MERRILL LYNCH
CALIFORNIA
INSURED
MUNICIPAL
BOND FUND
[FUND LOGO]
STRATEGIC
Performance
Semi-Annual Report
February 28, 1998
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
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 -- 2/98
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch California Insured Municipal Bond Fund February 28, 1998
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended February 28, 1998, bond yields declined
to recent historic lows. Prior to late October, the ongoing positive
combination of moderate economic growth and low inflation had
allowed interest rates to gradually move lower. More recently,
however, the decline in interest rates was driven more by the
continued turmoil in Asian equity markets than by fundamental
concerns. A significant "flight to quality" has benefited the US
Treasury bond market, particularly longer-maturity US Treasury
bonds, as foreign investors have sought safe haven in the relative
stability of US financial markets. Over the six months ended
February 28, 1998, US Treasury bond yields declined approximately 70
basis points (0.70%) to 5.92%. Long-term municipal revenue bonds, as
measured by the Bond Buyer Revenue Bond Index, declined over 30
basis points to end the February period at 5.36%. Tax-exempt bond
yields have not been at these levels since the mid-1970s.
Without the ability to benefit from the tax advantage inherent in
municipal bonds, foreign investors have not participated to any
significant extent in the tax-exempt market. Consequently, municipal
bond yields have not declined dramatically as have taxable US
Treasury securities. The increase in new municipal bond issuance
over the past six months has also prevented the tax-exempt bond
market from more closely mirroring the yield declines exhibited by
its taxable counterpart. Over the last six months, over $125 billion
in new long-term municipal bonds were underwritten, an increase of
over 35% compared to the same six-month period one year ago. As
interest rates have continued to decline in recent months, new tax-
exempt bond issuance has remained strong. Over $60 million in new
long-term municipal securities were issued during the last three
months, an increase of over 40% compared to the same three-month
period ended February 28, 1997. During the past month, over $20
billion in new long-term municipal securities were underwritten,
representing an increase of over 50% compared to the February 1997
level and the largest February issuance ever.
In our opinion, the recent correction in world equity markets has
enhanced the near-term prospects for continued low, if not
declining, interest rates in the United States. It is likely that
the recent correction will result in slower US domestic growth in
the coming months. This decline should be generated in part by
reduced US export growth. Going forward, Asian consumer demand for
US products is likely to decline in response to diminished Asian
economic growth. Perhaps more importantly, it is likely that,
barring a dramatic and unexpected resurgence in domestic growth and
inflation, the Federal Reserve Board will be unwilling to raise
interest rates until the full impact of the recent Asian market
turmoil can be established.
All of these factors suggest that over the near term, interest
rates, including tax-exempt bond yields, are unlikely to rise by any
appreciable amount. It is probable that municipal bond yields will
remain under some relative pressure because of continued strong new-
issue supply. However, the recent pace of municipal bond issuance is
likely to be unsustainable. Continued increases in bond issuance
will require lower and lower tax-exempt bond yields to generate the
economic savings necessary for additional municipal bond
refinancings. Preliminary estimates of 1998 total municipal bond
issuance are presently in the $200 billion -- $225 billion range.
These estimates suggest that recent supply pressures are likely to
abate somewhat next year, or at least exert only minimal technical
pressure during 1998. Additionally, municipal bond investors
received approximately $30 billion in January and February coupon
payments, bond maturities and proceeds from early redemptions, which
should serve to intensify investor demand in the near future. With
tax-exempt bond yields at already attractive yield ratios relative
to US Treasury bonds (approximately 90% at the end of February
1998), any further pressure on the municipal market may well
represent an attractive investment opportunity.
Portfolio Strategy
During the six months ended February 28, 1998, we slightly
restructured Merrill Lynch California Insured Municipal Bond Fund's
portfolio. Throughout the period, the municipal bond market
continued to be characterized by severe volatility within a fairly
tight trading range. Although the Fund has consistently generated an
attractive yield, our investment strategy was not as aggressive as
it could have been to take advantage of the price appreciation of
bonds in the recent environment of declining interest rates. We have
used recent market volatility to adopt a more aggressive strategy,
in line with a slow growth, low inflation scenario that could lead
to price gains for fixed-income securities in the months ahead.
As the US Treasury market has traded back toward the 6% level, we
increased the Fund's investments in discount securities. These
purchases were financed through the sale of more market-neutral
holdings such as prerefunded holdings or shorter maturity bonds.
This strategy should allow the Fund to participate more fully in the
further decline in interest rates that we expect later in 1998. This
restructuring is designed to enhance the Fund's total return with
little or no impact on the Fund's yield. We remain committed to
seeking to provide as high a level of current income as possible
while looking to enhance net asset values. By February 28, 1998, the
Fund had an extremely high credit quality mix with approximately 90%
of Fund assets rated AAA and 97% rated AA or higher by at least one
of the major rating agencies.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch California
Insured Municipal Bond Fund, and we look forward to serving your
investment needs in the months and years to come.
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
March 31, 1998
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 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*
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 2/28/98
<S> <C> <C> <C> <C>
ML California Insured Municipal Bond Fund Class A Shares +8.52% +2.07% +35.55% +3.93%
ML California Insured Municipal Bond Fund Class B Shares +7.98 +1.95 +32.17 +3.59
ML California Insured Municipal Bond Fund Class C Shares +7.98 +2.02 +32.34 +3.49
ML California Insured Municipal Bond Fund Class D Shares +8.41 +2.05 +34.75 +3.84
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was
included. Total investment returns are based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset value on the payable date. The Fund's
inception dates are: Class A and Class B Shares, 2/26/93; and Class C and Class D Shares, 10/21/94.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/97 +8.49% +4.15%
Inception (2/26/93)
through 12/31/97 +6.27 +5.38
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/97 +7.84% +3.84%
Inception (2/26/93)
through 12/31/97 +5.74 +5.74
* 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 12/31/97 +7.84% +6.84%
Inception (10/21/94)
through 12/31/97 +8.87 +8.87
* 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 12/31/97 +8.38% +4.05%
Inception (10/21/94)
through 12/31/97 +9.46 +8.07
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Merrill Lynch California Insured Municipal Bond Fund February 28, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
California -- 100.5%
AAA Aaa $1,000 Anaheim, California, Public Financing Authority, Tax Allocation
Revenue Bonds, RITES, 9.02% due 12/28/2018 (d)(e) $1,264
AA- Aa 1,965 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1,
7% due 8/01/2026 2,122
California Health Facilities Financing Authority
Revenue Bonds (d):
AAA Aaa 4,000 RITR, Series 17, 5.375% due 8/15/2030 (e) 4,205
AAA Aaa 2,000 (Scripps Memorial Hospital), Series A, 6.375% due 10/01/2022 2,196
California Pollution Control Financing Authority, PCR,
Refunding Pacific Gas (and Electric Co.), VRDN (a):
A1 NR* 100 AMT, Series G, 3.65% due 2/01/2016 100
A1+ NR* 300 Series C, 3.55% due 11/01/2026 300
NR* P1 200 California Pollution Control Financing Authority, Resource
Recovery Revenue Bonds (Delano Project), VRDN, AMT, Series 1991,
3.65% due 8/01/2019 (a) 200
California State Public Works Board, Lease Revenue Bonds,
Series A (f):
A Aaa 2,000 (Department of Corrections -- Monterey County Soledad II),
7% due 11/01/2004 2,360
AAA Aaa 2,000 (Various University of California Projects), 6.40%
due 12/01/2002 (b) 2,241
A1+ VMIG1+ 100 California Statewide Communities Development Authority, COP
(Saint Joseph's Health Systems Group), VRDN, 3.65% due 7/01/2024 (a) 100
AAA Aaa 1,200 Cucamonga County, California, Water District Facilities
Refinancing Bonds, COP, 6.50% due 9/01/2022 (c) 1,303
AAA Aaa 3,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds
(El Cajon Redevelopment Project), 6.60% due 10/01/2001 (b)(f) 3,320
AAA Aaa 2,500 Industry, California, Urban Development Agency Refunding Bonds
(Transportation District Industrial Redevelopment Project 2),
6.50% due 11/01/2016 (d) 2,762
AAA Aaa 5,000 Long Beach, California, Finance Authority, Lease Revenue
Refunding Bonds (Civic Center Project), Series A, 5%
due 10/01/2027 (d) 4,872
AAA Aaa 2,000 Los Angeles, California, Convention and Exhibition Center
Authority, Lease Revenue Bonds, RITR, Series 21, 5.375%
due 8/15/2018 (d)(e) 2,058
A+ Aa3 4,000 Los Angeles, California, Department of Water and Power,
Electric Plant Revenue Refunding Bonds, RIB, 6.375%
due 2/01/2020 (e) 4,316
Los Angeles, California, Harbor Department Revenue Bonds, AMT:
AAA Aaa 2,000 RITR, Series 7, 8.595% due 11/01/2026 (d)(e) 2,507
AAA Aaa 2,000 Series B, 6.625% due 8/01/2019 (b) 2,201
AAA Aaa 1,000 Mesa, California, Consolidated Water District, COP
(Water Project), 6.375% due 3/15/2012 (c) 1,085
AAA Aaa 4,000 Modesto, California, Irrigation District Financing Authority,
Revenue Refunding Bonds (Domestic Water Project), Series D, 4.75%
due 9/01/2022 (b) 3,779
AAA Aaa 4,150 Monterey County, California, COP (Natividad Medical
Center Improvement ), Series E, 4.75% due 8/01/2025 (d) 3,907
AAA Aaa 2,140 Mount Diablo, California, Unified School District,
Community Facilities -- Special District Tax No. 1, 6.30%
due 8/01/2022 (b) 2,343
AAA Aaa 2,500 Mountain View, California, Capital Improvements Financing Authority
Revenue Bonds (City Hall Community Theater), 6.50% due 8/01/2016 (d) 2,717
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) 3,824
AAA Aaa 2,000 Northern California, Transmission Revenue Bonds, RITR, Series 16,
7.12% due 5/01/2020 (d)(e) 2,007
AAA Aaa 3,000 Orchard, California, School District, GO, UT, Series A, 6.50%
due 8/01/2019 (c) 3,400
Sacramento, California, Municipal Utility District,
Electric Revenue Bonds:
AAA Aaa 2,000 INFLOS, 9.02% due 8/15/2018 (c)(e) 2,357
AAA Aaa 3,000 Series B, 6.375% due 8/15/2002 (d)(f) 3,342
San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series:
AAA Aaa 5,000 Issue 15B, 4.50% due 5/01/2028 (d) 4,505
AAA Aaa 3,750 Refunding, Issue 1, 6.50% due 5/01/2013 (b) 4,123
AAA Aaa 2,500 Refunding, Issue 2, 6.75% due 5/01/2020 (d) 2,798
AAA Aaa 2,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds
(Subregional Wastewater Project), Series A, 5% due 9/01/2022 (c) 1,953
Stockton, California, Revenue, COP (Wastewater Treatment
Plant Expansion), Series A (c)(f):
AAA Aaa 2,500 6.70% due 9/01/2004 2,902
AAA Aaa 2,500 6.80% due 9/01/2004 2,915
University of California Revenue Bonds (d):
AAA Aaa 3,685 (Multiple Purpose Projects), Series D, 6.30% due 9/01/2002 (f) 4,097
AAA Aaa 1,100 RITR, Series 13, 8.97% due 9/01/2019 (e) 1,350
AAA Aaa 2,000 Refunding (Multiple Purpose Projects), Series E, 5.125% due 9/01/2022 1,977
Total Investments (Cost -- $88,375) -- 100.5% 93,808
Liabilities in Excess of Other Assets -- (0.5%) (464)
----------
Net Assets -- 100.0% $93,344
==========
(a) The interest rate is subject to change periodically based upon prevailing market rates.
The interest rate shown is the rate in effect at February 28, 1998.
(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 February 28, 1998.
(f) Prerefunded.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
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
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of February 28, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $88,375,223) (Note 1a) $93,808,278
Cash 358,773
Receivables:
Securities sold $12,800,870
Interest 1,247,257
Beneficial interest sold 115,313 14,163,440
-------------
Deferred organization expenses (Note 1e) 5,580
Prepaid registration fees and other assets (Note 1e) 40,551
-------------
Total assets 108,376,622
-------------
Liabilities: Payables:
Securities purchased 14,570,868
Beneficial interest redeemed 206,192
Dividends to shareholders (Note 1f) 67,071
Investment adviser (Note 2) 39,653
Distributor (Note 2) 29,427 14,913,211
-------------
Accrued expenses and other liabilities 119,507
-------------
Total liabilities 15,032,718
-------------
Net Assets: Net assets $93,343,904
=============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $111,925
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 654,108
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 50,510
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 77,265
Paid-in capital in excess of par 88,726,429
Accumulated realized capital losses on investments -- net (Note 5) (1,709,388)
Unrealized appreciation on investments -- net 5,433,055
-------------
Net assets $93,343,904
=============
Net Asset Value: Class A -- Based on net assets of $11,687,088 and 1,119,251 shares of
beneficial interest outstanding $10.44
=============
Class B -- Based on net assets of $68,310,422 and 6,541,078 shares of
beneficial interest outstanding $10.44
=============
Class C -- Based on net assets of $5,272,337 and 505,102 shares of
beneficial interest outstanding $10.44
=============
Class D -- Based on net assets of $8,074,057 and 772,654 shares of
beneficial interest outstanding $10.45
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended
February 28, 1998
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $2,523,926
(Note 1d):
Expenses: Investment advisory fees (Note 2) $248,798
Account maintenance and distribution fees -- Class B (Note 2) 169,855
Accounting services (Note 2) 36,605
Professional fees 25,006
Registration fees (Note 1e) 24,933
Account maintenance and distribution fees -- Class C (Note 2) 14,676
Transfer agent fees -- Class B (Note 2) 12,246
Custodian fees 6,708
Account maintenance fees -- Class D (Note 2) 2,832
Amortization of organization expenses (Note 1e) 2,715
Pricing fees 2,513
Transfer agent fees -- Class A (Note 2) 1,790
Transfer agent fees -- Class C (Note 2) 898
Transfer agent fees -- Class D (Note 2) 848
----------
Total expenses before reimbursement 550,423
Reimbursement of expenses (Note 2) (6,357)
----------
Total expenses after reimbursement 544,066
----------
Investment income -- net 1,979,860
----------
Realized & Realized gain on investments -- net 1,103,750
Unrealized Gain on Change in unrealized appreciation on investments -- net 571,925
Investments -- Net ----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $3,655,535
==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C> <C>
Operations: Investment income -- net $1,979,860 $4,404,297
Realized gain on investments -- net 1,103,750 1,351,724
Change in unrealized appreciation on investments -- net 571,925 2,532,891
------------- -------------
Net increase in net assets resulting from operations 3,655,535 8,288,912
------------- -------------
Dividends to Investment income -- net:
Shareholders Class A (287,178) (695,974)
(Note 1f): Class B (1,457,360) (3,248,319)
Class C (102,451) (228,905)
Class D (132,871) (231,099)
------------- -------------
Net decrease in net assets from dividends to shareholders (1,979,860) (4,404,297)
------------- -------------
Beneficial Interest Net decrease in net assets derived from
Transactions beneficial interest transactions (389,576) (8,506,453)
(Note 4): ------------- -------------
Net Assets: Total increase (decrease) in net assets 1,286,099 (4,621,838)
Beginning of period 92,057,805 96,679,643
------------- -------------
End of period $93,343,904 $92,057,805
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.25 $9.84 $9.65 $9.54 $10.23
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .25 .50 .52 .52 .51
Realized and unrealized gain (loss) on
investments -- net .19 .41 .19 .11 (.65)
--------- --------- --------- --------- ---------
Total from investment operations .44 .91 .71 .63 (.14)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.25) (.50) (.52) (.52) (.51)
In excess of realized gain on
investments -- net -- -- -- -- (.04)
--------- --------- --------- --------- ---------
Total dividends and distributions (.25) (.50) (.52) (.52) (.55)
--------- --------- --------- --------- ---------
Net asset value, end of period $10.44 $10.25 $9.84 $9.65 $9.54
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.30%++++ 9.50% 7.44% 6.94% (1.44%)
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement .78%* .63% .49% .47% .33%
Net Assets: ========= ========= ========= ========= =========
Expenses .80%* .89% .85% .87% .96%
========= ========= ========= ========= =========
Investment income -- net 4.80%* 5.03% 5.20% 5.53% 5.16%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $11,687 $12,438 $14,183 $14,204 $15,946
Data: ========= ========= ========= ========= =========
Portfolio turnover 55.25% 67.28% 87.77% 61.53% 93.04%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class B
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.25 $9.84 $9.65 $9.54 $10.23
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .22 .45 .47 .48 .46
Realized and unrealized gain (loss) on
investments -- net .19 .41 .19 .11 (.65)
--------- --------- --------- --------- ---------
Total from investment operations .41 .86 .66 .59 (.19)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.22) (.45) (.47) (.48) (.46)
In excess of realized gain on
investments -- net -- -- -- -- (.04)
--------- --------- --------- --------- ---------
Total dividends and distributions (.22) (.45) (.47) (.48) (.50)
--------- --------- --------- --------- ---------
Net asset value, end of period $10.44 $10.25 $9.84 $9.65 $9.54
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.04%++++ 8.95% 6.89% 6.38% (1.93%)
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.29%* 1.14% .99% .97% .83%
Net Assets: ========= ========= ========= ========= =========
Expenses 1.30%* 1.39% 1.36% 1.38% 1.48%
========= ========= ========= ========= =========
Net Assets: Investment income -- net 4.29%* 4.52% 4.69% 5.02% 4.67%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $68,311 $69,320 $73,292 $71,670 $74,982
Data: ========= ========= ========= ========= =========
Portfolio turnover 55.25% 67.28% 87.77% 61.53% 93.04%
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class C
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
1998 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.24 $9.84 $9.64 $9.19
Operating --------- --------- --------- ---------
Performance: Investment income -- net .22 .44 .46 .39
Realized and unrealized gain on investments -- net .20 .40 .20 .45
--------- --------- --------- ---------
Total from investment operations .42 .84 .66 .84
--------- --------- --------- ---------
Less dividends from investment income -- net (.22) (.44) (.46) (.39)
--------- --------- --------- ---------
Net asset value, end of period $10.44 $10.24 $9.84 $9.64
========= ========= ========= =========
Total Investment Based on net asset value per share 4.09%++++ 8.74% 6.90% 9.38%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.39%* 1.24% 1.10% 1.09%*
Net Assets: ========= ========= ========= =========
Expenses 1.40%* 1.49% 1.46% 1.49%*
========= ========= ========= =========
Investment income -- net 4.19%* 4.42% 4.59% 4.76%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $5,272 $5,361 $4,901 $1,778
Data: ========= ========= ========= =========
Portfolio turnover 55.25% 67.28% 87.77% 61.53%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Class D
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
1998 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.26 $9.85 $9.65 $9.19
Operating --------- --------- --------- ---------
Performance: Investment income -- net .24 .49 .51 .44
Realized and unrealized gain on investments -- net .19 .41 .20 .46
--------- --------- --------- ---------
Total from investment operations .43 .90 .71 .90
--------- --------- --------- ---------
Less dividends from investment income -- net (.24) (.49) (.51) (.44)
--------- --------- --------- ---------
Net asset value, end of period $10.45 $10.26 $9.85 $9.65
========= ========= ========= =========
Total Investment Based on net asset value per share 4.24%++++ 9.39% 7.44% 9.99%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement .89%* .74% .59% .57%*
Net Assets: ========= ========= ========= =========
Expenses .90%* .98% .95% .97%*
========= ========= ========= =========
Investment income -- net 4.69%* 4.92% 5.09% 5.33%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $8,074 $4,939 $4,304 $1,845
Data: ========= ========= ========= =========
Portfolio turnover 55.25% 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 February 28, 1998
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. These
unaudited financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are of
a normal recurring nature. The Fund offers four classes of shares
under the Merrill Lynch Select 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 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
financial futures contracts and options on such futures contracts for
the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) 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 six months ended February 28, 1998, FAM earned
fees of $248,798, of which $6,357 was voluntarily waived.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 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 six months ended February 28, 1998, 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 $ 44 $ 546
Class D $193 $2,280
For the six months ended February 28, 1998, MLPF&S received contingent
deferred sales charges of $43,204 and $8,029 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 six months ended February 28, 1998 were $53,046,520 and
$49,418,249, respectively.
Net realized gains (losses) for the six months ended February 28, 1998
and net unrealized gains as of February 28, 1998 were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $1,054,574 $5,433,055
Short-term investments (25) --
Financial futures contracts 49,201 --
------------ ------------
Total $1,103,750 $5,433,055
============ ============
As of February 28, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $5,433,055, of which $5,591,559 related
to appreciated securities and $158,504 related to depreciated
securities. The aggregate cost of investments at February 28, 1998 for
Federal income tax purposes was $88,375,223.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $389,576 and $8,506,453 for the six months ended
February 28, 1998 and for the year ended August 31, 1997,
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 23,113 $241,963
Shares issued to shareholders
in reinvestment of dividends 11,693 121,432
------------ ------------
Total issued 34,806 363,395
Shares redeemed (129,205) (1,340,543)
------------ ------------
Net decrease (94,399) $(977,148)
============ ============
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 B Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 361,848 $3,764,182
Shares issued to shareholders
in reinvestment of dividends 57,457 596,750
------------ ------------
Total issued 419,305 4,360,932
Automatic conversion
of shares (9,482) (99,080)
Shares redeemed (632,178) (6,552,134)
------------ ------------
Net decrease (222,355) $(2,290,282)
============ ============
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 C Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 111,666 $1,162,492
Shares issued to shareholders
in reinvestment of dividends 4,711 48,935
------------ ------------
Total issued 116,377 1,211,427
Shares redeemed (134,617) (1,390,265)
------------ ------------
Net decrease (18,240) $(178,838)
============ ============
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 D Shares for the Six Months Dollar
Ended February 28, 1998 Shares Amount
Shares sold 286,605 $3,009,521
Automatic conversion
of shares 9,479 99,080
Shares issed to shareholders
in reinvestment of dividends 7,846 81,632
------------ ------------
Total issued 303,930 3,190,233
Shares redeemed (12,826) (133,541)
------------ ------------
Net increase 291,104 $3,056,692
============ ============
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
============ ============
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.
