MERRILL LYNCH
CALIFORNIA
INSURED
MUNICIPAL
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 2000
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the six months ended August 31, 2000, US domestic economic growth
remained robust. After growing at a 4.2% annual rate in 1999, US domestic
economic growth expanded at a 4.8% rate during the first quarter of 2000 and at
a 5.2% rate during the second quarter. However, despite these significant growth
rates and the lowest unemployment rates since 1970, few price measure indicators
have shown any meaningful signs of future price pressures at the consumer level.
With few signs of any economic slowdown, the Federal Reserve Board continued to
raise short-term interest rates in February, March and May 2000. The Federal
Reserve Board cited both the continued growth of US employment and the continued
strength of US equity markets as reasons for attempting to moderate US economic
growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong economic
fundamentals and concentrated upon very positive technical supply factors.
Declining bond issuance--both current, and more importantly, expected future
issuance--helped push bond yields lower into mid-April 2000. In late January and
early February 2000, the US Treasury announced its intention to reduce the
amounts to be auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to repurchase
outstanding, higher-couponed Treasury issues, primarily in the 15-year and
longer maturity sector. Both these actions resulted in significant reduction in
the outstanding supply of longer-dated maturity US Treasury debt. Domestic and
international investors soon began to accumulate what was expected to become a
scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined nearly 50 basis points
(0.50%) to 5.67%. During the remainder of the period, US Treasury bond prices
were volatile as strong economic reports and investors' concerns of additional
moves by the Federal Reserve Board occasionally overshadowed the positive
technical position of the long-term Treasury bond market. By mid-June, long-term
US Treasury bond yields rose to more than 6.00%.
Recently a number of economic indicators have begun to suggest that the actions
taken by the Federal Reserve Board in 1999 and early 2000 have started to affect
US economic growth. Both new home sales and consumer spending have slowed,
suggesting that economic growth may subside into a 4%-4.5% range by late 2000.
In our opinion, this range of growth was targeted by the Federal Reserve Board
as being sustainable, given current productivity measures, without endangering
the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-term US
Treasury securities and bond prices generally rose for the remainder of the
period. The decline in long-term US Treasury bond yields resulted in an inverted
yield curve as short-term and intermediate-term interest rates did not fall
proportionately to long-term interest rates as the Federal Reserve Board was
expected to continue to raise short-term interest rates. The current inversion
has had as much to do with debt reduction and Treasury buybacks as with investor
expectations of slower economic growth.
Tax-exempt bond yields have also declined in recent months. The decline has
largely been in response to the rally in US Treasury securities, as well as a
continued positive technical supply environment. States such as California and
Maryland have announced that their large current and anticipated future budget
surpluses will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers also have initiated tenders to repurchase
existing debt, reducing the supply of tax-exempt bonds in the secondary market
as well. Given the decline in available long-term Treasury securities, some
investors who need longer maturity investment vehicles have begun to consider
long-term municipal bonds as potential substitutes. This has further
strengthened the overall positive technical position of the tax-exempt market.
During the last six months, long-term revenue bond yields have declined more
than 50 basis points to 5.72%, their lowest level since late August 1999, as
measured by the Bond Buyer Revenue Bond Index.
August 2000 was one of the few months in recent years in which the tax-exempt
bond market
1
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
outperformed its taxable counterpart. This has largely been a reflection of the
continuing reduction in new municipal bond issuance and a moderate increase in
investor demand. During the last six months, approximately $100 billion in
long-term tax-exempt bonds was issued, a decline of almost 15% compared to the
same period in 1999. During the last three months, more than $50 billion in new
long-term municipal bonds was underwritten, a decline of nearly 10% compared to
the same three-month period in 1999.
Recently, investor demand has been stronger, particularly among individual
retail investors. Investors received more than $45 billion in coupon payments,
bond maturities and the proceeds from early redemptions during June and July.
Traditional institutional investors, such as mutual funds, have not played a
major role during recent months as fund flows, although slowing, remained
negative. However, non-traditional buyers, hedge funds and arbitrageurs have
noticeably increased their activity as may be expected when tax-exempt bond
yield ratios exceed 100% of their taxable counterparts as they have in recent
weeks. Property/casualty insurers, after being unprofitable for a number of
years, have also begun to return to the tax-exempt bond market.
However, tax-exempt bond yields have generally declined throughout most of this
year. Much of the resulting price appreciation has been triggered by the
significant improvement in the long-term US Treasury market. While the technical
position of the municipal bond market has been very positive this year, it was
also positive for most of 1999 when tax-exempt bond yields rose dramatically.
From that perspective, it may be too early to become overly positive about the
extent to which the municipal bond market can continue to improve. The US
Treasury bond market has demonstrated on a number of occasions this year that
its positive technical backdrop can quickly be subordinated by resurgent
domestic economic growth.
Fiscal Year in Review
During the fiscal year ended August 31, 2000, our portfolio strategy was to seek
to provide a generous tax-exempt yield to shareholders. We normally maintain a
relatively fully invested position for the Fund, as we did throughout the
12-month period ended August 31, 2000. Occasionally, cash equivalent reserves
were raised to 5% of total assets (although we still consider this level to be
fully invested) if there were short-term concerns on the immediate direction of
interest rates. Credit quality was a focus throughout this year, and it was a
factor in achieving better overall performance. Credit quality spreads have been
wide, and only recently, as the rally in municipal securities has become quite
advanced, has there been any improvement (tightening) in these spreads. We
purposely underutilized the basket of assets permitted to be committed to
uninsured securities.
Recently, we have closely monitored retail demand for California municipal
bonds. The improvement in bond prices has brought municipal yields to a level
where retail demand usually slows. Consequently, we have concentrated new
purchases in shorter maturity, higher-couponed securities. These purchases were
financed through the sale of longer maturity, more interest rate-sensitive
discount bonds. A combination of this restructuring and the general decline in
interest rates lowered the Fund's portfolio duration from a high of nearly 9.5
years in mid-1999 to 7.7 years at August 31, 2000, which we consider to be a
neutral position. By August 31, 2000, the Fund had 97% of its assets in
securities rated AAA by at least one of the major rating agencies or with bond
insurance.
The past 12 months encompassed two very distinct trends in the fixed-income
markets. The second half of 1999 witnessed a steady rise in interest rates and a
subsequent deterioration in municipal bond prices. As a result, the Fund's fully
invested position left it vulnerable to market volatility. As the backdrop for
interest rates improved in 2000, we maintained our investment approach and
performance recovered. Our emphasis on credit quality benefited the Fund's
performance, as spreads have remained wide. We believe it is important to
closely monitor the demand/supply technicals of the California municipal market
in an effort to protect the recovery of the Fund's net asset values made so far
this year.
2
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
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/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
September 27, 2000
3
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of 4%
and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% if redeemed during the first year, decreasing 1% each year
thereafter to 0% after the fourth year. In addition, Class B Shares are
subject to a distribution fee of 0.25% and an account maintenance fee of
0.25%. These shares automatically convert to Class D Shares after
approximately 10 years. (There is no initial sales charge for automatic
share conversions.)
o Class C Shares are subject to a distribution fee of 0.35% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Average
Annual Total Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. Investment return
and principal value of shares will fluctuate so that shares, when redeemed, may
be worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders. The Fund's
Investment Adviser voluntarily waived a portion of its management fee during
some of the time periods covered in this report to shareholders. Without such
waiver, the Fund's performance would have been lower.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/00 +2.16% -1.93%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.76 +4.90
--------------------------------------------------------------------------------
Inception (2/26/93) through 6/30/00 +5.05 +4.47
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/00 +1.64% -2.25%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.23 +5.23
--------------------------------------------------------------------------------
Inception (2/26/93) through 6/30/00 +4.52 +4.52
--------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/00 +1.43% +0.46%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.12 +5.12
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +5.82 +5.82
--------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/00 +2.06% -2.02%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.65 +4.79
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +6.40 +5.64
--------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
4
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
PERFORMANCE DATA (concluded)
ML California Insured Municipal Bond Fund's Class A and Class B Shares--Total
Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Portfolio'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** 8/00
ML California Insured
Municipal Bond Fund+--
Class A Shares* $ 9,600 $14,282
ML California Insured
Municipal Bond Fund+--
Class B Shares* $10,000 $14,323
Lehman Brothers Municipal
Bond Index++ $10,000 $15,263
ML California Insured Municipal Bond Fund's Class C and Class D Shares--Total
Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Portfolio's Class C
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Beginning and ending values are:
10/21/94** 8/00
ML California Insured
Municipal Bond Fund+--
Class C Shares* $10,000 $14,305
ML California Insured
Municipal Bond Fund+--
Class D Shares* $ 9,600 $14,162
Lehman Brothers Municipal
Bond Index++ $10,000 $15,078
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML California 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. The starting date for
the Index in the Class A & Class B Shares' graph is from 2/28/93 and in
the Class C & Class D Shares' graph is from 10/31/94.
Past performance is not predictive of future performance.
Recent Performance Results*
<TABLE>
<CAPTION>
6 Month 12 Month Since Inception Standardized
As of August 31, 2000 Total Return Total Return Total Return 30-Day Yield
==========================================================================================================================
<S> <C> <C> <C> <C>
ML California Insured Municipal Bond Fund Class A Shares +8.55% +7.28% +48.76% 4.40%
--------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class B Shares +8.16 +6.74 +43.23 4.08
--------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class C Shares +8.22 +6.74 +43.05 3.98
--------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class D Shares +8.49 +7.28 +47.52 4.30
==========================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's since inception dates are from
2/26/93 for Class A & Class B Shares and from 10/21/94 for Class C & Class
D Shares.
5
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
-----------------------------------------------------------------------------------------------------------------------
California--93.8%
-----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
AAA Aaa $2,500 Alameda Corridor Transportation Authority, California, Revenue Bonds,
Senior Lien, Series A, 5.25% due 10/01/2021 (f) $ 2,487
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,715 Alameda County, California, COP (Financing Project), 6% due 9/01/2021 (f) 1,817
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Senior-Series A, 6% due 9/01/2024 (e) 1,096
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds, RITES, 8.42% due 12/28/2018 (f)(h) 1,184
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Bakersfield, California, COP, Refunding (Convention Center Expansion
Project), 5.875% due 4/01/2022 (f) 2,080
-----------------------------------------------------------------------------------------------------------------------
AA- Aa2 570 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1, 7%
due 8/01/2026 (c) 590
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California Health Facilities Finance Authority Revenue Bonds (Scripps
Memorial Hospital), Series A, 6.375% due 10/01/2022 (f) 2,112
-----------------------------------------------------------------------------------------------------------------------
A1+ NR* 900 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, Series A, 3.30% due 12/01/2018 (i) 900
-----------------------------------------------------------------------------------------------------------------------
AAA NR* 1,000 California Rural Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds (Mortgage Backed Securities Program), AMT, Series
B, 6.15% due 6/01/2020 (d) 1,056
-----------------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds, Series A:
A+ Aaa 2,000 (Department of Corrections), 7% due 11/01/2004 (g) 2,259
AAA Aaa 2,000 (Department of Health Services), 5.625% due 11/01/2019 (f) 2,081
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 California State Public Works Board, Lease Revenue Refunding Bonds
(Various Community College Project), Series B, 5.625% due 3/01/2019 (a) 1,546
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,580 California State University and Colleges, Housing System Revenue
Refunding Bonds, 5.80% due 11/01/2017 (b) 1,660
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,700 Contra Costa County, California, Public Financing Authority, Lease
Revenue Refunding Bonds (Various Capital Facilities), Series A, 5.35%
due 8/01/2024 (f) 2,693
-----------------------------------------------------------------------------------------------------------------------
Grossmont, California, Unified High School District, COP (e):
AAA Aaa 1,220 5.65% due 9/01/2017 1,284
AAA Aaa 2,250 5.75% due 9/01/2026 2,321
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Industry, California, Urban Development Agency, Tax Allocation
Refunding Bonds (Transportation District Industrial Redevelopment
Project 2), 6.50% due 11/01/2016 (f) 2,644
-----------------------------------------------------------------------------------------------------------------------
NR* Aaa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, RITR,
AMT, Series RI-7, 8.095% due 11/01/2026 (f)(h) 2,241
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,140 Mount Diablo, California, Unified School District, Community Facilities
District Special Tax No. 1, 6.30% due 8/01/2022 (a) 2,251
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Mountain View, California, Capital Improvements Financing Authority,
Revenue Refunding Bonds (City Hall Community Theatre), 6.50% due
8/01/2016 (f) 2,599
-----------------------------------------------------------------------------------------------------------------------
</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
INFLOS Inverse Floating Rate Municipal Bonds
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
6
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
Ratings Ratings Amount Issue Value
-----------------------------------------------------------------------------------------------------------------------
California (concluded)
-----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
NR* Aaa $1,000 Petaluma, California, Community Development Commission
Tax Allocation Bonds (Petaluma Community Development Project),
Series A, 5.75% due 5/01/2030 (f) $ 1,027
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Pomona, California, Public Financing Authority, Revenue Refunding
Bonds (Southwest Pomona Redevelopment Project), Series W, 5% due
2/01/2024 (f) 2,853
-----------------------------------------------------------------------------------------------------------------------
AAAr Aaa 2,000 Port Oakland, California, RITR, AMT, Class R, Series 5, 5.85% due
11/01/2012 (b)(h) 2,261
-----------------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric Revenue
Refunding Bonds:
AAA Aaa 2,000 INFLOS, 8.564% due 8/15/2018 (b)(h) 2,195
AAA Aaa 1,000 Series L, 5.125% due 7/01/2022 (f) 974
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,700 Sacramento, California, Power Authority Revenue Bonds (Cogeneration
Project), 5.875% due 7/01/2015 (f) 1,819
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Bernardino, California, Joint Powers Financing Authority, Lease
Revenue Bonds (Department of Transportation Lease), Series A, 5.50%
due 12/01/2020 (f) 2,030
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, AMT, Second Series, Issue 11,
6.25% due 5/01/2026 (b) 2,620
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,250 San Francisco, California, City and County Airport Commission,
International Airport, Special Facilities Lease Revenue Bonds (SFO Fuel
Company LLC), AMT, Series A, 6.10% due 1/01/2020 (e) 1,322
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Jose, California, Redevelopment Agency Tax Allocation Bonds
(Merged Area Redevelopment Project), 5% due 8/01/2026 (a) 1,889
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 San Juan, California, Unified School District, GO, 5.70% due 8/01/2019 (e) 1,048
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,630 Temecula Valley, California, Unified School District, GO, Series F,
5.80% due 9/01/2014 (e) 1,748
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Turlock, California, Irrigation District Revenue Refunding Bonds, Series A,
5% due 1/01/2026 (f) 2,363
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 University of California, Revenue Refunding Bonds (Research Facilities),
Series C, 5% due 9/01/2021 (e) 1,445
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Puerto Rico--4.8%
-----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
AAA Aaa 2,000 Puerto Rico Commonwealth Highway and Transportation Authority,
Transportation Revenue Bonds, Series B, 5.75% due 7/01/2018 (f) 2,110
-----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds,
LEVRRS, 7.578% due 7/01/2002 (e)(g)(h) 1,081
-----------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$62,428)--98.6% 65,686
Other Assets Less Liabilities--1.4% 914
-------
Net Assets--100.0% $66,600
=======
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured.
(d) FNMA/GNMA Collateralized.
(e) FSA Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at August 31, 2000.
(i) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at August 31,
2000.
* Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 2000
<TABLE>
<CAPTION>
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$62,428,469) ........................ $ 65,686,474
Cash ........................................................................ 67,392
Receivables:
Interest .................................................................. $ 1,025,302
Beneficial interest sold .................................................. 36,044
Securities sold ........................................................... 35,000 1,096,346
-----------
Prepaid registration fees and other assets .................................. 24,254
------------
Total assets ................................................................ 66,874,466
------------
-------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Dividends to shareholders ................................................. 79,550
Investment adviser ........................................................ 24,748
Distributor ............................................................... 22,185
Beneficial interest redeemed .............................................. 10,504 136,987
-----------
Accrued expenses ............................................................ 137,380
------------
Total liabilities ........................................................... 274,367
------------
-------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................................. $ 66,600,099
============
-------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized ........................................................... $ 77,289
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 473,073
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 27,708
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ........................................................... 77,364
Paid-in capital in excess of par ............................................ 65,372,437
Accumulated realized capital losses on investments--net ..................... (2,436,562)
Accumulated distributions in excess of realized capital gains--net .......... (249,215)
Unrealized appreciation on investments--net ................................. 3,258,005
------------
Net assets .................................................................. $ 66,600,099
============
-------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $7,852,222 and 772,889 shares
of beneficial interest outstanding .......................................... $ 10.16
============
Class B--Based on net assets of $48,068,903 and 4,730,725 shares
of beneficial interest outstanding .......................................... $ 10.16
============
Class C--Based on net assets of $2,813,896 and 277,079 shares
of beneficial interest outstanding .......................................... $ 10.16
============
Class D--Based on net assets of $7,865,078 and 773,642 shares
of beneficial interest outstanding .......................................... $ 10.17
============
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
August 31, 2000
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned ........... $ 4,024,217
--------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees ........................................... $ 376,496
Account maintenance and distribution fees--Class B ................. 248,234
Professional fees .................................................. 66,638
Accounting services ................................................ 62,270
Printing and shareholder reports ................................... 39,749
Registration fees .................................................. 29,714
Account maintenance and distribution fees--Class C ................. 19,060
Transfer agent fees--Class B ....................................... 15,887
Custodian fees ..................................................... 11,453
Trustees' fees and expenses ........................................ 7,615
Account maintenance fees--Class D .................................. 7,533
Pricing fees ....................................................... 4,009
Transfer agent fees--Class A ....................................... 2,089
Transfer agent fees--Class D ....................................... 1,949
Transfer agent fees--Class C ....................................... 1,089
Other .............................................................. 21,655
---------
Total expenses ..................................................... 915,440
-----------
Investment income--net ............................................. 3,108,777
-----------
--------------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized loss on investments--net .................................. (2,385,982)
ized Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net . 3,361,613
Investments--Net: -----------
Net Increase in Net Assets Resulting from Operations ............... $ 4,084,408
===========
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
August 31,
------------------------------
Increase (Decrease) in Net Assets: 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income--net ..................................................... $ 3,108,777 $ 3,665,898
Realized gain (loss) on investments--net ................................... (2,385,982) 815,769
Change in unrealized appreciation/depreciation on investments--net ......... 3,361,613 (5,579,600)
------------ ------------
Net increase (decrease) in net assets resulting from operations ............ 4,084,408 (1,097,933)
------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Class A .................................................................. (400,642) (458,272)
Shareholders: Class B .................................................................. (2,205,219) (2,554,677)
Class C .................................................................. (137,983) (180,916)
Class D .................................................................. (364,933) (472,033)
In excess of realized gain on investments--net:
Class A .................................................................. -- (28,215)
Class B .................................................................. -- (177,057)
Class C .................................................................. -- (12,805)
Class D .................................................................. -- (31,138)
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ............................................................ (3,108,777) (3,915,113)
------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions ... (14,622,141) (8,725,912)
Transactions: ------------ ------------
------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total decrease in net assets ............................................... (13,646,510) (13,738,958)
Beginning of year .......................................................... 80,246,609 93,985,567
------------ ------------
End of year ................................................................ $ 66,600,099 $ 80,246,609
============ ============
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
The following per share data and ratios have been derived ------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 9.95 $ 10.54 $ 10.25 $ 9.84 $ 9.65
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .48 .47 .49 .50 .52
Realized and unrealized gain (loss) on
investments--net ..................... .21 (.56) .29 .41 .19
-------- -------- -------- -------- --------
Total from investment operations ..... .69 (.09) .78 .91 .71
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.48) (.47) (.49) (.50) (.52)
In excess of realized gain on
investments--net ................... -- (.03) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.48) (.50) (.49) (.50) (.52)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.16 $ 9.95 $ 10.54 $ 10.25 $ 9.84
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 7.28% (1.01%) 7.79% 9.50% 7.44%
Return:* ======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement ....... .93% .92% .81% .63% .49%
Average ======== ======== ======== ======== ========
Net Assets: Expenses ............................. .93% .92% .82% .89% .85%
======== ======== ======== ======== ========
Investment income--net ............... 4.93% 4.47% 4.74% 5.03% 5.20%
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 7,852 $ 9,663 $ 12,520 $ 12,438 $ 14,183
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 108.44% 151.45% 82.91% 67.28% 87.77%
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have been derived ------------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 9.95 $ 10.55 $ 10.25 $ 9.84 $ 9.65
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............... .43 .41 .44 .45 .47
Realized and unrealized gain (loss) on
investments--net ..................... .21 (.57) .30 .41 .19
-------- -------- -------- -------- --------
Total from investment operations ..... .64 (.16) .74 .86 .66
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............. (.43) (.41) (.44) (.45) (.47)
In excess of realized gain on
investments--net ................... -- (.03) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.43) (.44) (.44) (.45) (.47)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 10.16 $ 9.95 $ 10.55 $ 10.25 $ 9.84
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 6.74% (1.61%) 7.35% 8.95% 6.89%
Return:* ======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement ....... 1.43% 1.42% 1.31% 1.14% .99%
Average ======== ======== ======== ======== ========
Net Assets: Expenses ............................. 1.43% 1.42% 1.32% 1.39% 1.36%
======== ======== ======== ======== ========
Investment income--net ............... 4.43% 3.96% 4.24% 4.52% 4.69%
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 48,069 $ 57,410 $ 66,805 $ 69,320 $ 73,292
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 108.44% 151.45% 82.91% 67.28% 87.77%
======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
The following per share data and ratios have been derived --------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 9.94 $ 10.54 $ 10.24 $ 9.84 $ 9.64
Operating ------- ------- ------- ------- -------
Performance: Investment income--net ............... .42 .40 .43 .44 .46
Realized and unrealized gain (loss) on
investments--net ..................... .22 (.57) .30 .40 .20
------- ------- ------- ------- -------
Total from investment operations ..... .64 (.17) .73 .84 .66
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net ............. (.42) (.40) (.43) (.44) (.46)
In excess of realized gain on
investments--net ................... -- (.03) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions .... (.42) (.43) (.43) (.44) (.46)
------- ------- ------- ------- -------
Net asset value, end of year ......... $ 10.16 $ 9.94 $ 10.54 $ 10.24 $ 9.84
======= ======= ======= ======= =======
--------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 6.74% (1.71%) 7.25% 8.74% 6.90%
Return:* ======= ======= ======= ======= =======
--------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement ....... 1.53% 1.53% 1.42% 1.24% 1.10%
Average ======= ======= ======= ======= =======
Net Assets: Expenses ............................. 1.53% 1.53% 1.42% 1.49% 1.46%
======= ======= ======= ======= =======
Investment income--net ............... 4.33% 3.86% 4.13% 4.42% 4.59%
======= ======= ======= ======= =======
--------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 2,814 $ 4,027 $ 4,537 $ 5,361 $ 4,901
Data: ======= ======= ======= ======= =======
Portfolio turnover ................... 108.44% 151.45% 82.91% 67.28% 87.77%
======= ======= ======= ======= =======
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
The following per share data and ratios have been derived -----------------------------------------------------------
from information provided in the financial statements. For the Year Ended August 31,
-----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 9.95 $ 10.55 $ 10.26 $ 9.85 $ 9.65
Operating -------- -------- -------- ------- -------
Performance: Investment income--net ............... .47 .46 .48 .49 .51
Realized and unrealized gain (loss) on
investments--net ..................... .22 (.57) .29 .41 .20
-------- -------- -------- ------- -------
Total from investment operations ..... .69 (.11) .77 .90 .71
-------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net ............. (.47) (.46) (.48) (.49) (.51)
In excess of realized gain on
investments--net ................... -- (.03) -- -- --
-------- -------- -------- ------- -------
Total dividends and distributions .... (.47) (.49) (.48) (.49) (.51)
-------- -------- -------- ------- -------
Net asset value, end of year ......... $ 10.17 $ 9.95 $ 10.55 $ 10.26 $ 9.85
======== ======== ======== ======= =======
-----------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 7.28% (1.21%) 7.68% 9.39% 7.44%
Return:* ======== ======== ======== ======= =======
-----------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement ....... 1.03% 1.02% .91% .74% .59%
Average ======== ======== ======== ======= =======
Net Assets: Expenses ............................. 1.03% 1.02% .92% .98% .95%
======== ======== ======== ======= =======
Investment income--net ............... 4.83% 4.36% 4.63% 4.92% 5.09%
======== ======== ======== ======= =======
-----------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 7,865 $ 9,147 $ 10,124 $ 4,939 $ 4,304
Data: ======== ======== ======== ======= =======
Portfolio turnover ................... 108.44% 151.45% 82.91% 67.28% 87.77%
======== ======== ======== ======= =======
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
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's financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America, which may require the use of management accruals and
estimates. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued 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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
15
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend date. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
--------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
--------------------------------------------------------------------------------
Class B ................................... .25% .25%
Class C ................................... .25% .35%
Class D ................................... .10% --
--------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended August 31, 2000, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
Shares as follows:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class A ................................... $ 1 $ 14
Class D ................................... $654 $5,742
--------------------------------------------------------------------------------
For the year ended August 31, 2000, MLPF&S received contingent deferred sales
charges of $87,563 and $1,185 relating to transactions in Class B and Class C
Shares, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 2000 were $70,444,740 and $79,040,343, respectively.
Net realized losses for the year ended August 31, 2000 and net unrealized gains
as of August 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Gains
-------------------------------------------------------------------------------
Long-term investments ......................... $(2,332,564) $3,258,005
Financial futures contracts ................... (53,418) --
----------- ----------
Total ......................................... $(2,385,982) $3,258,005
=========== ==========
-------------------------------------------------------------------------------
16
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
As of August 31, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $3,258,005, of which $3,259,077 related to appreciated
securities and $1,072 related to depreciated securities. The aggregate cost of
investments at August 31, 2000 for Federal income tax purposes was $62,428,469.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$14,622,141 and $8,725,912 for the years ended August 31, 2000 and August 31,
1999, respectively.
Transactions in shares of beneficial interest for each class were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 15,744 $ 151,441
Shares issued to shareholders
in reinvestment of dividends ............. 17,370 169,038
--------- -----------
Total issued ............................. 33,114 320,479
Shares redeemed .......................... (231,605) (2,240,163)
--------- -----------
Net decrease ............................. (198,491) $(1,919,684)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 97,727 $ 973,842
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 15,300 205,667
--------- -----------
Total issued ............................. 113,027 1,179,509
Shares redeemed .......................... (329,069) (3,458,826)
--------- -----------
Net decrease ............................. (216,042) $(2,279,317)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 468,381 $ 4,582,279
Shares issued to shareholders
in reinvestment of dividends ........... 88,054 856,660
------------ ------------
Total issued ........................... 556,435 5,438,939
Automatic conversion of
shares ................................. (24,781) (244,376)
Shares redeemed ........................ (1,571,273) (15,240,546)
------------ ------------
Net decrease ........................... (1,039,619) $(10,045,983)
============ ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold ............................ 688,131 $ 7,229,823
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 103,885 1,084,413
------------ ------------
Total issued ........................... 792,016 8,314,236
Automatic conversion of
shares ................................. (43,034) (449,770)
Shares redeemed ........................ (1,313,598) (13,668,474)
------------ ------------
Net decrease ........................... (564,616) $ (5,804,008)
============ ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 28,488 $ 280,622
Shares issued to shareholders in
reinvestment of dividends ................ 8,661 84,140
--------- -----------
Total issued ............................. 37,149 364,762
Shares redeemed .......................... (165,003) (1,589,666)
--------- -----------
Net decrease ............................. (127,854) $(1,224,904)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 153,729 $ 1,618,701
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 11,048 115,099
--------- -----------
Total issued ............................. 164,777 1,733,800
Shares redeemed .......................... (190,263) (1,972,579)
--------- -----------
Net decrease ............................. (25,486) $ (238,779)
========= ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 85,074 $ 831,478
Automatic conversion of shares ........... 24,768 244,376
Shares issued to shareholders in
reinvestment of dividends ................ 21,376 208,180
--------- -----------
Total issued ............................. 131,218 1,284,034
Shares redeemed .......................... (276,492) (2,715,604)
--------- -----------
Net decrease ............................. (145,274) $(1,431,570)
========= ===========
--------------------------------------------------------------------------------
17
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
--------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
--------------------------------------------------------------------------------
Shares sold .............................. 313,889 $ 3,295,923
Automatic conversion of shares ........... 43,021 449,770
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 31,010 324,211
--------- -----------
Total issued ............................. 387,920 4,069,904
Shares redeemed .......................... (428,529) (4,473,712)
--------- -----------
Net decrease ............................. (40,609) $ (403,808)
========= ===========
--------------------------------------------------------------------------------
5. Short-Term Borrowings:
On December 3, 1999, the Fund, along with certain other funds managed by FAM and
its affiliates, entered into a one-year, unsecured $1,000,000,000 credit
agreement with Bank of America and other lenders. The funds may borrow money for
temporary or emergency purposes to meet shareholder redemptions. Each fund may
borrow up to the maximum amount allowable under the fund's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The funds collectively pay a commitment fee of
.09% per annum on the available portion of the facility. Amounts borrowed under
the facility bear interest at the Federal Funds rate plus .50%. The Fund did not
borrow from the facility during the year ended August 31, 2000.
6. Capital Loss Carryforward:
At August 31, 2000, the Fund had a net capital loss carryforward of
approximately $606,000, all of which expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
18
<PAGE>
Merrill Lynch California Insured Municipal Bond Fund August 31, 2000
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, 2000,
the related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at August 31, 2000 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
California Insured Municipal Bond Fund of Merrill Lynch California Municipal
Series Trust as of August 31, 2000, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 2000
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,
2000 qualify as tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributions paid by the Fund during
the year.
Please retain this information for your records.
19
<PAGE>
Officers and Trustees
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Arthur Zeikel, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and
Treasurer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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--8/00
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