UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-4264
Name of Fund: Merrill Lynch California Insured Municipal Bond Fund
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
California Insured Municipal Bond Fund, 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/03
Date of reporting period: 09/01/02 - 08/31/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
California Insured Municipal
Bond Fund
Annual Report
August 31, 2003
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch California Insured Municipal Bond Fund
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,
2003 qualify as tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
Electronic Delivery
The Fund is now offering electronic delivery of communications to its
shareholders. In order to receive this service, you must register your account
and provide us with e-mail information. To sign up for this service, simply
access this website http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification number
(PIN). You will need this PIN should you wish to update your e-mail address,
choose to discontinue this service and/or make any other changes to the service.
This service is not available for certain retirement accounts at this time.
2 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
A Letter From the President
Dear Shareholder
Now more than half behind us, 2003 has been a meaningful year in many respects.
Perhaps the most significant development was the conclusion of all-out war in
Iraq. Although not especially sensitive to geopolitical events, the municipal
market has not been exempt from the general market excitement we have seen since
fighting gave way to restructuring in Iraq.
Municipal bond yields rose and fell in response to war fears, equity market
uncertainty, sub par economic growth, unemployment and deflation. By the end of
August, long-term municipal revenue bond yields stood at 5.4%, as measured by
the Bond Buyer Revenue Bond Index. With many state deficits at record levels,
municipalities issued more than $390 billion in new long-term tax-exempt bonds
during the 12-month period ended August 31, 2003. The availability of bonds,
together with attractive yield ratios relative to U.S. Treasury issues, made
municipal bonds a popular fixed income investment alternative.
Against this backdrop, our portfolio managers continued to work diligently to
deliver on our commitment to provide superior performance within reasonable
expectations for risk and return. This included striving to outperform our peers
and the market indexes. With that said, remember also that the advice and
guidance of a skilled financial advisor often can mean the difference between
fruitful and fruitless investing. A financial professional can help you choose
those investments that will best serve you as you plan for your financial
future.
Finally, I am proud to premiere a new look to our shareholder communications.
Our portfolio manager commentaries have been trimmed and organized in such a way
that you can get the information you need at a glance, in plain language.
Today's markets are confusing enough. We want to help you put it all in
perspective. The report's new size also allows us certain mailing efficiencies.
Any cost savings in production or postage are passed on to the Fund and,
ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
In a very volatile period for interest rates, we maintained our focus on
increasing current return and credit quality in the portfolio while also
minimizing the Fund's price volatility.
Discuss the recent market environment relative to municipal bonds.
Over the past 12 months, long-term fixed income bond yields generally rose. For
the first eight months of the period, bond yields traded in a relatively broad
range. Volatile equity markets, concerns over the Iraq conflict and a sub par
economic recovery (particularly weak employment trends), all combined to foster
a generally benign fixed income environment. By the end of April 2003, long-term
U.S. Treasury bond yields had declined approximately 20 basis points (.20%) to
4.77%. Weaker economic activity and continued reductions in short-term interest
rates by the Federal Reserve Board pushed bond yields even lower in May and June
to 4.17%. Bond yields rose dramatically in July and August in response to
stronger-than-expected domestic economic growth and a consensus that the Federal
Reserve Board had finished lowering interest rates to revive economic activity.
At the end of August 2003, long-term U.S. Treasury yields stood at 5.22%, an
increase of approximately 30 basis points over the past year.
Long-term tax-exempt bond yields also rose over the 12 months, although to a
lesser extent than U.S. Treasury obligations. Yield volatility was lower than
that seen in U.S. Treasury issues, as municipal bond prices typically are less
sensitive to worldwide geopolitical pressures on a daily and weekly basis. By
the end of August, long-term municipal revenue bond yields, as measured by the
Bond Buyer Revenue Bond Index, stood at 5.40%, an increase of 15 basis points
over the past year. During the 12-month period, the rise in tax-exempt bond
yields has been approximately half that seen in their taxable counterparts.
The municipal market's outperformance of the U.S. Treasury market during the
period has been especially impressive given the dramatic increase in new bond
issuance. Over the past 12 months, municipalities have issued more than $390
billion in new securities, an increase of nearly 20% versus last year's
issuance. Recent semi-annual issuance has, in fact, exceeded the annual issuance
seen during much of the mid-1990s. Historically low interest rates over the past
year have been used by state and local governments as an opportunity to finance
existing infrastructure needs and refinance outstanding, higher-couponed issues.
Current estimates for 2003 municipal bond new issuance are approximately $350
billion, similar to 2002's record high issuance.
As an asset class, municipal bonds have remained an attractive investment
alternative, especially relative to U.S. Treasury issues. At the end of August,
long-term tax-exempt bond yields were 90% - 94% of comparable U.S. Treasury
issues, well in excess of their recent historic average of 85% - 88%. Current
yield ratios have made municipal securities attractive to both retail and
institutional investors. We expect the tax-exempt market's favorable technical
position to remain stable in the near term, therefore, an increase in bond
issuance during the remainder of 2003 is not likely to significantly impact the
municipal bond market's performance. Looking ahead, while many investors are
concerned about how economic growth might affect bond prices and yield, we
believe moderate economic growth, especially within a context of negligible
inflationary pressure, should not greatly endanger the positive fixed income
environments tax-exempt products have enjoyed.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended August 31, 2003, the Fund's Class A, Class B,
Class C and Class I Shares had total returns of +2.35%, +1.93%, +1.83% and
+2.54%, respectively. This compares to a return of +3.14% for the Fund's
unmanaged benchmark, the Lehman Brothers Municipal Bond Index, for the same
period. (Fund results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be found on
pages 6 - 8 of this report to shareholders.)
The disparity in returns versus the benchmark is expected, as the Index is a
broad measure of the municipal markets in the 50 states and Puerto Rico while
the Fund's investment is limited to insured California issues. However, the Fund
outperformed its Lipper category of California Insured Municipal Debt Funds,
which had an average return of +1.88% for the same 12-month period.
4 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Given the heightened levels of market volatility during the year, we structured
the Fund defensively and remained focused on generating yield by maintaining a
maximum position of inverse floaters, taking advantage of the steep municipal
yield curve and remaining fully invested. We did not make significant use of our
permissible 20% uninsured basket during the period, as there was not significant
yield to be gained relative to our insured bonds.
What developments in the state of California impacted the Fund?
California is consistently the largest issuer in the municipal bond market. This
year, the state will easily exceed its typical rate of issuance. The state
budget deficit for fiscal year 2003 - 2004 is a well-publicized $38 billion.
Because that budget must get plugged before the fiscal year closes in June 2004,
that will mean an enormous amount of borrowing. The state's next general
obligation (GO) bond, on the calendar for October 2003, is estimated at $1.5
billion. The deficit-financing bond, to come later in the fall, amounts to
approximately $8 billion.
Most topical in California has been the recall election that will determine the
state's governorship. While this is a significant media event, we do not feel it
is particularly relevant to the management of a California municipal bond
portfolio. No matter what the outcome of the election, we do not believe
California bond prices can tighten any more than they have already. Although
there has been some talk of a respreading based on the election result, we
believe the most prudent course is to remain underweight in California GO bonds.
At the close of the period, the portfolio consisted of less than 1% unenhanced
California GO bonds. In a high-tax state such as California, we generally seek
to deliver state tax-exempt income with the highest degree of credit quality
possible.
What changes did you make to the portfolio during the period?
An important topic this year was tobacco, as this was the first year these bonds
became available to us. As we ended the fiscal year, the portfolio had
approximately .5% invested in tobacco securities. These bonds are A-rated, but
trade at much less expensive levels. Tobacco bonds came to the market during the
year yielding about 6% and were trading closer to 8.5% - 9% by August 31, 2003.
Our first foray into these bonds was closer to the 7.5% point, but we were
willing to sacrifice some yield by entering into this new domain with caution.
Aside from the modest addition of tobacco bonds, changes to the portfolio have
been minimal to nonexistent, particularly over the past six months. The Fund was
structured defensively throughout most of the fiscal year. While approximately
15% of net assets was invested in inverse floaters, that portion of the Fund was
no more aggressive than our peers. Approximately 82% of the portfolio was
invested in insured California paper during the fiscal year, mostly in AAA-rated
issues and prerefunded bonds or those held in escrow. As always, we aimed to
remain fully invested during the year in an effort to deliver income.
How would you characterize the Fund's position at the close of the period?
We continued to focus on the four general themes that carried us through the
fiscal year: defensive positioning, above-average couponing, better current
yield and a high degree of credit quality. We believe these four conditions help
to limit the Fund's price volatility when market rates go up, and we intend to
stick with these key points, at least in the near term.
Walter C. O'Connor
Vice President and Portfolio Manager
September 9, 2003
- --------------------------------------------------------------------------------
Effective April 14, 2003, the share class names for the Merrill Lynch family of
mutual funds were changed to be consistent with the standard share classes of
most other mutual fund families. As of that date, all Class A Shares were
redesignated Class I Shares. At the same time, Class D Shares were redesignated
Class A Shares. There are no changes to the Class B or Class C share class
labels. Trading symbols have not changed nor have current eligibility rules or
pricing structures. This redesignation of share classes does not impact your
investment in any way.
- --------------------------------------------------------------------------------
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. Investors are able to purchase
shares of the Fund through multiple pricing alternatives:
o Class A Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).
o Effective December 1, 2002, Class B Shares are subject to a maximum
contingent deferred sales charge of 4%, declining to 0% after six years.
All Class B Shares purchased prior to December 1, 2002 will maintain the
four-year schedule. 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 A Shares after approximately ten
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 I Shares incur a maximum initial sales charge (front-end load) of 4%
and bear no ongoing distribution or account maintenance fees. Class I
Shares are available only to eligible investors.
None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following 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.
Recent Performance Results
Ten-Year/
6-Month 12-Month Since Inception Standardized
As of August 31, 2003 Total Return Total Return Total Return 30-Day Yield
===============================================================================================================================
ML California Insured Municipal Bond Fund Class A Shares* -0.88% +2.35% +70.12% 3.90%
- -------------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class B Shares* -1.08 +1.93 +57.56 3.66
- -------------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class C Shares* -1.13 +1.83 +62.66 3.56
- -------------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class I Shares* -0.83 +2.54 +65.79 4.00
- -------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** -0.21 +3.14 +76.44/+82.05 --
- -------------------------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's ten-year/since inception periods are
ten years for Class B & Class I Shares and from 10/21/94 for Class A &
Class C Shares.
** This unmanaged Index consists of long-term revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds. The ten-year/since
inception total returns are for ten years and from 10/31/94, respectively.
6 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Performance Data (continued)
ML California Insured Municipal Bond Fund's Class A and Class C Shares--Total
Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Portfolio's Class A
and Class C Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to August 2003:
10/21/94** 8/95 8/96 8/97 8/98 8/99
ML California Insured
Municipal Bond Fund+--
Class A Shares* $9,600 $10,501 $11,173 $12,128 $13,134 $12,874
ML California Insured
Municipal Bond Fund+--
Class C Shares* $10,000 $10,891 $11,529 $12,451 $13,405 $13,084
8/00 8/01 8/02 8/03
ML California Insured
Municipal Bond Fund+--
Class A Shares* $13,764 $15,124 $15,953 $16,331
ML California Insured
Municipal Bond Fund+--
Class C Shares* $13,918 $15,216 $15,970 $16,266
10/31/94** 8/95 8/96 8/97 8/98 8/99
Lehman Brothers Municipal
Bond Index++ $10,000 $11,248 $11,837 $12,932 $14,050 $14,120
8/00 8/01 8/02 8/03
Lehman Brothers Municipal
Bond Index++ $15,077 $16,614 $17,651 $18,205
* 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 C Shares' graph is from 10/31/94.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 8/31/03 +2.35% -1.75%
- --------------------------------------------------------------------------------
Five Years Ended 8/31/03 +4.45 +3.60
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 8/31/03 +6.18 +5.69
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 8/31/03 +1.83% +0.86%
- --------------------------------------------------------------------------------
Five Years Ended 8/31/03 +3.94 +3.94
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 8/31/03 +5.64 +5.64
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Performance Data (continued)
ML California Insured Municipal Bond Fund's Class B and Class I Shares--Total
Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Portfolio's Class B
Shares and Class I Shares compared to growth of an investment in the Lehman
Brothers Municipal Bond Index. Values are from August 1993 to August 2003:
8/93 8/94 8/95 8/96 8/97
ML California Insured
Municipal Bond Fund+--
Class B Shares* $10,000 $9,850 $10,465 $11,089 $11,989
ML California Insured
Municipal Bond Fund+--
Class I Shares* $9,600 $9,512 $10,153 $10,813 $11,739
8/98 8/99 8/00 8/01 8/02 8/03
ML California Insured
Municipal Bond Fund+--
Class B Shares* $12,931 $12,623 $13,441 $14,710 $15,454 $15,756
ML California Insured
Municipal Bond Fund+--
Class I Shares* $12,726 $12,496 $13,374 $14,710 $15,518 $15,916
8/93 8/94 8/95 8/96 8/97
Lehman Brothers Municipal
Bond Index++ $10,000 $10,014 $10,902 $11,473 $12,533
8/98 8/99 8/00 8/01 8/02 8/03
Lehman Brothers Municipal
Bond Index++ $13,617 $13,685 $14,613 $16,102 $17,107 $17,644
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
+ ML California Insured Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the state of
California, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers.
++ This unmanaged Index consists of long-term revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 8/31/03 +1.93% -1.97%
- --------------------------------------------------------------------------------
Five Years Ended 8/31/03 +4.03 +3.71
- --------------------------------------------------------------------------------
Ten Years Ended 8/31/03 +4.65 +4.65
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 8/31/03 +2.54% -1.56%
- --------------------------------------------------------------------------------
Five Years Ended 8/31/03 +4.58 +3.72
- --------------------------------------------------------------------------------
Ten Years Ended 8/31/03 +5.19 +4.76
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
8 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
===================================================================================================================================
California--95.4% AAA Aaa $ 2,625 ABAG Finance Authority for Nonprofit Corporations, California,
COP (Children's Hospital Medical Center), 6% due 12/01/2029 (a) $ 2,876
---------------------------------------------------------------------------------------------------------
NR* NR* 3,750 Alameda, California, Public Financing Authority, Local Agency
Special Tax Revenue Bonds (Community Facility Number 1),
Series A, 7% due 8/01/2019 4,017
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Alameda Corridor, California, Transportation Authority Revenue
Bonds, Senior Lien, Series A, 5.125% due 10/01/2018 (g) 2,070
---------------------------------------------------------------------------------------------------------
AAA Aaa 3,600 Alameda Corridor Transportation Authority, California, Revenue
Bonds, Senior Lien, Series A, 5.25% due 10/01/2021 (g) 3,697
---------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Anaheim, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds, RITES, 11.77% due 12/28/2018 (g)(h) 5,239
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Bakersfield, California, COP, Refunding (Convention Center
Expansion Project), 5.875% due 4/01/2022 (g) 2,192
---------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Bay Area Government Association, California, Revenue Refunding
Bonds (California Redevelopment Agency Pool), Series A, 6%
due 12/15/2024 (f) 6,428
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California Educational Facilities Authority Revenue Bonds
(University of Redlands), 5% due 6/01/2028 (d) 1,972
---------------------------------------------------------------------------------------------------------
California Educational Facilities Authority, Revenue Refunding
Bonds (g):
NR* Aaa 9,000 RIB, Series 413, 10.89% due 10/01/2026 (h) 10,768
NR* Aaa 1,025 (University of the Pacific), 5.875% due 11/01/2020 1,129
---------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 California Health Facilities Finance Authority, Insured Health
Facility Revenue Refunding Bonds (Catholic Healthcare West),
Series A, 6% due 7/01/2017 (g) 3,322
---------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority Revenue Bonds:
AAA NR* 5,000 (Kaiser Permanente), RIB, Series 26, 9.87% due
6/01/2022 (f)(h) 5,341
AAA Aaa 2,000 (Scripps Memorial Hospital), Series A, 6.375% due
10/01/2022 (g) 2,028
NR* Aa3 5,780 (Scripps Research Institute), Series A, 6.625% due
7/01/2014 6,101
---------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority, Revenue
Refunding Bonds, VRDN (i):
A1+ VMIG1+ 6,000 (Adventist Hospital), Series A, 0.77% due 9/01/2028 6,000
A1+ VMIG1+ 400 (Sutter/Catholic Healthcare System), Series B, 0.77%
due 7/01/2012 (a) 400
---------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority Revenue Bonds:
AAA NR* 10,000 DRIVERS, Series 181, 9.935% due 6/01/2022 (f)(h) 10,681
A+ A1 2,080 (Sutter Health), Series A, 6.25% due 8/15/2035 2,211
---------------------------------------------------------------------------------------------------------
BBB+ Baa2 14,000 California Pollution Control Financing Authority, Solid Waste
Disposal Revenue Refunding Bonds (Republic Services Inc.
Project), AMT, Series C, 5.25% due 6/01/2023 13,697
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California State Department of Water Resources, Water System
Revenue Refunding Bonds (Central Valley Project), Series Q,
5.375% due 12/01/2027 (g) 2,041
---------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds:
AAA NR* 10,000 (Department of Corrections), Series A, 7% due
11/01/2019 (a) 10,888
AAA Aaa 2,800 (Department of Health Services), Series A, 5.625% due
11/01/2019 (g) 2,971
AAA NR* 1,500 DRIVERS, Series 209, 10.184% due 3/01/2016 (a)(h) 1,773
---------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Refunding
Bonds, Series B:
AAA Aaa 10,000 (Department of Corrections), 5.625% due 11/01/2019 (g) 10,884
AAA Aaa 1,500 (Various Community College Projects), 5.625% due
3/01/2019 (a) 1,629
---------------------------------------------------------------------------------------------------------
BBB+ A3 4,500 California State, Department of Water Resources, Power Supply
Revenue Bonds, Series A, 5.75% due 5/01/2017 4,827
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,580 California State University and Colleges, Housing System Revenue
Refunding Bonds, 5.80% due 11/01/2017 (d) 1,726
Portfolio Abbreviations
To simplify the listings of Merrill Lynch California Insured Municipal Bond
Fund's portfolio holdings in the Schedule of Investments, we have abbreviated
the names of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
===================================================================================================================================
California AAA NR* $ 6,000 California Statewide Communities Development Authority, COP,
(continued) Refunding (Huntington Memorial Hospital), 5.80% due 7/01/2026 (b) $ 6,353
---------------------------------------------------------------------------------------------------------
A- A3 2,475 California Statewide Communities Development Authority, Health
Facility Revenue Bonds (Memorial Health Services), Series A, 6%
due 10/01/2023 2,572
---------------------------------------------------------------------------------------------------------
NR* NR* 1,200 Capistrano, California, Unified School District, Community
Facility District, Special Tax Bonds (No. 90-2 Talega), 6%
due 9/01/2032 1,190
---------------------------------------------------------------------------------------------------------
AAA Aaa 5,585 Contra Costa County, California, Public Financing Authority,
Lease Revenue Refunding Bonds (Various Capital Facilities),
Series A, 5.35% due 8/01/2024 (g) 5,711
---------------------------------------------------------------------------------------------------------
BBB NR* 340 Contra Costa County, California, Public Financing Authority,
Tax Allocation Revenue Bonds, Series A, 7.10% due 8/01/2022 344
---------------------------------------------------------------------------------------------------------
Corona, California, COP, Refunding (Corona Community):
AAA Aaa 1,915 8% due 3/01/2009 (e) 2,393
AAA Aaa 2,065 8% due 3/01/2010 (e) 2,606
AAA Aaa 2,230 8% due 3/01/2011 (e) 2,850
AAA Aaa 2,410 8% due 3/01/2012 (e) 3,123
AAA Aaa 2,605 8% due 3/01/2013 (e) 3,410
AAA Aaa 2,810 8% due 3/01/2014 (e) 3,710
AAA Aaa 3,035 8% due 3/01/2015 (c) 4,039
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,005 Cucamonga, California, County Water District COP, 5.25%
due 9/01/2025 (d) 1,019
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,250 Cucamonga, California, County Water District, COP, Refunding,
5.50% due 9/01/2024 (d) 1,304
---------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Elk Grove, California, East Franklin Community Number 1 Special
Tax, Series A, 6% due 8/01/2033 992
---------------------------------------------------------------------------------------------------------
NR* NR* 3,000 Etiwanda School District, California, Community Facilities
District Number 8, Special Tax, 6.25% due 9/01/2032 3,024
---------------------------------------------------------------------------------------------------------
BBB Baa2 2,900 Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds, Series A-4, 7.80%
due 6/01/2042 2,732
---------------------------------------------------------------------------------------------------------
Grossmont, California, Unified High School District, COP (f):
AAA Aaa 1,220 5.65% due 9/01/2017 1,343
AAA Aaa 2,250 5.75% due 9/01/2026 2,405
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Hawthorne, California, School District, GO, Series A, 5.50%
due 5/01/2022 (d) 2,891
---------------------------------------------------------------------------------------------------------
AAA Aaa 5,080 Irvine, California, Unified School District, Special Tax
Refunding Bonds (Community Facilities District No. 86-1), 5.50%
due 11/01/2017 (a) 5,519
---------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Long Beach, California, Special Tax Bonds (Community Facilities
District No. 3--Pine Ave.), 6.375% due 9/01/2023 1,035
---------------------------------------------------------------------------------------------------------
NR* Aaa 4,000 Los Angeles, California, COP (Sonnenblick Del Rio West Los
Angeles), 6.20% due 11/01/2031 (a) 4,542
---------------------------------------------------------------------------------------------------------
Los Angeles, California, Community College District, GO,
Series A (g):
AAA Aaa 12,265 5.50% due 8/01/2020 13,075
AAA Aaa 5,035 5.50% due 8/01/2021 5,337
---------------------------------------------------------------------------------------------------------
AAA Aaa 5,150 Los Angeles, California, Community Redevelopment Agency, Tax
Allocation Refunding Bonds (Bunker Hill), Series H, 6.50%
due 12/01/2016 (f) 5,313
---------------------------------------------------------------------------------------------------------
AAA NR* 7,000 Los Angeles, California, Convention and Exhibition Center
Authority, COP, 9% due 12/01/2020 (a) 8,173
---------------------------------------------------------------------------------------------------------
Los Angeles, California, Harbor Department Revenue Bonds, AMT:
AA Aa2 1,000 Series B, 5.375% due 11/01/2023 1,003
AAA Aaa 7,000 RITR, Series RI-7, 11.245% due 11/01/2026 (g)(h) 8,345
---------------------------------------------------------------------------------------------------------
AAA NR* 5,000 Los Angeles, California, Harbor Department Revenue Refunding
Bonds, 7.60% due 10/01/2018 (c)(g) 6,186
---------------------------------------------------------------------------------------------------------
Los Angeles, California, Water and Power Revenue Refunding
Bonds (Power System):
AAA Aaa 5,400 Series A-A-1, 5.25% due 7/01/2020 (f) 5,608
AAA Aaa 4,000 Series A-A-2, 5.375% due 7/01/2021 (g) 4,180
---------------------------------------------------------------------------------------------------------
NR* Aaa 2,000 Lynwood, California, Unified School District, GO (2002
Election), Series A, 5% due 8/01/2027 (f) 2,011
---------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 600 M-S-R Public Power Agency, California, Revenue Refunding Bonds
(San Juan Project), VRDN, Sub-Lien, Series D, 0.77% due
7/01/2018 (g)(i) 600
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,280 Morgan Hill, California, Unified School District, GO, 5.25%
due 8/01/2019 (d) 2,382
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,255 Moulton-Niguel, California, Water District, GO, Refunding, 2%
due 9/01/2006 (a) 2,266
10 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
===================================================================================================================================
California AAA Aaa $ 3,260 Oakland, California, Measure G, GO, Series A, 5% due
(continued) 1/15/2022 (d) $ 3,273
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,025 Palm Desert, California, Financing Authority, Tax Allocation
Revenue Refunding Bonds (Project Area Number 1), 5.45% due
4/01/2018 (g) 1,099
---------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Petaluma, California, Community Development Commission Tax
Allocation Bonds (Petaluma Community Development Project),
Series A, 5.75% due 5/01/2030 (g) 1,073
---------------------------------------------------------------------------------------------------------
NR* NR* 7,835 Pleasanton, California, Joint Powers Financing Authority,
Revenue Refunding Reassessment Bonds, Sub-Series B, 6.75% due
9/02/2017 8,002
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Port Oakland, California, Port Revenue Refunding Bonds,
Series I, 5.60% due 11/01/2019 (g) 1,086
---------------------------------------------------------------------------------------------------------
AAAr Aaa 8,295 Port Oakland, California, RITR, AMT, Class R, Series 5, 10.37%
due 11/01/2012 (d)(h) 9,578
---------------------------------------------------------------------------------------------------------
AAA Aaa 12,710 Port Oakland, California, Revenue Refunding Bonds, AMT,
Series L, 5.375% due 11/01/2027 (d) 12,857
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,750 Riverside County, California, Asset Leasing Corporation,
Leasehold Revenue Refunding Bonds (Riverside County Hospital
Project), Series B, 5.70% due 6/01/2016 (g) 1,931
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,115 Rowland, California, Unified School District, GO (2002 Election),
Series B, 5.25% due 8/01/2023 (f) 2,168
---------------------------------------------------------------------------------------------------------
AAA Aaa 3,865 Sacramento, California, City Financing Authority, Capital
Improvement Revenue Bonds (Solid Waste and Redevelopment
Project), 5.75% due 12/01/2022 (a) 4,185
---------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Sacramento, California, Municipal Utility District, Electric
Revenue Refunding Bonds, Series L, 5.125% due 7/01/2022 (g) 8,091
---------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Sacramento County, California, Airport System Revenue Refunding
Bonds, Sub-Series B, 5% due 7/01/2026 (d) 9,839
---------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Saddleback Valley, California, Unified School District, Public
Financing Authority, Special Tax Revenue Refunding Bonds,
Series A, 5.65% due 9/01/2017 (f) 3,792
---------------------------------------------------------------------------------------------------------
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 (g) 2,131
---------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 San Bernardino, California, Joint Powers Financing Authority,
Tax Allocation Revenue Refunding Bonds, Series A, 5.75% due
10/01/2015 (f) 4,357
---------------------------------------------------------------------------------------------------------
AAA NR* 4,000 San Bernardino County, California, COP, Refunding (Medical
Center Financing Project), 5.50% due 8/01/2019 (g) 4,199
---------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Diego, California, Certificates of Undivided Interest,
Water Utility Fund, Net System Revenue Bonds, 5% due
8/01/2021 (d) 10,081
---------------------------------------------------------------------------------------------------------
San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds (d):
AAA Aaa 4,450 Series A, 5.25% due 5/15/2027 4,482
AAA Aaa 6,175 Series B, 5.25% due 5/15/2027 6,219
---------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airports Commission,
International Airport Revenue Bonds, AMT, Second Series:
AAA Aaa 6,500 Issue 6, 6.60% due 5/01/2020 (a) 6,828
AAA Aaa 5,500 Issue 11, 6.25% due 5/01/2005 (d)(e) 5,980
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,250 San Francisco, California, City and County Airports Commission,
International Airport, Special Facilities Lease Revenue Bonds
(SFO Fuel Company LLC), AMT, Series A, 6.10% due 1/01/2020 (f) 1,357
---------------------------------------------------------------------------------------------------------
AAA Aaa 6,730 San Francisco, California, City and County Airports,
International Airport Revenue Refunding Bonds, Second Series,
Issue 29-B, 3% due 5/01/2007 (d) 6,905
---------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 San Francisco, California, State Building Authority, Lease
Revenue Bonds (San Francisco Civic Center Complex), Series A,
5.25% due 12/01/2021 (a) 4,109
---------------------------------------------------------------------------------------------------------
San Joaquin Hills, California, Transportation Corridor Agency,
Toll Road Revenue Refunding Bonds, Series A (g):
AAA Aaa 5,790 5.375% due 1/15/2029 5,932
AAA Aaa 3,410 5.25% due 1/15/2030 3,444
---------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 San Jose, California, Redevelopment Agency Tax Allocation Bonds
(Merged Area Redevelopment Project), 5% due 8/01/2026 (a) 6,896
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,735 San Jose, California, Unified School District, Santa Clara
County, GO, Series A, 4% due 8/01/2005 (f) 2,871
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,420 San Jose--Evergreen, California, Community College District,
GO, Series B, 5.50% due 9/01/2021 (d) 1,505
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
===================================================================================================================================
California San Juan, California, Unified School District, GO:
(concluded) AAA Aaa $ 3,740 5.625% due 8/01/2017 (d) $ 4,094
AAA Aaa 3,000 5.70% due 8/01/2019 (f) 3,287
AAA Aaa 4,345 5.625% due 8/01/2020 (d) 4,694
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 San Marcos, California, Public Facilities Authority, Tax
Allocation Revenue Refunding Bonds (Project Areas Number 1, 2
and 3), Series A, 5% due 8/01/2026 (d) 2,720
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,240 San Mateo County, California, Joint Powers Authority, Lease
Revenue Refunding Bonds (Capital Projects), Series A, 5.125%
due 7/15/2028 (f) 2,235
---------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Santa Clara County, California, Financing Authority, Lease
Revenue Bonds (VMC Facility Replacement Project), Series A,
6.75% due 11/15/2004 (a)(e) 10,880
---------------------------------------------------------------------------------------------------------
NR* Aaa 10,000 Santa Clara Valley, California, Water District, COP, Refunding,
RIB, Series 411, 10.89% due 2/01/2024 (d)(h) 10,738
---------------------------------------------------------------------------------------------------------
NR* NR* 1,650 Santa Margarita, California, Water Disposal Special Tax
Refunding Bonds (Community Facilities District Number 99-1),
6.20% due 9/01/2020 1,673
---------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Santa Monica, California, Redevelopment Agency, Tax Allocation
Bonds (Earthquake Recovery Redevelopment Project), 6% due
7/01/2029 (a) 4,415
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Santa Rosa, California, High School District, GO, 5.70% due
5/01/2021 (f) 1,081
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Southwestern Community College, District of California, GO,
5.625% due 8/01/2018 (a) 1,086
---------------------------------------------------------------------------------------------------------
AAA Aaa 1,630 Temecula Valley, California, Unified School District, GO,
Series F, 5.80% due 9/01/2014 (f) 1,814
---------------------------------------------------------------------------------------------------------
AAA Aaa 5,920 University of California Revenue Bonds (Multiple Purpose
Projects), Series Q, 3% due 9/01/2005 (f) 6,109
---------------------------------------------------------------------------------------------------------
AAA Aaa 4,215 Vista, California, Unified School District, GO, Series A, 5.25%
due 8/01/2025 (f) 4,284
---------------------------------------------------------------------------------------------------------
AAA Aaa 6,485 West Contra Costa, California, Unified School District, GO,
Series B, 5% due 8/01/2026 (f) 6,415
===================================================================================================================================
Puerto Rico--3.3% AAAr Aaa 7,300 Puerto Rico Commonwealth, GO, Refunding, RITR, Class R,
Series 3, 10.319% due 7/01/2016 (g)(h) 9,258
---------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Puerto Rico Commonwealth Highway and Transportation Authority,
Transportation Revenue Bonds, Series B, 5.75% due 7/01/2018 (g) 2,234
---------------------------------------------------------------------------------------------------------
BBB+ Baa3 4,385 Puerto Rico Public Finance Corporation, Commonwealth
Appropriation Revenue Bonds, Series E, 5.50% due 8/01/2029 4,471
---------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$453,299)--98.7% 482,252
=========================================================================================================
===================================================================================================================================
Shares
Held Short-Term Securities
===================================================================================================================================
6 CMA California Municipal Money Fund (j) 6
---------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$6)--0.0% 6
===================================================================================================================================
Total Investments (Cost--$453,305)--98.7% 482,258
Other Assets Less Liabilities--1.3% 6,240
--------
Net Assets--100.0% $488,498
========
(a) AMBAC Insured.
(b) Connie Lee Insured.
(c) Escrowed to maturity.
(d) FGIC Insured.
(e) Prerefunded.
(f) FSA Insured.
(g) MBIA Insured.
(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, 2003.
(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,
2003.
(j) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
CMA California Municipal Money Fund 6 $6
--------------------------------------------------------------------------
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
@ Ratings of issues shown are unaudited.
See Notes to Financial Statements.
12 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Statement of Assets and Liabilities
As of August 31, 2003
=========================================================================================================================
Assets
- -------------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$453,304,808) ................. $482,258,319
Cash .................................................................. 18,712
Receivables:
Interest ........................................................... $ 7,634,444
Beneficial interest sold ........................................... 249,355 7,883,799
-----------
Prepaid registration fees and other assets ............................ 36,349
------------
Total assets .......................................................... 490,197,179
------------
=========================================================================================================================
Liabilities
- -------------------------------------------------------------------------------------------------------------------------
Payables:
Dividends to shareholders .......................................... 690,126
Beneficial interest redeemed ....................................... 606,408
Investment adviser ................................................. 213,925
Distributor ........................................................ 114,673
Other affiliates ................................................... 36,279 1,661,411
-----------
Accrued expenses ...................................................... 38,236
------------
Total liabilities ..................................................... 1,699,647
------------
=========================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Net assets ............................................................ $488,497,532
============
=========================================================================================================================
Net Assets Consist of
- -------------------------------------------------------------------------------------------------------------------------
Class A Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .................................................. $ 2,142,470
Class B Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .................................................. 1,310,840
Class C Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .................................................. 435,048
Class I Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .................................................. 345,345
Paid-in capital in excess of par ...................................... 467,461,491
Undistributed investment income--net .................................. $ 740,799
Accumulated realized capital losses on investments--net ............... (12,891,972)
Unrealized appreciation on investments--net ........................... 28,953,511
-----------
Total accumulated earnings--net ....................................... 16,802,338
------------
Net assets ............................................................ $488,497,532
============
=========================================================================================================================
Net Asset Value
- -------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $247,184,122 and 21,424,705 shares of
beneficial interest outstanding ..................................... $ 11.54
============
Class B--Based on net assets of $151,275,391 and 13,108,399 shares of
beneficial interest outstanding ..................................... $ 11.54
============
Class C--Based on net assets of $50,197,377 and 4,350,477 shares of
beneficial interest outstanding ..................................... $ 11.54
============
Class I--Based on net assets of $39,840,642 and 3,453,446 shares of
beneficial interest outstanding ..................................... $ 11.54
============
See Notes to Financial Statements.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Year Ended August 31, 2003
=========================================================================================================================
Investment Income
- -------------------------------------------------------------------------------------------------------------------------
Interest .............................................................. $ 28,080,940
Dividends from affiliates ............................................. 6,242
------------
Total income .......................................................... 28,087,182
------------
=========================================================================================================================
Expenses
- -------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .............................................. $ 2,795,619
Account maintenance and distribution fees--Class B .................... 886,392
Account maintenance and distribution fees--Class C .................... 273,652
Account maintenance fees--Class A ..................................... 243,159
Accounting services ................................................... 195,158
Transfer agent fees--Class A .......................................... 89,534
Professional fees ..................................................... 76,230
Transfer agent fees--Class B .......................................... 76,178
Printing and shareholder reports ...................................... 57,287
Registration fees ..................................................... 50,403
Custodian fees ........................................................ 35,154
Trustees' fees and expenses ........................................... 31,347
Transfer agent fees--Class C .......................................... 19,505
Pricing fees .......................................................... 19,497
Transfer agent fees--Class I .......................................... 15,545
Other ................................................................. 33,043
-----------
Total expenses before waiver and reimbursement ........................ 4,897,703
Waiver and reimbursement of expenses .................................. (6,350)
-----------
Total expenses after waiver and reimbursement ......................... 4,891,353
------------
Investment income--net ................................................ 23,195,829
------------
=========================================================================================================================
Realized & Unrealized Gain (Loss) on Investments--Net
- -------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ..................................... 1,302,358
Change in unrealized appreciation on investments--net ................. (13,513,864)
------------
Total realized and unrealized loss on investments--net ................ (12,211,506)
------------
Net Increase in Net Assets Resulting from Operations .................. $ 10,984,323
============
See Notes to Financial Statements.
14 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Statements of Changes in Net Assets
For the Year Ended
August 31,
---------------------------
Increase (Decrease) in Net Assets: 2003 2002
=========================================================================================================================
Operations
- -------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................ $23,195,829 $ 23,455,004
Realized gain on investments--net ..................................... 1,302,358 3,249,693
Change in unrealized appreciation on investments--net ................. (13,513,864) (1,081,594)
---------------------------
Net increase in net assets resulting from operations .................. 10,984,323 25,623,103
---------------------------
=========================================================================================================================
Dividends to Shareholders
- -------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ............................................................ (11,484,980) (11,095,385)
Class B ............................................................ (7,656,305) (9,188,278)
Class C ............................................................ (1,923,362) (1,090,321)
Class I ............................................................ (2,037,876) (2,085,753)
---------------------------
Net decrease in net assets resulting from dividends to shareholders ... (23,102,523) (23,459,737)
---------------------------
=========================================================================================================================
Beneficial Interest Transactions
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets derived from beneficial interest
transactions .......................................................... (10,154,091) 10,414,391
---------------------------
=========================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................... (22,272,291) 12,577,757
Beginning of year ..................................................... 510,769,823 498,192,066
---------------------------
End of year* .......................................................... $488,497,532 $510,769,823
===========================
* Undistributed investment income--net ............................. $ 740,799 $ 640,574
===========================
See Notes to Financial Statements.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
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: 2003 2002 2001 2000 1999
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 11.82 $ 11.77 $ 11.26 $ 11.10 $ 12.16
------------------------------------------------------------
Investment income--net ................................ .56+ .57+ .58 .57 .59
Realized and unrealized gain (loss) on investments--net (.28) .05 .51 .16 (.80)
------------------------------------------------------------
Total from investment operations ...................... .28 .62 1.09 .73 (.21)
------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.56) (.57) (.58) (.57) (.59)
Realized gain on investments--net .................. -- -- -- -- (.18)
In excess of realized gain on investments--net ..... -- -- -- -- (.08)
------------------------------------------------------------
Total dividends and distributions ..................... (.56) (.57) (.58) (.57) (.85)
------------------------------------------------------------
Net asset value, end of year .......................... $ 11.54 $ 11.82 $ 11.77 $ 11.26 $ 11.10
============================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 2.35% 5.46% 9.93% 6.91% (1.98%)
============================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
reorganization expenses ............................. .78% .81% .79% .77% .75%
============================================================
Expenses, excluding reorganization expenses ........... .78% .81% .79% .77% .75%
============================================================
Expenses .............................................. .78% .84% .84% .77% .75%
============================================================
Investment income--net ................................ 4.74% 4.93% 4.96% 5.25% 4.98%
============================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $247,184 $236,181 $219,442 $193,497 $194,029
============================================================
Portfolio turnover .................................... 29.70% 37.35% 55.75% 84.36% 106.84%
============================================================
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
++ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
See Notes to Financial Statements.
16 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Financial Highlights (continued)
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: 2003 2002 2001 2000 1999
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 11.82 $ 11.77 $ 11.26 $ 11.10 $ 12.16
------------------------------------------------------------
Investment income--net ................................ .51+ .52+ .53 .53 .54
Realized and unrealized gain (loss) on investments--net (.28) .05 .51 .16 (.80)
------------------------------------------------------------
Total from investment operations ...................... .23 .57 1.04 .69 (.26)
------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.51) (.52) (.53) (.53) (.54)
Realized gain on investments--net .................. -- -- -- -- (.18)
In excess of realized gain on investments--net ..... -- -- -- -- (.08)
------------------------------------------------------------
Total dividends and distributions ..................... (.51) (.52) (.53) (.53) (.80)
------------------------------------------------------------
Net asset value, end of year .......................... $ 11.54 $ 11.82 $ 11.77 $ 11.26 $ 11.10
============================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 1.93% 5.04% 9.48% 6.48% (2.38%)
============================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
reorganization expenses ............................. 1.19% 1.22% 1.20% 1.18% 1.16%
============================================================
Expenses, excluding reorganization expenses ........... 1.19% 1.22% 1.20% 1.18% 1.16%
============================================================
Expenses .............................................. 1.19% 1.25% 1.25% 1.18% 1.16%
============================================================
Investment income--net ................................ 4.34% 4.52% 4.55% 4.85% 4.57%
============================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $151,276 $194,733 $221,516 $200,409 $269,191
============================================================
Portfolio turnover .................................... 29.70% 37.35% 55.75% 84.36% 106.84%
============================================================
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued)
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: 2003 2002 2001 2000 1999
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 11.82 $ 11.77 $ 11.26 $ 11.10 $ 12.15
------------------------------------------------------------
Investment income--net ................................ .50+ .51+ .52 .52 .53
Realized and unrealized gain (loss) on investments--net (.28) .05 .51 .16 (.79)
------------------------------------------------------------
Total from investment operations ...................... .22 .56 1.03 .68 (.26)
------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.50) (.51) (.52) (.52) (.53)
Realized gain on investments--net .................. -- -- -- -- (.18)
In excess of realized gain on investments--net ..... -- -- -- -- (.08)
------------------------------------------------------------
Total dividends and distributions ..................... (.50) (.51) (.52) (.52) (.79)
------------------------------------------------------------
Net asset value, end of year .......................... $ 11.54 $ 11.82 $ 11.77 $ 11.26 $ 11.10
============================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 1.83% 4.94% 9.37% 6.37% (2.40%)
============================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
reorganization expenses ............................. 1.29% 1.32% 1.30% 1.28% 1.26%
============================================================
Expenses, excluding reorganization expenses ........... 1.29% 1.32% 1.30% 1.28% 1.26%
============================================================
Expenses .............................................. 1.29% 1.35% 1.35% 1.28% 1.26%
============================================================
Investment income--net ................................ 4.24% 4.42% 4.45% 4.75% 4.46%
============================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $ 50,197 $ 36,983 $ 16,357 $ 10,262 $ 11,769
============================================================
Portfolio turnover .................................... 29.70% 37.35% 55.75% 84.36% 106.84%
============================================================
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
18 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Financial Highlights (concluded)
Class I++
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: 2003 2002 2001 2000 1999
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 11.81 $ 11.77 $ 11.26 $ 11.10 $ 12.15
------------------------------------------------------------
Investment income--net ................................ .57+ .58+ .59 .58 .60
Realized and unrealized gain (loss) on investments--net (.27) .04 .51 .16 (.79)
------------------------------------------------------------
Total from investment operations ...................... .30 .62 1.10 .74 (.19)
------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.57) (.58) (.59) (.58) (.60)
Realized gain on investments--net .................. -- -- -- -- (.18)
In excess of realized gain on investments--net ..... -- -- -- -- (.08)
------------------------------------------------------------
Total dividends and distributions ..................... (.57) (.58) (.59) (.58) (.86)
------------------------------------------------------------
Net asset value, end of year .......................... $ 11.54 $ 11.81 $ 11.77 $ 11.26 $ 11.10
============================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 2.54% 5.48% 10.04% 7.02% (1.80%)
============================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
reorganization expenses ............................. .68% .71% .69% .67% .65%
============================================================
Expenses, excluding reorganization expenses ........... .68% .71% .69% .67% .65%
============================================================
Expenses .............................................. .68% .74% .75% .67% .65%
============================================================
Investment income--net ................................ 4.84% 5.03% 5.06% 5.35% 5.07%
============================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $ 39,841 $ 42,873 $ 40,877 $ 31,868 $ 37,641
============================================================
Portfolio turnover .................................... 29.70% 37.35% 55.75% 84.36% 106.84%
============================================================
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
See Notes to Financial Statements.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
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 amended, as a
diversified, open-end management investment company. The Fund's financial
statements are prepared in conformity with accounting principles generally
accepted in the United States of America, which may require the use of
management accruals and estimates. The Fund offers multiple classes of shares.
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. The Fund's financial statements
and financial highlights contained within this report reflect the new share
class redesignation. Shares of Class A and Class I 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 A, Class B and Class C 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. Income, expenses (other than expenses attributable to
a specific class) and realized and unrealized gains and losses on investments
are allocated daily to each class based on its relative net assets. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movement and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. 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.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
(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).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
20 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Notes to Financial Statements (continued)
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.
(g) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(h) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax difference of $6,919 has been reclassified
between paid-in capital in excess of par and undistributed net investment
income. This reclassification has no effect on net assets or net asset value per
share.
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 is required to pay a
monthly fee based upon the average daily value of the Fund's net assets at the
following annual rates: .55% of the Fund's average daily net assets not
exceeding $500 million; .525% of average daily net assets in excess of $500
million but not exceeding $1 billion; and .50% of average daily net assets in
excess of $1 billion. For the year ended August 31, 2003, FAM earned fees of
$2,795,619, of which 2,653 was waived. For the year ended August 31, 2003, FAM
reimbursed the Fund in the amount of $3,697.
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 A ................................ .10% --
Class B ................................ .25% .25%
Class C ................................ .25% .35%
- --------------------------------------------------------------------------------
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 A, Class B and Class C 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, 2003, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class I
Shares as follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................. $5,306 $50,946
Class I ............................. $1,404 $11,672
- --------------------------------------------------------------------------------
For the year ended August 31, 2003, MLPF&S received contingent deferred sales
charges of $128,730 and $24,096 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $38 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
For the year ended August 31, 2003, the Fund reimbursed FAM $11,181 for certain
accounting services.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 2003 were $156,492,051 and $145,474,370, respectively.
Net realized gains (losses) for the year ended August 31, 2003 and net
unrealized gains as of August 31, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................... $ 1,703,033 $28,953,511
Financial futures contracts ............. (223,675) --
Forward interest rate swaps ............. (177,000) --
-------------------------------
Total ................................... $ 1,302,358 $28,953,511
===============================
- --------------------------------------------------------------------------------
As of August 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $28,426,462, of which $29,203,330 related to appreciated
securities and $776,868 related to depreciated securities. The aggregate cost of
investments at August 31, 2003 for Federal income tax purposes was $453,831,857.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(10,154,091) and $10,414,391 for the years ended August 31,
2003 and August 31, 2002, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 2003+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,254,766 $ 14,903,047
Automatic conversion of shares ........... 2,593,787 30,828,314
Shares issued to shareholders in
reinvestment of dividends .............. 427,503 5,048,446
-------------------------------
Total issued ............................. 4,276,056 50,779,807
Shares redeemed .......................... (2,841,291) (33,533,908)
-------------------------------
Net increase ............................. 1,434,765 $ 17,245,899
===============================
+ Effective April 14, 2003 Class D Shares were redesignated Class A Shares.
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 2002+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,397,500 $ 16,186,766
Automatic conversion of shares ........... 2,035,844 23,726,527
Shares issued to shareholders in
reinvestment of dividends .............. 409,392 4,746,423
-------------------------------
Total issued ............................. 3,842,736 44,659,716
Shares redeemed .......................... (2,501,336) (29,054,553)
-------------------------------
Net increase ............................. 1,341,400 $ 15,605,163
===============================
+ Effective April 14, 2003 Class D Shares were redesignated Class A Shares.
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,516,169 $ 17,984,139
Shares issued to shareholders in
reinvestment of dividends .............. 276,563 3,267,758
-------------------------------
Total issued ............................. 1,792,732 21,251,897
Automatic conversion of shares ........... (2,592,997) (30,828,314)
Shares redeemed .......................... (2,569,199) (30,339,314)
-------------------------------
Net decrease ............................. (3,369,464) $(39,915,731)
===============================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended August 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,226,522 $ 25,871,856
Shares issued to shareholders in
reinvestment of dividends .............. 343,648 3,984,430
-------------------------------
Total issued ............................. 2,570,170 29,856,286
Automatic conversion of shares ........... (2,035,493) (23,726,527)
Shares redeemed .......................... (2,876,883) (33,376,806)
-------------------------------
Net decrease ............................. (2,342,206) $(27,247,047)
===============================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,017,941 $ 23,936,180
Shares issued to shareholders in
reinvestment of dividends .............. 88,763 1,048,286
-------------------------------
Total issued ............................. 2,106,704 24,984,466
Shares redeemed .......................... (886,237) (10,443,796)
-------------------------------
Net increase ............................. 1,220,467 $ 14,540,670
===============================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended August 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,116,735 $ 24,603,457
Shares issued to shareholders in
reinvestment of dividends .............. 47,620 552,179
-------------------------------
Total issued ............................. 2,164,355 25,155,636
Shares redeemed .......................... (424,323) (4,898,714)
-------------------------------
Net increase ............................. 1,740,032 $ 20,256,922
===============================
22 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended August 31, 2003+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 564,411 $ 6,700,020
Shares issued to shareholders in
reinvestment of dividends .............. 73,005 861,983
-------------------------------
Total issued ............................. 637,416 7,562,003
Shares redeemed .......................... (812,952) (9,586,932)
-------------------------------
Net decrease ............................. (175,536) $ (2,024,929)
===============================
+ Effective April 14, 2003 Class A Shares were redesignated Class I Shares.
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended August 31, 2002+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 647,353 $ 7,518,687
Shares issued to shareholders in
reinvestment of dividends .............. 74,346 861,819
-------------------------------
Total issued ............................. 721,699 8,380,506
Shares redeemed .......................... (566,850) (6,581,153)
-------------------------------
Net increase ............................. 154,849 $ 1,799,353
===============================
+ Effective April 14, 2003 Class A Shares were redesignated Class I Shares.
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its affiliates, is a
party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. The Fund may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The 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 Fund pays a commitment fee of .09% per
annum based on the Fund's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each fund's election, the Federal Funds rate plus .50% or a base
rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement
was renewed for one year under the same terms, except that the commitment was
reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the
credit agreement during the year ended August 31, 2003.
6. Distributions to shareholders:
The tax character of distributions paid during the fiscal years ended August 31,
2003 and August 31, 2002 was as follows:
- -------------------------------------------------------------------------------
8/31/2003 8/31/2002
- -------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income ...................... $23,102,523 $23,459,737
------------------------------
Total distributions ...................... $23,102,523 $23,459,737
==============================
As of August 31, 2003, the components of accumulated earnings on a tax basis
were as follows:
- -----------------------------------------------------------------------------
Undistributed tax-exempt income -- net .................. $ 462,146
Undistributed long-term capital gains -- net ............ --
------------
Total undistributed earnings -- net ..................... 462,146
Capital loss carryforward ............................... (11,521,108)*
Unrealized gains -- net ................................. 27,861,300**
------------
Total accumulated earnings (losses) -- net .............. $ 16,802,338
============
* On August 31, 2003, the Fund had a net capital loss carryforward of
$11,521,108, of which $898,962 expires in 2008 and $10,622,146 expires in
2009. This amount will be available to offset like amounts of any future
taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
tax deferral of losses on straddles, and the difference between book and
tax amortization methods for premiums and discounts on fixed income
securities.
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 23
[LOGO] Merrill Lynch Investment Managers
Independent Auditors' Report
To the Shareholders and Board of Trustees of
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, 2003,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and 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 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 as of August 31, 2003 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, the financial statements and financial highlights referred to
above 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, 2003, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and its financial highlights for each of the five years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
October 22, 2003
24 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Officers and Trustees (unaudited)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President and Chairman of Merrill Lynch Invest- 122 Funds None
Glenn* Princeton, NJ and present ment Managers, L.P. ("MLIM")/Fund Asset 163 Portfolios
08543-9011 Trustee and Management, L.P. ("FAM")--Advised Funds since
Age: 62 1992 to 1999; Chairman (Americas Region) of MLIM from
present 2000 to 2002; Executive Vice President of MLIM
and FAM (which terms as used herein include
their corporate predecessors) from 1983 to 2002;
President of FAM Distributors, Inc. ("FAMD")
from 1986 to 2002 and Director thereof from 1991
to 2002; Executive Vice President and Director
of Princeton Services, Inc. ("Princeton
Services") from 1993 to 2002; President of
Princeton Administrators, L.P. from 1989 to
2002; Director of Financial Data Services, Inc.
since 1985.
----------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM
or MLIM acts as investment adviser. Mr. Glenn is an "interested person" as described in the Investment Company Act,
of the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators,
L.P. The Director's term is unlimited. Directors serve until their resignation, removal, or death, or until
December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of
Directors.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Trustee 1995 to Director, The China Business Group, Inc. since 40 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 59 Portfolios
08543-9095 1996 to 2003; Chairman, Berkshire Holding
Age: 59 Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Trustee 2002 to Member of the Committee of Investment of 40 Funds Kimco Realty
Grills Princeton, NJ present Employee Benefit Assets of the Association of 59 Portfolios Corporation
08543-9095 Financial Professionals ("CIEBA") since 1986
Age: 68 and its Chairman from 1991 to 1992; Member of
the Investment Advisory Committees of the State
of New York Common Retirement Fund since 1989;
Member of the Investment Advisory Committee of
the Howard Hughes Medical Institute from 1997
to 2000; Director, Duke Management Company since
1992 and Vice Chairman thereof since 1998;
Director, LaSalle Street Fund from 1995 to 2001;
Director, Kimco Realty Corporation since 1997;
Member of the Investment Advisory Committee of
the Virginia Retirement System since 1998 and
Vice Chairman thereof since 2002; Director,
Montpelier Foundation since 1998 and Vice
Chairman thereof since 2000; Member of the
Investment Committee of the Woodberry Forest
School since 2000; Member of the Investment
Committee of the National Trust for Historic
Preservation since 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Trustee 1993 to John M. Olin Professor of Humanities, New York 40 Funds None
London Princeton, NJ present University since 1993 and Professor thereof 59 Portfolios
08543-9095 since 1980; President of Hudson Institute since
Age: 64 1997 and Trustee thereof since 1980.
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 25
[LOGO] Merrill Lynch Investment Managers
Officers and Trustees (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Trustee 1993 to George Gund Professor of Finance and Banking, 40 Funds None
Perold Princeton, NJ present Harvard Business School since 2000 and a member 59 Portfolios
08543-9095 of the faculty since 1979; Director and Chairman
Age: 51 of the Board, UNX, Inc. since 2003; Director,
Sanlam Limited and Sanlam Life since 2001;
Director, Genbel Securities and Gensec Bank
since 1999; Director, Stockback.com from 2002
to 2002; Trustee, Commonfund from 1989 to 2001;
Director, Bulldogresearch.com from 2000 to 2001;
Director, Sanlam Investment Management from
1999 to 2001; Director, Quantec Limited from
1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Trustee 2001 to Shareholder, Modrall, Sperling, Roehl, Harris & 40 Funds None
Cooper Ramo Princeton, NJ present Sisk, P.A. since 1993; Director of Cooper's, 59 Portfolios
08543-9095 Inc. since 1999 and Chairman of the Board since
Age: 61 2000; Director of ECMC, Inc. since 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Trustee 2002 to Principal of STI Management since 1994; Trustee 40 Funds None
Salomon, Jr. Princeton, NJ present of Commonfund from 1980 to 2001; Regular 59 Portfolios
08543-9095 columnist with Forbes magazine from 1992 to
Age: 66 2001; Director of Rye Country Day School since
2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Trustee 2002 to Chairman, Fernwood Advisors (investment 41 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal of Fernwood 60 Portfolios
08543-9095 Associates (financial consultant) since 1975;
Age: 70 Chairman of RPP Corporation since 1978;
Director, International Mobile Communications,
Inc. since 1998.
----------------------------------------------------------------------------------------------------------------------
* The Trustee's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
- ------------------------------------------------------------------------------------------------------------------------------------
26 CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003
Officers and Trustees (unaudited) (concluded)
Position(s) Length
Held of Time
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof since
Burke Princeton, NJ President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999;
08543-9011 and and 1999 Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer to present
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Jacob Princeton, NJ President present Management) of MLIM from 1997 to 2000.
08543-9011
Age: 52
- ------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Loffredo Princeton, NJ President present Management) of MLIM from 1998 to 2000.
08543-9011
Age: 39
- ------------------------------------------------------------------------------------------------------------------------------------
Walter C. P.O. Box 9011 Vice 1993 to Managing Director of MLIM since 2003; Director (Municipal Tax-Exempt Fund
O'Connor Princeton, NJ President present Management) of MLIM from 2000 to 2003; Vice President of MLIM from 1994 to
08543-9011 2000.
Age: 41
- ------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith
Stewart Princeton, NJ present from 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001.
08543-9011
Age: 34
----------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
CALIFORNIA INSURED MUNICIPAL BOND FUND AUGUST 31, 2003 27
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
Merrill Lynch California Insured Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust
Box 9011
Princeton, NJ 08543-9011
#10329 -- 8/03
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request--
The registrant has adopted a code of ethics, as of the end of the
period covered by this report, that applies to the registrant's
principal executive officer, principal financial officer and principal
accounting officer, or persons performing similar functions. A copy of
the code of ethics is available without charge upon request by calling
toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -
The registrant's board of directors has determined that (i) the
registrant has the following audit committee financial experts serving
on its audit committee and (ii) each audit committee financial expert
is independent: (1) Joe Grills, (2) Andre Perold, (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last
two fiscal years for professional services rendered by
the principal accountant for the audit of the
registrant's annual financial statements or services
that are normally provided by the accountant in
connection with statutory and regulatory filings or
engagements for those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and
related services by the principal accountant
that are reasonably related to the performance
of the audit of the registrant's financial
statements and are not reported under
paragraph (a) of this Item. Registrants shall
describe the nature of the services comprising
the fees disclosed under this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of
the services comprising the fees disclosed under this
category. N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services
provided by the principal accountant, other than
the services reported in paragraphs (a) through
(c) of this Item. Registrants shall describe the
nature of the services comprising the fees
disclosed under this category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by
the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for each
of the last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act, state whether or not the registrant has a
separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. If the
registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee in Section 3(a)(58)(B) of the Exchange
Act, so state.
If applicable, provide the disclosure required by Rule 10A-3(d) under
the Exchange Act regarding an exemption from the listing standards for
audit committees. N/A
(Listed issuers must be in compliance with the new listing rules by the
earlier of their first annual shareholders meeting after January 2004,
or October 31, 2004 (annual requirement))
Item 6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities. N/A
Item 8 -- Reserved
Item 9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request
without charge. N/A.
10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
Attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Merrill Lynch California Insured Municipal Bond Fund
By: /s/ Terry K. Glenn
-----------------------------
Terry K. Glenn,
President of
Merrill Lynch California Insured Municipal Bond Fund
Date: October 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
-----------------------------
Terry K. Glenn,
President of
Merrill Lynch California Insured Municipal Bond Fund
Date: October 24, 2003
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch California Insured Municipal Bond Fund
Date: October 24, 2003
Attached hereto as a furnished exhibit are the certifications pursuant
to Section 906 of the Sarbanes-Oxley Act.