MERRILL LYNCH
CALIFORNIA
INSURED
MUNICIPAL
BOND FUND
FUND LOGO
Annual Report
August 31, 1995
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.
Merrill Lynch
California Insured
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
During the August quarter, US economic indicators continued to
suggest that economic growth is moderate and that the rate of
inflation remains low. Gross domestic product (GDP) growth for the
three months ended June 30 was revised to show that the economy
expanded at a 1.1% pace, rather than the 0.5% rate that was
originally reported. However, although the employment report for
August exceeded consensus expectations, most of the new jobs created
were in the service sector, reflecting the ongoing sluggishness in
manufacturing. In addition, total hours worked and hourly wages
declined in August. Other lackluster economic indicators included
disappointing durable goods orders in July and continued poor retail
sales results.
After gaining ground in recent weeks, the US dollar has strengthened
relative to the yen and the Deutschemark. Improving interest rate
differentials favoring the US currency, combined with coordinated
central bank intervention and more positive investor sentiment, have
helped to bolster the dollar in foreign exchange markets. Other
factors that appear to be improving the US dollar's outlook in the
near term are a pick-up in capital flows to the United States and
the prospect of increased capital outflows from Japan. However, it
remains to be seen if the US dollar's strengthening trend can
continue without significant improvements in the US budget and trade
deficits.
In the weeks ahead, investor interest will continue to focus on US
economic activity. Clear signs of a moderate, noninflationary
expansion could further benefit the US stock and bond markets. In
addition, should the current Federal budget deficit reduction
efforts now underway in Washington prove successful, the
implications would likely be positive for the US financial markets.
The Municipal Market
Tax-exempt bond yields generally drifted upward throughout the three
months ended August 31, 1995. As measured by the Bond Buyer Revenue
Bond Index, yields on A-rated, uninsured tax-exempt revenue bonds
rose approximately 20 basis points (0.20%) to 6.26%. Market yields
have generally risen in response to investor concerns that the
domestic economy was regaining momentum and that the Federal Reserve
Board's action in July had been premature. Fears that an expanding
economy would have negative inflationary implications pushed
municipal bond yields higher to 6.44% by mid-August. Municipal bond
yields rallied at the end of August as investors saw signs that
recent economic strength was diminishing and the inflationary
environment would remain benign. However, while displaying
considerable weekly volatility, US Treasury bond yields ended the
August quarter essentially unchanged at 6.65%.
Municipal bonds have underperformed US Treasury securities for a
number of reasons. The record highs of the US equity market have
continued to attract retail investors seeking further capital gains.
Investor demand has also been diminished in recent months by the
"sticker shock" effect that periodically affects the municipal bond
market. Investors who had become accustomed to purchasing tax-exempt
securities in the 6.50%--7.00% range six to seven months ago have
demonstrated understandable reluctance to purchase similar
securities at current levels. The strong fundamental structure of
the municipal bond market, however, suggests that such hesitancy may
prove costly.
However, the major reason by far for the tax-exempt market's recent
underperformance has been concerns regarding the implication for
municipal bonds' tax advantage resulting from various proposed tax
law changes (for example, flat tax, value-added tax or national
sales tax) that have reduced investor demand for tax-exempt
products. Such concerns are likely to quickly recede as investors
realize that such, if any, changes are unlikely to be enacted before
late 1996 at the earliest. Long-term investors will also recall 1986
when similar tax proposals were made, municipal bond yields
initially rose, in some instances, to over 100% of taxable yields.
Tax-exempt bond yields quickly declined as investors' fears proved
to be unfounded.
The municipal bond market's strong technical position has diminished
somewhat in recent months. New-issue supply over the last six months
has totaled approximately $75 billion, or a decline of over 12%
compared to the corresponding period in 1994. Over the last three
months, however, municipalities issued approximately $42 billion in
new securities, which represents less than a 2% decline versus the
same period a year earlier. Investor demand has remained muted in
recent months despite significant funds available to investors. By
the end of August investors, both individual and institutional, are
expected to have received as much as $85 billion from tax-exempt
bond maturities, coupon payments and the proceeds of early bond
redemptions. Little new money has entered the municipal market in
recent months, largely in response to the factors mentioned above.
Consequently, much of the technical support the municipal market
enjoyed earlier this year has evaporated, causing municipal bond
yields to decline at a slower rate than their taxable counterparts.
However, the recent relative underperformance of municipal bonds has
made them particularly attractive to long-term investors. Tax-exempt
bonds currently yield well over 90% of US Treasury securities. In
some instances, A-rated, long-term revenue bonds have yielded almost
95% of US Treasury bonds. Analysts usually consider municipal bonds
yielding over 82% of US Treasury securities to be historically
attractive. With inflation-adjusted, "real" after-tax equivalent tax-
exempt yields of over 6.50%, municipal securities appear to
represent considerable value.
Current tax-exempt yield levels appear to be overcompensating for
any proposed changes in tax law that can reasonably be expected to
be enacted. As Congressional hearings on this matter would continue
into 1996, and the revenue losses resultant from such changes become
more apparent, the likelihood of any significant changes to tax
codes and the resultant decline of municipal bonds' inherent tax
advantage should decline. Under such a scenario, tax-exempt bond
yields would quickly decline and currently available municipal bond
yields would return to their normal historic relationship.
Fiscal Year in Review
We began the Fund's fiscal year ended August 31, 1995 with a
strategy seeking to limit the negative impact that a bear phase in
the bond market had on the per share net asset valuations of Merrill
Lynch California Insured Municipal Bond Fund. In a period of
declining bond prices, we took advantage of opportunities to raise
the coupon income of the Fund's holdings to seek to cushion the
portfolio from the negative price movements of the municipal market.
To maintain a high level of current yield, we did not raise the
Fund's cash reserve levels significantly. Instead, we chose to
structure the portfolio more defensively by altering coupon
structure.
Toward the end of 1994, an improved outlook for fixed-income
securities was becoming apparent. The US economy was showing signs
of weakness and the Federal Reserve Board apparently basing its
monetary policy on the low rate of inflation. With this backdrop, we
postured the Fund more aggressively, anticipating the possibility of
a market rebound. We kept cash equivalent reserves at a minimum,
averaging less than 5% of total assets. Because this improvement in
the market came to fruition, the Fund had positive total returns for
the fiscal year.
In Conclusion
We are constantly working in close cooperation with our municipal
research group to uncover special credit situations within the
California market to seek to enhance our current return. However,
credit quality of the Fund's portfolio mix remains a primary
concern. Currently, 90% of the Fund's total assets have credit
enhancement and are rated AAA by at least one of the major rating
agencies. The additional yield incentive for utilizing uninsured
securities has largely evaporated in response to historically tight
credit quality spreads. For this reason, we are purposely
underutilizing the basket of Fund assets that can be invested in
this credit sector. We look at the current marketplace as being
relatively constructive for the municipal bond market, with an
extremely tight technical backdrop of low new issuance and increased
demand from insurance companies giving the market a firm tone.
However, we will be proceeding cautiously from this point, since the
significant gains of the past year naturally have resulted in yields
that have traditionally been unappealing to new retail customers.
We appreciate your investment in Merrill Lynch California Insured
Municipal Bond Fund, and we look forward to assisting you with your
financial needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President
September 27, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund through the Merrill Lynch Select Pricing SM System,
which offers four pricing alternatives:
* 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.
* 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.
* 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.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.10% (but no distribution fee).
Performance data for all the Fund's shares are presented in the
"Total Return Based on a $10,000 Investment" graphs on page 5 and
the "Recent Performance Results" table below. Data for the Fund's
Class A and Class B Shares are presented in the "Average Annual
Total Return" tables on page 5 and "Performance Summary" tables on
page 6. Data for Class C and Class D Shares are also presented in
the "Aggregate Total Return" tables on page 5.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class A and Class B
Shares for the 12-month and 3-month periods ended August 31, 1995
and for Class C and Class D Shares for the since inception and 3-
month periods ended August 31, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
None of the past results shown should 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. 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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/95 5/31/95 8/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.65 $9.78 $9.54 +1.15% -1.33%
Class B Shares* 9.65 9.78 9.54 +1.15 -1.33
Class C Shares* 9.64 9.77 9.19 +4.90 -1.33
Class D Shares* 9.65 9.78 9.19 +5.01 -1.33
Class A Shares--Total Return* +6.89(1) -0.01(2)
Class B Shares--Total Return* +6.35(3) -0.14(4)
Class C Shares--Total Return* +9.35(5) -0.16(6)
Class D Shares--Total Return* +9.94(7) -0.04(8)
Class A Shares--Standardized 30-day Yield 5.46%
Class B Shares--Standardized 30-day Yield 5.19%
Class C Shares--Standardized 30-day Yield 5.09%
Class D Shares--Standardized 30-day Yield 5.37%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class C and Class D Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.516 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.127 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.468 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.115 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.379 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.113 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.421 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.125 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A Shares and Class B
Shares
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to the growth of an
investment in the Lehaman Brothers Municipal Bond Index. Beginning
and ending values are:
2/26/93** 8/95
ML California Insured Municipal
Bond Fund++--Class A Shares* $ 9,600 $10,600
ML California Insured Municipal
Bond Fund++--Class B Shares* $10,000 $10,711
Lehman Brothers Municipal Bond Index++++ $10,000 $11,386
Total Return Based on a $10,000 Investment--Class C Shares and Class D
Shares
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to the growth of an
investment in the Lehman Brothers Municipal Bond Index. Beginning
and ending values are:
10/21/94** 8/95
ML California Insured Municipal
Bond Fund++--Class C Shares $10,000 $10,835
ML California Insured Municipal
Bond Fund++--Class D Shares* $ 9,600 $10,544
Lehman Brothers Municipal Bond Index++++ $10,000 $11,248
[FN]
*Assuming maximum sales charge, transacton costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++ML California Insured 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.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/95 + 7.82% + 3.51%
Inception (2/26/93)
through 6/30/95 + 3.54 + 1.75
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/95 + 7.27% + 3.27%
Inception (2/26/93)
through 6/30/95 + 3.02 + 2.20
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 6/30/95 + 7.53% + 6.53%
[FN]
*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*
Inception (10/21/94)
through 6/30/95 + 8.15% + 3.82%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
2/26/93-12/31/93 $10.00 $10.25 -- $0.450 + 7.18%
1994 10.25 8.97 -- 0.518 - 7.54
1/1/95-8/31/95 8.97 9.65 -- 0.325 +11.42
------
Total $1.293
Cumulative total return as of 8/31/95: +10.42%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
2/26/93-12/31/93 $10.00 $10.26 -- $0.407 + 6.83%
1994 10.26 8.98 -- 0.471 - 7.99
1/1/95-8/31/95 8.98 9.65 -- 0.295 +10.94
------
Total $1.173
Cumulative total return as of 8/31/95: + 9.05%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch California Insured
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
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--93.5%
<S> <S> <C> <S> <C>
AAA Aaa $ 1,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue
Bonds, RITES, 8.745% due 12/28/2018 (d)(e) $ 1,081
AAA Aaa 3,920 Brea, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Redevelopment Project A-B), 6.125% due 8/01/2013 (d) 3,991
AAA Aaa 1,290 California Fairs Financing Authority Revenue Bonds, 6.50% due 7/01/2011 (f) 1,355
California Health Facilities Financing Authority Revenue Bonds, Series A:
BB Ba 2,000 Refunding (Good Samaritan Health System), 7.50% due 5/01/2015 2,013
AAA Aaa 2,000 (Scripps Memorial Hospital), 6.375% due 10/01/2022 (d) 2,046
AA- Aa 2,000 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1, 7% due 8/01/2026 2,086
A1 VMIG1++ 300 California Pollution Control Financing Authority, PCR (Southern California
Edison), VRDN, Series A, 3.45% due 2/28/2008 (a) 300
NR* P1 100 California Pollution Control Financing Authority, Resource Recovery Revenue
Refunding Bonds (Ultra Power Malaga Project), VRDN, AMT, Series A, 3.55%
due 4/01/2017 (a) 100
A1+ VMIG1++ 400 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN, AMT, Series B,
3.60% due 12/01/2024 (a) 400
California State, Public Works Board, Lease Revenue Bonds, Series A:
A- A 2,000 (Department of Corrections--Monterey County), 7% due 11/01/2019 2,140
AAA Aaa 4,000 (Various University of California Projects), 6.40% due 12/01/2016 (b) 4,141
A1 VMIG1++ 100 California Statewide Community Development Authority Revenue Bonds, COP
(Sutter Health Obligation Group), VRDN, 3.30% due 7/01/2015 (a)(b) 100
AAA Aaa 2,360 Central Coast Water Authority, California, Revenue Bonds (State Water
Project Regional Facilities), 6.50% due 10/01/2014 (b) 2,468
AAA Aaa 2,000 Cerritos, California, Public Financing Authority, Revenue Refunding Bonds
(Los Coyotes Redevelopment Project Loan), Series A, 6.50% due 11/01/2023 (b) 2,178
AAA Aaa 1,200 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022 (c) 1,238
AAA Aaa 2,000 Cupertino, California, Unified School District, Series A, 5.75% due
8/01/2020 (c) 1,948
AAA Aaa 4,000 El Cajon, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(El Cajon Redevelopment Project), 6.60% due 10/01/2022 (b) 4,202
AAA Aaa 2,235 Eureka, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds (Eureka Redevelopment Projects), 6.25% due 11/01/2011 (f) 2,325
AAA Aaa 2,500 Fresno, California, Sewer Revenue Bonds (Fowler Avenue Project), Series A,
6.25% due 8/01/2011 (b) 2,585
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $ 2,500 Industry, California, Urban Development Agency, Revenue Refunding Bonds
(Transportation District Industrial Redevelopment Project 2), 6.50% due
11/01/2016 (d) $ 2,632
AA- Aa 2,000 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds, Registered RITR, 8.522% due 2/01/2020 (e) 2,075
AAA Aaa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B,
6.625% due 8/01/2019 (b) 2,094
Los Angeles, California, Wastewater System Revenue Bonds:
AAA Aaa 3,235 Refunding, Series A, 5.70% due 6/01/2020 (d) 3,102
AAA Aaa 1,000 Series B, 6.25% due 6/01/2012 (b) 1,026
AAA Aaa 2,000 Los Angeles County, California, COP (Correctional Facilities Project),
6.50% due 9/01/2013 (d) 2,070
AAA Aaa 1,320 Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Bonds, Series A, 6.75% due 7/01/2001 (c)(g) l,496
AAA Aaa 1,000 Mesa, California, Consolidated Water District, COP (Water Project), 6.375%
due 3/15/2012 (c) 1,040
AAA Aaa 2,500 Mountain View, California, Capital Improvements Financing Authority
Revenue Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 2,595
AAA Aaa 3,500 Northern California Public Power Agency, Revenue Refunding Bonds
(Hydroelectric Project No. 1), Series A, 6.25% due 7/01/2012 (d) 3,610
AAA Aaa 3,000 Orchard, California, School District, GO, UT, Series A, 6.50% due
8/01/2019 (c) 3,142
AAA Aaa 2,000 Poway, California, Redevelopment Agency, Tax Allocation, Refunding Bonds
(Parguay Redevelopment Project), 5.75% due 12/15/2026 (c) 1,921
Sacramento, California, Municipal Utility District, Electric Revenue
Bonds (d):
AAA Aaa 1,500 Refunding, Series G, 6.50% due 9/01/2013 1,647
AAA Aaa 3,000 Series B, 6.375% due 8/15/2022 3,079
San Francisco, California, City and County Airport Commission,
International Airport, Revenue Refunding Bonds, Second Series:
AAA Aaa 1,500 First Issue, 6.50% due 5/01/2013 (b) 1,577
AAA Aaa 2,500 Second Issue, 6.75% due 5/01/2020 (d) 2,679
AAA Aaa 2,235 San Mateo County, California, Joint Powers Financing Authority, Lease
Revenue Refunding Bonds (Capital Projects Program), 6.50% due 7/01/2015 (d) 2,432
AAA Aaa 2,500 Stockton, California, COP, Revenue Bonds (Wastewater Treatment Plant
Expansion), Series A, 6.70% due 9/01/2014 (c) 2,673
AAA Aaa 1,500 Union City, California, Community Redevelopment Agency, Tax Allocation
Revenue Bonds (Community Redevelopment Project), 5.85% due 10/01/2023 (b) 1,470
University of California Revenue Bonds (Multiple Purpose Projects),
Series D (d):
AAA Aaa 2,235 6.30% due 9/01/2015 2,290
AAA Aaa 2,250 6.375% due 9/01/2019 2,310
Total Investments (Cost--$82,510)--93.5% 83,657
Other Assets Less Liabilities--6.5% 5,840
-------
Net Assets--100.0% $89,497
=======
<FN>
(a)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, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)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, 1995.
(f)Capital Guaranty.
(g)Prerefunded.
*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.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$82,510,393) (Note 1a) $ 83,656,783
Cash 63,181
Receivables:
Securities sold $ 5,819,174
Interest 1,512,262
Beneficial interest sold 369,856 7,701,292
------------
Deferred organization expenses (Note 1e) 28,497
Prepaid expenses and other assets (Note 1e) 46,443
------------
Total assets 91,496,196
------------
Liabilities: Payables:
Securities purchased 1,580,263
Beneficial interest redeemed 165,234
Dividends to shareholders (Note 1f) 123,955
Distributor (Note 2) 30,686
Investment adviser (Note 2) 11,144 1,911,282
------------
Accrued expenses and other liabilities 87,796
------------
Total liabilities 1,999,078
------------
Net Assets: Net assets $ 89,497,118
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 147,227
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 742,798
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 18,446
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 19,113
Paid-in capital in excess of par 92,193,753
Accumulated realized capital losses on investments--net (Note 5) (4,404,870)
Accumulated distributions in excess of realized capital
gains--net (365,739)
Unrealized appreciation on investments--net 1,146,390
------------
Net assets $ 89,497,118
============
Net Asset Value: Class A--Based on net assets of $14,204,187 and 1,472,276 shares
of beneficial interest outstanding $ 9.65
============
Class B--Based on net assets of $71,669,604 and 7,427,977 shares
of beneficial interest outstanding $ 9.65
============
Class C--Based on net assets of $1,778,027 and 184,456 shares
of beneficial interest outstanding $ 9.64
============
Class D--Based on net assets of $1,845,300 and 191,127 shares
of beneficial interest outstanding $ 9.65
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
August 31, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 5,213,964
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 478,480
Account maintenance and distribution fees--Class B (Note 2) 354,796
Registration fees (Note 1e) 68,249
Professional fees 62,500
Accounting services (Note 2) 46,158
Transfer agent fees--Class B (Note 2) 36,271
Printing and shareholder reports 25,439
Custodian fees 14,513
Amortization of organization expenses (Note 1e) 11,443
Transfer agent fees--Class A (Note 2) 6,335
Pricing fees 5,408
Trustees' fees and expenses 5,089
Account maintenance and distribution fees--Class C (Note 2) 3,740
Account maintenance fees--Class D (Note 2) 696
Transfer agent fees--Class C (Note 2) 314
Transfer agent fees--Class D (Note 2) 297
Other 4,909
------------
Total expenses before reimbursement 1,124,637
Reimbursement of expenses (Note 2) (354,675)
------------
Total expenses after reimbursement 769,962
------------
Investment income--net 4,444,002
------------
Realized & Realized loss on investments--net (2,217,617)
Unrealized Change in unrealized depreciation on investments--net 2,985,447
Gain (Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 5,211,832
- --Net (Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 4,444,002 $ 4,410,272
Realized loss on investments--net (2,217,617) (1,974,493)
Change in unrealized appreciation/depreciation on investments--net 2,985,447 (4,299,648)
------------ ------------
Net increase (decrease)in net assets resulting from operations 5,211,832 (1,863,869)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (814,541) (874,505)
Shareholders Class B (3,562,702) (3,535,767)
(Note 1f): Class C (29,658) --
Class D (37,101) --
In excess of realized gain on investments--net:
Class A -- (67,794)
Class B -- (297,945)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (4,444,002) (4,776,011)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions (2,198,874) 7,602,289
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (1,431,044) 962,409
Beginning of year 90,928,162 89,965,753
------------ ------------
End of year $ 89,497,118 $ 90,928,162
============ ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Feb. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.54 $ 10.23 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .52 .51 .24
Realized and unrealized gain (loss) on investments--net .11 (.65) .23
-------- -------- --------
Total from investment operations .63 (.14) .47
-------- -------- --------
Less dividends and distributions:
Investment income--net (.52) (.51) (.24)
In excess of realized gain on investments--net -- (.04) --
-------- -------- --------
Total dividends and distributions (.52) (.55) (.24)
-------- -------- --------
Net asset value, end of period $ 9.65 $ 9.54 $ 10.23
======== ======== ========
Total Investment Based on net asset value per share 6.89% (1.44%) 4.81%+++
Return:** ======== ======== ========
Ratios to Expenses, net of reimbursement .47% .33% .14%*
Average ======== ======== ========
Net Assets: Expenses .87% .96% 1.06%*
======== ======== ========
Investment income--net 5.53% 5.16% 4.80%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 14,204 $ 15,946 $ 17,105
Data: ======== ======== ========
Portfolio turnover 61.53% 93.04% 74.26%
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived Feb. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.54 $ 10.23 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .48 .46 .22
Realized and unrealized gain (loss) on investments--net .11 (.65) .23
-------- -------- --------
Total from investment operations .59 (.19) .45
-------- -------- --------
Less dividends and distributions:
Investment income--net (.48) (.46) (.22)
In excess of realized gain on investments--net -- (.04) --
-------- -------- --------
Total dividends and distributions (.48) (.50) (.22)
-------- -------- --------
Net asset value, end of period $ 9.65 $ 9.54 $ 10.23
======== ======== ========
Total Investment Based on net asset value per share 6.35% (1.93%) 4.56%+++
Return:** ======== ======== ========
Ratios to Expenses, excluding account maintenance and
Average distribution fees and net of reimbursement .47% .33% .14%*
Net Assets: ======== ======== ========
Expenses, net of reimbursement .97% .83% .64%*
======== ======== ========
Expenses 1.38% 1.46% 1.56%*
======== ======== ========
Investment income--net 5.02% 4.67% 4.31%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 71,670 $ 74,982 $ 72,861
Data: ======== ======== ========
Portfolio turnover 61.53% 93.04% 74.26%
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
August 31, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.19 $ 9.19
Operating -------- --------
Performance: Investment income--net .39 .44
Realized and unrealized gain on investments--net .45 .46
-------- --------
Total from investment operations .84 .90
-------- --------
Less dividends from investment income--net (.39) (.44)
-------- --------
Net asset value, end of period $ 9.64 $ 9.65
======== ========
Total Investment Based on net asset value per share 9.35%+++ 9.94%+++
Return:** ======== ========
Ratios to Expenses, excluding account maintenance and distribution fees and
Average net of reimbursement .49%* .47%*
Net Assets: ======== ========
Expenses, net of reimbursement 1.09%* .57%*
======== ========
Expenses 1.49%* .97%*
======== ========
Investment income--net 4.76%* 5.33%*
======== ========
Supplemental Net assets, end of period (in thousands) $ 1,778 $ 1,845
Data: ======== ========
Portfolio turnover 61.53% 61.53%
======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch California Insured 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 non-diversified, open-end management investment company.
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 on an amortized cost basis, 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 Trustees of the Trust, including valu-
ations 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.
* Financial futures contracts--The Fund may purchase or sell interest
rate 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) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. The Investment Advisory Agreement obligates
FAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the average daily
net assets in excess thereof. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made to FAM during any fiscal year which will cause such expenses
to exceed expense limitations at the time of such payment. For the
year ended August 31, 1995, FAM earned fees of $478,480, of which
$354,675 was voluntarily waived.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("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, 1995, 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 $1,321 $13,608
Class D $2,544 $25,943
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $347,212 and $76 relating to transactions
in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $50,756,645 and $52,098,785,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (1,941,023) $ 1,146,390
Financial futures contracts (276,594) --
------------ -------------
Total $ (2,217,617) $ 1,146,390
============ =============
As of August 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $1,146,390, of which $1,860,991
related to appreciated securities and $714,601 related to
depreciated securities. The aggregate cost of investments at August
31, 1995 for Federal income tax purposes was $82,510,393.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(2,198,874) and $7,602,289 for the years
ended August 31, 1995 and August 31, 1994, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 182,796 $ 1,683,426
Shares issued to share-
holders in reinvestment
of dividends 33,346 310,570
----------- ------------
Total issued 216,142 1,993,996
Shares redeemed (415,410) (3,820,473)
----------- ------------
Net decrease (199,268) $ (1,826,477)
=========== ============
Class A Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 301,766 $ 3,002,096
Shares issued to share-
holders in reinvestment of
dividends and distributions 39,457 389,777
----------- ------------
Total issued 341,223 3,391,873
Shares redeemed (342,542) (3,318,587)
----------- ------------
Net increase (decrease) (1,319) $ 73,286
=========== ============
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 1,704,924 $ 15,799,247
Shares issued to share-
holders in reinvestment
of dividends 174,843 1,629,535
----------- ------------
Total issued 1,879,767 17,428,782
Shares redeemed (2,311,348) (21,348,197)
----------- ------------
Net decrease (431,581) $ (3,919,415)
=========== ============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 1,864,973 $ 18,580,245
Shares issued to share-
holders in reinvestment of
dividends and distributions 198,811 1,962,586
----------- ------------
Total issued 2,063,784 20,542,831
Shares redeemed (1,329,588) (13,013,828)
----------- ------------
Net increase 734,196 $ 7,529,003
=========== ============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 247,131 $ 2,347,801
Shares issued to share-
holders in reinvestment
of dividends 1,481 14,182
----------- ------------
Total issued 248,612 2,361,983
Shares redeemed (64,156) (608,073)
----------- ------------
Net increase 184,456 $ 1,753,910
=========== ============
[FN]
++Commencement of Operations.
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 308,159 $ 2,879,606
Shares issued to share-
holders in reinvestment
of dividends 1,745 16,707
----------- ------------
Total issued 309,904 2,896,313
Shares redeemed (118,777) (1,103,205)
----------- ------------
Net increase 191,127 $ 1,793,108
=========== ============
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $2,950,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch California Insured 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 Insured Municipal Bond Fund of Merrill Lynch California
Municipal Series Trust as of August 31, 1995, 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 two-year period
then ended and for the period February 26, 1993 (commencement of
operations) to August 31, 1993. These financial statements and the
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1995 by correspondence with the custodian and broker. 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 Insured Municipal Bond Fund of Merrill
Lynch California Municipal Series Trust as of August 31, 1995, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 1995
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by
Merrill Lynch California Insured Municipal Bond Fund of Merrill
Lynch California Municipal Series Trust during its taxable year
ended August 31, 1995 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, there were no capital gains distributed during the
year.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
