MERRILL LYNCH
CALIFORNIA
INSURED
MUNICIPAL
BOND FUND
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
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 Insured
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011 #16575 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch California Insured Municipal Bond Fund August 31, 1997
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended August 31, 1997, a number of very favorable
factors combined to push both tax-exempt and taxable bond yields lower.
A slowing domestic economy, a continued benign, if not improving,
inflationary environment, a declining Federal budget deficit with
resultant reduced Treasury borrowing needs, and a successful
Congressional budget accord all resulted in significant declines in
fixed-income yields. By the end of July, 30-year US Treasury bond yields
had declined approximately 50 basis points (0.50%) to 6.30%, their
lowest level in over a year. Similarly, as measured by the Bond Buyer
Revenue Bond Index, long-term municipal revenue bond yields fell over 50
basis points to 5.49%, their lowest level since early 1994.
However, during August the fixed-income markets retraced a part of their
earlier gains. Investors and traders developed new fears that domestic
economic growth would reaccelerate during the remainder of the calendar
year and cause the Federal Reserve Board to raise interest rates prior
to 1998. During August, long-term US Treasury bond yields increased by
approximately 30 basis points to end the period at 6.61%. Long-term,
tax-exempt revenue bond yields rose by approximately 20 basis points to
end the August 31, 1997 period at 5.60%. Over the last six months, the
overall positive combination of moderate economic growth and minimal
inflation fostered a decline in long-term US Treasury bond yields of
approximately 20 basis points, while long-term municipal bond yields
fell approximately 25 basis points.
The decline in tax-exempt yields in recent months was even more
impressive given that the municipal market lost much of the technical
support it enjoyed for over a year. In previous quarters, new tax-exempt
bond issuance declined, or remained stable. During the six months ended
August 31, 1997, approximately $100 billion in new long-term municipal
securities was underwritten, an increase of over 12% versus the
comparable period in 1996. As tax-exempt bond yields declined, many
municipal bond issuers took this opportunity to both issue new debt as
well as refinance older, higher-couponed debt with new, lower-yielding
issues. This refinancing led to a surge in tax-exempt issuance in recent
months. Over the three months ended August 31, 1997, new long-term, tax-
exempt bond issuance totaled approximately $55 billion, an increase of
over 25% versus the August 31, 1996 quarter.
The decline in municipal bond yields also resulted in some reduction in
retail investor demand. In earlier episodes of rapidly declining
interest rates, individual investor demand initially fell until
investors became more acclimated to the lower interest rate levels.
Should interest rates stabilize, we expect investor demand to increase
once again. Also, this past June and July, municipal bond investors
received over $50 billion in assets from coupon income payments, bond
maturities, and the proceeds from early bond redemptions. Despite the
continued attraction of the US equity market, much of these assets
should be reallocated to the municipal bond market as investors adjust
to the new investment environment.
Looking ahead, given the extent of the recent bond market rally, some
retrenchment or at least a period of consolidation is likely. However,
the positive backdrop of modest economic growth and low inflation
suggests that any such adjustment is not likely to be excessive. Despite
recent increases in new bond issuance, supply for all of 1997 is not
expected to be materially different than earlier estimates of
approximately $175 billion. It is likely that the recent increase in
issuance is largely borrowed from financings that originally were
scheduled for later this year. Additionally, any significant increase in
tax-exempt bond yields will preclude any further bond refinancings,
reducing future supply. Unless the current positive economic
fundamentals undergo immediate and meaningful deterioration, we are
likely to view any increase in municipal bond yields as an opportunity
to purchase more attractively priced tax-exempt securities.
Fiscal Year in Review
As 1997 began, Treasury bond yields rose in excess of 7% as an improving
economy caused inflationary concerns to mount. We identified this level
as the lower price end of the trading range and began buying long-term
municipal bonds.
One interesting note during the fiscal year was that municipal bonds
outperformed Treasury issues. This was most likely caused by a decreased
amount of issuance in a year where many municipal bonds were redeemed,
or called from the marketplace.
A rally into the six months ended August 31, 1997 brought municipal
interest rates back down to levels where they historically lose retail
support. In our experience, professional traders and arbitrageurs
normally account for most trading activity at these prices. When this
occurred, we reduced the Fund's exposure to the long-term end of the
market, protecting net asset valuation. We presently expect to maintain
this position until the Federal Reserve Board completes its tightening
phase and a more sustained drop in yields can be forecast. During the
fiscal year, our strategy benefited the Fund's total return, enabling
Class A Shares to achieve an above California insured municipal bond
fund industry average of 8.84%. (Results shown do not reflect sales
charges and would be lower if sales charges were included. Complete
performance information, including average annual total returns, can be
found on pages 3 -- 6 of this report to shareholders.)
Portfolio Strategy
During the past several months, the municipal market was characterized
by enormous volatility within an abnormally tight trading range. Lack of
significant primary supply, combined with an equally disinterested
demand side at low interest rates created a stagnant marketplace where a
low volume of activity fostered inefficient price movements. During the
six months ended August 31, 1997, our portfolio strategy was aimed at
identifying and capturing the relevant municipal bond trading range that
corresponds to Treasury bond yields ranging from 7% to 6.50%. When
Treasury yields are at these levels, municipal bonds tend to have a
corresponding range of 5.50% -- 5.90%. We presently aim to buy municipal
bonds when yields approach the 5.90% level and sell when they reach the
latter level. During the August period, this formula worked well on
several occasions. We remain focused on achieving as high a level of
income as possible. To this end, we seek to invest in higher-yielding
California bonds that comply with the Fund's credit constraints. We are
currently neutral on the prospects for the fixed-income market, with a
bias toward becoming more aggressively postured as interest rates move
higher in anticipation of another possible Federal Funds rate increase
this fall. Should this event provide us with a buying opportunity, we
would expect to reenter the insured California bond market by extending
the Fund's duration, since the municipal bond market's prospects appear
very favorable for 1998.
In Conclusion
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,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/WALTER C. O'CONNOR
Walter C. O'Connor
Vice President and Portfolio Manager
October 2, 1997
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:
[bullet] 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.
[bullet] 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.)
[bullet] 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.
[bullet] 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 "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" 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.
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.25 $10.04 $9.84 +4.17% +2.09%
Class B Shares* 10.25 10.04 9.84 +4.17 +2.09
Class C Shares* 10.24 10.03 9.84 +4.07 +2.09
Class D Shares* 10.26 10.04 9.85 +4.16 +2.19
Class A Shares -- Total Return* +9.50(1) +3.35(2)
Class B Shares -- Total Return* +8.95(3) +3.22(4)
Class C Shares -- Total Return* +8.74(5) +3.19(6)
Class D Shares -- Total Return* +9.39(7) +3.42(8)
Class A Shares -- Standardized 30-day Yield 3.98%
Class B Shares -- Standardized 30-day Yield 3.64%
Class C Shares -- Standardized 30-day Yield 3.54%
Class D Shares -- Standardized 30-day Yield 3.89%
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included.
(1) Percent change includes reinvestment of $0.504 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.123 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.453 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.110 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.443 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.108 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.494 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.121 per share ordinary income dividends.
</TABLE>
[GRAPHIC LINE CHART OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
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 growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
2/26/93** 8/97
ML California Insured Municipal Bond +
Fund -- Class A Shares* $9,600 $12,477
ML California Insured Municipal Bond +
Fund -- Class B Shares* $10,000 $12,704
Lehman Brothers Municipal Bond Index++ $10,000 $13,091
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 growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
10/21/94** 8/97
ML California Insured Municipal Bond +
Fund -- Class C Shares* $10,000 $12,714
ML California Insured Municipal Bond +
Fund -- Class D Shares* $9,600 $12,410
Lehman Brothers Municipal Bond Index++ $10,000 $12,932
* Assuming maximum sales charge, transaction 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 6/30/97 +9.50% +5.12%
Inception (2/26/93)
through 6/30/97 +5.76 +4.77
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +8.95% +4.95%
Inception (2/26/93)
through 6/30/97 +5.23 +5.23
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 +8.96% +7.96%
Inception (10/21/94)
through 6/30/97 +8.64 +8.64
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/97 +9.50% +5.12%
Inception (10/21/94)
through 6/30/97 +9.24 +7.60
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1995 8.97 10.10 -- 0.514 +18.73
1996 10.10 10.09 -- 0.510 + 5.17
1/1/97-- 8/31/97 10.09 10.25 -- 0.327 + 5.02
Total $2.319
Cumulative total return as of 8/31/97: + 29.97%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1995 8.98 10.11 -- 0.465 +18.12
1996 10.11 10.10 -- 0.460 + 4.64
1/1/97-- 8/31/97 10.10 10.25 -- 0.294 + 4.57
Total $2.097
Cumulative total return as of 8/31/97: +27.04%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.19 $8.97 -- $0.091 - 1.38%
1995 8.97 10.09 -- 0.455 +17.90
1996 10.09 10.09 -- 0.450 + 4.64
1/1/97-- 8/31/97 10.09 10.24 -- 0.287 + 4.50
Total $1.283
Cumulative total return as of 8/31/97: +27.14%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.19 $8.98 -- $0.101 - 1.16%
1995 8.98 10.11 -- 0.505 +18.60
1996 10.11 10.10 -- 0.501 + 5.07
1/1/97-- 8/28/97 10.10 10.26 -- 0.320 + 4.95
Total $1.427
Cumulative total return as of 8/31/97: + 29.27%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch California Insured Municipal Bond Fund August 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
California -- 96.3%
AAA Aaa $1,000 Anaheim, California, Public Financing Authority, Tax Allocation
Revenue Bonds, RITES, 9.12% due 12/28/2018 (d)(e) $1,179
AAA Aaa 1,290 California Fairs Financing Authority Revenue Bonds, 6.50% due 7/01/2011
(f) 1,399
AA - Aa 1,965 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1, 7% due
8/01/2026 2,102
California Health Facilities Financing Authority Revenue Bonds, Series A:
BB Aaa 2,000 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (g) 2,206
AAA Aaa 2,000 (Scripps Memorial Hospital), 6.375% due 10/01/2022 (d)(h) 2,170
A1 NR* 300 California Pollution Control Financing Authority, PCR, Refunding (Pacific
Gas and Electric Co.), VRDN, AMT, Series G, 3.50% due 2/01/2016 (a) 300
NR* P1 100 California Pollution Control Financing Authority, Resource Recovery
Revenue Refunding Bonds (Ultra Power Malaga Project), VRDN, AMT, Series B,
3.55% due 4/01/2017 (a) 100
California State Public Works Board, Lease Revenue Bonds, Series A (g):
A Aaa 2,000 (Department of Corrections -- Monterey County Soledad II), 7% due
11/01/2004 2,345
AAA Aaa 2,000 (Various University of California Projects), 6.40% due 12/01/2002 (b) 2,234
AAA Aaa 2,500 California State, Veterans' Bonds, AMT, UT, Series BD, BE and BF, 6.375%
due 2/01/2027 (b) 2,570
NR* Aa2 300 California Statewide Community Development Authority, Solid Waste
Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 3.50%
due 12/15/2024 (a) 300
AAA Aaa 1,200 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022 (c) 1,301
AAA Aaa 2,000 East Bay, California, Municipal Utilities District, Water System Revenue
Bonds, 6.50% due 6/01/2004 (b)(g) 2,272
AAA Aaa 4,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (b) 4,369
AAA Aaa 2,500 Fresno, California, Sewer Revenue Bonds (Fowler Avenue Project), Series A,
6.25% due 8/01/2011 (b) 2,684
AAA Aaa 2,500 Industry, California, Urban Development Agency Refunding Bonds
(Transportation District Industrial Redevelopment Project 2), 6.50% due
11/01/2016 (d) 2,739
AAA Aaa 1,795 Los Angeles, California, Convention and Exhibition Center Authority, Lease
Revenue Refunding Bonds, Series A, 5.125% due 8/15/2021 (d) 1,701
A+ Aa3 4,000 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Refunding Bonds, 6.375% due 2/01/2020 4,277
Los Angeles, California, Harbor Department Revenue Bonds, AMT:
AAA Aaa 2,000 RITR, 8.795% due 11/01/2026 (d)(e) 2,375
AAA Aaa 2,000 Series B, 6.625% due 8/01/2019 (b) 2,167
AAA Aaa 2,000 Los Angeles, California, Wastewater Systems Revenue Bonds, Series D,
6.70% due 12/01/2000 (d)(g) 2,193
AAA Aaa 1,000 Mesa, California, Consolidated Water District, COP (Water Project), 6.375%
due 3/15/2012 (c) 1,072
AAA Aaa 2,140 Mount Diablo, California, Unified School District, Community Facilities
-- Special District Tax No. 1, 6.30% due 8/01/2022 (b) 2,319
AAA Aaa 2,500 Mountain View, California, Capital Improvements Financing Authority Revenue
Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 2,715
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) 3,778
AAA Aaa 3,000 Orchard, California, School District, GO, UT, Series A, 6.50% due 8/01/2019
(c) 3,342
AAA Aaa 1,500 Rancho, California, Water District Financing Authority, Revenue Refunding
Bonds, 6.25% due 8/01/2012 (c) 1,607
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
AAA Aaa 2,000 INFLOS, 8.868% due 8/15/2018 (c)(e) 2,307
AAA Aaa 3,000 Series B, 6.375% due 8/15/2002 (d)(g) 3,333
San Diego, California, Public Facilities Financing Authority, Sewer Revenue
Bonds (c):
AAA Aaa 2,000 5% due 5/15/2020 1,876
AAA Aaa 1,500 Series B, 5.25% due 5/15/2027 1,445
San Francisco, California, City and County Airport Commission, International
Airport, Revenue Refunding Bonds, Second Series:
AAA Aaa 3,750 First Issue, 6.50% due 5/01/2013 (b) 4,090
AAA Aaa 2,500 Second Issue, 6.75% due 5/01/2020 (d) 2,784
AAA Aaa 2,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds (Subregional
Water Project), Series A, 5% due 9/01/2022 (c) 1,878
Stockton, California, Revenue, COP (Wastewater Treatment Plant Expansion),
Series A (c):
AAA Aaa 2,500 6.70% due 9/01/2014 2,790
AAA Aaa 2,500 6.80% due 9/01/2024 2,795
AAA Aaa 2,000 Truckee - Donner, California, Public Utility District, COP (Water System
Improvement Project), 6.75% due 11/15/2001 (d)(g) 2,233
AAA Aaa 3,685 University of California Revenue Bonds (Multiple Purpose Projects),
Series D, 6.30% due 9/01/2015 (d) 3,997
AAA Aaa 1,100 University of California Revenue Bonds, RITR, Series 13, 9.17% due
9/01/2019 (d)(e) 1,283
Total Investments (Cost -- $83,789) -- 96.3% 88,627
Variation Margin on Financial Futures Contracts** -- 0.0% (24)
Other Assets Less Liabilities -- 3.7% 3,455
---------
Net Assets -- 100.0% $92,058
=========
(a) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate is
effect at August 31, 1997.
(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, 1997.
(f) FSA Insured.
(g) Prerefunded.
(h) All or a portion of security held as collateral in connection with
open financial futures contracts.
* Not Rated.
** Financial futures contracts purchased as of August 31, 1997
were as follows:
(in Thousands)
Value
Number of Expiration (Notes
Contracts Issue Date 1a & 1b)
40 Municipal Bond Index December 1997 $4,713
Total Financial Futures Contracts Purchased
(Total Contract Price -- $4,689) $4,713
=======
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</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
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
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>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $83,789,452) (Note 1a) $88,626,832
Cash 48,072
Receivables:
Securities sold $3,983,670
Interest 1,354,911
Beneficial interest sold 115,004 5,453,585
-----------
Deferred organization expenses (Note 1e) 5,580
Prepaid registration and other assets (Note 1e) 40,551
------------
Total assets 94,174,620
------------
Liabilities: Payables:
Securities purchased 1,692,972
Beneficial interest redeemed 115,633
Dividends to shareholders (Note 1f) 78,557
Investment adviser (Note 2) 35,972
Distributor (Note 2) 33,837
Variation margin (Note 1b) 23,750 1,980,721
-----------
Accrued expenses and other liabilities 136,094
------------
Total liabilities 2,116,815
------------
Net Assets: Net assets $92,057,805
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $121,365
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 676,343
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 52,334
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 48,155
Paid-in capital in excess of par 89,111,616
Accumulated realized capital losses on investments -- net (Note 5) (2,813,138)
Unrealized appreciation on investments -- net 4,861,130
------------
Net assets $92,057,805
============
Net Asset Value: Class A -- Based on net assets of $12,437,427 and 1,213,650 shares of
beneficial interest outstanding $10.25
============
Class B -- Based on net assets of $69,320,188 and 6,763,433 shares of
beneficial interest outstanding $10.25
============
Class C -- Based on net assets of $5,361,183 and 523,342 shares of
beneficial interest outstanding $10.24
============
Class D -- Based on net assets of $4,939,007 and 481,550 shares of
beneficial interest outstanding $10.26
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
August 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $5,411,269
(Note 1d):
Expenses: Investment advisory fees (Note 2) $525,625
Account maintenance and distribution fees -- Class B (Note 2) 359,250
Accounting services (Note 2) 86,203
Registration fees (Note 1e) 80,516
Professional fees 51,573
Printing and shareholder reports 38,488
Account maintenance and distribution fees -- Class C (Note 2) 31,088
Transfer agent fees -- Class B (Note 2) 22,281
Custodian fees 13,474
Amortization of organization expenses (Note 1e) 11,443
Pricing fees 7,061
Account maintenance fees -- Class D (Note 2) 4,693
Transfer agent fees -- Class A (Note 2) 3,385
Trustees' fees and expenses 3,149
Transfer agent fees -- Class C (Note 2) 1,585
Transfer agent fees -- Class D (Note 2) 1,143
Other 4,850
----------
Total expenses before reimbursement 1,245,807
Reimbursement of expenses (Note 2) (238,835)
----------
Total expenses after reimbursement 1,006,972
----------
Investment income -- net 4,404,297
----------
Realized & Realized gain on investments -- net 1,351,724
Unrealized Gain on Change in unrealized appreciation on investments -- net 2,532,891
Investments -- Net ----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $8,288,912
==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $4,404,297 $4,511,142
Realized gain on investments -- net 1,351,724 605,747
Change in unrealized appreciation on investments -- net 2,532,891 1,181,849
----------- -----------
Net increase in net assets resulting from operations 8,288,912 6,298,738
----------- -----------
Dividends to Investment income -- net:
Shareholders Class A (695,974) (752,385)
(Note 1f): Class B (3,248,319) (3,437,910)
Class C (228,905) (161,469)
Class D (231,099) (159,378)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (4,404,297) (4,511,142)
----------- -----------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions (8,506,453) 5,394,929
(Note 4): ----------- -----------
Net Assets: Total increase (decrease) in net assets (4,621,838) 7,182,525
Beginning of year 96,679,643 89,497,118
----------- -----------
End of year $92,057,805 $96,679,643
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
Period
Feb. 26,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.84 $9.65 $9.54 $10.23 $10.00
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .50 .52 .52 .51 .24
Realized and unrealized gain (loss) on
investments -- net .41 .19 .11 (.65) .23
--------- --------- --------- --------- ---------
Total from investment operations .91 .71 .63 (.14) .47
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.50) (.52) (.52) (.51) (.24)
In excess of realized gain on
investments -- net -- -- -- (.04) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.50) (.52) (.52) (.55) (.24)
--------- --------- --------- --------- ---------
Net asset value, end of period $10.25 $9.84 $9.65 $9.54 $10.23
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 9.50% 7.44% 6.94% (1.44%) 4.81%++++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement .63% .49% .47% .33% .14%*
Net Assets: ========= ========= ========= ========= =========
Expenses .89% .85% .87% .96% 1.06%*
========= ========= ========= ========= =========
Investment income -- net 5.03% 5.20% 5.53% 5.16% 4.80%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $12,438 $14,183 $14,204 $15,946 $17,105
========= ========= ========= ========= =========
Portfolio turnover 67.28% 87.77% 61.53% 93.04% 74.26%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Class B
For the
Period
Feb. 26,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.84 $9.65 $9.54 $10.23 $10.00
Operating --------- --------- --------- --------- ---------
Performance:
Investment income -- net .45 .47 .48 .46 .22
Realized and unrealized gain (loss) on
investments -- net .41 .19 .11 (.65) .23
--------- --------- --------- --------- ---------
Total from investment operations .86 .66 .59 (.19) .45
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.45) (.47) (.48) (.46) (.22)
In excess of realized gain on
investments -- net -- -- -- (.04) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.45) (.47) (.48) (.50) (.22)
--------- --------- --------- --------- ---------
Net asset value, end of period $10.25 $9.84 $9.65 $9.54 $10.23
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 8.95% 6.89% 6.38% (1.93%) 4.56%++++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.14% .99% .97% .83% .64%*
Net Assets: ========= ========= ========= ========= =========
Expenses 1.39% 1.36% 1.38% 1.48% 1.56%*
========= ========= ========= ========= =========
Investment income -- net 4.52% 4.69% 5.02% 4.67% 4.31%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $69,320 $73,292 $71,670 $74,982 $72,861
========= ========= ========= ========= =========
Portfolio turnover 67.28% 87.77% 61.53% 93.04% 74.26%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Class C Class D
For the For the
Period Period
For the Oct 21, For the Oct. 21,
The following per share data and ratios have been derived Year Ended 1994+ to Year Ended 1994+ to
from information provided in the financial statements. August 31, Aug. 31, August 31, Aug. 31,
1997 1996 1995 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.84 $9.64 $9.19 $9.85 $9.65 $9.19
Operating --------- --------- --------- --------- --------- ---------
Performance:
Investment income -- net .44 .46 .39 .49 .51 .44
Realized and unrealized gain on
investments -- net .40 .20 .45 .41 .20 .46
--------- --------- --------- --------- --------- ---------
Total from investment operations .84 .66 .84 .90 .71 .90
--------- --------- --------- --------- --------- ---------
Less dividends from investment
income -- net (.44) (.46) (.39) (.49) (.51) (.44)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period $10.24 $9.84 $9.64 $10.26 $9.85 $9.65
========= ========= ========= ========= ========= =========
Total Investment Based on net asset value per share 8.74% 6.90% 9.38%++++ 9.39% 7.44% 9.99%++++
Return:** ========= ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.24% 1.10% 1.09%* .74% .59% .57%*
Net Assets: ========= ========= ========= ========= ========= =========
Expenses 1.49% 1.46% 1.49%* .98% .95% .97%*
========= ========= ========= ========= ========= =========
Investment income -- net 4.42% 4.59% 4.76%* 4.92% 5.09% 5.33%*
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $5,361 $4,901 $1,778 $4,939 $4,304 $1,845
========= ========= ========= ========= ========= =========
Portfolio turnover 67.28% 87.77% 61.53% 67.28% 87.77% 61.53%
========= ========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 1997
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 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 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 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.
[bullet] 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.
(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 date.
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.
For the year ended August 31, 1997, FAM earned fees of $525,625, of
which $238,835 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 Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and MLPF&S
for providing account maintenance services to Class B, Class C
and Class D shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B and Class C shareholders.
For the year ended August 31, 1997, 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 $150 $1,335
Class D $503 $3,096
For the year ended August 31, 1997, MLPF&S received contingent deferred
sales charges of $133,241 and $1,735 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $60,586,252 and $68,143,623,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $1,327,093 $4,837,380
Financial futures contracts 24,631 23,750
----------- -----------
Total $1,351,724 $4,861,130
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $4,837,380, of which $4,866,392 related to
appreciated securities and $29,012 related to depreciated securities.
The aggregate cost of investments at August 31, 1997 for Federal income
tax purposes was $83,789,452.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(8,506,453) and $5,394,929 for the years ended August
31, 1997 and August 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 167,842 $1,721,861
Shares issued to shareholders
in reinvestment of dividends 26,473 266,230
----------- -----------
Total issued 194,315 1,988,091
Shares redeemed (422,075) (4,313,656)
----------- -----------
Net decrease (227,760) $(2,325,565)
=========== ===========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 192,761 $1,890,855
Shares issued to shareholders
in reinvestment of dividends 28,926 285,031
----------- -----------
Total issued 221,687 2,175,886
Shares redeemed (252,553) (2,492,063)
----------- -----------
Net decrease (30,866) $(316,177)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 925,806 $9,285,667
Shares issued to shareholders
in reinvestment of dividends 132,283 1,330,133
----------- -----------
Total issued 1,058,089 10,615,800
Automatic conversion
of shares (30,435) (307,865)
Shares redeemed (1,712,394) (17,203,405)
----------- -----------
Net decrease (684,740) $(6,895,470)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,369,886 $13,477,417
Shares issued to shareholders
in reinvestment of dividends 155,360 1,531,776
----------- -----------
Total issued 1,525,246 15,009,193
Automatic conversion
of shares (35,131) (353,395)
Shares redeemed (1,469,919) (14,486,720)
----------- -----------
Net increase 20,196 $169,078
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 252,747 $2,537,534
Shares issued to shareholders
in reinvestment of dividends 14,024 140,882
----------- -----------
Total issued 266,771 2,678,416
Shares redeemed (241,739) (2,416,566)
----------- -----------
Net increase 25,032 $261,850
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 424,343 $4,215,073
Shares issued to shareholders
in reinvestment of dividends 11,412 112,281
----------- -----------
Total issued 435,755 4,327,354
Shares redeemed (121,901) (1,209,318)
----------- -----------
Net increase 313,854 $3,118,036
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 59,711 $601,386
Automatic conversion of shares 30,417 307,865
Shares issued to shareholders
in reinvestment of dividends 15,575 156,681
----------- -----------
Total issued 105,703 1,065,932
Shares redeemed (61,225) (613,200)
----------- -----------
Net increase 44,478 $452,732
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 263,889 $2,602,675
Automatic conversion
of shares 35,107 353,395
Shares issued to shareholders
in reinvestment of dividends 10,947 107,791
----------- -----------
Total issued 309,943 3,063,861
Shares redeemed (63,998) (639,869)
----------- -----------
Net increase 245,945 $2,423,992
=========== ===========
5. Capital Loss Carryforward:
At August 31, 1997, the Fund had a net capital loss carryforward of
approximately $2,594,000, of which $1,578,000 expires in 2003 and
$1,016,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch California 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, 1997, 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 four-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, 1997 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, 1997, the results of
its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 7, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by Merrill
Lynch California Insured Municipal Bond Fund during its taxable year
ended August 31, 1997 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, there were no capital gains distributions made by the Fund
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
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Robert E. Putney, III, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
