UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04264
Name of Fund: Merrill Lynch California Insured Municipal Bond Fund of Merrill
Lynch California Municipal Series Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch California Insured Municipal Bond Fund of Merrill
Lynch California Municipal Series Trust, 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: 08/31/06
Date of reporting period: 09/01/05 - 02/28/06
Item 1 - Report to Stockholders
Semi-Annual Report
February 28, 2006
Merrill Lynch
California Insured
Municipal Bond Fund
Of Merrill Lynch California Municipal Series Trust
Merrill Lynch California Insured Municipal Bond Fund
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected to
close in the third quarter of 2006, at which time the new company will operate
under the BlackRock name. If approved by the Fund's Board of Trustees and Fund
shareholders, the combined company that results from the transaction is expected
to become the investment adviser of the Fund.
Portfolio Information as of February 28, 2006
Percent of
Distribution by Market Sector Total Investments
- --------------------------------------------------------------------------------
Other Revenue Bonds ........................................ 64.2%
General Obligation Bonds ................................... 23.9
Prerefunded Bonds .......................................... 11.5
Mutual Funds ............................................... 0.3
Other* ..................................................... 0.1
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
Quality Ratings by Percent of
S&P/Moody's Total Investments
- --------------------------------------------------------------------------------
AAA/Aaa .................................................... 93.4%
AA/Aa ...................................................... 0.8
A/A ........................................................ 0.7
NR (Not Rated) ............................................. 4.7
Other* ..................................................... 0.4
- --------------------------------------------------------------------------------
* Includes portfolio holdings in mutual funds and short-term investments.
2 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
===============================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
- -----------------------------------------------------------------------------------------------
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
- -----------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
- -----------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
- -----------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
- -----------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
- -----------------------------------------------------------------------------------------------
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to 4.5%.
Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in January, a
month after the central bank removed the critical word "measured" from the
description of its rate-hiking program. Still, most observers expect at least
one more interest rate hike before the Fed pauses in its tightening campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending by
businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust
dividend-distribution, share-buyback and merger-and-acquisition activity in
2005, a trend that has continued in 2006. This, as well as reasonably good
company earnings and low core inflation, has been supportive of U.S. stocks
despite the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts of
inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the curve
at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage you to
review your goals periodically with your financial advisor and to make portfolio
changes, as needed. For timely "food for thought" for investors, we also invite
you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine. As
always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to continuing to serve your investment
needs.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the average return of its comparable Lipper category
of California Insured Municipal Debt Funds for the period while also providing
an above-average yield.
Describe the recent market environment relative to municipal bonds.
Over the past six months, long-term bond yields generally rose as their prices,
which move in the opposite direction, declined. Investors appeared to disregard
signs of slowing economic growth, reflected in gross domestic product growth of
just 1.6% in the fourth quarter of 2005, and instead focused on potential
inflationary pressures and continued short-term interest rate increases by the
Federal Reserve Board (the Fed). This helped push bond yields higher over the
past six months.
For its part, the Fed has continued to raise short-term interest rates at each
of its meetings during the period, bringing the federal funds rate to 4.5%.
Given little expectation that the Fed's monetary tightening cycle will end in
early 2006, the yield curve continued to flatten with shorter interest rates
increasing more than longer ones. At the end of February 2006, 30-year U.S.
Treasury bond yields had risen 25 basis points (.25%) to 4.51%, while 10-year
Treasury yields rose 53 basis points to 4.55% and two-year Treasury yields rose
85 basis points to 4.69%. The result was an inverted Treasury yield curve.
Notably, the municipal yield curve has maintained a positive slope. According to
Municipal Market Data, AAA-rated tax-exempt bonds maturing in 30 years saw their
yields increase eight basis points to 4.30%, while yields on AAA-rated issues
maturing in 10 years increased 25 basis points to end the period at 3.75%. The
tax-exempt market's positive technical position has allowed municipal bond
prices to decline less than those of taxable bonds.
Supporting the recent outperformance of the municipal bond market has been a
dramatic slowdown in the issuance of new long-term tax-exempt bonds. In 2005,
more than $408 billion in new long-term tax-exempt bonds was underwritten,
representing a new annual record and an increase of over 13% compared to 2004.
For the six-month period ended February 28, 2006, $172 billion in long-term
municipal bonds was issued, a decline of 1.5% compared to the same period a year
ago. More recently, new-issue volume has declined at an even faster rate. In the
past three months, $76 billion in new long-term tax-exempt bonds was marketed, a
decline of 16% compared to the same three months a year ago. The record level of
new issuance in 2005 was largely triggered by a 47% increase in refunding
activity as issuers took advantage of historically low bond yields and a
flattening yield curve to refinance outstanding higher-couponed debt. So far in
2006, refunding issuance has declined more than 55% relative to the first two
months of 2005. It remains to be seen if this decline is the beginning of a
sustained trend toward a significant decline in refunding issuance. This is
important, as analysts' estimates for new-issue supply for 2006, currently in
the $340 billion - $370 billion range, are largely dependant on modest declines
in refunding activity. Should the current trend continue, new-issue supply
projections for this year could be adjusted lower.
Investor demand for municipal product has remained strong. As reported by the
Investment Company Institute (ICI), for all of 2005, long-term municipal bond
funds received net new monies of $5.04 billion. This represented a sharp
reversal from the $3.67 billion outflow in 2004. January 2006 data from ICI
indicates that tax-exempt mutual funds have continued to experience positive
cash flows, receiving over $2 billion for the month, more than twice that
received in January 2005.
Looking ahead, the fundamentals for the tax-exempt bond market appear favorable,
and continued positive cash flows are anticipated. Given their attractive yields
relative to comparable U.S. Treasury bonds, and the prospects for reduced
issuance in 2006, we believe municipal bonds could enjoy solid results in the
coming months.
How did the Fund perform during the period?
For the six-month period ended February 28, 2006, Merrill Lynch California
Insured Municipal Bond Fund's Class A, Class B, Class C and Class I Shares had
total returns of +1.34%, +1.14%, +1.09% and +1.39%, respectively. (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 and 7 of this
report to shareholders.) For the same period, the Fund's unmanaged benchmark,
the Lehman Brothers Municipal Bond Index, returned +.99%, and its comparable
Lipper category of California Insured Municipal Debt Funds had an average return
of +.85%. (Funds in this Lipper category invest primarily in securities exempt
from taxation in California and insured as to timely payment.)
4 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
The Fund's outperformance for the period is mainly attributable to our
long-standing focus on generating the highest possible degree of tax-exempt
income for our shareholders. To that end, we have maintained an above-average
level of coupon accrual, which provides the defensive structure that outperforms
in a slightly rising interest rate environment such as we experienced during
this six-month period. Overall, our intention has been to limit net asset value
volatility in the portfolio while generating a relatively high level of income.
We accomplished this while maintaining a high degree of credit quality.
Describe conditions in the State of California.
Currently, California general obligation bonds hold credit ratings of A2 from
Moody's, A from Standard & Poor's and A from Fitch. Despite some talk of a
possible credit-rating upgrade, that had not come to fruition as of year-end
2005.
In a recent State of the State address, Governor Schwarzenegger outlined a $222
billion construction plan to fund transportation, education, corrections, ports
and water projects. The proposal includes $68 billion in borrowings during the
next 10 years, with the first authorization to come on the June 2006 ballot. If
implemented, the plan would essentially maximize the state's borrowing capacity
through 2018 and would establish a strict cap on borrowing with no more than 6%
of the general fund reserves for debt repayment.
We believe some of the plan may go forward, but the initial amount of $68
billion seems unlikely in the intermediate term. The state's overall budget
situation has improved, although this is solely due to revenue increases
originating from the improving economic environment. Thus far, no new structural
reforms have been enacted to address expenditures.
What changes were made to the portfolio during the period?
Portfolio activity was focused primarily on approaching a more neutral duration
posture, a stance advocated by our in-house Municipal Investment Committee. In
prior periods, we managed with a more defensive interest rate posture in an
effort to mute price volatility in case of rising interest rates. In October and
early November, an increase in interest rates did occur, and we viewed this as
an opportunity to extend the Fund's duration. A relatively active new-issue
calendar provided an ample supply of California municipal bonds to achieve a
degree of this restructuring. We were able to purchase longer-dated securities,
along with some zero-coupon holdings, to bring the Fund's duration exposure
closer to that of its Lipper peers.
Also during the period, we were faced with the challenge of reinvesting the
proceeds from bond redemptions that had occurred. Given already tight credit
spreads, we saw little value in purchasing lower-rated issues, as the additional
income associated with them was not enough to compensate for their heightened
risk profile. Instead, we used the derivatives market to take advantage of what
was still a relatively steep tax-exempt yield curve. We were able to pick up
some yield by using AAA-rated inverse floaters, accepting slight extension risk
but avoiding the lower-rated credits that come with more risk but little
additional yield. In fact, one of our land-based tax increment issues for Orange
County Community Facilities District, a lower-rated credit, was sold during the
period at a yield of 5.15%. This compared to insured bonds yielding within 50
basis points at the time of the sale. When necessary, we sold prerefunded bonds
to raise the cash needed to finance the purchase of longer-duration securities.
How would you characterize the Fund's position at the close of the period?
At the beginning of 2005, the average coupon in the portfolio was approximately
5.90%. Due to redemptions, the Fund's average coupon began 2006 at 5.75%, still
well above the industry average and the 4.30% yield of AAA-rated, 30-year
municipal bonds as measured by Municipal Market Data.
In terms of interest rate exposure, the Fund ended the period with a slightly
defensive to neutral posture. Consensus thinking among market participants and
economists is that a fairly benign trading range will follow the eventual end of
Fed tightening. Our focus on maintaining the Fund's high current yield is well
suited to such a stable interest rate environment. Any changes to our current
positioning will likely depend on future economic releases and how that data is
interpreted by the Fed under new Chairman Ben Bernanke.
Walter C. O'Connor, CFA
Vice President and Portfolio Manager
March 14, 2006
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 5
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of 4%
and an account maintenance fee of 0.10% per year (but no distribution
fee).
o 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% per year and an
account maintenance fee of 0.25% per year. 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% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase.
o Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or
account maintenance fees and are available only to eligible investors. Had
the sales charge been included, the Fund's Class I Shares' performance
would have been lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to the
most recent month-end. 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 gain distributions, if any, at net asset value on the
payable date. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the different levels
of account maintenance, distribution and transfer agency fees applicable to each
class, which are deducted from the income available to be paid to shareholders.
The Fund's Investment Adviser reimbursed a portion of its fee. Without such
reimbursement, the Fund's total returns may have been lower.
Recent Performance Results
6-Month 12-Month 10-Year Standardized
As of February 28, 2006 Total Return Total Return Total Return 30-Day Yield
=============================================================================================================================
ML California Insured Municipal Bond Fund Class A Shares* +1.34% +3.39% +65.46% 3.57%
- -----------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class B Shares* +1.14 +2.97 +58.90 3.31
- -----------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class C Shares* +1.09 +2.87 +57.31 3.22
- -----------------------------------------------------------------------------------------------------------------------------
ML California Insured Municipal Bond Fund Class I Shares* +1.39 +3.49 +67.26 3.82
- -----------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** +0.99 +3.87 +75.81 --
- -----------------------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Cumulative 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.
** This unmanaged Index consists of long-term revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds.
6 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 2/28/06 +3.39% -0.74%
- --------------------------------------------------------------------------------
Five Years Ended 2/28/06 +5.00 +4.15
- --------------------------------------------------------------------------------
Ten Years Ended 2/28/06 +5.16 +4.74
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 2/28/06 +2.97% -0.98%
- --------------------------------------------------------------------------------
Five Years Ended 2/28/06 +4.58 +4.24
- --------------------------------------------------------------------------------
Ten Years Ended 2/28/06 +4.74 +4.74
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 2/28/06 +2.87% +1.88%
- --------------------------------------------------------------------------------
Five Years Ended 2/28/06 +4.47 +4.47
- --------------------------------------------------------------------------------
Ten Years Ended 2/28/06 +4.63 +4.63
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
Class I Shares Return
================================================================================
One Year Ended 2/28/06 +3.49%
- --------------------------------------------------------------------------------
Five Years Ended 2/28/06 +5.11
- --------------------------------------------------------------------------------
Ten Years Ended 2/28/06 +5.28
- --------------------------------------------------------------------------------
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 7
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses, including advisory fees, distribution fees including
12b-1 fees, and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on September 1, 2005 and held through
February 28, 2006) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders' ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value September 1, 2005
September 1, 2005 February 28, 2006 to February 28, 2006
==============================================================================================================================
Actual
==============================================================================================================================
Class A $1,000 $1,013.40 $3.89
- ------------------------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,011.40 $5.93
- ------------------------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,010.90 $6.43
- ------------------------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,013.90 $3.40
==============================================================================================================================
Hypothetical (5% annual return before expenses)**
==============================================================================================================================
Class A $1,000 $1,020.93 $3.91
- ------------------------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,018.90 $5.96
- ------------------------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,018.40 $6.46
- ------------------------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,021.43 $3.41
- ------------------------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (.78% for Class A, 1.19% for Class B, 1.29% for Class
C and .68% for Class I) multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half year divided by 365.
8 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
======================================================================================
California--93.3%
- --------------------------------------------------------------------------------------
$ 2,625 ABAG Finance Authority for Nonprofit Corporations,
California, COP (Children's Hospital Medical Center),
6% due 12/01/2029 (a) $ 2,866
- --------------------------------------------------------------------------------------
3,750 Alameda, California, Public Financing Authority, Local
Agency Special Tax Revenue Bonds (Community Facility
Number 1), Series A, 7% due 8/01/2019 3,872
- --------------------------------------------------------------------------------------
3,600 Alameda Corridor Transportation Authority, California,
Revenue Bonds, Senior Lien, Series A, 5.25%
due 10/01/2021 (g) 3,829
- --------------------------------------------------------------------------------------
4,000 Anaheim, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds, RITES, 9.57%
due 12/28/2018 (g)(i) 4,585
- --------------------------------------------------------------------------------------
2,000 Bakersfield, California, COP, Refunding (Convention
Center Expansion Project), 5.875% due 4/01/2022 (g) 2,071
- --------------------------------------------------------------------------------------
2,935 Bay Area Government Association, California, Tax
Allocation Revenue Bonds (California Redevelopment
Agency Pool), Series A, 5.125% due 9/01/2025 (j) 3,132
- --------------------------------------------------------------------------------------
770 Bay Area Government Association, California, Tax
Allocation Revenue Refunding Bonds (California
Redevelopment Agency Pool), Series A, 6%
due 12/15/2024 (e) 783
- --------------------------------------------------------------------------------------
California Educational Facilities Authority, Revenue
Refunding Bonds (g):
9,000 RIB, Series 413, 8.53% due 10/01/2026 (i) 9,623
1,025 (University of the Pacific), 5.875% due 11/01/2020 1,126
- --------------------------------------------------------------------------------------
California Health Facilities Financing Authority
Revenue Bonds:
10,000 DRIVERS, Series 181, 7.509% due 6/01/2022 (e)(i) 11,275
5,000 (Kaiser Permanente), RIB, Series 26, 7.51%
due 6/01/2022 (e)(i) 5,638
2,080 (Sutter Health), Series A, 6.25% due 8/15/2035 2,316
- --------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Revenue
Refunding Bonds (Catholic Healthcare West), Series A (g):
645 6% due 7/01/2006 (h) 664
2,355 6% due 7/01/2017 2,422
- --------------------------------------------------------------------------------------
2,500 California State Department of Water Resources, Power
Supply Revenue Bonds, Series A, 5.75%
due 5/01/2012 (h) 2,819
- --------------------------------------------------------------------------------------
California State Public Works Board, Lease
Revenue Bonds, Series A:
1,800 (Department of Health Services), 5.625%
due 11/01/2009 (g)(h) 1,958
3,000 (Various Community College Projects), 5.625%
due 3/01/2016 (a) 3,066
- --------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue
Refunding Bonds, Series B:
10,000 (Department of Corrections), 5.625%
due 11/01/2019 (g) 10,350
1,500 (Various Community College Projects), 5.625%
due 3/01/2019 (a) 1,533
- --------------------------------------------------------------------------------------
California Statewide Communities Development Authority:
6,000 COP, Refunding (Huntington Memorial Hospital),
5.80% due 7/01/2006 (b)(h) 6,170
2,475 Health Facility Revenue Bonds (Memorial Health
Services), Series A, 6% due 10/01/2023 2,747
- --------------------------------------------------------------------------------------
Capistrano, California, Unified School District,
Community Facility District, Special Tax Bonds:
1,720 (No. 05-1 Rancho Madrina), 5.15% due 9/01/2029 1,730
1,200 (No. 90-2 Talega), 6% due 9/01/2032 1,271
- --------------------------------------------------------------------------------------
1,000 Coachella Valley, California, Unified School District,
Capital Appreciation, GO (Election of 2005), Series A,
5.09%* due 8/01/2030 (d) 323
- --------------------------------------------------------------------------------------
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) 5,862
- --------------------------------------------------------------------------------------
Corona, California, COP, Refunding (Corona
Community) (h):
2,065 8% due 3/01/2010 2,413
2,230 8% due 3/01/2011 2,680
2,410 8% due 3/01/2012 2,967
2,605 8% due 3/01/2013 3,290
2,810 8% due 3/01/2014 3,628
- --------------------------------------------------------------------------------------
4,500 Corona, California, Department of Water and Power,
COP, 5% due 9/01/2035 (g) 4,712
- --------------------------------------------------------------------------------------
1,250 Cucamonga, California, County Water District, COP,
Refunding, 5.50% due 9/01/2024 (d) 1,366
- --------------------------------------------------------------------------------------
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
ROLS Reset Option Long Securities
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 9
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
======================================================================================
California (continued)
- --------------------------------------------------------------------------------------
$ 1,000 Elk Grove, California, East Franklin Community
No. 1 Special Tax, Series A, 6% due 8/01/2007 (h) $ 1,070
- --------------------------------------------------------------------------------------
5,000 Elk Grove, California, Finance Authority, Special Tax
Revenue Refunding Bonds, 5% due 9/01/2036 (a) 5,223
- --------------------------------------------------------------------------------------
3,000 Etiwanda School District, California, Community
Facilities District No. 8, Special Tax, 6.25%
due 9/01/2032 3,167
- --------------------------------------------------------------------------------------
Eureka, California, Union School District, GO
(Election of 2002) (g):
2,345 5.06%* due 8/01/2026 937
2,545 5.18%* due 8/01/2029 877
2,760 5.26%* due 8/01/2032 826
2,990 5.27%* due 8/01/2035 764
- --------------------------------------------------------------------------------------
3,620 Fremont, California, GO (Election of 2002), Series B,
5% due 8/01/2029 (d) 3,810
- --------------------------------------------------------------------------------------
2,000 Glendale, California, Unified School District, GO,
Series F, 5% due 9/01/2028 (g) 2,098
- --------------------------------------------------------------------------------------
2,250 Grossmont, California, Unified High School District,
COP, 5.75% due 9/01/2008 (e)(h) 2,421
- --------------------------------------------------------------------------------------
2,750 Hawthorne, California, School District, GO, Series A,
5.50% due 11/01/2008 (d)(h) 2,951
- --------------------------------------------------------------------------------------
5,080 Irvine, California, Unified School District, Special Tax
Refunding Bonds (Community Facilities District No. 86-1),
5.50% due 11/01/2017 (a) 5,351
- --------------------------------------------------------------------------------------
3,000 La Quinta, California, Financing Authority, Local Agency
Tax Allocation and Revenue Refunding Bonds, ROLS,
Series II-R-412X, 6.951% due 9/01/2034 (a)(i) 3,347
- --------------------------------------------------------------------------------------
3,250 Long Beach, California, Community College District,
GO (Election of 2002), Series B, 5% due 5/01/2030 (d) 3,426
- --------------------------------------------------------------------------------------
4,000 Los Angeles, California, COP (Sonnenblick Del Rio West
Los Angeles), 6.20% due 11/01/2031 (a) 4,467
- --------------------------------------------------------------------------------------
Los Angeles, California, Harbor Department
Revenue Bonds, AMT:
7,000 RITR, Series RI-7, 8.915% due 11/01/2026 (g)(i) 7,391
1,000 Series B, 5.375% due 11/01/2023 1,020
- --------------------------------------------------------------------------------------
4,560 Los Angeles, California, Harbor Department Revenue
Refunding Bonds, 7.60% due 10/01/2018 (c)(g) 5,575
- --------------------------------------------------------------------------------------
4,000 Los Angeles, California, Wastewater System Revenue
Refunding Bonds, Series A, 5% due 6/01/2032 (g) 4,220
- --------------------------------------------------------------------------------------
Los Angeles, California, Water and Power Revenue
Refunding Bonds (Power System):
5,400 Series A-A-1, 5.25% due 7/01/2020 (e) 5,791
4,000 Series A-A-2, 5.375% due 7/01/2021 (g) 4,318
- --------------------------------------------------------------------------------------
4,000 Los Angeles County, California, Metropolitan
Transportation Authority, Sales Tax Revenue Refunding
Bonds, Proposition A, First Tier Senior Series A, 5%
due 7/01/2035 (a) 4,220
- --------------------------------------------------------------------------------------
Los Angeles County, California, Sanitation Districts
Financing Authority, Revenue Refunding Bonds (Capital
Projects--District No. 14), Sub-Series B (d):
5,000 5% due 10/01/2029 5,297
2,500 5% due 10/01/2030 2,646
1,195 5% due 10/01/2034 1,259
- --------------------------------------------------------------------------------------
4,275 Los Gatos, California, Unified School District, GO
(Election of 2001), Series C, 5% due 8/01/2030 (d) 4,518
- --------------------------------------------------------------------------------------
2,000 Los Rios, California, Community College District, GO
(Election of 2002), Series B, 5% due 8/01/2027 (g) 2,110
- --------------------------------------------------------------------------------------
2,220 Madera, California, Unified School District, GO (Election
of 2002), 5% due 8/01/2028 (e) 2,315
- --------------------------------------------------------------------------------------
2,780 Morgan Hill, California, Unified School District, GO,
5.25% due 8/01/2019 (d) 3,013
- --------------------------------------------------------------------------------------
700 Murrieta, California, Community Facilities District,
Special Tax Bonds (No. 04-1 Bremerton), 5.625%
due 9/01/2034 730
- --------------------------------------------------------------------------------------
4,000 Oakland, California, Alameda County Unified School
District, GO (Election of 2000), 5% due 8/01/2027 (g) 4,237
- --------------------------------------------------------------------------------------
3,000 Orange County, California, Community Facilities District,
Special Tax Bonds (No. 04-1 Ladera Ranch), Series A,
5.15% due 8/15/2029 3,023
- --------------------------------------------------------------------------------------
2,000 Orange County, California, Sanitation District, COP,
5.25% due 2/01/2028 (d) 2,133
- --------------------------------------------------------------------------------------
1,025 Palm Desert, California, Financing Authority, Tax
Allocation Revenue Refunding Bonds (Project Area
Number 1), 5.45% due 4/01/2018 (g) 1,067
- --------------------------------------------------------------------------------------
1,500 Palm Springs, California, Financing Authority, Lease
Revenue Refunding Bonds (Convention Center Project),
Series A, 5.50% due 11/01/2029 (g) 1,673
- --------------------------------------------------------------------------------------
5,485 Peralta, California, Community College District, GO
(Election of 2000), Series C, 5% due 8/01/2029 (g) 5,774
- --------------------------------------------------------------------------------------
1,000 Petaluma, California, Community Development
Commission Tax Allocation Bonds (Petaluma
Community Development Project), Series A, 5.75%
due 5/01/2008 (g)(h) 1,060
- --------------------------------------------------------------------------------------
1,000 Port of Oakland, California, Port Revenue Refunding
Bonds, Series I, 5.60% due 11/01/2019 (g) 1,056
- --------------------------------------------------------------------------------------
6,355 Port of Oakland, California, RIB, AMT, Series 1192,
7.30% due 11/01/2027 (d)(i) 7,261
- --------------------------------------------------------------------------------------
8,295 Port of Oakland, California, RITR, AMT, Class R, Series 5,
8.039% due 11/01/2012 (d)(i) 9,454
- --------------------------------------------------------------------------------------
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) 1,964
- --------------------------------------------------------------------------------------
10 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
======================================================================================
California (continued)
- --------------------------------------------------------------------------------------
Sacramento, California, City Financing Authority,
Capital Improvement Revenue Bonds (Redevelopment
Projects) (a):
$ 2,320 5.75% due 12/01/2009 (h) $ 2,563
1,545 5.75% due 12/01/2022 1,693
- --------------------------------------------------------------------------------------
8,000 Sacramento, California, Municipal Utility District,
Electric Revenue Refunding Bonds, Series L, 5.125%
due 7/01/2022 (g) 8,321
- --------------------------------------------------------------------------------------
10,000 Sacramento County, California, Airport System Revenue
Refunding Bonds, Sub-Series B, 5% due 7/01/2026 (d) 10,328
- --------------------------------------------------------------------------------------
1,820 Saddleback Valley, California, Unified School District,
GO, 5% due 8/01/2029 (e) 1,917
- --------------------------------------------------------------------------------------
3,500 Saddleback Valley, California, Unified School District,
Public Financing Authority, Special Tax Revenue
Refunding Bonds, Series A, 5.65% due 9/01/2017 (e) 3,577
- --------------------------------------------------------------------------------------
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) 2,044
- --------------------------------------------------------------------------------------
4,000 San Bernardino County, California, COP, Refunding
(Medical Center Financing Project), 5.50%
due 8/01/2019 (g) 4,036
- --------------------------------------------------------------------------------------
2,000 San Buenaventura, California, Wastewater Revenue
Refunding Bonds, COP, 5% due 3/01/2029 (g) 2,090
- --------------------------------------------------------------------------------------
10,000 San Diego, California, Certificates of Undivided Interest,
Water Utility Fund, Net System Revenue Bonds, 5%
due 8/01/2021 (d) 10,430
- --------------------------------------------------------------------------------------
San Diego, California, Public Facilities Financing
Authority, Sewer Revenue Bonds (d):
4,450 Series A, 5.25% due 5/15/2027 4,574
6,175 Series B, 5.25% due 5/15/2027 6,347
- --------------------------------------------------------------------------------------
4,235 San Diego, California, Unified School District, GO
(Election of 1998), Series F, 5% due 7/01/2029 (e) 4,456
- --------------------------------------------------------------------------------------
San Diego County, California, Water Authority, Water
Revenue Bonds, COP, Series A (e):
7,350 5% due 5/01/2030 7,748
4,000 5% due 5/01/2031 4,213
- --------------------------------------------------------------------------------------
6,270 San Francisco, California, Bay Area Rapid Transit District,
Sales Tax Revenue Refunding Bonds, Series A, 5%
due 7/01/2030 (g) 6,629
- --------------------------------------------------------------------------------------
1,250 San Francisco, California, City and County Airport
Commission, International Airport, Special Facilities
Lease Revenue Bonds (SFO Fuel Company LLC), AMT,
Series A, 6.10% due 1/01/2020 (e) 1,327
- --------------------------------------------------------------------------------------
4,000 San Francisco, California, State Building Authority,
Lease Revenue Bonds (San Francisco Civic Center
Complex), Series A, 5.25% due 12/01/2006 (a)(h) 4,138
- --------------------------------------------------------------------------------------
5,790 San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue Refunding Bonds, Series A,
5.375% due 1/15/2029 (g) 5,986
- --------------------------------------------------------------------------------------
1,420 San Jose-Evergreen, California, Community College
District, GO, Series B, 5.50% due 9/01/2021 (d) 1,532
- --------------------------------------------------------------------------------------
San Juan, California, Unified School District, GO:
3,740 5.625% due 8/01/2017 (d) 4,080
3,000 5.70% due 8/01/2019 (e) 3,266
4,345 5.625% due 8/01/2020 (d) 4,740
3,500 (Election of 2002), 5% due 8/01/2028 (g) 3,670
- --------------------------------------------------------------------------------------
1,000 San Mateo County, California, Community College
District, COP, 5% due 10/01/2029 (g) 1,048
- --------------------------------------------------------------------------------------
2,240 San Mateo County, California, Joint Powers Authority,
Lease Revenue Refunding Bonds (Capital Projects),
Series A, 5.125% due 7/15/2028 (e) 2,331
- --------------------------------------------------------------------------------------
1,650 Santa Margarita, California, Water District, Special Tax
Refunding Bonds (Community Facilities District No. 99),
Series 1, 6.20% due 9/01/2020 1,757
- --------------------------------------------------------------------------------------
4,000 Santa Monica, California, Redevelopment Agency, Tax
Allocation Bonds (Earthquake Recovery Redevelopment
Project), 6% due 7/01/2029 (a) 4,331
- --------------------------------------------------------------------------------------
Santa Rosa, California, High School District, GO:
1,000 5.70% due 5/01/2021 (e) 1,057
1,000 (Election of 2002), 5% due 8/01/2028 (g) 1,049
- --------------------------------------------------------------------------------------
6,700 Sonoma County, California, Junior College District, GO
(Election of 2002), Refunding, Series B, 5%
due 8/01/2028 (e) 7,103
- --------------------------------------------------------------------------------------
1,400 Stockton, California, Public Financing Authority, Water
Revenue Bonds (Water System Capital Improvement
Projects), Series A, 5% due 10/01/2031 (g) 1,480
- --------------------------------------------------------------------------------------
4,590 Sweetwater, California, Union High School District,
Public Financing Authority, Special Tax Revenue Bonds,
Series A, 5% due 9/01/2026 (e) 4,857
- --------------------------------------------------------------------------------------
Temecula Valley, California, Unified School District,
Community Facilities District, Special Tax
Bonds (No. 02-1):
1,255 5.125% due 9/01/2030 1,265
1,905 5.125% due 9/01/2035 1,916
- --------------------------------------------------------------------------------------
1,650 Turlock, California, Public Finance Authority, Sewer
Revenue Bonds, Series A, 5% due 9/15/2026 (d) 1,738
- --------------------------------------------------------------------------------------
5,500 University of California, Hospital Revenue Refunding
Bonds (UCLA Medical Center), Series B, 5.50%
due 5/15/2021 (a) 6,097
- --------------------------------------------------------------------------------------
2,500 Vernon, California, Redevelopment Agency, Tax
Allocation Bonds (Industrial Redevelopment Project),
5% due 9/01/2035 (g) 2,618
- --------------------------------------------------------------------------------------
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 11
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
======================================================================================
California (concluded)
- --------------------------------------------------------------------------------------
$ 4,215 Vista, California, Unified School District, GO, Series A,
5.25% due 8/01/2025 (e) $ 4,521
- --------------------------------------------------------------------------------------
======================================================================================
Puerto Rico--4.4%
- --------------------------------------------------------------------------------------
Puerto Rico Commonwealth Infrastructure Financing
Authority, Special Tax and Capital Appreciation Revenue
Bonds, Series A:
9,750 4.66%* due 7/01/2033 (d) 2,794
9,750 4.77%* due 7/01/2043 (a) 1,759
- --------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Public Improvement, GO (g):
6,790 5.75% due 7/01/2010 (h) 7,394
6,610 Refunding, 5.70% due 7/01/2020 7,154
- --------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$395,872)--97.7% 418,921
- --------------------------------------------------------------------------------------
Shares
Held Mutual Funds
======================================================================================
69 BlackRock California Insured Municipal 2008 Term
Trust, Inc. 1,058
- --------------------------------------------------------------------------------------
Total Mutual Funds (Cost--$1,155)--0.3% 1,058
- --------------------------------------------------------------------------------------
Short-Term Securities
======================================================================================
585 CMA California Municipal Money Fund, 2.56% (f) 585
- --------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$585)--0.1% 585
- --------------------------------------------------------------------------------------
Total Investments (Cost--$397,612**)--98.1% 420,564
Other Assets Less Liabilities--1.9% 8,156
--------
Net Assets--100.0% $428,720
========
* Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
** The cost and unrealized appreciation (depreciation) of investments as of
February 28, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................. $ 397,197
=========
Gross unrealized appreciation .................. $ 24,113
Gross unrealized depreciation .................. (746)
---------
Net unrealized appreciation .................... $ 23,367
=========
(a) AMBAC Insured.
(b) Connie Lee Insured.
(c) Escrowed to maturity.
(d) FGIC Insured.
(e) FSA Insured.
(f) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
CMA California Municipal Money Fund (6,838) $ 46
--------------------------------------------------------------------------
(g) MBIA Insured.
(h) Prerefunded.
(i) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(j) XL Capital Insured.
See Notes to Financial Statements.
12 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Statement of Assets and Liabilities
As of February 28, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$397,027,076) ................................ $ 419,979,155
Investments in affiliated securities, at value
(identified cost--$584,567) .................................... 584,567
Cash ............................................................ 15,663
Receivables:
Interest ..................................................... $ 6,109,429
Securities sold .............................................. 2,628,647
Beneficial interest sold ..................................... 198,271
Dividends .................................................... 4,410 8,940,757
-------------
Prepaid expenses and other assets ............................... 671,368
-------------
Total assets .................................................... 430,191,510
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Payables:
Beneficial interest redeemed ................................. 745,548
Dividends to shareholders .................................... 402,479
Investment adviser ........................................... 147,982
Distributor .................................................. 73,312
Other affiliates ............................................. 39,894 1,409,215
-------------
Accrued expenses ................................................ 62,023
-------------
Total liabilities ............................................... 1,471,238
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ...................................................... $ 428,720,272
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized .......................... $ 2,262,349
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized .......................... 718,925
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized .......................... 390,987
Class I Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized .......................... 324,499
Paid-in capital in excess of par ................................ 405,386,540
Undistributed investment income--net ............................ $ 936,463
Accumulated realized capital losses--net ........................ (4,251,570)
Unrealized appreciation--net .................................... 22,952,079
-------------
Total accumulated earnings--net ................................. 19,636,972
-------------
Net Assets ...................................................... $ 428,720,272
=============
===================================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $262,353,533 and
22,623,488 shares of beneficial interest outstanding ........... $ 11.60
=============
Class B--Based on net assets of $83,392,112 and 7,189,251
shares of beneficial interest outstanding ...................... $ 11.60
=============
Class C--Based on net assets of $45,344,949 and 3,909,868
shares of beneficial interest outstanding ...................... $ 11.60
=============
Class I--Based on net assets of $37,629,678 and 3,244,985
shares of beneficial interest outstanding ...................... $ 11.60
=============
See Notes to Financial Statements.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 13
Statement of Operations
For the Six Months Ended February 28, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Interest ........................................................ $ 11,169,821
Dividends (including $46,065 from affiliates) ................... 72,524
-------------
Total income .................................................... 11,242,345
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ........................................ $ 1,182,782
Account maintenance and distribution fees--Class B .............. 222,848
Account maintenance and distribution fees--Class C .............. 135,070
Account maintenance fees--Class A ............................... 129,850
Accounting services ............................................. 89,419
Transfer agent fees--Class A .................................... 42,559
Registration fees ............................................... 28,281
Professional fees ............................................... 27,810
Printing and shareholder reports ................................ 24,021
Transfer agent fees--Class B .................................... 17,522
Custodian fees .................................................. 16,731
Trustees' fees and expenses ..................................... 12,262
Pricing fees .................................................... 9,182
Transfer agent fees--Class C .................................... 8,729
Transfer agent fees--Class I .................................... 5,938
Other ........................................................... 17,881
-------------
Total expenses before reimbursement ............................. 1,970,885
Reimbursement of expenses ....................................... (8,754)
-------------
Total expenses after reimbursement .............................. 1,962,131
-------------
Investment income--net .......................................... 9,280,214
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ............................................. 2,371,902
Futures contracts--net ....................................... 60,736 2,432,638
-------------
Change in unrealized appreciation on investments--net ........... (6,450,186)
-------------
Total realized and unrealized loss--net ......................... (4,017,548)
-------------
Net Increase in Net Assets Resulting from Operations ............ $ 5,262,666
=============
See Notes to Financial Statements
14 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .......................................... $ 9,280,214 $ 19,668,627
Realized gain--net .............................................. 2,432,638 4,552,900
Change in unrealized appreciation--net .......................... (6,450,186) (5,182,090)
-----------------------------------
Net increase in net assets resulting from operations ............ 5,262,666 19,039,437
-----------------------------------
===================================================================================================================================
Dividends to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ...................................................... (5,744,232) (11,717,196)
Class B ...................................................... (1,790,184) (4,380,225)
Class C ...................................................... (881,945) (1,854,212)
Class I ...................................................... (819,761) (1,645,811)
-----------------------------------
Net decrease in net assets resulting from dividends to
shareholders ................................................... (9,236,122) (19,597,444)
-----------------------------------
===================================================================================================================================
Beneficial Interest Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from beneficial
interest transactions .......................................... (10,243,179) (16,252,019)
-----------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets .................................... (14,216,635) (16,810,026)
Beginning of period ............................................. 442,936,907 459,746,933
-----------------------------------
End of period* .................................................. $ 428,720,272 $ 442,936,907
===================================
* Undistributed investment income--net ....................... $ 936,463 $ 892,371
===================================
See Notes to Financial Statements.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 15
Financial Highlights
Class A
-------------------------------------------------------------
For the Six For the Year Ended
Months Ended August 31,
The following per share data and ratios have been derived February 28, -----------------------------------------------
from information provided in the financial statements. 2006 2005 2004 2003 2002
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ..... $ 11.70 $ 11.72 $ 11.54 $ 11.82 $ 11.77
-------------------------------------------------------------
Investment income--net*** ................ .25 .53 .55 .56 .57
Realized and unrealized gain (loss)--net . (.10) (.03) .17 (.28) .05
-------------------------------------------------------------
Total from investment operations ......... .15 .50 .72 .28 .62
-------------------------------------------------------------
Less dividends from investment income--net (.25) (.52) (.54) (.56) (.57)
-------------------------------------------------------------
Net asset value, end of period ........... $ 11.60 $ 11.70 $ 11.72 $ 11.54 $ 11.82
=============================================================
===================================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 1.34%+ 4.40% 6.37% 2.35% 5.46%
=============================================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ........... .78%* .78% .78% .78% .81%
=============================================================
Expenses ................................. .79%* .78% .78% .78% .84%
=============================================================
Investment income--net ................... 4.44%* 4.50% 4.66% 4.74% 4.93%
=============================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) . $262,354 $264,482 $258,411 $247,184 $236,181
=============================================================
Portfolio turnover ....................... 17.30% 30.78% 24.69% 29.70% 37.35%
=============================================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Financial Highlights (continued)
Class B
-------------------------------------------------------------
For the Six For the Year Ended
Months Ended August 31,
The following per share data and ratios have been derived February 28, -----------------------------------------------
from information provided in the financial statements. 2006 2005 2004 2003 2002
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ..... $ 11.70 $ 11.72 $ 11.54 $ 11.82 $ 11.77
-------------------------------------------------------------
Investment income--net*** ................ .23 .48 .50 .51 .52
Realized and unrealized gain (loss)--net . (.10) (.02) .18 (.28) .05
-------------------------------------------------------------
Total from investment operations ......... .13 .46 .68 .23 .57
-------------------------------------------------------------
Less dividends from investment income--net (.23) (.48) (.50) (.51) (.52)
-------------------------------------------------------------
Net asset value, end of period ........... $ 11.60 $ 11.70 $ 11.72 $ 11.54 $ 11.82
=============================================================
===================================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 1.14%+ 3.98% 5.94% 1.93% 5.04%
=============================================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ........... 1.19%* 1.19% 1.18% 1.19% 1.22%
=============================================================
Expenses ................................. 1.19%* 1.19% 1.18% 1.19% 1.25%
=============================================================
Investment income--net ................... 4.04%* 4.10% 4.25% 4.34% 4.52%
=============================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) . $ 83,392 $ 96,650 $118,304 $151,276 $194,733
=============================================================
Portfolio turnover ....................... 17.30% 30.78% 24.69% 29.70% 37.35%
=============================================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 17
Financial Highlights (continued)
Class C
-------------------------------------------------------------
For the Six For the Year Ended
Months Ended August 31,
The following per share data and ratios have been derived February 28, -----------------------------------------------
from information provided in the financial statements. 2006 2005 2004 2003 2002
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ..... $ 11.70 $ 11.72 $ 11.54 $ 11.82 $ 11.77
-------------------------------------------------------------
Investment income--net*** ................ .23 .47 .49 .50 .51
Realized and unrealized gain (loss)--net . (.11) (.02) .17 (.28) .05
-------------------------------------------------------------
Total from investment operations ......... .12 .45 .66 .22 .56
-------------------------------------------------------------
Less dividends from investment income--net (.22) (.47) (.48) (.50) (.51)
-------------------------------------------------------------
Net asset value, end of period ........... $ 11.60 $ 11.70 $ 11.72 $ 11.54 $ 11.82
=============================================================
===================================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 1.09%+ 3.88% 5.84% 1.83% 4.94%
=============================================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ........... 1.29%* 1.29% 1.28% 1.29% 1.32%
=============================================================
Expenses ................................. 1.29%* 1.29% 1.28% 1.29% 1.35%
=============================================================
Investment income--net ................... 3.94%* 4.00% 4.15% 4.24% 4.42%
=============================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) . $ 45,345 $ 45,700 $ 46,900 $ 50,197 $ 36,983
=============================================================
Portfolio turnover ....................... 17.30% 30.78% 24.69% 29.70% 37.35%
=============================================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
18 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Financial Highlights (concluded)
Class I
-------------------------------------------------------------
For the Six For the Year Ended
Months Ended August 31,
The following per share data and ratios have been derived February 28, -----------------------------------------------
from information provided in the financial statements. 2006 2005 2004 2003 2002
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ..... $ 11.70 $ 11.72 $ 11.54 $ 11.81 $ 11.77
-------------------------------------------------------------
Investment income--net*** ................ .26 .54 .56 .57 .58
Realized and unrealized gain (loss)--net . (.10) (.02) .17 (.27) .04
-------------------------------------------------------------
Total from investment operations ......... .16 .52 .73 .30 .62
-------------------------------------------------------------
Less dividends from investment income--net (.26) (.54) (.55) (.57) (.58)
-------------------------------------------------------------
Net asset value, end of period ........... $ 11.60 $ 11.70 $ 11.72 $ 11.54 $ 11.81
=============================================================
===================================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 1.39%+ 4.50% 6.48% 2.54% 5.48%
=============================================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ........... .68%* .68% .68% .68% .71%
=============================================================
Expenses ................................. .69%* .68% .68% .68% .74%
=============================================================
Investment income--net ................... 4.54%* 4.60% 4.76% 4.84% 5.03%
=============================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) . $ 37,630 $ 36,105 $ 36,132 $ 39,841 $ 42,873
=============================================================
Portfolio turnover ....................... 17.30% 30.78% 24.69% 29.70% 37.35%
=============================================================
* Annualized.
** Total investment returns exclude the effects of sales charges. Effective
December 28, 2005, Class I Shares are no longer subject to any front-end
sales charge.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 19
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 U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund offers multiple
classes of shares. Effective December 28, 2005, Class I Shares are no longer
subject to any front-end sales charge. Class A Shares are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. Class I Shares are sold only to certain eligible
investors. 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 (except that Class B shareholders may vote on certain changes to
the Class A distribution plan). 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 are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Trustees. Such valuations and procedures are reviewed
periodically by the Board of Trustees of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued based upon quoted fair valuations received daily by the Fund's pricing
service. Short-term investments with a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value, under which method
the investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
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 Fund.
(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 movements 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.
20 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(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.
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.
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 Plan 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. The Investment Adviser has agreed to reimburse its
management fee by the amount of management fees the Fund pays to FAM indirectly
through its investment in the CMA California Municipal Money Fund. For the six
months ended February 28, 2006, FAM reimbursed the Fund in the amount of $8,754.
Pursuant to the Distribution Plan 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"), an affiliate of FAM, 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 six months ended February 28, 2006, 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 ............................ $ 2,761 $22,089
Class I ............................ $ 3,534 $33,177
- --------------------------------------------------------------------------------
For the six months ended February 28, 2006, MLPF&S received contingent deferred
sales charges of $21,313 and $1,936 relating to transactions in Class B and
Class C Shares, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
For the six months ended February 28, 2006, the Fund reimbursed FAM $4,811 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.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 21
Notes to Financial Statements (continued)
business, including FAM, with the investment management business of BlackRock,
Inc. The transaction is expected to close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended February 28, 2006 were $73,608,704 and $89,305,587, respectively.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$10,243,179 and $16,252,019 for the six months ended February 28, 2006 and the
year ended August 31, 2005, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended February 28, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 753,152 $ 8,699,439
Automatic conversion of shares ........... 487,199 5,633,432
Shares issued to shareholders in
reinvestment of dividends .............. 230,866 2,670,686
-------------------------------
Total issued ............................. 1,471,217 17,003,557
Shares redeemed .......................... (1,451,556) (16,785,766)
-------------------------------
Net increase ............................. 19,661 $ 217,791
===============================
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 1,668,005 $ 19,517,215
Automatic conversion of shares ........... 687,586 8,056,701
Shares issued to shareholders in
reinvestment of dividends .............. 460,636 5,402,855
-------------------------------
Total issued ............................. 2,816,227 32,976,771
Shares redeemed .......................... (2,267,688) (26,572,006)
-------------------------------
Net increase ............................. 548,539 $ 6,404,765
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended February 28, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 62,598 $ 725,401
Shares issued to shareholders in
reinvestment of dividends .............. 60,178 696,544
-------------------------------
Total issued ............................. 122,776 1,421,945
-------------------------------
Shares redeemed .......................... (704,608) (8,140,627)
Automatic conversion of shares ........... (486,929) (5,633,432)
-------------------------------
Total redemptions ........................ (1,191,537) (13,774,059)
-------------------------------
Net decrease ............................. (1,068,761) $(12,352,114)
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 187,982 $ 2,203,871
Shares issued to shareholders in
reinvestment of dividends .............. 148,916 1,747,316
-------------------------------
Total issued ............................. 336,898 3,951,187
-------------------------------
Shares redeemed .......................... (1,486,201) (17,431,258)
Automatic conversion of shares ........... (687,322) (8,056,701)
-------------------------------
Total redemptions ........................ (2,173,523) (25,487,959)
-------------------------------
Net decrease ............................. (1,836,625) $(21,536,772)
===============================
- -------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended February 28, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 382,471 $ 4,424,163
Shares issued to shareholders in
reinvestment of dividends .............. 39,308 454,828
-------------------------------
Total issued ............................. 421,779 4,878,991
Shares redeemed .......................... (417,310) (4,827,372)
-------------------------------
Net increase ............................. 4,469 $ 51,619
===============================
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 663,641 $ 7,785,750
Shares issued to shareholders in
reinvestment of dividends .............. 84,383 989,892
-------------------------------
Total issued ............................. 748,024 8,775,642
Shares redeemed .......................... (845,227) (9,908,126)
-------------------------------
Net decrease ............................. (97,203) $ (1,132,484)
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Six Months Dollar
Ended February 28, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 396,716 $ 4,584,803
Shares issued to shareholders in
reinvestment of dividends .............. 35,549 411,233
-------------------------------
Total issued ............................. 432,265 4,996,036
Shares redeemed .......................... (273,011) (3,156,511)
-------------------------------
Net increase ............................. 159,254 $ 1,839,525
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 444,568 $ 5,205,686
Shares issued to shareholders in
reinvestment of dividends .............. 72,265 847,615
-------------------------------
Total issued ............................. 516,833 6,053,301
Shares redeemed .......................... (515,164) (6,040,829)
-------------------------------
Net increase ............................. 1,669 $ 12,472
===============================
22 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
5. Short-Term Borrowings:
The Trust, on behalf of the Fund, along with certain other funds managed by FAM
and its affiliates, is a party to a $500,000,000 credit agreement with a group
of 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 .07% 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 defined in the credit agreement. The Fund did not borrow under the
credit agreement during the six months ended February 28, 2006. On November 23,
2005, the credit agreement was renewed for one year under substantially the same
terms.
6. Capital Loss Carryforward:
On August 31, 2005, the Fund had a net capital loss carryforward of $6,510,086,
all of which expires in 2009. This amount will be available to offset like
amounts of any future taxable gains.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 23
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Trustees
All but one member of the Board of Trustees is an independent trustee whose only
affiliation with Fund Asset Management, L.P. (the "Manager") or other Merrill
Lynch affiliates is as a trustee of the Fund and certain other funds advised by
the Manager or its affiliates. The Co-chairmen of the Board are also independent
trustees. New trustee nominees are chosen as nominees by a Nominating Committee
comprised of independent trustees. All independent trustees also are members of
the Board's Audit Committee and the independent trustees meet in executive
session at each in-person Board meeting. The Board and the Audit Committee meet
in person for at least two days each quarter and conduct other in-person and
telephone meetings throughout the year, some of which are formal board meetings,
and some of which are informational meetings. The independent counsel to the
independent trustees attends all in-person Board and Audit Committee meetings
and other meetings at the independent trustees' request.
Management Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's Management Agreement. The
Board assesses the nature, scope and quality of the services provided to the
Fund by the personnel of the Manager and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory requirements.
The Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Manager and its affiliates. Among the matters considered are: (a) fees (in
addition to management fees) paid to the Manager and its affiliates by the Fund,
such as transfer agency fees and fees for marketing and distribution; (b) Fund
operating expenses paid to third parties; (c) the resources devoted to and
compliance reports relating to the Fund's investment objective, policies and
restrictions, and its compliance with its Code of Ethics and the Manager's
compliance policies and procedures; and (d) the nature, cost and character of
non-investment management services provided by the Manager and its affiliates.
The Board believes that the Manager is one of the most experienced global asset
management firms and considers the overall services provided by the Manager to
be of high quality. The Board also believes that the Manager is financially
sound and well managed and notes that the Manager is affiliated with one of
America's largest financial firms. The Board works closely with the Manager in
overseeing the Manager's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Manager taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Trustees
In the period prior to the Board meeting to consider renewal of the Management
Agreement, the Board requested and received materials specifically relating to
the Fund's Management Agreement. These materials include (a) information
compiled by Lipper Inc. ("Lipper") on the fees and expenses and the investment
performance of the Fund as compared to a comparable group of funds as classified
by Lipper; (b) sales and redemption data for the Fund; (c) a discussion by the
Fund's portfolio management team of investment strategies used by the Fund
during its most recent fiscal year; (d) information on the profitability to the
Manager and its affiliates of the Management Agreement and other relationships
with the Fund; and (e) information provided by the Manager concerning investment
advisory fees charged to other clients under similar investment mandates. The
Board also considers other matters it deems important to the approval process
such as payments made to the Manager or its affiliates relating to the
distribution of Fund shares, services related to the valuation and pricing of
Fund portfolio holdings, allocation of Fund brokerage fees, the Fund's portfolio
turnover statistics, and direct and indirect benefits to the Manager and its
affiliates from their relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Management Agreement in
February, 2006, the independent trustees' and Board's review included the
following:
Services Provided by the Manager -- The Board reviewed the nature, extent and
quality of services provided by the Manager, focusing on the investment advisory
services and the resulting performance of the Fund. The Board uses data provided
by Lipper and by management in its review of advisory services. The data
compared Fund performance -- both including and excluding the effects of the
Fund's fees and expenses -- to the performance of a comparable group of funds,
and the performance of a relevant index or combination of indexes. In addition
to data regarding total return, the Board also considers yield a significant
factor in its analysis.
24 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
While the Board reviews performance data at least quarterly, consistent with the
Manager's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years. The Board
concluded that the comparative data indicated that performance was satisfactory.
Considering all of these factors, the Board concluded that the nature and
quality of these services supported the continuation of the Management Agreement
with the Fund.
The Manager's Personnel and Investment Process -- The Board reviewed the Fund's
investment objectives and strategies. The Board discussed with senior management
of the Manager responsible for investment operations and the senior management
of the Manager's municipal investing group the strategies being used to achieve
the stated objectives. Among other things, the Board considered the size,
education and experience of the Manager's investment staff, its use of
technology, and the Manager's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board also
reviewed the Manager's compensation policies and practices with respect to the
Fund's portfolio managers. The Board also considered the experience of the
Fund's portfolio management team and noted that Mr. O'Connor has more than ten
years' experience in analyzing and investing in tax-exempt fixed income
securities, including California Municipal Bonds. Moreover, the Manager and its
investment staff have extensive experience in analyzing and managing the types
of investments used by the Fund. The Board concluded that the Fund benefits from
that expertise.
Management Fees and Other Expenses -- The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds considered comparable by Lipper. The Board also compared each
Fund's total expenses to those of other comparable funds. The Board noted that
the Manager advised the Board that it had no investment mandates with other
clients comparable to the Fund. The Board determined that the Fund's contractual
and actual management fee rates, as well as the total expenses, were competitive
with those of comparable funds. The Board concluded that the management fee and
fee rate and overall expense ratio are reasonable compared to those of other
comparable funds.
Profitability -- The Board considered the cost of the services provided to each
Fund by the Manager, and the Manager's and its affiliates' profits in relating
to the management and distribution of the Fund and the MLIM/FAM-advised funds.
As part of its analysis, the Board reviewed the Manager's methodology in
allocating its costs to the management of each Fund and concluded that there was
a reasonable basis for the allocation. The Board concluded the Manager's profits
are acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of each Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board noted that the Fund's
management fee rate includes a breakpoint schedule that reduces the Fund's
management fee rate as the Fund's assets increase. The Board determined that the
management fee structure was reasonable and that no changes were currently
necessary.
Conclusion
After the independent trustees deliberated in executive session, the entire
Board, including all of the independent trustees, approved the renewal of each
existing Management Agreement, concluding that the advisory fee was reasonable
in relation to the services provided and that a contract renewal was in the best
interests of the shareholders.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 25
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
James H. Bodurtha, Trustee
Kenneth A. Froot, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Donald C. Burke, Vice President and Treasurer
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Walter C. O'Connor, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
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
- --------------------------------------------------------------------------------
Effective January 1, 2006, Stephen B. Swensrud retired as Trustee of Merrill
Lynch California Insured Municipal Bond Fund of Merrill Lynch California
Municipal Series Trust. The Fund's Board of Trustees wishes Mr. Swensrud well in
his retirement.
- --------------------------------------------------------------------------------
26 MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers 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 Web
site at 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.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND FEBRUARY 28, 2006 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.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 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site 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 -- 2/06
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(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.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - 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 of Merrill Lynch California
Municipal Series Trust
By: /s/ Robert C. Doll, Jr.
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Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch California Insured Municipal Bond Fund of Merrill Lynch
California Municipal Series Trust
Date: April 20, 2006
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/ Robert C. Doll, Jr.
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Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch California Insured Municipal Bond Fund of Merrill Lynch
California Municipal Series Trust
Date: April 20, 2006
By: /s/ Donald C. Burke
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Donald C. Burke,
Chief Financial Officer of
Merrill Lynch California Insured Municipal Bond Fund of Merrill Lynch
California Municipal Series Trust
Date: April 20, 2006