483% due 8/01/2023 (d)(j) 4,182
- -----------------------------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority Revenue Bonds:
NR* Aaa 5,000 RITR, Series 17, 7.97% due 8/15/2030 (h)(j) 4,053
NR* A1 5,780 (Scripps Research Institute), Series A, 6.625% due 7/01/2014 5,980
- -----------------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 5,500 California Health Facilities Finance Authority, Revenue Refunding Bonds (Adventist
Hospital), VRDN, Series A, 3.05% due 9/01/2028 (h)(k) 5,500
- -----------------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding, VRDN (k):
A1+ NR* 1,800 (Pacific Gas & Electric Corp.) Series C, 3.10% due 11/01/2026 1,800
A1+ VMIG1+ 400 (Pacific Gas & Electric Corp.) Series E, 3.05% due 11/01/2026 400
A1 VMIG1+ 300 (Southern California Edison Company) Series A, 3.10% due 2/28/2008 300
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 California State Department of Water Resources, Water System Revenue Refunding
Bonds (Central Valley Project), Series Q, 5.375% due 12/01/2027 (h) 6,874
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 California State, GO, Refunding, 4.25% due 10/01/2026 (h) 15,076
- -----------------------------------------------------------------------------------------------------------------------------------
A+ A 3,200 California State Public Works Board, High Technology Facilities, Lease Revenue
Bonds (San Jose Facilities), Series A, 7.75% due 8/01/2006 3,490
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California State Public Works Board, Lease Revenue Bonds (i):
A+ AAA 10,125 (Department of Corrections), Series A, 7% due 11/01/2004 11,289
A+ AAA 6,000 (Various Community College Projects), 7% due 3/01/2004 6,619
- -----------------------------------------------------------------------------------------------------------------------------------
NR* NR* 12,000 California Statewide Communities Development Authority, COP, RIB, Series 24, 7.135%
due 12/01/2015 (f)(j) 11,153
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</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of California Municipal Bond Fund's portfolio holdings
in the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
6
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 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>
BBB NR* $ 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Bonds, Series A, 7.10% due 8/01/2022 (i) $ 1,056
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Corona, California, COP, Refunding Bonds (Corona Community):
AAA AAA 1,915 8% due 3/01/2009 (i) 2,318
AAA AAA 2,065 8% due 3/01/2010 (i) 2,519
AAA AAA 2,230 8% due 3/01/2011 (i) 2,740
AAA AAA 2,410 8% due 3/01/2012 (i) 2,980
AAA AAA 2,605 8% due 3/01/2013 (i) 3,235
AAA AAA 2,810 8% due 3/01/2014 (i) 3,502
AAA AAA 3,035 8% due 3/01/2015 (b) 3,796
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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) 4,359
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 9,000 Fresno, California, Sewer Revenue Bonds, Series A, 5% due 9/01/2023 (h) 7,853
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Irvine, California, Public Facilities and Infrastructure Authority, Assessment
Revenue Refunding Bonds, Series A, 5.05% due 9/02/2022 (a) 3,527
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Long Beach, California, Improvement Bond Act 1915 (Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 476
NR* NR* 495 7.05% due 9/02/2002 512
NR* NR* 530 7.10% due 9/02/2003 549
NR* NR* 570 7.15% due 9/02/2004 590
NR* NR* 610 7.20% due 9/02/2005 632
NR* NR* 655 7.25% due 9/02/2006 678
NR* NR* 4,065 7.50% due 9/02/2011 4,211
- -----------------------------------------------------------------------------------------------------------------------------------
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 (l) 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 944
- -----------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 4,000 Los Angeles, California, COP (Sonnenblick Del Rio -- West Los Angeles), 6.20%
due 11/01/2031 (a) 4,029
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AAA Aaa 5,150 Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Bunker Hill), Series H, 6.50% due 12/01/2016 (f) 5,492
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AAA AAA 15,000 Los Angeles, California, Convention and Exhibition Center Authority, COP, 9%
due 12/01/2005 (i) 18,184
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NR* Aaa 8,950 Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue
Refunding Bonds, RITR, Series 21, 7.97% due 8/15/2018 (h)(j) 8,055
- -----------------------------------------------------------------------------------------------------------------------------------
Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds:
A+ Aa3 11,435 6% due 2/15/2024 11,377
A+ Aa3 5,190 6% due 2/15/2028 5,144
- -----------------------------------------------------------------------------------------------------------------------------------
NR* VMIG1+ 5,000 Los Angeles, California, Harbor Department Revenue Bonds, RITR, AMT, Series RI-7,
9.595% due 11/01/2026 (h)(j) 5,139
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AAA NR* 5,000 Los Angeles, California, Harbor Department Revenue Refunding Bonds, 7.60%
due 10/01/2018 (b) 5,997
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AAA Aaa 3,305 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax
Revenue Refunding Bonds, Proposition A, First Tier, Senior Series A, 5.25% due 7/01/2027 (h) 2,977
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 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>
Metropolitan Water District of Southern California, Waterworks Revenue Bonds:
AA Aa2 $11,150 RIB, 8.483% due 2/07/2003 (i)(j) $ 12,279
AA Aa2 4,000 Series A, 5% due 7/01/2026 3,445
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,420 Northern California Power Agency, Public Power Revenue Refunding Bonds
(Hydroelectric Project No. 1), Series A, 5.125% due 7/01/2023 (h) 2,145
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 Northern California, Transmission Revenue Refunding Bonds (California -- Oregon
Transmission Project), Series A, 5.25% due 5/01/2020 (h) 18,432
- -----------------------------------------------------------------------------------------------------------------------------------
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) 5,847
- -----------------------------------------------------------------------------------------------------------------------------------
NR* NR* 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 16,290
- -----------------------------------------------------------------------------------------------------------------------------------
NR* NR* 7,835 Pleasanton, California, Joint Powers Financing Authority, Revenue Refunding
Reassessment Bonds, Sub-Series B, 6.75% due 9/02/2017 7,957
- -----------------------------------------------------------------------------------------------------------------------------------
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) 2,077
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Roseville, California, Special Tax Refunding Bonds (Community Facilities District 1 --
Northwest), 4.75% due 9/01/2020 (f) 1,709
- -----------------------------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric Revenue Refunding
Bonds:
AAA Aaa 7,000 INFLOS, 8.894% due 8/15/2018 (c)(j) 7,368
AAA Aaa 9,000 Series L, 5.125% due 7/01/2022 (h) 8,027
AAA Aaa 2,315 Series M, 5.25% due 7/01/2028 (a) 2,075
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Sacramento County, California, Airport System Revenue Refunding Bonds, Sub-Series
B, 5% due 7/01/2026 (c) 8,613
- -----------------------------------------------------------------------------------------------------------------------------------
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) 3,477
- -----------------------------------------------------------------------------------------------------------------------------------
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) 4,044
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Diego, California, Certificates of Undivided Interest, Water Utility Fund, Net
System Revenue Bonds, 5% due 8/01/2021 (c) 8,803
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Francisco, California, Bay Area Rapid Transit District, Sales Tax Revenue
Bonds, 5.50% due 7/01/2015 (c) 1,981
- -----------------------------------------------------------------------------------------------------------------------------------
San Francisco, California, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding Bonds (a):
AAA Aaa 9,000 4.75% due 7/01/2023 7,517
AAA Aaa 10,000 5% due 7/01/2028 8,564
- -----------------------------------------------------------------------------------------------------------------------------------
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) 6,796
AAA Aaa 3,000 Issue 11, 6.25% due 5/01/2026 (c) 3,035
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Jose, California, Redevelopment Agency, Tax Allocation Bonds (Merged Area
Redevelopment Project), 5% due 8/01/2026 (a) 8,612
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Mateo-Foster City, California, School District, GO, 5.30% due 8/01/2029 (c) 4,524
- -----------------------------------------------------------------------------------------------------------------------------------
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) 11,051
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 14,000 Santa Clara County, California, Financing Authority, Lease Revenue Refunding Bonds,
Series A, 5% due 11/15/2022 (a) 12,243
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 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>
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 $ 2,787
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Santa Monica, California, Redevelopment Agency, Tax Allocation Bonds
(Earthquake Recovery Redevelopment Project), 6% due 7/01/2029 (a) 4,012
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional
Wastewater Project), Series A, 5% due 9/01/2022 (c) 8,707
- -----------------------------------------------------------------------------------------------------------------------------------
Southern California Home Finance Authority, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT:
AAA NR* 1,960 Series A, 7.625% due 10/01/2023 (g) 2,003
AAA NR* 1,440 Series A, 7.35% due 9/01/2024 (e) 1,476
AAA NR* 590 Series B, 7.75% due 3/01/2024 (e) 605
- -----------------------------------------------------------------------------------------------------------------------------------
A- NR* 9,725 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 9,939
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 University of California, COP, Series A, 5.30% due 11/01/2029 (a) 1,804
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 University of California, Revenue Refunding Bonds (Multiple Purpose Projects),
Series E, 5.125% due 9/01/2020 (h) 4,526
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,330 West and Central Basin California, Financing Authority, Revenue Refunding Bonds
(Central Basin Project), Series A, 5.375% due 8/01/2017 (a) 3,200
- -----------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 2.0%
Puerto Rico Commonwealth, GO:
AAA AAA 5,000 6.45% due 7/01/2004 (i) 5,405
AAA Aaa 4,150 5% due 7/01/2024 (h) 3,622
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $436,218) -- 98.6% 440,754
Other Assets Less Liabilities -- 1.4% 6,424
--------
Net Assets -- 100.0% $447,178
========
- -----------------------------------------------------------------------------------------------------------------------------------
</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 February 29, 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 February
29, 2000.
(l) Non-income producing security.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of February 29, 2000
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $436,218,259) ..................... $ 440,754,296
Receivables:
Securities sold ........................................................... $ 18,085,657
Interest .................................................................. 7,140,599
Beneficial interest sold .................................................. 167,321 25,393,577
------------
Prepaid registration fees and other assets .................................. 58,762
-------------
Total assets ................................................................ 466,206,635
-------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ...................................................... 16,477,775
Beneficial interest redeemed .............................................. 1,585,685
Dividends to shareholders ................................................. 449,016
Investment adviser ........................................................ 155,336
Distributor ............................................................... 107,999 18,775,811
------------
Accrued expenses and other liabilities ...................................... 252,494
-------------
Total liabilities ........................................................... 19,028,305
-------------
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................................. $ 447,178,330
=============
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 299,010
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 2,071,464
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 88,989
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 1,723,885
Paid-in capital in excess of par ............................................ 461,829,277
Accumulated realized capital losses -- net .................................. (19,595,215)
Accumulated distributions in excess of realized capital gains -- net ........ (3,775,117)
Unrealized appreciation on investments -- net ............................... 4,536,037
-------------
Net assets .................................................................. $ 447,178,330
=============
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A -- Based on net assets of $31,954,750 and 2,990,104 shares of
beneficial interest outstanding ............................................. $ 10.69
=============
Class B -- Based on net assets of $221,444,818 and 20,714,645 shares of
beneficial interest outstanding ............................................. $ 10.69
=============
Class C -- Based on net assets of $9,511,414 and 889,891 shares of
beneficial interest outstanding ............................................. $ 10.69
=============
Class D -- Based on net assets of $184,267,348 and 17,238,847 shares of
beneficial interest outstanding ............................................. $ 10.69
=============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended
February 29, 2000
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income: Interest and amortization of premium and discount earned .................... $ 14,598,996
- --------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees .................................................... $ 1,312,156
Account maintenance and distribution fees -- Class B ........................ 607,652
Account maintenance fees -- Class D ......................................... 93,853
Transfer agent fees -- Class B .............................................. 49,397
Accounting services ......................................................... 40,779
Professional fees ........................................................... 35,900
Printing and shareholder reports ............................................ 32,986
Account maintenance and distribution fees -- Class C ........................ 32,607
Transfer agent fees -- Class D .............................................. 31,762
Registration fees ........................................................... 27,067
Custodian fees .............................................................. 25,524
Trustees' fees and expenses ................................................. 19,405
Pricing fees ................................................................ 6,902
Transfer agent fees -- Class A .............................................. 5,780
Transfer agent fees -- Class C .............................................. 2,330
Other ....................................................................... 13,330
------------
Total expenses before reimbursement ......................................... 2,337,430
Reimbursement of expenses ................................................... (3,784)
------------
Total expenses after reimbursement .......................................... 2,333,646
-------------
Investment income -- net .................................................... 12,265,350
-------------
- --------------------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized loss on investments -- net ......................................... (19,595,215)
ized Gain (Loss) Change in unrealized appreciation on investments -- net ..................... 823,740
on Investments -- -------------
Net: Net Decrease in Net Assets Resulting from Operations ........................ $ (6,506,125)
=============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income -- net .................................................... $ 12,265,350 $ 27,598,478
Realized gain (loss) on investments -- net .................................. (19,595,215) 3,881,437
Change in unrealized appreciation on investments -- net ..................... 823,740 (42,431,664)
------------- -------------
Net decrease in net assets resulting from operations ........................ (6,506,125) (10,951,749)
------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
Dividends & Investment income -- net:
Distributions to Class A ................................................................... (935,231) (2,218,488)
Shareholders: Class B ................................................................... (6,026,950) (14,430,329)
Class C ................................................................... (264,038) (595,163)
Class D ................................................................... (5,039,131) (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 . (12,265,350) (40,371,826)
------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
Beneficial Net decrease in net assets derived from beneficial
Interest interest transactions ....................................................... (46,680,613) (40,854,161)
Transactions: ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ................................................ (65,452,088) (92,177,736)
Beginning of period ......................................................... 512,630,418 604,808,154
------------- -------------
End of period ............................................................... $ 447,178,330 $ 512,630,418
============= =============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended August 31,
Feb. 29, --------------------------------------------
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 period ............ $ 11.10 $ 12.15 $ 11.81 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .29 .60 .63 .64 .64
Realized and unrealized gain (loss) on
investments -- net .............................. (.41) (.79) .34 .32 .09
-------- -------- -------- -------- --------
Total from investment operations ................ (.12) (.19) .97 .96 .73
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (29) (.60) (.63) (.64) (.64)
Realized gain on investments -- net ........... -- (.18) -- -- --
In excess of realized gain on
investments -- net ............................ -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.29) (.86) (.63) (.64) (.64)
-------- -------- -------- -------- --------
Net asset value, end of period .................. $ 10.69 $ 11.10 $ 12.15 $ 11.81 $ 11.49
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (1.03%)+ (1.80%) 8.39% 8.55% 6.53%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement .................. .67%* .65% .65% .63% .65%
Net Assets: ======== ======== ======== ======== ========
Expenses ........................................ .67%* .65% .65% .63% .65%
======== ======== ======== ======== ========
Investment income -- net ........................ 5.45%* 5.07% 5.25% 5.49% 5.51%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ........ $ 31,955 $ 37,641 $ 45,544 $ 44,652 $ 42,668
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 44.72% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
charges.
+ Aggregate total investment return.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended August 31,
Feb. 29, --------------------------------------------
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 period ............ $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .27 .54 .57 .58 .58
Realized and unrealized gain (loss) on
investments -- net .............................. (.41) (.80) .34 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ................ (.14) (.26) .91 .91 .67
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (.27) (.54) (.57) (.58) (.58)
Realized gain on investments -- net ........... -- (.18) -- -- --
In excess of realized gain on
investments -- net ............................ -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.27) (.80) (.57) (.58) (.58)
-------- -------- -------- -------- --------
Net asset value, end of period .................. $ 10.69 $ 11.10 $ 12.16 $ 11.82 $ 11.49
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (1.28%)+ (2.38%) 7.84% 8.09% 5.99%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement .................. 1.17%* 1.16% 1.16% 1.14% 1.16%
Net Assets: ======== ======== ======== ======== ========
Expenses ........................................ 1.17%* 1.16% 1.16% 1.14% 1.16%
======== ======== ======== ======== ========
Investment income -- net ........................ 4.95%* 4.57% 4.75% 4.98% 5.01%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ........ $221,445 $269,191 $341,111 $376,018 $480,668
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 44.72% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
charges.
+ Aggregate total investment return.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended August 31,
Feb. 29, --------------------------------------------
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 period ............ $ 11.10 $ 12.15 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .26 .53 .55 .57 .57
Realized and unrealized gain (loss) on
investments -- net .............................. (.41) (.79) .33 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ................ (.15) (.26) .88 .90 .66
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (.26) (.53) (.55) (.57) (.57)
Realized gain on investments -- net ........... -- (.18) -- -- --
In excess of realized gain on
investments -- net ............................ -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.26) (.79) (.55) (.57) (.57)
-------- -------- -------- -------- --------
Net asset value, end of period .................. $ 10.69 $ 11.10 $ 12.15 $ 11.82 $ 11.49
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (1.33%)+ (2.40%) 7.65% 7.98% 5.88%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Average Expenses, net of reimbursement .................. 1.27%* 1.26% 1.26% 1.24% 1.26%
Net Assets: ======== ======== ======== ======== ========
Expenses ........................................ 1.28%* 1.26% 1.26% 1.24% 1.26%
======== ======== ======== ======== ========
Investment income -- net ........................ 4.85%* 4.46% 4.64% 4.87% 4.91%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ........ $ 9,511 $ 11,769 $ 12,646 $ 10,904 $ 8,112
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 44.72% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
charges.
+ Aggregate total investment return.
See Notes to Financial Statements.
15
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
----------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended August 31,
Feb. 29, --------------------------------------------
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 period ............ $ 11.10 $ 12.16 $ 11.82 $ 11.49 $ 11.40
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ........................ .29 .59 .62 .63 .63
Realized and unrealized gain (loss) on
investments -- net .............................. (.41) (.80) .34 .33 .09
-------- -------- -------- -------- --------
Total from investment operations ................ (.12) (.21) .96 .96 .72
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net ...................... (.29) (.59) (.62) (.63) (.63)
Realized gain on investments -- net ........... -- (.18) -- -- --
In excess of realized gain on
investment -- net ............................. -- (.08) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............... (.29) (.85) (.62) (.63) (.63)
-------- -------- -------- -------- --------
Net asset value, end of period .................. $ 10.69 $ 11.10 $ 12.16 $ 11.82 $ 11.49
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share .............. (1.08%)+ (1.98%) 8.28% 8.53% 6.43%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Average Expenses, net of reimbursement .................. .77%* .75% .75% .73% .75%
Net Assets: ======== ======== ======== ======== ========
Expenses ........................................ .77%* .75% .75% .73% .75%
======== ======== ======== ======== ========
Investment income -- net ........................ 5.35%* 4.98% 5.15% 5.39% 5.42%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ........ $184,267 $194,029 $205,507 $185,300 $111,817
Data: ======== ======== ======== ======== ========
Portfolio turnover .............................. 44.72% 106.84% 90.92% 73.60% 53.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
charges.
+ Aggregate total investment return.
See Notes to Financial Statements.
16
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 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 generally accepted accounting principles, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. The Fund offers four classes of shares under
the Merrill Lynch Select PricingSM System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
17
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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. For the six months ended February 29, 2000, FAM earned
fees of $1,312,156, of which $3,784 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 six months ended February 29, 2000, 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 .......................................... $1,148 $ 94
Class D .......................................... $1,821 $12,961
- --------------------------------------------------------------------------------
For the six months ended February 29, 2000, MLPF&S received contingent deferred
sales charges of $154,852 and $1,533 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, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended February 29, 2000 were $204,612,260 and $247,338,960, respectively.
Net realized gains (losses) for the six months ended February 29, 2000 and net
unrealized gains as of February 29, 2000 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments .......................... $(19,765,296) $4,536,037
Financial futures contracts .................... 170,081 --
------------ ----------
Total .......................................... $(19,595,215) $4,536,037
============ ==========
- --------------------------------------------------------------------------------
As of February 29, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $4,536,037, of which $17,316,081 related to appreciated
securities and $12,780,044 related to depreciated securities. The aggregate cost
of investments at February 29, 2000 for Federal income tax purposes was
$436,218,259.
18
<PAGE>
Merrill Lynch California Municipal Bond Fund February 29, 2000
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$46,680,613 and $40,854,161 for the six months ended February 29, 2000 and for
the year ended August 31, 1999, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended February 29, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 152,180 $ 1,642,282
Shares issued to shareholders
in reinvestment of dividends ............ 38,194 410,636
---------- -----------
Total issued ............................ 190,374 2,052,918
Shares redeemed ......................... (591,252) (6,402,428)
---------- -----------
Net decrease ............................ (400,878) $(4,349,510)
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended February 29, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 1,026,302 $11,131,973
Shares issued to shareholders
in reinvestment of dividends ............ 246,382 2,650,623
---------- -----------
Total issued ............................ 1,272,684 13,782,596
Automatic conversion
of shares ............................... (1,227,431) (13,296,551)
Shares redeemed ......................... (3,573,472) (38,531,713)
---------- -----------
Net decrease ............................ (3,528,219) $(38,045,668)
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended February 29, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 57,374 $ 618,092
Shares issued to shareholders
in reinvestment of dividends ............ 13,578 146,003
---------- -----------
Total issued ............................ 70,952 764,095
Shares redeemed ......................... (241,155) (2,593,586)
---------- -----------
Net decrease ............................ (170,203) $(1,829,491)
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended February 29, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 178,351 $ 1,926,229
Automatic conversion
of shares ............................... 1,227,883 13,296,551
Shares issued to shareholders
in reinvestment of dividends ............ 192,172 2,066,604
---------- -----------
Total issued ............................ 1,598,406 17,289,384
Shares redeemed ......................... (1,835,136) (19,745,328)
---------- -----------
Net decrease ............................ (236,730) $(2,455,944)
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
========== ===========
- --------------------------------------------------------------------------------
19
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011 #10329--2/00
[LOGO] Printed on post-consumer recycled paper
