-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HnVoFQOk3gv4UXTUjtBFJLhsgwRdJMVhnfHQ3CWtaeR2NkeOMu0hZrBWvhQfCC5L nSTlFBW0j6hYIaRgkQvibg== 0001047469-98-027881.txt : 19980723 0001047469-98-027881.hdr.sgml : 19980723 ACCESSION NUMBER: 0001047469-98-027881 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980721 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND INC CENTRAL INDEX KEY: 0000867189 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 226515010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: SC 13E4 SEC ACT: SEC FILE NUMBER: 005-41587 FILM NUMBER: 98669053 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND INC CENTRAL INDEX KEY: 0000867189 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 226515010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: SC 13E4 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 SC 13E4 1 13E4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998 SECURITIES ACT FILE NO. 333-39839 INVESTMENT COMPANY ACT FILE NO. 811-6156 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- SCHEDULE 13E-4 ISSUER TENDER OFFER STATEMENT (PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. (Name of Issuer) MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. (Name of Person(s) Filing Statement) SHARES OF COMMON STOCK, PAR VALUE $.10 PER SHARE (Title of Class of Securities) 589945 10 4 (CUSIP Number of Class of Securities) ARTHUR ZEIKEL MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (609) 282-2800 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) Filing Statement) COPIES TO: THOMAS R. SMITH, JR., ESQ. PATRICK D. SWEENEY, ESQ. BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P. ONE WORLD TRADE CENTER P.O. BOX 9011 NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011 JULY 21, 1998 (Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRANSACTION VALUATION: $45,440,000(a) AMOUNT OF FILING FEE: $9,088(b)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (a) Calculated as the aggregate estimated maximum purchase price to be paid for 4,000,000 shares in the offer, based upon the net asset value per share ($11.36) at July 16, 1998. (b) Calculated as 1/50th of 1% of the Transaction Valuation. / / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: ____________________________________________________ Form or Registration No.: __________________________________________________ Filing Party: ______________________________________________________________ Filing Date: _______________________________________________________________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND ISSUER. (a) The name of the issuer is Merrill Lynch High Income Municipal Bond Fund, Inc., a closed-end investment company organized as a Maryland corporation (the "Fund"). The principal executive offices of the Fund are located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. (b) The title of the securities being sought is shares of common stock, par value $.10 per share (the "Shares"). As of June 30, 1998 there were in excess of 20 million Shares issued and outstanding. The Fund is seeking tenders for 4,000,000 Shares (the "Offer"), at net asset value per Share calculated on the day the tender offer terminates, less any "Early Withdrawal Charge," upon the terms and subject to the conditions set forth in the Offer to Purchase dated July 21, 1998 (the "Offer to Purchase"). A copy of each of the Offer to Purchase and the related Letter of Transmittal is attached hereto as Exhibit (a)(1)(ii) and Exhibit (a)(2), respectively. Reference is hereby made to the Cover Page and Section 1 "Price; Number of Shares" of the Offer to Purchase, which are incorporated herein by reference. The Fund has been informed that no Directors, officers or affiliates of the Fund intend to tender Shares pursuant to the Offer. (c) The Shares are not currently traded on an established trading market. (d) Not Applicable. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) Reference is hereby made to Section 9 "Source and Amount of Funds" of the Offer to Purchase, which is incorporated herein by reference. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. Reference is hereby made to Section 7 "Purpose of the Offer," Section 8 "Certain Effects of the Offer" and Section 9 "Source and Amount of Funds" of the Offer to Purchase, which are incorporated herein by reference. The Fund currently is engaged in a continuous public offering of its Shares. The Fund otherwise has no plans or proposals that relate to or would result in (a) the acquisition by any person of additional securities of the Fund or the disposition of securities of the Fund; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Fund; (c) a sale or transfer of a material amount of assets of the Fund; (d) any change in the present Board of Directors or management of the Fund, including, but not limited to, any plans or proposals to change the number or the term of Directors, or to fill any existing vacancy on the Board or to change any material term of the employment contract of any executive officer; (e) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Fund; (f) any other material change in the Fund's corporate structure or business, including any plans or proposals to make any changes in its investment policy for which a vote would be required by Section 13 of the Investment Company Act of 1940, as amended; or (g) changes in the Fund's articles of incorporation, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Fund by any person. Paragraphs (h) through (j) of this Item 3 are not applicable. ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. There have not been any transactions involving the Shares of the Fund that were effected during the past 40 business days by the Fund, any executive officer or Director of the Fund, any person controlling the Fund, any executive officer or Director of any corporation ultimately in control of the Fund or by any associate or subsidiary of any of the foregoing including any executive officer or Director of any such subsidiary, except that within the past 40 business days pursuant to a continuous public offering of its i Shares, the Fund has sold approximately 431,822 Shares at a price equal to the net asset value ("NAV") of the Fund on the date of each such sale. ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES. The Fund does not know of any contract, arrangement, understanding or relationship relating directly or indirectly to the Offer (whether or not legally enforceable) between the Fund, any of the Fund's executive officers or Directors, any person controlling the Fund or any executive officer or Director of any corporation ultimately in control of the Fund and any person with respect to any securities of the Fund (including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss, or the giving or withholding of proxies, consents or authorizations). ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. No persons have been employed, retained or are to be compensated by the Fund to make solicitations or recommendations in connection with the Offer. ITEM 7. FINANCIAL INFORMATION. (a) Reference is hereby made to the financial statements attached hereto as Exhibits (g)(1), (g)(2) and (g)(3) which are incorporated herein by reference. (b) Not applicable. ITEM 8. ADDITIONAL INFORMATION. (a) None. (b) Reference is made to Section 11 "Certain Information About the Fund" of the Offer to Purchase, which is incorporated herein by reference. (c) Not applicable. (d) None. (e) The Offer to Purchase, attached hereto as Exhibit (a)(1)(ii), is incorporated herein by reference in its entirety. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) (i) --Advertisement to be printed in THE WALL STREET JOURNAL. (ii) --Offer to Purchase. (a)(2) --Form of Letter of Transmittal. (a)(3) --Letter to Stockholders. (b)-(f) --Not Applicable. (g)(1) --Audited Financial Statements of the Fund for the fiscal year ended August 31, 1996. (g)(2) --Audited Financial Statements of the Fund for the fiscal year ended August 31, 1997. (g)(3) --Unaudited Financial Statements of the Fund for the six months ended February 28, 1998.
ii SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. By /s/ TERRY K. GLENN ................................... Terry K. Glenn, EXECUTIVE VICE PRESIDENT Date: July 21, 1998 EXHIBIT INDEX
EXHIBIT - ----------- (a)(1)(i) Advertisement to be printed in THE WALL STREET JOURNAL. (a)(1)(ii) Offer to Purchase. (a)(2) Form of Letter of Transmittal. (a)(3) Letter to Stockholders. (g)(1) Audited Financial Statements of the Fund for the fiscal year ended August 31, 1996. (g)(2) Audited Financial Statements of the Fund for the fiscal year ended August 31, 1997. (g)(3) Unaudited Financial Statements of the Fund for the six months ended February 28, 1998.
EX-99.(A)(1)(I) 2 EXHIBIT-99.(A)(1)(I) EXHIBIT (a)(1)(i) THIS ANNOUNCEMENT IS NOT AN OFFER TO PURCHASE OR A SOLICITATION OF AN OFFER TO SELL SHARES. THE OFFER IS MADE ONLY BY THE OFFER TO PURCHASE DATED JULY 21, 1998, AND THE RELATED LETTER OF TRANSMITTAL. THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF SHARES IN ANY JURISDICTION IN WHICH MAKING OR ACCEPTING THE OFFER WOULD VIOLATE THAT JURISDICTION'S LAWS. --------------------------------------------------------- MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. NOTICE OF OFFER TO PURCHASE FOR CASH 4,000,000 OF ITS ISSUED AND OUTSTANDING SHARES AT NET ASSET VALUE PER SHARE THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE ARE 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, AUGUST 17, 1998, UNLESS EXTENDED. Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is offering to purchase 4,000,000 of its issued and outstanding shares of common stock par value $.10 per share (the "Shares") at a price equal to their net asset value ("NAV") less any applicable early withdrawal charge as of the close of the New York Stock Exchange on the Expiration Date, August 17, 1998, unless extended, upon the terms and conditions set forth in the Offer to Purchase dated July 21, 1998 (the "Offer"). The NAV on July 16, 1998, was $11.36 per share. The purpose of the Offer is to provide liquidity to stockholders since the Fund is unaware of any secondary market that exists for the Shares. The Offer is not conditioned upon the tender of any minimum number of Shares. If more than 4,000,000 Shares are duly tendered prior to the expiration of the Offer, assuming no changes in the factors originally considered by the Board of Directors when it determined to make the Offer, the Fund will either extend the Offer period, if necessary, and increase the number of Shares that the Fund is offering to purchase to an amount that it believes will be sufficient to accommodate the excess Shares tendered, as well as any Shares tendered during the extended Offer period, or purchase 4,000,000 Shares (or such larger number of Shares sought) on a pro rata basis. Shares tendered pursuant to the Offer may be withdrawn at any time prior to 12:00 midnight, New York City time, on Monday, August 17, 1998, unless the Offer is extended, and, if not yet accepted for payment by the Fund, Shares may also be withdrawn after September 15, 1998. The information required to be disclosed by paragraph (d)(1) of Rule 13e-4 under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Offer to Purchase and the related Letter of Transmittal contain important information that should be read carefully before any decision is made with respect to the Offer. Questions and requests for assistance, for current NAV quotations or for copies of the Offer to Purchase, Letter of Transmittal, and any other tender offer documents, may be directed to the Merrill Lynch Response Center at the address and telephone number below. Copies will be furnished promptly at no expense to you and also may be obtained by completing and returning the coupon below to the Merrill Lynch Response Center. Stockholders who do not own Shares directly should effect a tender through their broker, dealer, or nominee. For example, stockholders who purchased shares through Merrill Lynch, Pierce, Fenner & Smith Incorporated should effect tenders through their Financial Consultant. 1-800-MERRILL, EXT. 3652 1-800-637-7455 - ----------------------------------- MAIL TO: MERRILL LYNCH RESPONSE CENTER P.O. BOX 30200, NEW BRUNSWICK, NJ 08989-0200 / / PLEASE SEND ME MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. TENDER OFFER MATERIALS. NAME ADDRESS BUSINESS PHONE CITY HOME PHONE STATE ZIP MERRILL LYNCH CLIENTS, PLEASE GIVE THE NAME AND OFFICE ADDRESS OF YOUR MERRILL LYNCH FINANCIAL CONSULTANT: __________________________________________ 3652 July 21, 1998
[LOGO] EX-99.(A)(1)(II) 3 EXHIBIT-99(A)(1)(II) EXHIBIT (a)(1)(ii) MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 OFFER TO PURCHASE FOR CASH 4,000,000 OF ITS ISSUED AND OUTSTANDING SHARES AT NET ASSET VALUE PER SHARE THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1998, UNLESS EXTENDED. To the Holders of Shares of MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.: The Fund is offering to purchase up to 4,000,000 of its shares of common stock, par value $.10 per share (the "Shares"), for cash at a price equal to their net asset value ("NAV"), less any applicable Early Withdrawal Charge, as of the close of the New York Stock Exchange on August 17, 1998, the expiration date, unless extended, upon the terms and conditions set forth in this Offer to Purchase (the "Offer") and the related Letter of Transmittal. The Shares are not currently traded on an established secondary market. The NAV on July 16, 1998 was $11.36 per Share. You can obtain current NAV quotations from your Merrill Lynch Financial Consultant or the Merrill Lynch, Pierce, Fenner & Smith Incorporated Response Center (the "Merrill Lynch Response Center") (see Section 1). The Fund presently intends each quarter to consider making a tender offer for its Shares at a price equal to their then current NAV. If more than 4,000,000 Shares are duly tendered prior to the expiration of the Offer, assuming no changes in the factors originally considered by the Board of Directors when it determined to make the Offer, the Fund will either (i) extend the Offer period, if necessary, and increase the number of Shares that the Fund is offering to purchase to an amount that it believes will be sufficient to accommodate the excess Shares tendered as well as any Shares tendered during the extended Offer period or (ii) purchase 4,000,000 Shares (or such larger number of Shares sought) on a pro rata basis. THIS OFFER IS BEING MADE TO ALL STOCKHOLDERS OF THE FUND AND IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED. IMPORTANT If you desire to tender all or any portion of your Shares, you should either (1) request your broker, dealer, commercial bank, trust company or other nominee to effect the transaction for you or (2) if you own your Shares directly, complete and sign the Letter of Transmittal and mail or deliver it along with any Share certificate(s) and any other required documents to the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"). If your Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you must contact such broker, dealer, commercial bank, trust company or other nominee if you desire to tender your Shares. Shares held in your Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") brokerage account are registered in the name of Merrill Lynch and are not held by you directly. Merrill Lynch may charge its customers a $5.35 processing fee to confirm a repurchase of Shares from such customers pursuant to the Offer. NEITHER THE FUND NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES. EACH STOCKHOLDER MUST MAKE HIS OWN DECISION WHETHER TO TENDER SHARES, AND IF SO, HOW MANY SHARES TO TENDER. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE FUND AS TO WHETHER STOCKHOLDERS SHOULD TENDER SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. Questions and requests for assistance may be directed to your Merrill Lynch Financial Consultant or other nominee, or to the Transfer Agent at the address and telephone number set forth below. Requests for additional copies of this Offer to Purchase and the Letter of Transmittal should be directed to the Merrill Lynch Response Center. July 21, 1998 MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. Merrill Lynch Response Center Transfer Agent: Merrill Lynch Financial P.O. Box 30200 Data Services, Inc. New Brunswick, New Jersey 08989-0200 Attn: Merrill Lynch High Income Attn: Merrill Lynch High Income Municipal Bond Fund, Inc. Municipal Bond Fund, Inc. P.O. Box 45289 (800) 637-7455, ext. 3652 Jacksonville, Florida 32232-5289 (800) 637-3863 ------------------------ TABLE OF CONTENTS
SECTIONS PAGE - ------------- ----- 1. Price; Number of Shares.......................................................................... 3 2. Procedure for Tendering Shares................................................................... 3 3. Early Withdrawal Charge.......................................................................... 4 4. Withdrawal Rights................................................................................ 5 5. Payment for Shares............................................................................... 5 6. Certain Conditions of the Offer.................................................................. 5 7. Purpose of the Offer............................................................................. 6 8. Certain Effects of the Offer..................................................................... 6 9. Source and Amount of Funds....................................................................... 6 10. Summary of Selected Financial Information........................................................ 6 11. Certain Information About the Fund............................................................... 8 12. Additional Information........................................................................... 8 13. Certain Federal Income Tax Consequences.......................................................... 8 14. Extension of Tender Period; Termination; Amendments.............................................. 9 15. Miscellaneous.................................................................................... 10
2 1. PRICE; NUMBER OF SHARES. The Fund will, upon the terms and subject to the conditions of the Offer, purchase up to 4,000,000 of its issued and outstanding Shares that are tendered and not withdrawn prior to 12:00 midnight, New York City time, on August 17, 1998 (such time and date being hereinafter called the "Initial Expiration Date"), unless it determines to accept none of them. The Fund reserves the right to extend the Offer (see Section 14). The later of the Initial Expiration Date or the latest time and date to which the Offer is extended is hereinafter called the "Expiration Date." The purchase price of the Shares will be their NAV as of the close of the New York Stock Exchange on the Expiration Date. An Early Withdrawal Charge to recover distribution expenses will be assessed on most Shares accepted for purchase which have been held for less than three years (see Section 3). The Offer is being made to all stockholders of the Fund and is not conditioned upon any number of Shares being tendered. If more than 4,000,000 Shares are duly tendered prior to the Initial Expiration Date, assuming no changes in the factors originally considered by the Board of Directors when it initially determined to make the Offer, the Fund will either extend the Offer period, if necessary, and increase the number of Shares that the Fund is offering to purchase to an amount that it believes will be sufficient to accommodate the excess Shares tendered as well as any Shares tendered during the extended Offer period or purchase 4,000,000 Shares (or such larger number of Shares sought) on a pro rata basis. As of June 30, 1998, there were in excess of 20 million Shares issued and outstanding and there were 285 holders of record of Shares (in addition, Merrill Lynch maintains accounts for 6,466 beneficial owners of Shares). The Fund has been informed that none of the Directors, officers or affiliates of the Fund intends to tender any Shares pursuant to the Offer. The Shares currently are not traded on any established secondary market. Current NAV quotations for the Shares can be obtained from your Merrill Lynch Financial Consultant or from the Merrill Lynch Response Center at (800) 637-7455, ext. 3652. 2. PROCEDURE FOR TENDERING SHARES. In order for you to tender any of your Shares pursuant to the Offer, you may either: (a) request your broker, dealer, commercial bank, trust company or other nominee to effect the transaction for you, in which case a Letter of Transmittal is not required or (b) if the Shares are registered in your name, send to the Transfer Agent, at the address set forth on page 2, any certificates for such Shares, a properly completed and executed Letter of Transmittal and any other documents required therein. Please contact the Merrill Lynch Response Center at (800) 637-7455, ext. 3652 as to any additional documents that may be required. A. PROCEDURES FOR BENEFICIAL OWNERS HOLDING SHARES THROUGH MERRILL LYNCH OR OTHER BROKERS OR NOMINEES. If your Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you must contact such broker, dealer, commercial bank, trust company or other nominee if you desire to tender your Shares. You should contact such broker or other nominee in sufficient time to permit notification of your desire to tender to reach the Transfer Agent by the Expiration Date. No brokerage commission will be charged on the purchase of Shares by the Fund pursuant to the Offer. However, a broker or dealer may charge a fee for processing the transaction on your behalf. Merrill Lynch may charge its customers a $5.35 processing fee to confirm a purchase of Shares pursuant to the Offer. B. PROCEDURES FOR REGISTERED STOCKHOLDERS. If you will be mailing or delivering the Letter of Transmittal and any other required documents to the Transfer Agent in order to tender your Shares, they must be received on or prior to the Expiration Date by the Transfer Agent at its address set forth on page 2 of this Offer to Purchase. Signatures on the Letter of Transmittal MUST be guaranteed by a member firm of a national securities exchange or a commercial bank or trust company having an office, branch or agency in the United States ("Eligible Institution"). Notarized signatures are not sufficient. 3 Payment for Shares tendered and purchased will be made only after receipt by the Transfer Agent on or before the Expiration Date of a properly completed and duly executed Letter of Transmittal and any other required documents. If your Shares are evidenced by certificates, those certificates must also be received by the Transfer Agent on or prior to the Expiration Date. THE METHOD OF DELIVERY OF ANY DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES, IS AT THE ELECTION AND RISK OF THE PARTY TENDERING THE SHARES. IF DOCUMENTS ARE SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. C. DETERMINATIONS OF VALIDITY. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tenders will be determined by the Fund, in its sole discretion, which determination shall be final and binding. The Fund reserves the absolute right to reject any or all tenders determined by it not to be in appropriate form or the acceptance of or payment for which would, in the opinion of counsel for the Fund, be unlawful. The Fund also reserves the absolute right to waive any of the conditions of the Offer or any defect in any tender with respect to any particular Shares or any particular stockholder, and the Fund's interpretations of the terms and conditions of the Offer will be final and binding. Unless waived, any defects or irregularities in connection with tenders must be cured within such times as the Fund shall determine. Tenders will not be deemed to have been made until the defects or irregularities have been cured or waived. Neither the Fund, its investment adviser and administrator, Merrill Lynch Asset Management, L.P. ("MLAM"), nor the Transfer Agent, nor any other person shall be obligated to give notice of any defects or irregularities in tenders, nor shall any of them incur any liability for failure to give such notice. D. TENDER CONSTITUTES AN AGREEMENT. A tender of Shares made pursuant to any one of the procedures set forth above will constitute an agreement between the tendering stockholder and the Fund in accordance with the terms and subject to the conditions of the Offer. 3. EARLY WITHDRAWAL CHARGE. The Fund will assess an Early Withdrawal Charge on Shares accepted for purchase which have been held for less than three years. The charge will be paid to Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of MLAM and the distributor of the Shares, to recover distribution expenses. The Early Withdrawal Charge will be imposed on those Shares accepted for tender based on an amount equal to the lesser of the NAV of the Shares on the Expiration Date or the cost of the Shares being tendered. In addition, the Early Withdrawal Charge is not imposed on Shares derived from reinvestments of dividends or capital gains distributions. The Early Withdrawal Charge imposed will vary depending on the length of time the Shares have been owned since purchase (separate purchases shall not be aggregated for these purposes), as set forth in the following table:
EARLY YEAR OF TENDER AFTER PURCHASE WITHDRAWAL CHARGE - --------------------------------------------------------------------- ----------------------- First................................................................ 3.0% Second............................................................... 2.0% Third................................................................ 1.0% Fourth and following................................................. 0%
In determining whether an Early Withdrawal Charge is applicable to a tender of Shares, the calculation will be determined in the manner that results in the lowest possible amount being charged. Therefore, it will be assumed that the tender is first of Shares acquired through dividend reinvestment and of Shares held for over three years and then of Shares held longest during the three-year period. The Early Withdrawal Charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. The Early Withdrawal Charge will be waived on Shares tendered following the 4 death of all beneficial owners of such Shares, provided the Shares are tendered within one year of death (a death certificate and other applicable documents may be required). At the time of acceptance of the Offer, the record or succeeding beneficial owner must notify the Transfer Agent either directly or indirectly through the Distributor that the Early Withdrawal Charge should be waived. Upon confirmation of the owner's entitlement, the waiver will be granted; otherwise, the waiver will be lost. 4. WITHDRAWAL RIGHTS. You may withdraw Shares tendered at any time prior to the Expiration Date and, if the Shares have not yet been accepted for payment by the Fund, at any time after September 15, 1998. Stockholders whose accounts are maintained through Merrill Lynch should notify their Financial Consultant prior to the Expiration Date if they wish to withdraw Shares. Stockholders whose accounts are maintained through another broker, dealer, commercial bank, trust company or other nominee should notify such nominee prior to the Expiration Date. Stockholders whose accounts are maintained directly through the Transfer Agent should submit written notice to the Transfer Agent. To be effective, any notice of withdrawal must be timely received by the Transfer Agent at the address set forth on page 2 of this Offer to Purchase. Any notice of withdrawal must specify the name of the person having deposited the Shares to be withdrawn, the number of Shares to be withdrawn, and, if the certificates representing such Shares have been delivered or otherwise identified to the Transfer Agent, the name of the registered holder(s) of such Shares as set forth in such certificates and the number of Shares to be withdrawn. If the certificates have been delivered to the Transfer Agent, then, prior to the release of such certificates, you must also submit the certificate numbers shown on the particular certificates evidencing such Shares and the signature on the notice of the withdrawal must be guaranteed by an Eligible Institution. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Fund in its sole discretion, which determination shall be final and binding. Shares properly withdrawn shall not thereafter be deemed to be tendered for purposes of the Offer. However, withdrawn Shares may be retendered by following one of the procedures described in Section 2 prior to the Expiration Date. 5. PAYMENT FOR SHARES. For purposes of the Offer, the Fund will be deemed to have accepted for payment (and thereby purchased) Shares that are tendered as, if and when it gives oral or written notice to the Transfer Agent of its election to purchase such Shares. Payment for Shares will be made promptly by the Transfer Agent to tendering stockholders as directed by the Fund. Certificates for Shares not purchased (see Sections 1 and 6), or for Shares not tendered included in certificates forwarded to the Transfer Agent, will be returned promptly following the termination, expiration or withdrawal of the Offer, without expense to the tendering stockholder. The Fund will pay all transfer taxes, if any, payable on the transfer to it of Shares purchased pursuant to the Offer. If tendered certificates are registered in the name of any person other than the person signing the Letter of Transmittal, the amount of any such transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person of such Shares will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. The Fund will not pay any interest on the purchase price under any circumstances. As noted above, Merrill Lynch may charge its customers a $5.35 processing fee to confirm a purchase of Shares from such customers pursuant to the Offer. 6. CERTAIN CONDITIONS OF THE OFFER. The Fund shall not be required to accept for payment or pay for any Shares tendered, and may terminate or amend the Offer or may postpone the acceptance for payment of or payment for Shares tendered, if: (1) such purchases would impair the Fund's status as a regulated investment company under the Internal Revenue Code (which would make the Fund a taxable entity, causing the Fund's income to be taxed at the corporate level in addition to the taxation of stockholders who receive dividends from the Fund); (2) the Fund would not be able to liquidate portfolio securities in a 5 manner that is orderly and consistent with the Fund's investment objective and policies in order to purchase Shares tendered pursuant to the Offer; or (3) there is, in the Board of Directors' judgment, any (a) legal action or proceeding instituted or threatened challenging the Offer or otherwise materially adversely affecting the Fund, (b) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by banks in the United States or New York State, which is material to the Fund, (c) limitation imposed by Federal or state authorities on the extension of credit by lending institutions, (d) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States that is material to the Fund, or (e) other event or condition that would have a material adverse effect on the Fund or its stockholders if Shares tendered pursuant to the Offer were purchased. If the Fund determines to amend the Offer or to postpone the acceptance for payment of or payment for Shares tendered, it will, to the extent necessary, extend the period of time during which the Offer is open as provided in Section 14. Moreover, in the event any of the foregoing conditions are modified or waived in whole or in part at any time, the Fund will promptly make a public announcement of such waiver and may, depending on the materiality of the modification or waiver, extend the Offer period as provided in Section 14. 7. PURPOSE OF THE OFFER. The Fund does not currently believe there will be an active secondary market for its Shares. The Board of Directors has determined that it would be in the best interest of stockholders for the Fund to take action to attempt to provide liquidity to stockholders. To that end, the Directors presently intend each quarter to consider the making of a tender offer to purchase the Shares at NAV. The Fund will at no time be required to make any such tender offer. 8. CERTAIN EFFECTS OF THE OFFER. The purchase of Shares pursuant to the Offer will have the effect of increasing the proportionate interest in the Fund of stockholders who do not tender their Shares. If you retain your Shares, however, you will be subject to any increased risks that may result from the reduction in the Fund's aggregate assets resulting from payment for the Shares, including, for example, the potential for greater volatility due to decreased diversification and higher expenses. However, the Fund believes that those risks will be reduced to the extent new Shares of the Fund are sold. All Shares purchased by the Fund pursuant to the Offer will be retired by the Board of Directors of the Fund. 9. SOURCE AND AMOUNT OF FUNDS. The price to be paid by the Fund for shares tendered in the Offer will equal their NAV as of the close of the New York Stock Exchange on the Expiration Date, less any applicable Early Withdrawal Charge. Based on the NAV on July 16, 1998, the aggregate purchase price if 4,000,000 Shares are tendered and accepted for payment pursuant to the Offer would be approximately $45,440,000. The Fund anticipates that the purchase price for any Shares acquired pursuant to the Offer will first be derived from cash on hand, and then from the proceeds from the sale of cash equivalents held by the Fund. Although the Fund is authorized to borrow money to finance the purchase of Shares pursuant to tender offers, the Board of Directors believes that the Fund currently has sufficient liquidity to repurchase the Shares without such borrowing. However, if, in the judgment of the Directors, there is not sufficient liquidity of the assets of the Fund to pay for tendered Shares, the Fund may, within the limits set forth in the Prospectus, borrow money as described above or may terminate the Offer. 10. SUMMARY OF SELECTED FINANCIAL INFORMATION. Set forth below is a summary of selected financial information for the Fund for the fiscal years ended August 31, 1996 and 1997 and for the six months ended February 28, 1998. The information with respect to the fiscal years ended August 31, 1996 and 1997 has been excerpted from the Fund's audited financial statements and the information with respect to the six months ended February 28, 1998 has been excerpted from the Fund's unaudited financial statements. More comprehensive financial information is included in such financial statements (copies of which have been filed as exhibits to the Schedule 13E-4 filed with the Securities and Exchange Commission (the "Commission") and may be obtained from the Transfer Agent) and the summary of selected financial information 6 set forth below is qualified in its entirety by reference to such documents and the financial information, the notes thereto and related matter contained therein. SUMMARY OF SELECTED FINANCIAL INFORMATION (IN 000'S EXCEPT PER SHARE DATA AND RATIOS)
YEAR FOR THE SIX YEAR ENDED ENDED MONTHS ENDED AUGUST 31, AUGUST 31, FEBRUARY 28, 1996 1997 1998 ---------- ---------- ------------ (UNAUDITED) INCOME STATEMENT Investment income......................................................... $ 14,914 $ 14,934 $ 7,641 Expenses.................................................................. 3,016 2,964 1,607 ---------- ---------- ------------ Investment income--net.................................................... $ 11,898 $ 11,970 $ 6,034 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain on investments--net......................................... 1,967 4,093 978 Change in unrealized appreciation on investments--net..................... (2,409) 4,045 5,059 FINANCIAL HIGHLIGHTS (AT END OF PERIOD) Total assets.............................................................. $ 200,328 $ 212,349 $ 237,209 Total liabilities......................................................... 776 729 10,428 ---------- ---------- ------------ Net assets................................................................ $ 199,552 $ 211,620 $ 226,781 Net asset value per share................................................. $ 10.94 $ 11.34 $ 11.46 Shares of common stock outstanding........................................ 18,234 18,655 19,783 PER SHARE Investment income--net.................................................... $ .66 $ .65 $ .31 Dividends from net investment income to common stockholders............... $ .66 $ .65 $ .31 Distributions from net realized gain on investments to common stockholders............................................................ $ -- $ .04 $ .20 RATIOS Total expenses to average net assets...................................... 1.50% 1.44% 1.47%* Investment income--net, to average net assets............................. 5.90% 5.83% 5.51%*
- ------------------------ * Annualized. 7 11. CERTAIN INFORMATION ABOUT THE FUND. The Fund was incorporated under the laws of the State of Maryland on August 16, 1990 and is a non-diversified, closed-end, management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is to provide stockholders with high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which is exempt from Federal income taxes in the opinion of bond counsel to the issuer. The Fund will seek to achieve its objective by investing at least 80% of its assets, except during temporary defensive periods, in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities paying interest that, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes ("Municipal Bonds"). MLAM, an affiliate of Merrill Lynch, acts as investment adviser and administrator for the Fund. There have not been any transactions involving the Shares of the Fund that were effected during the past 40 business days by the Fund, any executive officer or Director of the Fund, any person controlling the Fund, any executive officer or Director of any corporation ultimately in control of the Fund or by any associate or subsidiary of any of the foregoing including any executive officer or Director of any such subsidiary, except that within the past 40 business days pursuant to a continuous public offering of its Shares, the Fund has sold approximately 431,822 Shares at the NAV per Share on the date of each such sale. The Fund has been granted an exemption by the Commission relating to tender offers that is based on representations by the Fund that no secondary market for the Fund's Shares is expected to develop. The exemption is conditioned on (1) the absence of a secondary market, (2) the Fund suspending the offering of its Shares during the five business days preceding the termination of a tender offer and (3) the Fund refraining from purchasing non-investment grade and unrated Municipal Bonds in secondary market transactions during such five business day period. The principal executive offices of the Fund are located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. 12. ADDITIONAL INFORMATION. The Fund has filed a statement on Schedule 13E-4 with the Commission that includes certain additional information relating to the Offer. Such material may be inspected and copied at prescribed rates at the Commission's public reference facilities at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, New York, New York 10048; and Room 3190, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained by mail at prescribed rates from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web site (http://www.sec.gov) that contains the Schedule 13E-4 and other information regarding the Fund. 13. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a general summary of the Federal income tax consequences of a sale of Shares pursuant to the Offer. You should consult your own tax adviser for a complete description of the tax consequences to you of a sale of Shares pursuant to the Offer. The sale of Shares pursuant to the Offer will be a taxable transaction for Federal income tax purposes, either as a "sale or exchange," or under certain circumstances, as a "dividend." In general, the transaction should be treated as a sale or exchange of the Shares under Section 302 of the Internal Revenue Code of 1986, as amended (the "Code"), if the receipt of cash (a) is "substantially disproportionate" with respect to the stockholder, (b) results in a "complete redemption" of the stockholder's interest in the Fund, or (c) is "not essentially equivalent to a dividend" with respect to the stockholder. A "substantially disproportionate" distribution generally requires a reduction of at least 20% in the stockholder's proportionate interest in the Fund after all Shares are tendered. A "complete redemption" of a stockholder's interest generally requires that the stockholder dispose of all Shares directly owned or attributed to the stockholder under Section 318 of the Code. A distribution "not essentially equivalent to a dividend" requires that there be a 8 "meaningful reduction" in the stockholder's interest, which should be the case if the stockholder has a minimal interest in the Fund, exercises no control over Fund affairs and suffers a reduction in proportionate interest in the Fund. If any of these three tests for "sale or exchange" treatment is met, you will recognize gain or loss equal to the difference between the amount of cash received pursuant to the Offer and the adjusted tax basis of the Shares sold. Such gain or loss will be a capital gain or loss if the Shares sold have been held by you as a capital asset. In general, capital gain or loss with respect to Shares sold will be long-term capital gain or loss if the holding period for such Shares is more than one year. Recent legislation created additional categories of capital gains taxable at different rates. Under these new rules, if the Stockholder has held the Shares for more than 18 months, the maximum capital gains rate is reduced to 20%. The maximum 28% rate still applies to a sale of Shares held for more than one year but not more than 18 months. Proposed legislation, scheduled to be signed into law by President Clinton, would eliminate the 18 month holding period requirement applicable to the 20% capital gains rate category for sales occurring after December 31, 1997. Consequently, if the legislation is enacted, a Stockholder who has held Fund Shares for more than a year will be taxed at 20% on a sale of the Shares. If none of the Code Section 302 tests are met, you may be treated as having received, in whole or in part, a dividend, return of capital or capital gain, depending on (i) whether the Fund has sufficient earnings and profits to support a dividend and (ii) your tax basis in the Shares. The tax basis in the Shares tendered to the Fund will be transferred to any remaining Shares held by you. In addition, if the sale of Shares pursuant to the Offer is treated as a "dividend" to a tendering stockholder, a Code Section 305(c) constructive dividend may result to a non-tendering stockholder whose proportionate interest in the earnings and assets of the Fund has been increased as a result of such tender. Accordingly, the differentiation between "dividend" and "sale or exchange" treatment is important with respect to the amount and character of income that tendering stockholders are deemed to receive. In addition, while the marginal tax rates for dividends and capital gains are the same for corporate stockholders, currently under the Code the top income tax rate on ordinary income of individuals (39.6%) exceeds the maximum applicable marginal tax rates on long-term capital gains (20% or 28%, with the 28% rate to be eliminated if the proposed legislation described above is enacted). The Transfer Agent will be required to withhold 31% of the gross proceeds paid to a stockholder or other payee pursuant to the Offer unless either: (a) the stockholder has provided the stockholder's taxpayer identification number/social security number and certifies under penalties of perjury: (i) that such number is correct, and (ii) either that (A) the stockholder is exempt from backup withholding, (B) the stockholder is not otherwise subject to backup withholding as a result of a failure to report all interest or dividends, or (C) the Internal Revenue Service has notified the stockholder that the stockholder is no longer subject to backup withholding; or (b) an exception applies under applicable law and Treasury regulations. Foreign stockholders may be required to provide the Transfer Agent with a completed Form W-8, available from the Transfer Agent, in order to avoid 31% backup withholding. Unless a reduced rate of withholding or a withholding exemption is available under an applicable tax treaty, a stockholder who is a nonresident alien or a foreign entity may be subject to a 30% United States withholding tax on the gross proceeds received by such stockholder, if the proceeds are treated as a "dividend" under the rules described above. Foreign stockholders should consult their tax advisers regarding application of these withholding rules. 14. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS. The Fund reserves the right, at any time and from time to time, to extend the period of time during which the Offer is pending by making a public announcement thereof. In the event that the Fund so elects to extend the tender period, the NAV for the Shares tendered will be determined as of the close of the New York Stock Exchange on the Expiration Date, as extended. During any such extension, all Shares previously tendered and not purchased or withdrawn will remain subject to the Offer. The Fund also reserves the right, at any time and from time to 9 time up to and including the Expiration Date, to (a) terminate the Offer and not to purchase or pay for any Shares, and (b) amend the Offer in any respect by making a public announcement. Such public announcement will be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date and will disclose the approximate number of Shares tendered as of that date. Without limiting the manner in which the Fund may choose to make a public announcement of extension, termination or amendment, except as provided by applicable law (including Rule 13e-4(e)(2)), the Fund shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a release to the Dow Jones News Service. 15. MISCELLANEOUS. The Offer is not being made to, nor will tenders be accepted from, stockholders in any jurisdiction in which the Offer or its acceptance would not comply with the securities or Blue Sky laws of such jurisdiction. The Fund is not aware of any jurisdiction in which the Offer or tenders pursuant thereto would not be in compliance with the laws of such jurisdiction. However, the Fund reserves the right to exclude stockholders from the Offer in any jurisdiction in which it is asserted that the Offer cannot lawfully be made. The Fund believes such exclusion is permissible under applicable tender offer rules, provided the Fund makes a good faith effort to comply with any state law deemed applicable to the Offer. In any jurisdiction the securities or Blue Sky laws of which require the Offer to be made by a licensed broker or dealer the Offer shall be deemed to be made on the Fund's behalf by Merrill Lynch. MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. July 21, 1998 10 EX-99.(A)(2) 4 EXHIBIT-99(A)(2) EXHIBIT (a)(2) LETTER OF TRANSMITTAL TO BE USED TO TENDER SHARES OF MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. PURSUANT TO THE OFFER TO PURCHASE DATED JULY 21, 1998 ------------------- THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, AUGUST 17, 1998, UNLESS EXTENDED ------------------- TRANSFER AGENT: MERRILL LYNCH FINANCIAL DATA SERVICES, INC. ATTENTION: MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. P.O. BOX 45289 JACKSONVILLE, FLORIDA 32232-5289 TELEPHONE INFORMATION NUMBER: (800) 637-3863 DELIVERY TO AN ADDRESS OTHER THAN THAT SHOWN ABOVE DOES NOT CONSTITUTE VALID DELIVERY. THIS LETTER OF TRANSMITTAL IS TO BE USED ONLY IF THE STOCKHOLDER IS A RECORD OWNER OF SHARES WHO DESIRES TO EFFECT THE TENDER OFFER TRANSACTION HIMSELF BY TRANSMITTING THE NECESSARY DOCUMENTS TO THE FUND'S TRANSFER AGENT AND DOES NOT INTEND TO REQUEST HIS BROKER OR DEALER TO EFFECT THE TRANSACTION FOR HIM. A STOCKHOLDER WHO HOLDS SHARES IN A MERRILL LYNCH ACCOUNT OR THROUGH ANOTHER BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE IS NOT THE RECORD OWNER AND SHOULD INSTRUCT HIS FINANCIAL CONSULTANT OR SUCH OTHER NOMINEE TO EFFECT THE TENDER ON HIS BEHALF. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Gentlemen: The undersigned hereby tenders to the Merrill Lynch High Income Municipal Bond Fund, Inc., a closed-end investment company incorporated under the laws of the State of Maryland (the "Fund"), the shares described below of its common stock, par value $.10 per share (the "Shares"), at a price equal to the net asset value per Share ("NAV") calculated on the Expiration Date (as defined in the Offer to Purchase), in cash, less any applicable Early Withdrawal Charge, upon the terms and conditions set forth in the Offer to Purchase dated July 21, 1998, receipt of which is hereby acknowledged, and in this Letter of Transmittal (which together constitute the "Offer"). The undersigned hereby sells to the Fund all Shares tendered hereby that are purchased pursuant to the Offer and hereby irrevocably constitutes and appoints the Transfer Agent as attorney in fact of the undersigned, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to present such Shares and any Share certificates for cancellation of such Shares on the Fund's books. The undersigned hereby warrants that the undersigned has full authority to sell the Shares tendered hereby and that the Fund will acquire good title thereto, free and clear of all liens, charges, encumbrances, conditional sales agreements or other obligations relating to the sale thereof, and not subject to any adverse claim, when and to the extent the same are purchased by it. Upon request, the undersigned will execute and deliver any additional documents necessary to complete the sale in accordance with the terms of the Offer. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase, the Fund may not be required to purchase any or all of the Shares tendered hereby. In that event, the undersigned understands that, in the case of Shares evidenced by certificates, the certificate(s) for any Shares not purchased will be returned to the undersigned at the address indicated below. In the case of Shares not evidenced by certificates and held in an Investment Account, the Transfer Agent will cancel the tender order for any Shares not purchased and only the purchased Shares will be withdrawn from the Account. The check for the purchase price for the tendered Shares purchased will be issued to the order of the undersigned and mailed to the address indicated in the "Description of Shares Tendered" table below. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and the obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer, this tender is irrevocable. DESCRIPTION OF SHARES TENDERED (SEE INSTRUCTIONS 3 AND 4)
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN EXACTLY THE NAME(S) IN WHICH SHARES ARE SHARES TENDERED REGISTERED) (ATTACH ADDITIONAL SCHEDULE IF NECESSARY) NO. OF SHARES CERTIFICATE LISTED NO. OF SHARES NO.(S)* ON CERTIFICATE* TENDERED** Account No. Total Shares Tendered...........
* Need not be completed by stockholders whose Shares are not evidenced by certificates. ** To be completed by all tendering stockholders, whether or not your Shares are evidenced by certificates. If you desire to tender fewer than all Shares held in your account or evidenced by a certificate listed above, please indicate in this column the number you wish to tender. Otherwise all Shares evidenced by such certificate or held in your account will be deemed to have been tendered. SIGNATURE FORM --SIGN HERE-- (SEE INSTRUCTIONS 1, 5 AND 8) Social Security No. or Taxpayer Identification No. ................ Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security No. or Taxpayer Identification No. and (2) either (A) that I am exempt from backup withholding or (B) that I am not subject to backup withholding either because I have not been notified that I am subject thereto as a result of failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: You must strike out the language in (2) above if you have been notified that you are subject to backup withholding due to underreporting and you have not received a notice from the IRS that backup withholding has been terminated. ........................................................................... ........................................................................... (SIGNATURE(S) OF OWNER(S) EXACTLY AS REGISTERED) Date ................ , 1998 Name(s) and Address(es) .................................................... ........................................................................... (PLEASE PRINT) Telephone Number ( ) ................ Signature(s) Guaranteed .................................................... .................................................... INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal must be guaranteed by a member firm of a registered national securities exchange, or a commercial bank or trust company having an office, branch or agency in the United States. This Letter of Transmittal is to be used only if you may effect the tender offer transaction yourself and do not intend to request your broker or dealer to effect the transaction for you. 2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates for all tendered Shares, together with a properly completed and duly executed Letter of Transmittal, should be mailed or delivered to the Transfer Agent on or prior to the Expiration Date at the appropriate address set forth herein and must be received by the Transfer Agent prior to the Expiration Date. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. 3. INADEQUATE SPACE. If the space provided is inadequate, the certificate numbers and number of Shares should be listed on a separate signed schedule attached hereto. 4. PARTIAL TENDERS. If fewer than all of the Shares in your Investment Account or evidenced by any certificate submitted are to be tendered, fill in the number of Shares which are to be tendered in the column entitled "No. of Shares Tendered." If applicable, a new certificate for the remainder of the Shares evidenced by your old certificate(s) will be sent to you as soon as practicable after the Expiration Date of the Offer. All Shares represented by each certificate listed or in your Investment Account are deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL, AUTHORIZATION AND ENDORSEMENTS. (a) If the Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) in which the Shares are registered. (b) If the Shares are held of record by two or more joint holders, all such holders must sign this Letter of Transmittal. (c) If any tendered Shares are registered in different names it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of Shares. (d) When this Letter of Transmittal is signed by the registered holder(s) of the Shares listed and, if applicable, of the certificates transmitted hereby, no endorsements of certificates or separate authorizations are required. (e) If this Letter of Transmittal or any certificates or authorizations are signed by trustees, executors, administrators, guardians, attorneys in fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and must submit proper evidence satisfactory to the Fund of their authority so to act. 6. TRANSFER TAXES. The Fund will pay all the taxes, if any, payable on the transfer to it of Shares purchased pursuant to the Offer. If tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person of such Shares will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. 7. IRREGULARITIES. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares will be determined by the Fund, whose determinations shall be final and binding. The Fund reserves the absolute right to reject any or all tenders determined by it not to be in appropriate form or the acceptance of or payment for which would, in the opinion of counsel for the Fund, be unlawful. The Fund also reserves the absolute right to waive any of the conditions of the Offer or any defect in any tender with respect to any particular Shares or any particular stockholder, and the Fund's interpretations of the terms and conditions of the Offer (including these instructions) will be final and binding. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Fund shall determine. Tenders will not be deemed to have been made until all defects and irregularities have been cured or waived. Neither the Fund, Merrill Lynch Asset Management, L.P. nor the Transfer Agent, nor any other person shall be obligated to give notice of defects or irregularities in tenders, nor shall any of them incur any liability for failure to give any such notice. 8. IMPORTANT TAX INFORMATION. Under Federal income tax law, a stockholder whose tendered Shares are accepted for payment generally is required by law to provide the Transfer Agent (as payer) with his correct taxpayer identification number, which is accomplished by completing and signing the Signature Form. EX-99.(A)(3) 5 EXHIBIT-99(A)(3) EXHIBIT (a)(3) [LOGO] Dear Stockholder: As you requested, we are enclosing a copy of the Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") Offer to Purchase dated July 21, 1998 (the "Offer to Purchase") 4,000,000 issued and outstanding shares (the "Shares"). The Offer to Purchase is for cash at Net Asset Value ("NAV") per Share as of the expiration date of the Offer, less any Early Withdrawal Charge. Together with the Offer to Purchase we are sending you a Letter of Transmittal (the "Letter") for use by holders of record of Shares, which you should read carefully. Certain selected financial information with respect to the Fund is set forth in the Offer to Purchase. If, after reviewing the information set forth in the Offer to Purchase and Letter, you wish to tender Shares for purchase by the Fund, please either contact your Merrill Lynch Financial Consultant or other broker, dealer or nominee to effect the tender for you or, if you are the record owner of the Shares, you may follow the instructions contained in the Offer to Purchase and Letter. Neither the Fund nor its Board of Directors is making any recommendation to any holder of Shares as to whether to tender Shares. Each stockholder is urged to consult his or her broker or tax adviser before deciding whether to tender any Shares. The Fund's distribution rate for the period May 22, 1998 through June 18, 1998 based on the amounts actually distributed by the Fund, was 5.28% based on the June 18, 1998 NAV of $11.40 per share. For the quarter ended June 30, 1998, the Fund's highest NAV was $11.50 per share and its lowest NAV was $11.35 per share. The Fund's NAV on July 16, 1998 was $11.36 per share. The Fund publishes its NAV each week in BARRON'S. It appears in the "Investment Company Institute List" under the sub-heading "Closed-End Bond Funds" within the listings of mutual funds and closed-end funds. Requests for current NAV quotations or for additional copies of the Offer to Purchase, the Letter and any other tender offer documents may be directed to the Merrill Lynch Response Center at (800) 637-7455, ext. 3652. Should you have any other questions on the enclosed material, please do not hesitate to contact your Merrill Lynch Financial Consultant or other broker or dealer or call the Fund's Transfer Agent, Merrill Lynch Financial Data Services, Inc., at (800) 637-3863. We appreciate your continued interest in Merrill Lynch High Income Municipal Bond Fund, Inc. Yours truly, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED EX-99.(G)(1) 6 EXHIBIT-99(G)(1) EXHIBIT (g)(1) INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch High Income Municipal Bond Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch High Income Municipal Bond Fund, Inc. as of August 31, 1996, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at August 31, 1996 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch High Income Municipal Bond Fund, Inc. as of August 31, 1996, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey September 30, 1996 PORTFOLIO ABBREVIATIONS To simplify the listing 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) COP Certificates of Participation DATES Daily Adjustable Tax-Exempt Securities 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 UT Unlimited Tax VRDN Variable Rate Demand Notes
SCHEDULE OF INVESTMENTS (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Alabama--1.3% B+ NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation American Project), 8% due 4/01/2009 $ 1,055 BBB- Baa3 1,500 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds (Mobile Energy Services Company Project), 6.95% due 1/01/2020 1,563
Arizona--0.7% NR* NR* 1,235 Pima County, Arizona, IDA, Revenue Bonds (La Hacienda Project), 9.50% due 12/01/2016 1,237 A1+ P1 100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corporation), VRDN, 3.55% due 12/01/2009 (a) 100 California--2.4% NR* Aa3 100 California Pollution Control Financing Authority, Resource Recovery Revenue Bonds (Honey Lake Power Project), VRDN, AMT, 3.50% due 9/01/2018 (a) 100 BBB- Baa 10,000 Foothill/Eastern Transportation Corridor Agency, California, Toll Road Revenue Bonds (Senior Lien), Series A, 6.50%** due 1/01/2028 1,183 NR* NR* 1,500 Long Beach, California, Redevelopment Agency, M/F Housing Revenue Bonds (Pacific Court Apartments), AMT, Issue B, 6.80% due 9/01/2013 1,214 NR* NR* 12,000 San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue Bonds (Senior Lien), 6.425%** due 1/01/2022 2,199 Colorado--3.9% Denver, Colorado, City and County Airport Revenue Bonds: BBB Baa 900 AMT, Series A, 8% due 11/15/2025 999 BBB Baa 2,000 AMT, Series D, 7.75% due 11/15/2013 2,332 AAA NR* 500 Series A, 7.25% due 11/15/2002 (d) 569 BBB Baa 1,500 Series A, 7.25% due 11/15/2025 1,664 NR* NR* 2,000 Mountain Village Metropolitan District, Colorado, Refunding Bonds (San Miguel County), UT, 8.10% due 12/01/2011 2,220 Connecticut--1.0% NR* B1 1,895 New Haven, Connecticut, Facilities Revenue Bonds (Hill Health Corporation Project), 9.25% due 5/01/2017 2,033 District of B- NR* 2,000 District of Columbia, COP, 7.30% due 1/01/2013 2,049 Columbia--1.0%
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Florida--1.6% BB NR* $ 960 Jacksonville, Florida, Port Authority, IDR, Refunding (United States Gypsum Corporate Project), 7.25% due 10/01/2014 $ 991 A1+ VMIG1++ 200 Manatee County, Florida, PCR, Refunding (Florida Power and Light Company Project), VRDN, 3.55% due 9/01/2024 (a) 200 NR* VMIG1++ 100 Palm Beach County, Florida, Water and Sewer Revenue Bonds, VRDN, 3.60% due 10/01/2011 (a) 100 A1 VMIG1++ 1,900 Pinellas County, Florida, Health Facilities Authority, Revenue Refunding Bonds (Pooled Hospital Loan Program), DATES, 3.55% due 12/01/2015 (a) 1,900
Georgia--3.7% NR* NR* 2,480 Atlanta, Georgia, Urban Residential Finance Authority, College Facilities Revenue Bonds (Morris Brown College Project), 9.50% due 12/01/2001 (d) 3,068 NR* NR* 2,000 Atlanta, Georgia, Urban Residential Finance Authority, M/F Housing Mortgage Revenue Bonds (Northside Plaza Apartments Project), 9.75% due 11/01/2020 2,191 NR* NR* 2,000 Hancock County, Georgia, COP, 8.50% due 4/01/2015 (h) 2,171 Hawaii--0.9% AA+ NR* 1,750 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Citizens Utility Company), RIB, Series 91-B, 9.232% due 11/01/2021 (g) 1,872 Illinois--5.6% BBB NR* 1,500 Alton, Illinois, Hospital Facility Revenue Refunding Bonds (Saint Anthony's Health Center), 6% due 9/01/2014 1,384 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Bonds: BB+ Baa2 4,000 Refunding (American Airlines Inc. Project), 8.20% due 12/01/2024 4,599 BB Baa2 445 (United Airlines, Inc.), AMT, Series B, 8.95% due 5/01/2018 505 NR* NR* 2,000 Illinois Educational Facilities Authority Revenue Bonds (Chicago Osteopathic Health System), 7.25% due 11/15/2019 (d) 2,272 NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross Hospital Project), 6.75% due 3/01/2024 1,243 BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding Bonds (Sales Tax-Landings Redevelopment), 7% due 12/01/2008 1,085 Indiana--1.8% A NR* 1,500 Indiana Bond Bank, Special Hospital Program Revenue Bonds (Hendricks Community Hospital), Series A, 7.125% due 4/01/2013 1,618 NR* NR* 2,000 Wabash, Indiana, Solid Waste Disposal Revenue Bonds (Jefferson Smurfit Corporation Project), AMT, 7.50% due 6/01/2026 2,012 Iowa--0.9% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 1,720 Kentucky--2.2% AAA Aaa 4,000 Louisville, Kentucky, Hospital Revenue Bonds, INFLOS, 9.24% due 10/01/2014 (b)(g) 4,450 Louisiana--4.0% NR* Baa2 3,500 Lake Charles, Louisiana, Harbor and Terminal District, Port Facilities Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 3,913 BBB+ A 1,000 Louisiana Public Facilities Authority, Hospital Revenue Bonds (Woman's Hospital Foundation Project), 7.25% due 10/01/2022 1,054 BB- NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project), 7.50% due 7/01/2013 3,104
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Massachusetts-- NR* NR* $ 1,200 Boston, Massachusetts, Industrial Development Financing 10.0% Authority, Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way Project), AMT, 10.50% due 1/01/2011 $ 1,359 NR* Ba 795 Lawrence, Massachusetts, GO, 9.875% due 12/15/1998 877 AAA Aaa 3,460 Massachusetts Municipal Wholesale Electric Company, Power Supply System, Revenue Refunding Bonds, Series B, 5% due 7/01/2017 (b) 3,101 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: NR* B 1,850 (New England Memorial Hospital Project), Series C, 7% due 4/01/2014 1,652 NR* NR* 605 (North Adams Regional Hospital), Issue B, 8% due 7/01/1998 629 NR* B 3,000 Refunding (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 2,382 Massachusetts State Industrial Finance Agency Revenue Bonds: NR* B1 1,675 (Bay Cove Human Services Inc.), 8.375% due 4/01/2019 1,782 BB+ Ba1 1,600 (Vinfen Corporation), 7.10% due 11/15/2018 1,574 NR* NR* 1,000 Massachusetts State Industrial Finance Agency, Solid Waste Disposal Revenue Bonds (Molten Metal Technology Project), 8.25% due 8/01/2014 1,024 NR* NR* 5,000 Massachusetts State Port Authority, Special Project Revenue Bonds (Harborside Hyatt Project), AMT, 10% due 3/01/2026 5,586 Michigan--1.7% AAA Ba1 2,900 Detroit, Michigan, GO, UT, Series A, 8.70% due 4/01/2000 (d) 3,323 Missouri--5.3% BBB- NR* 2,865 Joplin, Missouri, IDA, Hospital Facilities Revenue Refunding and Improvement Bonds (Tri-State Osteopathic Project), 8.25% due 12/15/2014 3,044 Missouri Health and Educational Facilities Authority Revenue Bonds (Southwest Baptist University Project): BB NR* 905 9.50% due 10/01/2001 1,008 BB NR* 3,690 9.50% due 10/01/2011 4,238 AAA Aaa 2,000 Phelps County, Missouri, Hospital Revenue Bonds (Phelps County Regional Medical Center), 8.30% due 3/01/2000 (d) 2,269 New Hampshire-- BB- NR* 3,500 New Hampshire State Business Finance Authority, Pollution 1.8% Control and Solid Waste Revenue Refunding Bonds (Crown Paper Company Project), 7.75% due 1/01/2022 3,525 New Jersey--9.0% NR* NR* 2,000 Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds (Holt Hauling & Warehousing), Series A, 9.875% due 1/01/2021 2,000 BBB+ Ba 4,000 Camden County, New Jersey, Pollution Control Financing Authority, Solid Waste Resource Recovery Revenue Bonds, Series D, 7.25% due 12/01/2010 4,107 NR* NR* 1,500 New Jersey, EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due 10/01/2014 1,495 New Jersey Health Care Facilities Financing Authority Revenue Bonds: NR* NR* 4,725 (Riverwood Center Issue), Series A, 9.90% due 7/01/2021 5,244 BBB- Baa 4,700 (Saint Elizabeth Hospital), Series B, 8.25% due 7/01/2020 5,110
SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) New Mexico--1.0% BB Ba2 $2,000 Farmington, New Mexico, PCR, Refunding (Public Service Company-San Juan Project), Series A, 6.40% due 8/15/2023 $ 1,939 New York--8.4% BBB+ Baa1 5,260 New York City, New York, GO, UT, Series C, Sub-Series C-1, 7.50% due 8/01/2021 5,795 NR* NR* 2,500 New York City, New York, IDA, Revenue Bonds (Visy Paer Inc. Project), AMT, 7.95% due 1/01/2028 2,616 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Special Project-KIAC), AMT, Series 4: NR* NR* 2,250 3rd Installment, 7% due 10/01/2007 2,369 NR* NR* 2,750 5th Installment, 6.75% due 10/01/2019 2,737 Utica, New York, Public Improvement Bonds: CCC B 635 8.50% due 8/15/2007 643 CCC B 635 8.50% due 8/15/2008 644 CCC B 500 8.50% due 8/15/2009 507 CCC B 500 8.50% due 8/15/2010 507 CCC B 500 8.50% due 8/15/2011 507 CCC B 500 8.50% due 8/15/2012 507 Ohio--2.3% NR* Ba1 2,325 Defiance County, Ohio, Economic Development Revenue Bonds (Kroger Co. Project), 8% due 10/15/2015 2,537 AAA Aaa 1,950 Ohio, HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A-2, 9.885% due 3/24/2031 (c)(g) 2,052 Oklahoma--0.5% BB NR* 985 Blaine County, Oklahoma, Industrial Authority, IDR (United States Gypsum Corp. Project), 7.25% due 10/01/2010 1,029 Oregon--1.6% 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* 1,955 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint Corporate Project), 8% due 12/01/2003 2,071 Pennsylvania-- NR* NR* 2,000 Lehigh County, Pennsylvania, General Purpose Authority 12.5% Revenue Bonds (Wiley House Kids Peace), 8.75% due 11/01/2014 2,056 BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority Revenue Bonds (Bradford Hospital Project), 8.875% due 10/01/2020 5,814 Montgomery County, Pennsylvania, IDA, Revenue Bonds: NR* Ba 3,400 (Pennsburg Nursing and Rehabilitation Center), 7.625% due 7/01/2018 3,401 NR* NR* 1,500 Refunding (1st Mortgage-Meadowood Corporation Project), Series A, 10.25% due 12/01/2020 1,649 NR* NR* 2,000 Pennsylvania Economic Development Financing Authority, IDR (GEHL Company Inc. Project), AMT, Series F, 9% due 9/01/2010 2,181 NR* NR* 5,000 Pennsylvania Economic Development Financing Authority, Recycling Revenue Bonds (Ponderosa Fibres Project), AMT, Series A, 9.25% due 1/01/2022 4,703 NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding (Commercial Development Philadelphia Airport), AMT, 7.75% due 12/01/2017 5,245
SCHEDULE OF INVESTMENTS (concluded) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Rhode Island-- BBB+ NR* $ 1,500 Rhode Island State Health and Educational Building Corporation, 1.2% Hospital Financing Revenue Bonds (South County Hospital), 7.25% due 11/01/2011 $ 1,550 NR* Baa 875 West Warwick, Rhode Island, GO, UT, Series A, 6.80% due 7/15/1998 905 South Carolina-- AA- Aa 2,000 Greenville, South Carolina, Hospital System Revenue 0.9% Refunding Bonds, Series B, 5.25% due 5/01/2023 1,792 Tennessee--2.3% NR* NR* 4,265 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Revenue Bonds (Baptist Health System of East Tennessee), 8.60% due 4/15/2016 4,494 Texas--6.4% BB+ Baa2 3,000 Dallas-Fort Worth, Texas, International Airport Facilities Improvement Corporation Revenue Bonds (American Airlines, Inc.), AMT, 7.25% due 11/01/2030 3,159 BB Ba1 4,805 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 5,022 BB Ba 3,270 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 3,459 NR* NR* 1,845 Swisher County, Texas, Jail Facilities Financing Corporation Revenue Bonds (Criminal Detention Center), 9.75% due 8/01/2009 (f) -- BBB Baa2 1,000 West Side Calhoun County, Texas, Navigation District, Solid Waste Disposal Revenue Bonds (Union Carbide Chemicals and Plastics), AMT, 8.20% due 3/15/2021 1,112 Utah--1.7% AAA Aaa 3,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Inc.), INFLOS, 9.779% due 5/15/2020 (e)(g) 3,375 Vermont--0.8% NR* NR* 1,500 Vermont Educational and Health Buildings Financing Agency Revenue Bonds (College of Saint Joseph's Project), 8.50% due 11/01/2024 1,608 Total Investments (Cost--$184,349)--98.4% 196,314 Other Assets Less Liabilities--1.6% 3,238 -------- Net Assets--100.0% $199,552 -------- --------
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at August 31, 1996. (b)MBIA Insured. (c)GNMA Collateralized. (d)Prerefunded. (e)AMBAC Insured. (f)Non-income producing security. (g)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at August 31, 1996. (h)Bank Qualified. *Not Rated. **Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1996 Assets: Investments, at value (identified cost--$184,348,939) (Note 1a) $196,313,800 Cash 6,042 Receivables: Interest $ 3,922,428 Capital shares sold 76,072 3,998,500 ------------ Prepaid registration fees and other assets (Note 1e) 9,942 ------------ Total assets 200,328,284 ------------ Liabilities: Payables: Dividends to shareholders (Note 1f) 360,295 Investment adviser (Note 2) 172,947 Administration (Note 2) 45,513 578,755 ------------ Accrued expenses and other liabilities 197,100 ------------ Total liabilities 775,855 ------------
Net Assets: Net assets $199,552,429 ------------ ------------ Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $ 1,823,397 Consist of: Paid-in capital in excess of par 187,104,917 Accumulated realized capital losses on investments--net (1,340,746) Unrealized appreciation on investments--net 11,964,861 ------------ Net assets--Equivalent to $10.94 per share based on 18,233,970 shares of capital outstanding $199,552,429 ------------ ------------ See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statement of Operations
For The Year Ended August 31, 1996 Investment Income Interest and amortization of premium and discount earned $ 14,914,448 (Note 1d): Expenses: Investment advisory fees (Note 2) 1,911,059 Administrative fees (Note 2) 502,910 Transfer agent fees (Note 2) 123,874 Registration fees (Note 1e) 88,152 Professional fees 81,506 Accounting services (Note 2) 70,139 Printing and shareholder reports 68,644 Advertising 62,151 Listing fees 35,538 Directors' fees and expenses 24,597 Custodian fees 19,548 Pricing services 13,173 Amortization of organization expenses (Note 1e) 7,409 Other 7,695 ------------ Total expenses 3,016,395 ------------ Investment income--net 11,898,053 ------------
Realized & Realized gain on investments--net 1,967,290 Unrealized Change in unrealized appreciation on investments--net (2,408,692) Gain (Loss) on ------------ Investments--Net Net Increase in Net Assets Resulting from Operations $ 11,456,651 (Notes 1b, 1d & 3): ------------ ------------ See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets For the Year Ended August 31, Increase (Decrease) in Net Assets: 1996 1995 Operations: Investment income--net $ 11,898,053 $ 12,378,384 Realized gain (loss) on investments--net 1,967,290 (2,713,001) Change in unrealized appreciation on investments--net (2,408,692) 6,520,321 ------------ ------------ Net increase in net assets resulting from operations 11,456,651 16,185,704 ------------ ------------ Dividends & Investment income--net (11,898,053) (12,378,384) Distributions to Realized gain on investments--net -- (2,796,951) Shareholders In excess of realized gain on investments--net -- (595,035) (Note 1f): ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (11,898,053) (15,770,370) ------------ ------------ Capital Share Net increase (decrease) in net assets derived from Transactions capital shares transactions 1,418,958 (14,798,840) (Note 4): ------------ ------------ Net Assets: Total increase (decrease) in net assets 977,556 (14,383,506) Beginning of year 198,574,873 212,958,379 ------------ ------------ End of year $199,552,429 $198,574,873 ------------ ------------ ------------ ------------ See Notes to Financial Statements.
FINANCIAL INFORMATION (concluded) Financial Highlights The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 Per Share Net asset value, beginning of year $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29 Operating -------- -------- -------- -------- -------- Performance: Investment income--net .66 .65 .65 .68 .71 Realized and unrealized gain (loss) on investments--net (.03) .23 (.45) .75 .50 -------- -------- -------- -------- -------- Total from investment operations .63 .88 .20 1.43 1.21 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.66) (.65) (.65) (.68) (.71) Realized gain on investments--net -- (.15) (.07) (.05) (.05) In excess of realized gain on investments--net -- (.03) -- -- -- -------- -------- -------- -------- -------- Total dividends and distributions (.66) (.83) (.72) (.73) (.76) -------- -------- -------- -------- -------- Net asset value, end of year $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Investment Based on net asset value per share 5.81% 8.68% 1.75% 13.83% 12.29% Return:* -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Ratios to Average Expenses, net of reimbursement 1.50% 1.52% 1.48% 1.37% 1.30% Net Assets: -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Expenses 1.50% 1.52% 1.48% 1.47% 1.55% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Investment income--net 5.90% 6.11% 5.81% 6.17% 6.85% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Supplemental Net assets, end of year (in thousands) $199,552 $198,575 $212,958 $216,922 $170,735 Data: -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Portfolio turnover 28.54% 21.28% 28.51% 28.74% 31.74% -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
*Total investment returns exclude the effects of sales loads. The Fund is a continuously offered closed-end fund, the shares of which are offered at net asset value. Therefore, no separate market exists. See Notes to Financial Statements. 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 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, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. 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 interest rate 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 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. (e) Deferred organization expenses and prepaid registration fees-- Deferred organization expenses are charged to expense on a straight- line basis over a five-year period. Prepaid registration fees are charged to expense as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend 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 0.95% of the Fund's average daily net assets. The Fund also has entered into an Administrative Services Agreement with MLAM whereby MLAM will receive a fee equal to an annual rate of 0.25% 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. The Investment Advisory Agreement obligates MLAM to reimburse the Fund to the extent the Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions, and extraordinary items) exceed (a) 2.0% of the Fund's average daily net assets or (b) 2.5% of the Fund's first $30 million of average net assets, 2.0% of the next $70 million of average daily net assets, and 1.5% of the average net assets in excess thereof. MLAM's obligation to reimburse the Fund is limited to the amount of the investment advisory fee. No fee payment will be made to MLAM during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation applicable at the time of such payment. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly- owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLPF&S, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended August 31, 1996 were $57,059,552 and $55,429,659, respectively. Net realized and unrealized gains as of August 31, 1996 were as follows: Realized Unrealized Gains Gains Long-term investments $ 1,967,290 $ 11,964,861 ------------ ------------ Total $ 1,967,290 $ 11,964,861 ------------ ------------ ------------ ------------ As of August 31, 1996, net unrealized appreciation for Federal income tax purposes aggregated $11,964,861, of which $13,087,215 related to appreciated securities and $1,122,354 related to depreciated securities. The aggregate cost of investments at August 31, 1996 for Federal income tax purposes was $184,348,939. 4. Capital Shares Transactions: Transactions in capital shares were as follows: For the Year Ended Dollar August 31, 1996 Shares Amount Shares sold 1,986,078 $ 21,952,170 Shares issued to share- holders in reinvestment of dividends 435,140 4,809,103 ------------ ------------ Total issued 2,421,218 26,761,273 Shares tendered (2,283,709) (25,342,315) ------------ ------------ Net increase 137,509 $ 1,418,958 ------------ ------------ ------------ ------------ For the Year Ended Dollar August 31, 1995 Shares Amount Shares sold 1,405,923 $ 15,030,501 Shares issued to share- holders in reinvestment of dividends and distributions 630,887 6,628,373 ------------ ------------ Total issued 2,036,810 21,658,874 Shares tendered (3,446,599) (36,457,714) ------------ ------------ Net decrease (1,409,789) $(14,798,840) ------------ ------------ ------------ ------------ EX-99.(G)(2) 7 EXHIBIT-99(G)(2) EXHIBIT (g)(2) INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch High Income Municipal Bond Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch High Income Municipal Bond Fund, Inc. as of August 31, 1997, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at August 31, 1997 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch High Income Municipal Bond Fund, Inc. as of August 31, 1997, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey September 30, 1997
SCHEDULE OF INVESTMENTS (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Alabama -- 1.3% B+ NR* $1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation American Project), 8% due 4/01/2009 $1,083 BBB- Baa3 1,500 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds (Mobile Energy Services Company Project), 6.95% due 1/01/2020 1,631 Arizona -- 2.8% B B2 3,000 Coconino County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds (Tuscon Electric Power - Navajo), AMT, Series A, 7.125% due 10/01/2032 3,123 NR* NR* 1,500 Navajo County, Arizona, IDA, IDR (Stone Container Corporation Project), AMT, 7.20% due 6/01/2027 1,598 NR* NR* 1,235 Pima County, Arizona, IDA, Revenue Bonds (La Hacienda Project), 9.50% due 12/01/2016 1,272 California -- 1.3% AAA Aaa 10,000 Foothill/Eastern Transportation Corridor Agency, California, Toll Road Revenue Bonds (Senior Lien), Series A, 6.50%** due 1/01/2028 (h) 1,786 NR* NR* 1,500 Long Beach, California, Redevelopment Agency, M/F Housing Revenue Bonds (Pacific Court Apartments), AMT, Issue B, 6.80% due 9/01/2013 (f) 975 Colorado -- 7.4% NR* NR* 1,700 Colorado Postsecondary Educational Facilities Authority Revenue Bonds (Colorado Ocean Journey Incorporated Project), 8.30% due 12/01/2017 1,769 Denver, Colorado, City and County Airport Revenue Bonds: BBB Baa1 900 AMT, Series A, 8% due 11/15/2025 1,005 BBB Baa1 2,000 AMT, Series D, 7.75% due 11/15/2013 2,471 AAA Baa1 1,500 Series A, 7.25% due 11/15/2002 (d) 1,718 AAA NR* 500 Series A, 7.25% due 11/15/2002 (d) 573 NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds (Downtown Denver), AMT, Series A, 7.75% due 9/01/2017 3,080 NR* NR* 2,000 Mountain Village Metropolitan District, Colorado, Refunding Bonds (San Miguel County), UT, 8.10% due 12/01/2011 2,254 Public Highway Authority, Colorado, Revenue Refunding Bonds (E-470), Senior Series B (b): AAA Aaa 5,000 5.47%** due 9/01/2019 1,474 AAA Aaa 5,000 5.50%** due 9/01/2020 1,378
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) COP Certificates of Participation 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 UT Unlimited Tax VRDN Variable Rate Demand Notes
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Connecticut -- 1.7% NR* NR* 1,500 Connecticut State Health and Educational Facilities Authority Revenue Bonds (Edgehill Issue), Series A, 6.875% due 7/01/2027 1,525 NR* B1 1,875 New Haven, Connecticut, Facilities Revenue Bonds (Hill Health Corporation Project), 9.25% due 5/01/2017 2,083 Florida -- 1.8% NR* NR* 1,000 Arbor Greene, Florida, Community Development District, Special Assessment Revenue Bonds, 7.60% due 5/01/2018 1,032 AA- VMIG1+ 800 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding Bonds (Florida Power and Light Company), VRDN, 3.75% due 6/01/2021 (a) 800 NR* NR* 1,000 Grand Haven Community Development District, Florida, Special Assessment, Series B, 6.90% due 5/01/2019 988 BB+ NR* 960 Jacksonville, Florida, Port Authority, IDR, Refunding (United States Gypsum Company Project), 7.25% due 10/01/2014 1,040 Georgia -- 5.2% NR* Aaa 2,465 Atlanta, Georgia, Urban Residential Finance Authority, College Facilities Revenue Bonds (Morris Brown College Project), 9.50% due 12/01/2001 (d) 3,000 NR* NR* 1,975 Atlanta, Georgia, Urban Residential Finance Authority, M/F Housing Mortgage Revenue Bonds (Northside Plaza Apartments Project), 9.75% due 11/01/2020 2,143 NR* NR* 2,000 Hancock County, Georgia, COP, 8.50% due 4/01/2015 2,207 NR* NR* 1,485 Rockdale County, Georgia, Development Authority, Solid Waste Disposal Revenue Bonds (Visy Paper Inc. Project), AMT, 7.40% due 1/01/2016 1,587 NR* NR* 2,000 Savannah, Georgia, EDA, IDR (Stone Container Corporation Project), AMT, 7.40% due 4/01/2026 2,152 Hawaii -- 0.9% AA+ NR* 1,750 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Citizens Utility Company), RIB, AMT, Series 91-B, 9.132% due 11/01/2021 (g) 1,984 Illinois -- 6.2% BBB - Baa2 4,000 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Refunding Bonds (American Airlines Inc. Project), 8.20% due 12/01/2024 4,784 NR* NR* 3,195 Illinois Development Finance Authority, Acquisition Program Revenue Bonds (Prime Health Care Centers Facilities), 7.75% due 12/01/2016 3,406 NR* NR* 2,000 Illinois Educational Facilities Authority Revenue Bonds (Chicago Osteopathic Health System), 7.25% due 11/15/2019 (d) 2,419 NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross Hospital Project), 6.75% due 3/01/2024 1,319 BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding Bonds (Sales Tax - Landings Redevelopment), 7% due 12/01/2008 1,108 Indiana -- 1.8% A NR* 1,500 Indiana Bond Bank, Special Hospital Program (Hendricks Community Hospital), Series A, 7.125% due 4/01/2013 1,647 NR* NR* 2,000 Wabash, Indiana, Solid Waste Disposal Revenue Bonds (Jefferson Smurfit Corporation Project), AMT, 7.50% due 6/01/2026 2,145 Iowa -- 0.9% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 1,959 Kentucky -- 2.2% AAA Aaa 4,000 Louisville, Kentucky, Hospital Revenue Bonds, INFLOS, 9.288% due 10/01/2014 (b)(g) 4,605
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Louisiana -- 4.0% NR* A3 3,500 Lake Charles, Louisiana, Harbor and Terminal District, Port Facilities Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 3,998 NR* A3 1,000 Louisiana Public Facilities Authority, Hospital Revenue Bonds (Woman's Hospital Foundation Project), 7.25% due 10/01/2002 (d) 1,138 BB NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project), 7.50% due 7/01/2013 3,277 Maryland -- 1.0% NR* NR* 2,000 Maryland State Energy Financing Administration, Limited Obligation Revenue Bonds (Cogeneration - AES Warrior Run), AMT, 7.40% due 9/01/2019 2,151 Massachusetts -- 7.4% NR* NR* 1,145 Boston, Massachusetts, Industrial Development Financing Authority, Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way Project), AMT, 10.50% due 1/01/2011 1,293 NR* Ba2 530 Lawrence, Massachusetts, GO, 9.875% due 12/15/1998 562 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: NR* B 1,810 (New England Memorial Hospital Project), Series C, 7% due 4/01/2014 1,700 NR* NR* 305 (North Adams Regional Hospital), Issue B, 8% due 7/01/1998 312 NR* B2 3,000 Refunding (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 2,590 Massachusetts State Industrial Finance Agency Revenue Bonds: NR* B1 1,675 (Bay Cove Human Services Incorporated), 8.375% due 4/01/2019 1,861 BBB Ba1 1,600 (Vinfen Corporation), 7.10% due 11/15/2018 1,734 NR* NR* 5,000 Massachusetts State Port Authority, Special Project Revenue Bonds (Harborside Hyatt), AMT, 10% due 3/01/2026 5,582 Missouri -- 4.6% BBB- NR* 2,830 Joplin, Missouri, IDA, Hospital Facilities Revenue Refunding and Improvement Bonds (Tri-State Osteopathic), 8.25% due 12/15/2014 3,122 BB NR* 3,690 Missouri State Health and Educational Facilities Authority Revenue Bonds (Southwest Baptist University Project), 9.50% due 10/01/2011 4,347 AAA Aaa 2,000 Phelps County, Missouri, Hospital Revenue Bonds (Phelps County Regional Medical Center), 8.30% due 3/01/2000 (d) 2,227 New Jersey -- 12.3% Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds (Holt Hauling & Warehousing), Series A: NR* NR* 4,600 9.625% due 1/01/2011 5,298 NR* NR* 2,000 9.875% due 1/01/2021 2,334 BB 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 4,093 NR* NR* 1,500 New Jersey, EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due 10/01/2014 1,596 NR* Aaa 8,070 New Jersey, EDA, Revenue Bonds (Saint Barnabas Project), 5.625%** due 7/01/2024 (b) 1,839 New Jersey Health Care Facilities Financing Authority Revenue Bonds (d): NR* NR* 4,725 (Riverwood Center Issue), Series A, 9.90% due 7/01/2001 5,686 AAA Aaa 4,700 (Saint Elizabeth Hospital), Series B, 8.25% due 7/01/2000 5,236
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) New Mexico -- 0.5% B B2 1,000 Farmington, New Mexico, PCR (Tucson Electric Power Company - San Juan), Series A, 6.95% due 10/01/2020 1,046 New York -- 5.1% BBB+ Baa1 310 New York City, New York, GO, UT, Series C, Sub-Series C-1, 7.50% due 8/01/2021 348 BB+ Baa3 2,750 New York City, New York, IDA, Special Facilities Revenue Bonds (United Airlines Inc. Project), AMT, 5.65% due 10/01/2032 2,686 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Special Project - KIAC), AMT, Series 4: NR* NR* 1,000 3rd Installment, 7% due 10/01/2007 1,114 NR* NR* 2,750 5th Installment, 6.75% due 10/01/2019 2,961 Utica, New York, Public Improvement, UT: CCC B 635 8.50% due 8/15/2007 706 CCC B 635 8.50% due 8/15/2008 708 CCC B 500 8.50% due 8/15/2009 557 CCC B 500 8.50% due 8/15/2010 557 CCC B 500 8.50% due 8/15/2011 557 CCC B 500 8.50% due 8/15/2012 557 Ohio -- 0.9% AAA Aaa 1,700 Ohio, HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A-2, 9.72% due 3/24/2031 (c)(g) 1,895 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 1,069 B+ NR* 1,955 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint Corporation Project), 8% due 12/01/2003 2,126 Pennsylvania -- 10.4% NR* NR* 2,000 Lehigh County, Pennsylvania, General Purpose Authority Revenue Bonds (Wiley House Kids Peace), 8.75% due 11/01/2014 2,092 BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority Revenue Bonds (Bradford Hospital Project), 8.875% due 10/01/2020 5,685 Montgomery County, Pennsylvania, IDA, Revenue Bonds: NR* Ba3 3,400 (Pennsburg Nursing and Rehabilitation Center), 7.625% due 7/01/2018 3,832 NR* NR* 1,500 Refunding (1st Mortgage - Meadowood Corporation Project), Series A, 10.25% due 12/01/2020 1,663 NR* NR* 5,000 Pennsylvania Economic Development Financing Authority, Recycling Revenue Bonds (Ponderosa Fibres Project), AMT, Series A, 9.25% due 1/01/2022 3,262 NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding (Commercial Development - Philadelphia Airport), AMT, 7.75% due 12/01/2017 5,511 Rhode Island -- 0.8% AAA NR* 1,500 Rhode Island State Health and Educational Building Corporation, Hospital Financing Revenue Bonds (South County Hospital), 7.25% due 11/01/2001 (d) 1,671 Tennessee -- 1.2% BBB Baa2 2,500 Memphis - Shelby County, Tennessee, Airport Authority, Special Facilities and Projects Revenue Refunding Bonds (Federal Express Corporation), 5.35% due 9/01/2012 2,528
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Texas -- 8.6% BBB- Baa2 3,000 Dallas - Fort Worth, Texas, International Airport Facilities Improvement Corporation Revenue Bonds (American Airlines, Inc.), AMT, 7.25% due 11/01/2030 3,297 BB Ba2 3,000 Houston, Texas, Airport System Revenue Bonds, Special Facilities (Continental Airline Airport Improvement), AMT, Series C, 6.125% due 7/15/2027 3,043 BB Ba1 4,650 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 4,897 BB Ba 3,270 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 3,624 NR* VMIG1+ 2,200 Port Arthur, Texas, Navigational District, PCR, Refunding (Texaco Incorporated Project), VRDN, 3.80% due 10/01/2024 (a) 2,200 NR* NR* 1,845 Swisher County, Texas, Jail Facilities Financing Corporation Revenue Bonds (Criminal Detention Center), 9.75% due 8/01/2009 (f) -- BBB Baa2 1,000 West Side Calhoun County, Texas, Navigation District, Solid Waste Disposal Revenue Bonds (Union Carbide Chemicals and Plastics), AMT, 8.20% due 3/15/2021 1,114 Utah -- 2.9% AAA Aaa 3,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Incorporated), INFLOS, 9.616% due 5/15/2020 (e)(g) 3,514 NR* NR* 2,600 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental), AMT, Series A, 7.55% due 7/01/2027 2,675 Vermont -- 0.8% NR* NR* 1,500 Vermont Educational and Health Buildings Financing Agency Revenue Bonds (College of Saint Joseph's Project), 8.50% due 11/01/2024 1,692 Virginia -- 1.8% A+ A2 1,500 Henry County, Virginia, IDA, Hospital Revenue Refunding Bonds (Martinsville and Henry Memorial Hospital), 6% due 1/01/2027 1,539 NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Multi-Trade Revenue Bonds, AMT, Series A, 7.50% due 1/01/2014 2,176 Total Investments (Cost -- $189,991) -- 97.3% 206,001 Other Assets Less Liabilities -- 2.7% 5,619 -------- Net Assets -- 100.0% $211,620 ========
(a) The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at August 31, 1997. (b) MBIA Insured. (c) GNMA Collateralized. (d) Prerefunded. (e) AMBAC Insured. (f) Non-income producing security. (g) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at August 31, 1997. (h) FSA Insured. * Not Rated. ** Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund. + Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 FINANCIAL INFORMATION Statements of Assets and Liabilities as of August 31, 1997 Assets: Investments, at value (identified cost -- $189,990,692) (Note 1a) $206,000,786 Cash 51,512 Receivables: Interest $3,832,233 Securities sold 1,876,749 Capital shares sold 544,416 6,253,398 ----------- Prepaid registration fees and other assets (Note 1e) 43,400 ------------- Total assets 212,349,096 ------------- Liabilities: Payables: Dividends to shareholders (Note 1f) 360,144 Investment adviser (Note 2) 178,298 Administrator (Note 2) 46,920 585,362 ----------- Accrued expenses and other liabilities 143,599 ------------- Total liabilities 728,961 ------------- Net Assets: Net assets $211,620,135 ============= Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $1,865,498 Consist of: Paid-in capital in excess of par 191,672,043 Undistributed realized capital gains on investments -- net 2,072,500 Unrealized appreciation on investments -- net 16,010,094 ------------- Net assets -- Equivalent to $11.34 per share based on 18,654,978 shares of capital outstanding $211,620,135 =============
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 FINANCIAL INFORMATION (Continued) Statement of Operations Investment Income Interest and amortization of premium and discount earned $14,933,718 (Note 1d): Expenses: Investment advisory fees (Note 2) 1,950,602 Administrative fees (Note 2) 513,316 Transfer agent fees (Note 2) 119,690 Advertising 66,715 Printing and shareholder reports 60,505 Accounting services (Note 2) 52,907 Professional fees 51,421 Registration fees (Note 1e) 48,359 Listing fees 35,882 Directors' fees and expenses 24,683 Custodian fees 18,746 Pricing services 14,215 Other 6,476 ------------ Total expenses 2,963,517 ------------ Investment income -- net 11,970,201 ------------ Realized & Realized gain on investments -- net 4,093,259 Unrealized Change in unrealized appreciation on investments -- net 4,045,233 Gain on ------------ Investments -- Net Net Increase in Net Assets Resulting from Operations $20,108,693 (Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 FINANCIAL INFORMATION (Continued) Statement of Changes in Net Assets For the Year Ended August 31, 1997 Increase (Decrease) in Net Assets 1997 1996 Operations: Investment income -- net $11,970,201 $11,898,053 Realized gain on investments -- net 4,093,259 1,967,290 Change in unrealized appreciation on investments -- net 4,045,233 (2,408,692) ------------- ------------- Net increase in net assets resulting from operations 20,108,693 11,456,651 ------------- ------------- Dividends & Investment income -- net (11,970,201) (11,898,053) Distributions to Realized gain on investments -- net (680,014) -- Shareholders ------------- ------------- (Note 1f): Net decrease in net assets resulting from dividends and distributions to shareholders (12,650,215) (11,898,053) ------------- ------------- Capital Share Net increase in net assets derived from capital share transactions 4,609,228 1,418,958 Transactions ------------- ------------- (Note 4): Net Assets: Total increase in net assets 12,067,706 977,556 Beginning of year 199,552,429 198,574,873 ------------- ------------- End of year $211,620,135 $199,552,429 ============= =============
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 FINANCIAL INFORMATION (Concluded) Financial Highlights The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended August 31, 1997 1996 1995 1994 1993 Increase (Decrease) in Net Asset Value: Per Share Net asset value, beginning of year $10.94 $10.97 $10.92 $11.44 $10.74 Operating --------- --------- --------- --------- --------- Performance: Investment income -- net .65 .66 .65 .65 .68 Realized and unrealized gain (loss) on investments -- net .44 (.03) .23 (.45) .75 --------- --------- --------- --------- --------- Total from investment operations 1.09 .63 .88 .20 1.43 --------- --------- --------- --------- --------- Less dividends and distributions: Investment income -- net (.65) (.66) (.65) (.65) (.68) Realized gain on investments -- net (.04) -- (.15) (.07) (.05) In excess of realized gain on investments -- net -- -- (.03) -- -- --------- --------- --------- --------- --------- Total dividends and distributions (.69) (.66) (.83) (.72) (.73) --------- --------- --------- --------- --------- Net asset value, end of year $11.34 $10.94 $10.97 $10.92 $11.44 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 10.20% 5.81% 8.68% 1.75% 13.83% Return:* ========= ========= ========= ========= ========= Ratios to Average Expenses, net of reimbursement 1.44% 1.50% 1.52% 1.48% 1.37% Net Assets: ========= ========= ========= ========= ========= Expenses 1.44% 1.50% 1.52% 1.48% 1.47% ========= ========= ========= ========= ========= Investment income -- net 5.83% 5.90% 6.11% 5.81% 6.17% ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $211,620 $199,552 $198,575 $212,958 $216,922 Data: ========= ========= ========= ========= ========= Portfolio turnover 43.07% 28.54% 21.28% 28.51% 28.74% ========= ========= ========= ========= =========
* Total investment returns exclude the effects 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. See Notes to Financial Statements. Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 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 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, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. 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. [bullet] Financial futures contracts -- The Fund may purchase or sell interest rate 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. [bullet] Options -- The Fund is authorized to write covered call options and purchase put 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 Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997 income. Realized gains and losses on security transactions are determined on the identified cost basis. (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. 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 0.95% 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 0.25% 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 year ended August 31, 1997, Merrill Lynch Funds Distributor, Inc. ("MLFD") earned early withdrawal charges of $44,647 relating to the tender of the Fund's shares. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended August 31, 1997 were $86,555,822 and $85,811,091, respectively. Net realized and unrealized gains as of August 31, 1997 were as follows: Realized Unrealized Gains Gains Long-term investments $4,093,259 $16,010,094 ----------- ----------- Total $4,093,259 $16,010,094 =========== =========== As of August 31, 1997, net unrealized appreciation for Federal income tax purposes aggregated $15,989,952, of which $18,452,554 related to appreciated securities and $2,462,602 related to depreciated securities. The aggregate cost of investments at August 31, 1997 for Federal income tax purposes was $190,010,834. 4. Capital Share Transactions: Transactions in capital shares were as follows: For the Year Ended Dollar August 31, 1997 Shares Amount Shares sold 2,126,310 $23,757,046 Shares issued to share- holders in reinvestment of dividends and distributions 447,856 4,995,614 ----------- ----------- Total issued 2,574,166 28,752,660 Shares tendered (2,153,158) (24,143,432) ----------- ----------- Net increase 421,008 $4,609,228 =========== =========== For the Year Ended Dollar August 31, 1996 Shares Amount Shares sold 1,986,078 $21,952,170 Shares issued to share- holders in reinvestment of dividends 435,140 4,809,103 ----------- ----------- Total issued 2,421,218 26,761,273 Shares tendered (2,283,709) (25,342,315) ----------- ----------- Net increase 137,509 $1,418,958 =========== =========== EX-99.(G)(3) 8 EXHIBIT-99(G)(3) EXHIBIT (g)(3)
Merrill Lynch High Income Municipal Bond Fund, Inc. February 28, 1998 SCHEDULE OF INVESTMENTS (in Thousands) S&P Moody's Face Value State Ratings Ratings Amount Issue (Note 1a) Alabama -- 1.2% B+ NR* $1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation American Project), 8% due 4/01/2009 $1,134 BBB- Baa3 1,500 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds (Mobile Energy Services Co. Project), 6.95% due 1/01/2020 1,685 Arizona -- 3.7% B B2 3,000 Coconino County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds (Tucson Electric Power - Navajo), AMT, Series A, 7.125% due 10/01/2032 3,449 Pima County, Arizona, IDA, Revenue Bonds: NR* NR* 1,235 (La Hacienda Project), 9.50% due 12/01/2016 1,292 B B2 3,500 (Tucson Electric Power Company Project), Series B, 6% due 9/01/2029 3,595 California -- 1.3% AAA Aaa 10,000 Foothill/Eastern Transportation Corridor Agency, California, Toll Road Revenue Bonds (Senior Lien), Series A, 6.50%** due 1/01/2028 (h) 2,090 NR* NR* 1,500 Long Beach, California, Redevelopment Agency, M/F Housing Revenue Bonds (Pacific Court Apartments), AMT, Issue B, 6.80% due 9/01/2013 (f) 825 Colorado -- 5.5% NR* NR* 1,700 Colorado Postsecondary Educational Facilities Authority Revenue Bonds (Colorado Ocean Journey Incorporated Project), 8.30% due 12/01/2017 1,998 Denver, Colorado, City and County Airport Revenue Bonds: BBB Baa1 2,000 AMT, Series D, 7.75% due 11/15/2013 2,533 AAA Baa1 1,500 Series A, 7.25% due 11/15/2002 (d) 1,722 AAA NR* 500 Series A, 7.25% due 11/15/2002 (d) 574 NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds (Downtown Denver), AMT, Series A, 7.75% due 9/01/2017 3,328 Mountain Village Metropolitan District, Colorado, Refunding Bonds (San Miguel County), UT: NR* NR* 1,350 8.10% due 12/01/2002 (d) 1,588 NR* NR* 650 8.10% due 12/01/2011 750 Page 2 Connecticut -- 2.6% Connecticut State Health and Educational Facilities Authority Revenue Bonds: NR* NR* 1,500 (Edgehill Issue), Series A, 6.875% due 7/01/2027 1,613 BBB Baa2 2,205 Refunding (Hospital for Special Care Issue), Series B, 5.375% due 7/01/2017 2,198 NR* B1 1,875 New Haven, Connecticut, Facilities Revenue Bonds (Hill Health Corporation Project), 9.25% due 5/01/2017 2,093 Florida -- 1.7% NR* NR* 1,000 Arbor Greene, Florida, Community Development District, Special Assessment Revenue Bonds, 7.60% due 5/01/2018 1,078 NR* NR* 1,000 Grand Haven Community Development District, Florida, Special Assessment, Series B, 6.90% due 5/01/2019 1,029 BBB NR* 960 Jacksonville, Florida, Port Authority, IDR, Refunding (United States Gypsum Company Project), 7.25% due 10/01/2014 1,090 A1+ VMIG1+ 600 Saint Lucie County, Florida, PCR, Refunding (Florida Power & Light Company Project), VRDN, 3.60% due 1/01/2026 (a) 600 Georgia -- 4.9% NR* Aaa 2,465 Atlanta, Georgia, Urban Residential Finance Authority, College Facilities Revenue Bonds (Morris Brown College Project), 9.50% due 12/01/2001 (d) 2,983 NR* NR* 1,950 Atlanta, Georgia, Urban Residential Finance Authority, M/F Housing Mortgage Revenue Bonds (Northside Plaza Apartments Project), 9.75% due 11/01/2020 2,105 NR* NR* 2,000 Hancock County, Georgia, COP, 8.50% due 4/01/2015 2,249 NR* NR* 1,465 Rockdale County, Georgia, Development Authority, Solid Waste Disposal Revenue Bonds (Visy Paper Inc. Project), AMT, 7.40% due 1/01/2016 1,590 NR* NR* 2,000 Savannah, Georgia, EDA, IDR (Stone Container Corporation Project), AMT, 7.40% due 4/01/2026 2,252 Hawaii -- 0.9% AA+ NR* 1,750 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Citizens Utility Company), RIB, AMT, Series 91-B, 9.305% due 11/01/2021 (g) 2,026 Illinois -- 5.9% BBB- Baa2 4,000 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Refunding Bonds (American Airlines Inc. Project), 8.20% due 12/01/2024 4,895 NR* NR* 3,195 Illinois Development Finance Authority, Acquisition Program Revenue Bonds (Prime Health Care Centers Facilities), 7.75% due 12/01/2016 3,542 NR* NR* 2,000 Illinois Educational Facilities Authority Revenue Bonds (Chicago Osteopathic Health System), 7.25% due 11/15/2019 (d) 2,487 NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross Hospital Project), 6.75% due 3/01/2024 1,370 BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding Page 3 Bonds (Sales Tax -- Landings Redevelopment), 7% due 12/01/2008 1,116 Indiana -- 2.3% A+ NR* 1,500 Indiana Bond Bank, Special Hospital Program (Hendricks Community Hospital), Series A, 7.125% due 4/01/2013 1,657 BBB+ NR* 1,250 Indiana Health Facilities Financing Authority, Hospital Revenue Refunding Bonds (Schneck Memorial -- Jackson County), 5.125% due 2/15/2017 1,215 A1+ Aaa 200 Rockport, Indiana, PCR, Refunding (AEP Generating Co. Project), VRDN, Series A, 3.75% due 7/01/2025 (a)(e) 200 NR* NR* 2,000 Wabash, Indiana, Solid Waste Disposal Revenue Bonds (Jefferson Smurfit Corporation Project), AMT, 7.50% due 6/01/2026 2,233 Iowa -- 0.9% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 1,995 Kentucky -- 2.1% AAA Aaa 3,900 Louisville, Kentucky, Hospital Revenue Bonds, INFLOS, 9.319% due 10/30/2001 (b)(d)(g) 4,695 Louisiana -- 3.8% NR* A3 3,500 Lake Charles, Louisiana, Harbor and Terminal District, Port Facilities Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 4,039 NR* A3 1,000 Louisiana Public Facilities Authority, Hospital Revenue Bonds (Woman's Hospital Foundation Project), 7.25% due 10/01/2002 (d) 1,143 BB NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project), 7.50% due 7/01/2013 3,384 Maryland -- 2.4% NR* NR* 5,000 Maryland State Energy Financing Administration, Limited Obligation Revenue Bonds (Cogeneration -- AES Warrior Run), AMT, 7.40% due 9/01/2019 5,542 Massachusetts -- 7.0% NR* NR* 1,145 Boston, Massachusetts, Industrial Development Financing Authority, Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way Project), AMT, 10.50% due 1/01/2011 1,289 NR* Ba2 265 Lawrence, Massachusetts, GO, 9.875% due 12/15/1998 275 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: NR* B 1,765 (New England Memorial Hospital Project), Series C, 7% due 4/01/2014 1,782 NR* NR* 305 (North Adams Regional Hospital), Issue B, 8% due 7/01/1998 308 NR* B2 3,000 Refunding (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 2,825 Massachusetts State Industrial Finance Agency Revenue Bonds: NR* B1 1,675 (Bay Cove Human Services Inc.), 8.375% due 4/01/2019 1,912 Page 4 BBB Ba1 1,600 (Vinfen Corporation), 7.10% due 11/15/2018 1,776 NR* NR* 5,000 Massachusetts State Port Authority, Special Project Revenue Bonds (Harborside Hyatt), AMT, 10% due 3/01/2026 5,638 Michigan -- 0.1% A1+ VMIG1+ 300 University of Michigan, University Hospital Revenue Bonds, VRDN, Series A, 3.65% due 12/01/2027 (a) 300 Mississippi -- 1.1% NR* NR* 2,375 Mississippi Development Bank, Special Obligation Refunding Bonds (Diamond Lakes Utilities), Series A, 6.25% due 12/01/2017 2,428 Missouri -- 3.3% BBB+ NR* 2,755 Joplin, Missouri, IDA, Hospital Facilities Revenue Refunding and Improvement Bonds (Tri-State Osteopathic), 8.25% due 12/15/2001 (d) 3,167 BB NR* 3,690 Missouri State Health and Educational Facilities Authority Revenue Bonds (Southwest Baptist University Project), 9.50% due 10/01/2011 4,387 New Jersey -- 11.2% Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds (Holt Hauling & Warehousing), Series A: NR* NR* 4,600 9.625% due 1/01/2011 5,521 NR* NR* 2,000 9.875% due 1/01/2021 2,430 B- 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 4,063 NR* NR* 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due 10/01/2014 1,655 NR* NR* 1,000 New Jersey EDA, Revenue Bonds (Leisure Park Project), Series A, 5.875% due 12/01/2027 1,016 New Jersey Health Care Facilities Financing Authority Revenue Bonds (d): NR* NR* 4,725 (Riverwood Center Issue), Series A, 9.90% due 7/01/2001 5,631 AAA Aaa 4,700 (Saint Elizabeth Hospital), Series B, 8.25% due 7/01/2000 5,210 New Mexico -- 1.9% BB+ Ba1 3,000 Farmington, New Mexico, PCR, Refunding (Public Service Co.), Series B, 5.80% due 4/01/2022 3,090 B B2 1,000 Farmington, New Mexico, PCR (Tucson Electric Power Co. -- San Juan), Series A, 6.95% due 10/01/2020 1,142 New York -- 3.7% BBB+ A3 310 New York City, New York, GO, UT, Series C, Sub-Series C-1, 7.50% due 8/01/2021 350 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Special Project -- KIAC), AMT, Series 4: NR* NR* 1,000 3rd Installment, 7% due 10/01/2007 1,136 Page 5 NR* NR* 2,750 5th Installment, 6.75% due 10/01/2019 3,066 Utica, New York, Public Improvement Bonds, UT: CCC B2 635 8.50% due 8/15/2007 732 CCC B2 635 8.50% due 8/15/2008 732 CCC B2 500 8.50% due 8/15/2009 577 CCC B2 500 8.50% due 8/15/2010 577 CCC B2 500 8.50% due 8/15/2011 577 CCC B2 500 8.50% due 8/15/2012 577 Ohio -- 4.0% BB- Ba2 5,000 Cleveland, Ohio, Airport Special Revenue Refunding Bonds (Continental Airlines, Inc.), AMT, 5.70% due 12/01/2019 4,955 NR* NR* 2,500 Franklin County, Ohio, Health Care Facilities, Revenue Refunding Bonds (Ohio Presbyterian Services), 5.50% due 7/01/2017 2,476 AAA Aaa 1,500 Ohio HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A-2, 9.791% due 3/24/2031 (c)(g) 1,689 Oregon -- 2.4% NR* Baa2 2,000 Oregon State, Economic Development Revenue Refunding Bonds (Pacific Corp. Project), 5.70% due 12/01/2025 2,071 NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds (Wauna Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,101 B+ NR* 1,955 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint Corporation Project), 8% due 12/01/2003 2,190 Pennsylvania -- 12.4% NR* NR* 2,000 Lehigh County, Pennsylvania, General Purpose Authority Revenue Bonds (Wiley House Kids Peace), 8.75% due 11/01/2014 2,096 BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority Revenue Bonds (Bradford Hospital Project), 8.875% due 10/01/2020 5,661 Montgomery County, Pennsylvania, IDA, Revenue Bonds (d): NR* NR* 1,500 (1st Mortgage -- Meadowood Corporation Project), Series A, 10.25% due 12/01/2000 1,765 NR* Ba3 3,400 (Pennsburg Nursing and Rehabilitation Center), 7.625% due 3/31/2004 4,033 BBB- Baa2 2,500 Pennsylvania Economic Development Financing Authority, Exempt Facilities Revenue Bonds (MacMillan Limited Partnership Project), AMT, 7.60% due 12/01/2020 2,802 NR* NR* 5,000 Pennsylvania Economic Development Financing Authority, Recycling Revenue Bonds (Ponderosa Fibres Project), AMT, Series A, 9.25% due 1/01/2022 3,350 NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding (Commercial Development -- Philadelphia Airport), AMT, 7.75% due 12/01/2017 5,648 A1+ VMIG1+ 2,700 Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities Authority, Hospital Revenue Bonds Page 6 (Children's Hospital Project), VRDN, Series A, 3.65% due 3/01/2027 (a) 2,700 Tennessee -- 1.1% BBB Baa2 2,500 Memphis-Shelby County, Tennessee, Airport Authority, Special Facilities and Projects, Revenue Refunding Bonds (Federal Express Corporation), 5.35% due 9/01/2012 2,565 Texas -- 10.0% BBB- Baa2 3,000 Dallas-Fort Worth, Texas, International Airport Facilities Improvement Corporation Revenue Bonds (American Airlines, Inc.), AMT, 7.25% due 11/01/2030 3,370 A1+ NR* 1,100 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN, 3.65% due 12/01/2026 (a) 1,100 BB Ba2 3,000 Houston, Texas, Airport System Revenue Bonds, Special Facilities (Continental Airlines Airport Improvement), AMT, Series C, 6.125% due 7/15/2027 3,137 BB Ba1 4,650 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 4,905 B+ Ba1 4,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin Semiconductor), AMT, 6.375% due 4/01/2027 4,631 BB Ba2 3,270 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 3,804 NR* VMIG1+ 100 Port Arthur, Texas, Navigational District, PCR, Refunding (Texaco Incorporated Project), VRDN, 3.70% due 10/01/2024 (a) 100 A1+ VMIG1+ 200 Sabine River Authority, Texas, PCR, Refunding (Texas Utilities Project), VRDN, Series A, 3.65% due 3/01/2026 (a)(e) 200 NR* VMIG1+ 300 Southwest Texas, Higher Education Authority Incorporated, Revenue Refunding Bonds (Southern Methodist University), VRDN, 3.65% due 7/01/2015 (a) 300 NR* NR* 1,845 Swisher County, Texas, Jail Facilities Financing Corporation Revenue Bonds (Criminal Detention Center), 9.75% due 8/01/2009 (f) -- BBB Baa2 1,000 West Side Calhoun County, Texas, Navigation District, Solid Waste Disposal Revenue Bonds (Union Carbide Chemicals and Plastics), AMT, 8.20% due 3/15/2021 1,112 Utah -- 3.1% AAA Aaa 3,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Incorporated), INFLOS, 9.716% due 5/15/2020 (e)(g)(i) 3,555 NR* NR* 3,200 Toole County, Utah, PCR, Refunding (Laidlaw Environmental), AMT, Series A, 7.55% due 7/01/2027 3,543 Vermont -- 0.8% NR* NR* 1,500 Vermont Educational and Health Buildings Financing Agency Revenue Bonds (College of Saint Joseph's Project), 8.50% due 11/01/2024 1,730 Page 7 Virginia -- 1.0% NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Multi-Trade Revenue Bonds, AMT, Series A, 7.50% due 1/01/2014 2,215 ------------ Total Investments (Cost -- $210,886) -- 102.3% 231,955 Liabilities in Excess of Other Assets -- (2.3%) (5,174) ------------ Net Assets -- 100.0% $226,781 ============ (a) The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at February 28, 1998. (b) MBIA Insured. (c) GNMA Collateralized. (d) Prerefunded. (e) AMBAC Insured. (f) Non-income producing security. (g) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at February 28, 1998. (h) FSA Insured. (i) Escrowed to Maturity. * Not Rated. ** Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund. + Highest short-term rating by Moody's Investors Service, Inc. See Notes to Financial Statements. PORTFOLIO ABBREVIATIONS To simplify the listing of Merrill Lynch High Income Muni- cipal 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) COP Certificates of Participation 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 Page 8 M/F Multi-Family PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds S/F Single-Family UT Unlimited Tax VRDN Variable Rate Demand Notes
Page 9 FINANCIAL INFORMATION Statement of Assets and Liabilities as of February 28, 1998 Assets: Investments, at value (identified cost -- $210,886,239) (Note 1a) $231,955,177 Cash 237,185 Receivables: Interest $4,227,703 Capital shares sold 444,077 Securities sold 301,770 4,973,550 ------------ Prepaid registration fees and other assets (Note 1e) 43,400 ------------ Total assets 237,209,312 ------------ Liabilities: Payables: Securities purchased 9,695,543 Dividends to shareholders (Note 1f) 336,304 Investment adviser (Note 2) 165,588 Administration (Note 2) 43,576 10,241,011 ------------ Accrued expenses and other liabilities 186,986 ------------ Total liabilities 10,427,997 ------------ Net Assets: Net assets $226,781,315 ============ Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $1,978,298 Consist of: Paid-in capital in excess of par 204,457,883 Accumulated realized capital losses on investments -- net (723,804) Unrealized appreciation on investments -- net 21,068,938 ------------ Net assets -- Equivalent to $11.46 per share based on 19,782,978 shares of capital outstanding $226,781,315 ============ See Notes to Financial Statements.
Page 10 Statement of Operations For the Six Months Ended February 28, 1998 Interest Income Interest and amortization of premium and discount earned $7,641,208 (Note 1d): Expenses: Investment advisory fees (Note 2) 1,040,623 Administrative fees (Note 2) 273,848 Professional fees 58,743 Transfer agent fees (Note 2) 56,606 Advertising 31,296 Printing and shareholder reports 29,548 Accounting services (Note 2) 29,427 Listing fees 28,577 Registration fees (Note 1e) 23,294 Directors' fees and expenses 13,982 Custodian fees 9,993 Pricing services 6,929 Other 3,733 ------------ Total expenses 1,606,599 ------------ Investment income -- net 6,034,609 ------------ Realized & Realized gain on investments -- net 977,862 Unrealized Gain on Change in unrealized appreciation on investments -- net 5,058,844 Investments -- Net ------------ (Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $12,071,315 ============ See Notes to Financial Statements.
Page 11 Statements of Changes in Net Assets For the Six For the Months Ended Year Ended February 28, August 31, Increase (Decrease) in Net Assets: 1998 1997 Operations: Investment income -- net $6,034,609 $11,970,201 Realized gain on investments -- net 977,862 4,093,259 Change in unrealized appreciation on investments -- net 5,058,844 4,045,233 ------------ ------------ Net increase in net assets resulting from operations 12,071,315 20,108,693 ------------ ------------ Dividends & Investment income -- net (6,034,609) (11,970,201) Distributions to Realized gain on investments -- net (3,774,166) (680,014) Shareholders ------------ ------------ (Note 1f): Net decrease in net assets resulting from dividends and distributions to shareholders (9,808,775) (12,650,215) ------------ ------------ Capital Share Net increase in net assets derived from capital share transactions 12,898,640 4,609,228 Transactions ------------ ------------ (Note 4): Net Assets: Total increase in net assets 15,161,180 12,067,706 Beginning of period 211,620,135 199,552,429 ------------ ------------ End of period $226,781,315 $211,620,135 ============ ============ See Notes to Financial Statements.
Page 12 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 28, For the Year Ended August 31, 1998 1997 1996 1995 1994 Increase (Decrease) in Net Asset Value: Per Share Net asset value, beginning of period $11.34 $10.94 $10.97 $10.92 $11.44 Operating --------- --------- --------- --------- --------- Performance: Investment income -- net .31 .65 .66 .65 .65 Realized and unrealized gain (loss) on investments -- net .32 .44 (.03) .23 (.45) --------- --------- --------- --------- --------- Total from investment operations .63 1.09 .63 .88 .20 --------- --------- --------- --------- --------- Less dividends and distributions: Investment income -- net (.31) (.65) (.66) (.65) (.65) Realized gain on investments -- net (.20) (.04) -- (.15) (.07) In excess of realized gain on investments -- net -- -- -- (.03) -- --------- --------- --------- --------- --------- Total dividends and distributions (.51) (.69) (.66) (.83) (.72) --------- --------- --------- --------- --------- Net asset value, end of period $11.46 $11.34 $10.94 $10.97 $10.92 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 5.63%++++ 10.20% 5.81% 8.68% 1.75% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses 1.47%* 1.44% 1.50% 1.52% 1.48% Net Assets: ========= ========= ========= ========= ========= Investment income -- net 5.51%* 5.83% 5.90% 6.11% 5.81% ========= ========= ========= ========= ========= Supplemental Net assets, end of period (in thousands) $226,781 $211,620 $199,552 $198,575 $212,958 Data: ========= ========= ========= ========= ========= Portfolio turnover 13.39% 43.07% 28.54% 21.28% 28.51% ========= ========= ========= ========= ========= * Annualized. ** Total investment returns exclude the effects 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.
Page 13 Merrill Lynch High Income Municipal Bond Fund, Inc. February 28, 1998 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. 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, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. 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 Page 14 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. (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. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Page 15 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 0.95% 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 0.25% 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 28, 1998, Merrill Lynch Funds Distributor, Inc. ("MLFD") earned early withdrawal charges of $19,282 relating to the tender of the Fund's shares. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended February 28, 1998 were $46,126,310 and $28,742,385, respectively. Net realized gains for the six months ended February 28, 1998 and net unrealized gains as of February 28, 1998 were as follows: Realized Unrealized Gains Gains Long-term investments $977,862 $21,068,938 ------------ ------------ Total $977,862 $21,068,938 ============ ============ As of February 28, 1998, net unrealized appreciation for Federal income tax purposes aggregated $21,068,938, of which $23,412,369 related to appreciated securities and $2,343,431 related to Page 16 depreciated securities. The aggregate cost of investments at February 28, 1998 for Federal income tax purposes was $210,886,239. 4. Capital Shares Transactions: Transactions in capital shares were as follows: For the Six Months Ended Dollar February 28, 1998 Shares Amount Shares sold 1,726,208 $19,798,525 Shares issued to shareholders in reinvestment of dividends and distributions 372,007 4,258,191 ------------ ------------ Total issued 2,098,215 24,056,716 Shares tendered (970,215) (11,158,076) ------------ ------------ Net increase 1,128,000 $12,898,640 ============ ============ For the Year Ended Dollar August 31, 1997 Shares Amount Shares sold 2,126,310 $23,757,046 Shares issued to shareholders in reinvestment of dividends and distributions 447,856 4,995,614 ------------ ------------ Total issued 2,574,166 28,752,660 Shares tendered (2,153,158) (24,143,432) ------------ ------------ Net increase 421,008 $4,609,228 ============ ============ -----END PRIVACY-ENHANCED MESSAGE-----