EX-99.A.5.III 6 0006.txt SEMI-ANNUAL REPORT Exhibit (a)(5)(iii) Merrill Lynch High Income Municipal Bond Fund, Inc. (Unaudited) February 29, 2000
SCHEDULE OF INVESTMENTS (in Thousands) S&P Moody's Face State Ratings Ratings Amount Issue Value Alabama--1.6% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of America Project), 8% due 4/01/2009 $ 1,040 CCC Ca 5,285 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds (Mobile Energy Services Co. Project), 6.95% due 1/01/2020 1,720 Arizona--6.2% B+ Ba3 3,000 Coconino County, Arizona, Pollution Control Corporation Revenue Refunding Bonds (Tucson Electric Power--Navajo), AMT, Series A, 7.125% due 10/01/2032 2,955 NR* B1 4,600 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds (America West Airlines Inc.), AMT, 6.30% due 4/01/2023 4,065 NR* NR* 1,235 Pima County, Arizona, IDA, Industrial Revenue Bonds (La Hacienda Project), 9.50% due 12/01/2016 1,339 B+ Ba3 1,500 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds (Tucson Electric Power Company Project), Series C, 6% due 9/01/2029 1,275 Sedona, Arizona, Wastewater Municipal Property Corporation, Excise Tax Revenue Refunding Bonds (d): AAA NR* 1,510 5.20%** due 7/01/2021 425 AAA NR* 1,310 5.24%** due 7/01/2023 325 California-- AAA Aaa 10,000 Foothill/Eastern Corridor Agency, California, Toll Road Revenue 4.7% Bonds, Series A, 5.775%** due 1/01/2028 (a)(b) 1,845 NR* NR* 1,500 Long Beach, California, M/F Housing Redevelopment Agency Revenue Bonds (Pacific Court Apartments), AMT, Issue B, 6.80% due 9/01/2013 (e) 930 AAA NR* 5,865 Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds, RIB, Series 144, 7.56% due 6/15/2029 (b)(h) 5,149
PORTFOLIO ABBREVIATIONS To simplify the listings of Merrill Lynch High Income Municipal Bond Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list below and at right. AMT Alternative Minimum Tax (subject to) EDA Economic Development Authority GO General Obligation Bonds HFA Housing Finance Agency IDA Industrial Development Authority IDB Industrial Development Board IDR Industrial Development Revenue Bonds INFLOS Inverse Floating Rate Municipal Bonds M/F Multi-Family PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds S/F Single-Family VRDN Variable Rate Demand Notes Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Issue Value Colorado--5.7% NR* NR* $ 1,700 Colorado Post-Secondary Educational Facilities Authority Revenue Bonds (Colorado Ocean Journey Inc. Project), 8.30% due 12/01/2017 $ 1,880 BBB+ Baa1 2,000 Denver, Colorado, City and County Airport Revenue Bonds, AMT, Series D, 7.75% due 11/15/2013 2,291 NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment and Allocation Bonds, AMT, 7.75% due 9/01/2017 3,170 San Miguel County, Colorado, GO, Refunding (Mountain Village Metropolitan District): NR* NR* 1,350 8.10% due 12/01/2002 (f) 1,472 NR* NR* 650 8.10% due 12/01/2011 696 Connecticut-- NR* NR* 1,500 Connecticut State Health and Educational Facilities Authority 1.9% Revenue Bonds (Edgehill Issue), Series A, 6.875% due 7/01/2027 1,387 NR* B1 1,805 New Haven, Connecticut, Facility Revenue Bonds (Hill Health Corporation Project), 9.25% due 5/01/2017 1,889 Florida--2.7% NR* NR* 970 Florida, Arbor Greene Community Development District, Special Assessment Revenue Bonds, 7.60% due 5/01/2018 1,010 NR* NR* 1,000 Florida, Grand Haven Community Development District, Special Assessment Bonds, Series B, 6.90% due 5/01/2019 979 NR* NR* 3,000 Orlando, Florida, Special Assessment Bonds (Conroy Road Interchange Project), Series A, 5.80% due 5/01/2026 2,567 Georgia--1.2% NR* NR* 1,895 Atlanta, Georgia, Urban Residential Finance Authority, M/F Mortgage Revenue Bonds (Northside Plaza Apartments Project), AMT, 9.75% due 11/01/2020 1,966 Illinois--6.6% BBB- Baa1 4,000 Chicago, Illinois, O'Hare International Airport, Special Facility Revenue Refunding Bonds (American Airlines Inc. Project), 8.20% due 12/01/2024 4,360 NR* NR* 3,195 Illinois Development Finance Authority, Primary Health Care Centers Facilities, Acquisition Program Revenue Bonds, 7.75% due 12/01/2016 3,442 NR* NR* 2,000 Illinois Educational Facilities Authority, Revenue Refunding Bonds (Chicago Osteopathic Health System), 7.25% due 11/15/2019 (f) 2,286 BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding Bonds (Sales Tax--Landings Redevelopment), 7% due 12/01/2008 1,050 Indiana--2.1% A+ NR* 1,500 Indiana Bond Bank Revenue Bonds, Special Hospital Program (Hendricks Community Hospital), Series A, 7.125% due 4/01/2013 1,571 NR* NR* 2,000 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club Project), Series B, 7.50% due 10/01/2029 1,926 Iowa--1.1% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 1,791 Kentucky--3.5% NR* NR* 1,850 Kenton County, Kentucky, Airport Board, Special Facilities Revenue Bonds (Mesaba Aviation Inc. Project), AMT, Series A, 6.70% due 7/01/2029 1,741 AAA Aaa 3,700 Louisville, Kentucky, Hospital Revenue Refunding Bonds, INFLOS, 9.572% due 10/01/2014 (d)(h) 4,084
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Issue Value Louisiana--1.8% CC NR* $ 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project), 7.50% due 7/01/2013 $ 3,045 Maryland--3.0% NR* NR* 5,000 Maryland State Energy Financing Administration, Limited Obligation Revenue Bonds (Cogeneration-AES Warrior Run), AMT, 7.40% due 9/01/2019 5,109 Massachusetts NR* NR* 1,145 Boston, Massachusetts, Industrial Development Financing --6.6% Authority, Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way Project), AMT, 10.50% due 1/01/2011 1,218 NR* NR* 1,475 Massachusetts State Health and Educational Facilities Authority Revenue Bonds (New England Memorial Hospital Project), Series C, 7% due 4/01/2014 (e) 371 NR* Ca 2,745 Massachusetts State Health and Educational Facilities Authority, Revenue Refunding Bonds (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 (e) 690 AAA Ba1 1,600 Massachusetts State Industrial Finance Agency Revenue Bonds (Vinfen Corporation), 7.10% due 11/15/2003 (f) 1,747 NR* Aaa 1,675 Massachusetts State Industrial Finance Agency, Revenue Refunding Bonds (Bay Cove Human Services Inc.), 8.375% due 4/01/2004 (f) 1,874 NR* NR* 5,000 Massachusetts State Port Authority, Special Project Revenue Bonds (Harborside Hyatt Project), AMT, 10% due 3/01/2026 5,253 Mississippi-- NR* NR* 2,275 Mississippi Development Bank, Special Obligation Revenue 1.3% Refunding Bonds (Diamond Lakes Utilities), Series A, 6.25% due 12/01/2017 2,144 Nevada--1.1% BBB+ Baa1 2,500 Henderson, Nevada, Health Care Facility Revenue Bonds (Catholic Healthcare West--Saint Rose Dominican Hospital), 5.375% due 7/01/2026 1,891 New Jersey-- Camden County, New Jersey, Improvement Authority, Lease 14.3% Revenue Bonds (Holt Hauling & Warehousing), AMT, Series A: BB- NR* 4,600 9.625% due 1/01/2011 5,089 BB- NR* 2,000 9.875% due 1/01/2021 2,236 CCC B2 4,000 Camden County, New Jersey, Pollution Control Financing Authority, Solid Waste Resource Recovery Revenue Bonds, Series D, 7.25% due 12/01/2010 3,777 CCC B2 6,000 Camden County, New Jersey, Pollution Control Financing Authority, Solid Waste Resource Recovery Revenue Refunding Bonds, AMT, Series A, 7.50% due 12/01/2010 5,637 NR* NR* 3,000 New Jersey EDA, Economic Development Revenue Bonds (Glimcher Properties LP Project), AMT, 6% due 11/01/2028 2,675 NR* NR* 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due 10/01/2014 1,515 BBB- NR* 1,500 New Jersey EDA, Revenue Bonds, First Mortgage (Fellowship Village Project), Series C, 5.50% due 1/01/2028 1,154 BBB- Baa3 2,000 New Jersey Health Care Facilities Financing Authority, Revenue Refunding Bonds (Trinitas Hospital Obligation Group), 7.375% due 7/01/2015 1,974
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Issue Value New Mexico-- B+ Ba3 $ 1,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric 0.6% Power Co.--San Juan Project), Series A, 6.95% due 10/01/2020 $ 978 New York--2.1% Utica, New York, GO, Public Improvement: CCC B2 635 8.50% due 8/15/2007 698 CCC B2 635 8.50% due 8/15/2008 699 CCC B2 500 8.50% due 8/15/2009 551 CCC B2 500 8.50% due 8/15/2010 551 CCC B2 500 8.50% due 8/15/2011 551 CCC B2 500 8.50% due 8/15/2012 550 Ohio--4.1% NR* Ba2 6,800 Cleveland, Ohio, Airport Special Revenue Refunding Bonds (Continental Airlines Inc. Project), AMT, 5.70% due 12/01/2019 5,796 AAA Aaa 1,050 Ohio HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A, 9.466% due 3/24/2031 (c)(h) 1,109 Oregon--1.5% NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds (Wauna Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,031 B NR* 1,455 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint Corporation Project), 8% due 12/01/2003 1,504 Pennsylvania-- NR* NR* 1,000 Lehigh County, Pennsylvania, General Purpose Authority, Revenue 10.4% Refunding Bonds (Kidspeace Obligation Group), 6% due 11/01/2023 834 BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority, Hospital Revenue Bonds (Bradford Hospital Project), 8.875% due 10/01/2020 5,223 5 Northhampton Pulp LLC (a)(e)(g) 672 NR* NR* 3,270 Pennsylvania Economic Development Financing Authority, Exempt Facilities Revenue Bonds (National Gypsum Company), AMT, Series A, 6.25% due 11/01/2027 2,964 NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Commercial Development, AMT, 7.75% due 12/01/2017 5,243 NR* NR* 3,125 Philadelphia, Pennsylvania, Authority for Industrial Development, Health Care Facility Revenue Refunding Bonds (Paul's Run), Series A, 5.875% due 5/15/2028 2,490 South BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue Bonds Carolina--1.4% (Westminster Presbyterian Center), 7.75% due 11/15/2030 1,972 NR* NR* 500 South Carolina Jobs, EDA, Health Facilities Revenue Bonds, First Mortgage (Lutheran Homes Project), 6.625% due 5/01/2028 463 Texas--1.6% A1+ NR* 100 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN, 3.85% due 12/01/2025 (i) 100 BB Ba1 3,000 Houston, Texas, Airport System Revenue Bonds (Special Facilities-- Continental Airlines), AMT, Series C, 6.125% due 7/15/2027 2,597 Utah--1.9% NR* NR* 3,200 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental), AMT, Series A, 7.55% due 7/01/2027 3,199 Vermont--0.9% NR* NR* 1,450 Vermont Educational and Health Buildings Financing Agency, Revenue Refunding Bonds (College of Saint Joseph Project), 8.50% due 11/01/2024 1,582
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Issue Value Virginia--8.6% NR* NR* $ 4,560 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds (Port Facility--Zeigler Coal), 6.90% due 5/02/2022 $ 3,756 NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Revenue Refunding Bonds, Exempt-Facility, AMT, Series A, 7.50% due 1/01/2014 2,051 Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds: NR* Ba1 5,500 1st Tier, Sub-Series C, 6.25%** due 8/15/2027 669 NR* Ba1 9,000 1st Tier, Sub-Series C, 6.25%** due 8/15/2035 593 BBB- Baa3 48,400 Senior Series B, 5.95%** due 8/15/2031 5,041 NR* NR* 2,500 Virginia, Community Development Authority, Special Assessment Tax (Dulles Town Center Project), 6.25% due 3/01/2026 2,316 Total Investments (Cost--$176,588)--98.5% 165,808 Other Assets Less Liabilities--1.5% 2,480 -------- Net Assets--100.0% $168,288 ========
(a) Escrowed to maturity. (b) FSA Insured. (c) GNMA Collateralized. (d) MBIA Insured. (e) Non-income producing security. (f) Prerefunded. (g) Represents an equity interest in the reorganization of Ponderosa Fibres PA. The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (h) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at February 29, 2000. (i) The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at February 29, 2000. * Not Rated. ** Represents a zero coupon; the interest rate shown is the effective yield at the time of purchase by the Fund. See Notes to Financial Statements. QUALITY PROFILE The quality ratings of securities in the Fund as of February 29, 2000 were as follows: Percent of S&P Rating/Moody's Rating Net Assets AAA/Aaa 9.8% A/A 0.9 BBB/Baa 14.8 BB/Ba 13.2 B/B 12.8 CCC/Caa 1.0 CC/Ca 2.2 NR (Not Rated) 43.7 Other++ 0.1 ++Temporary investments in short-term municipal securities. Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 FINANCIAL INFORMATION Statement of Assets and Liabilities as of February 29, 2000 Assets: Investments, at value (identified cost--$176,587,519) $165,807,609 Cash 53,696 Receivables: Interest $ 3,392,721 Securities sold 1,631,057 Capital shares sold 35,004 5,058,782 ------------ Prepaid registration fees and other assets 17,301 ------------ Total assets 170,937,388 ------------ Liabilities: Payables: Securities purchased 1,960,640 Dividends to shareholders 320,412 Investment adviser 104,590 Administration 27,524 2,413,166 ------------ Accrued expenses and other liabilities 235,772 ------------ Total liabilities 2,648,938 ------------ Net Assets: Net assets $168,288,450 ============ Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $ 1,751,196 Consist of: Paid-in capital in excess of par 183,696,409 Accumulated realized capital loss on investments--net (3,228,383) Accumulated distributions in excess of realized capital gains--net (3,150,862) Unrealized depreciation on investments--net (10,779,910) ------------ Net assets--Equivalent to $9.61 per share based on 17,511,962 shares of capital outstanding $168,288,450 ============ See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 FINANCIAL INFORMATION (continued)
Statement of Operations For the Six Months Ended February 29, 2000 Investment Income Interest and amortization of premium and discount earned $ 6,726,430 (Note 1d): Expenses: Investment advisory fees $ 899,584 Administrative fees 236,733 Transfer agent fees 55,981 Professional fees 48,696 Registration fees 38,288 Advertising 36,766 Printing and shareholder reports 34,742 Directors' fees and expenses 14,406 Custodian fees 10,537 Pricing services 8,026 Accounting services 5,827 Other 4,462 ------------ Total expenses 1,394,048 ------------ Investment income--net 5,332,382 ------------ Realized & Realized loss on investments--net (3,228,383) Unrealized Change in unrealized depreciation on investments--net (9,023,009) Loss on ------------ Investments--Net: Net Decrease in Net Assets Resulting from Operations $ (6,919,010) ============ See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets For the Six For the Months Ended Year Ended February 29, August 31, Increase (Decrease) in Net Assets: 2000 1999 Operations: Investment income--net $ 5,332,382 $ 11,419,261 Realized loss on investments--net (3,228,383) (569,093) Change in unrealized appreciation/depreciation on investments--net (9,023,009) (17,755,283) ------------ ------------ Net decrease in net assets resulting from operations (6,919,010) (6,905,115) ------------ ------------ Dividends & Investment income--net (5,332,382) (11,419,261) Distributions to Realized gain on investments--net -- (3,642,201) Shareholders: In excess of realized gain on investments--net -- (3,150,862) ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (5,332,382) (18,212,324) ------------ ------------ Capital Share Net decrease in net assets derived from capital shares Transactions: transactions (21,033,900) (7,021,727) ------------ ------------ Net Assets: Total decrease in net assets (33,285,292) (32,139,166) Beginning of period 201,573,742 233,712,908 ------------ ------------ End of period $168,288,450 $201,573,742 ============ ============ See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 FINANCIAL INFORMATION (concluded)
Financial Highlights The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended February 29, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of period $ 10.24 $ 11.46 $ 11.34 $ 10.94 $ 10.97 Operating -------- -------- -------- -------- -------- Performance: Investment income--net .28 .55 .61 .65 .66 Realized and unrealized gain (loss) on investments--net (.63) (.89) .32 .44 (.03) -------- -------- -------- -------- -------- Total from investment operations (.35) (.34) .93 1.09 .63 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.28) (.55) (.61) (.65) (.66) Realized gain on investments--net -- (.18) (.20) (.04) -- In excess of realized gain on investments--net -- (.15) -- -- -- -------- -------- -------- -------- -------- Total dividends and distributions (.28) (.88) (.81) (.69) (.66) -------- -------- -------- -------- -------- Net asset value, end of period $ 9.61 $ 10.24 $ 11.46 $ 11.34 $ 10.94 ======== ======== ======== ======== ======== Total Investment Based on net asset value per share (3.47%)++ (3.16%) 8.43% 10.20% 5.81% Return:** ======== ======== ======== ======== ======== Ratios to Average Expenses 1.47%* 1.46% 1.48% 1.44% 1.50% Net Assets: ======== ======== ======== ======== ======== Investment income--net 5.62%* 5.07% 5.37% 5.83% 5.90% ======== ======== ======== ======== ======== Supplemental Net assets, end of period (in thousands) $168,288 $201,574 $233,713 $211,620 $199,552 Data: ======== ======== ======== ======== ======== Portfolio turnover 8.08% 39.53% 36.45% 43.07% 28.54% ======== ======== ======== ======== ========
* Annualized. ** Total investment returns exclude the effect of the early withdrawal charge, if any. The Fund is a continuously offered closed- end fund, the shares of which are offered at net asset value. Therefore, no separate market exists. ++ Aggregate total investment return. See Notes to Financial Statements. Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a continuously offered, non-diversified, closed-end management investment company. The Fund's financial statements are prepared in accordance with generally accepted accounting principles, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Fund invests are traded primarily in the over-the-counter municipal bond and money markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained from one or more dealers that make markets in the securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their settlement prices as of the close of such exchanges. 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 over- the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term investments with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to write covered call options and purchase put and call options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. Merrill Lynch High Income Municipal Bond Fund, Inc. February 29, 2000 NOTES TO FINANCIAL STATEMENTS (concluded) (e) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. Distributions in excess of realized capital gains are due primarily to differing tax treatments for futures transactions and post-October losses. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly- owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. MLAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .95% of the Fund's average daily net assets. The Fund also has entered into an Administrative Services Agreement with MLAM whereby the Fund pays a monthly fee at an annual rate of .25% of the Fund's average daily net assets, in return for the performance of administrative services (other than investment advice and related portfolio activities) necessary for the operation of the Fund. For the six months ended February 29, 2000, Merrill Lynch Funds Distributor ("MLFD"), a division of Princeton Funds Distributor, Inc. ("PFD"), which is a wholly-owned subsidary of Merrill Lynch Group, Inc., earned early withdrawal charges of $94,390 relating to the tender of the Fund's shares. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, FDS, PFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended February 29, 2000 were $15,007,827 and $37,628,439, respectively. Net realized losses for the six months ended February 29, 2000 and net unrealized losses as of February 29, 2000 were as follows: Realized Unrealized Losses Losses Long-term investments $(3,228,383) $(10,779,910) ----------- ------------ Total $(3,228,383) $(10,779,910) =========== ============ As of February 29, 2000, net unrealized depreciation for Federal income tax purposes aggregated $10,779,910, of which $5,084,166 related to appreciated securities and $15,864,076 related to depreciated securities. The aggregate cost of investments at February 29, 2000 for Federal income tax purposes was $176,587,519. 4. Capital Shares Transactions: Transactions in capital shares were as follows: For the Six Months Ended Dollar February 29, 2000 Shares Amount Shares sold 274,318 $ 2,717,630 Shares issued to share- holders in reinvestment of dividends 218,116 2,146,110 ------------ ------------ Total issued 492,434 4,863,740 Shares tendered (2,662,986) (25,897,640) ------------ ------------ Net decrease (2,170,552) $(21,033,900) ============ ============ For the Year Ended Dollar August 31, 1999 Shares Amount Shares sold 1,231,384 $ 13,670,459 Shares issued to share- holders in reinvestment of dividends and distributions 732,001 7,958,787 ------------ ------------ Total issued 1,963,385 21,629,246 Shares tendered (2,680,943) (28,650,973) ------------ ------------ Net decrease (717,558) $ (7,021,727) ============ ============