<PAGE> 1
PROSPECTUS
DECEMBER 20, 1996
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
COMMON STOCK
------------------------
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is a
continuously offered, non-diversified, closed-end
management investment company seeking to provide shareholders with high current
income exempt from Federal income taxes by investing primarily in a portfolio of
medium to lower grade or unrated municipal obligations with remaining maturities
of greater than one year, the interest on which is exempt from Federal income
taxes in the opinion of bond counsel to the issuer. The Fund may invest in
certain tax-exempt securities which are classified as "private activity bonds"
which may subject certain investors in the Fund to an alternative minimum tax.
At times, the Fund may seek to hedge its portfolio through the use of options
and futures transactions. There can be no assurance that the investment
objective of the Fund will be realized.
INVESTMENTS IN MEDIUM TO LOWER RATED MUNICIPAL OBLIGATIONS (SOMETIMES
REFERRED TO AS "JUNK BONDS") GENERALLY PROVIDE A HIGHER YIELD THAN HIGHER RATED
MUNICIPAL OBLIGATIONS OF SIMILAR MATURITY BUT ARE SUBJECT TO GREATER MARKET RISK
AND ARE ALSO SUBJECT TO A GREATER DEGREE OF RISK WITH RESPECT TO THE ABILITY OF
THE ISSUER TO MEET ITS PRINCIPAL AND INTEREST OBLIGATIONS. As a result, an
investment in the Fund may be speculative in that it involves a high degree of
risk and should not constitute a complete investment program. Investors should
carefully consider the risks before investing. In addition, the Fund should be
considered a long-term investment and not a vehicle for trading purposes. See
"Risk Factors".
Shares of Common Stock of the Fund are offered on a best efforts basis at a
price equal to the next determined net asset value per share without a front-end
sales charge. As of the date of this Prospectus, net asset value per share is
$11.12. Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609)
282-2800, or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases directly through the Fund's transfer agent are not subject to the
postage and handling charge. The minimum initial purchase is $1,000 and the
minimum subsequent purchase in the continuous offering is $50. See "Purchase of
Shares". In connection with an exemption the Fund has obtained from the
Securities and Exchange Commission relating to its tender offers, the Fund will
not offer its shares during the five business days preceding the termination of
a tender offer. See "Tender Offers".
No market presently exists for the Fund's Common Stock and it is not
currently expected that a secondary market will develop. Since the Fund's Common
Stock may not be considered readily marketable, the Board of Directors of the
Fund presently intends to consider the making of tender offers on a quarterly
basis to purchase all or a portion of the Common Stock of the Fund from
shareholders at the net asset value per share. In the event that tender offers
are not made, however, shareholders may find that their shares of Common Stock
are not marketable. See "Tender Offers". Shares of Common Stock purchased by the
Fund pursuant to tender offers which have been held for less than three years
will be subject to an "Early Withdrawal Charge" which will not exceed 3.0% of
the original purchase amount for such Common Stock, which will be paid to the
Fund's distributor. See "Early Withdrawal Charge".
Merrill Lynch Asset Management, L.P., an affiliate of Merrill Lynch, acts as
investment adviser and administrator for the Fund. The address of the Fund is
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800. This Prospectus sets forth concisely information about the
Fund that a prospective investor ought to know before purchasing shares.
Investors are advised to read this Prospectus carefully and retain it for future
reference.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD(2) FUND(3)
<CAPTION>
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $11.12 None $11.12
- ------------------------------------------------------------------------------------------------------------------
Total(3).................................. $135,950,084 None $135,950,084
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Common Stock is offered on a best efforts basis at a price equal to net
asset value, which from November 2, 1990 (commencement of operations) to the
date of this prospectus, has ranged from $10.00 to $11.60 per share.
(2) Because the Distributor will pay all offering expenses (other than
registration fees) and sales commissions to selected dealers (primarily
Merrill Lynch) from its own assets, all of the proceeds of the offering will
be available to the Fund for investment in portfolio securities. See
"Purchase of Shares".
(3) These amounts (a) do not take into account prepaid registration fees, in the
amount of approximately $48,900, which will be charged to income as the
related shares are issued, and (b) assume all shares currently registered
are sold pursuant to a continuous offering.
------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is a
continuously offered, non-diversified, closed-end fund. See "The Fund".
THE OFFERING
Shares of Common Stock of the Fund may be offered by Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), and other securities dealers which have
entered into selected dealer agreements with the Distributor, including Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
The Fund will offer its Common Stock at a price equal to the next
determined net asset value per share without a front-end sales charge. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50.
The Fund reserves the right to waive or modify the initial and subsequent
minimum investment requirements at any time. See "Purchase of Shares".
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide shareholders with high
current income exempt from Federal income taxes by investing primarily in a
portfolio of medium to lower grade or unrated municipal obligations with
remaining maturities of greater than one year, the interest on which is exempt
from Federal income taxes in the opinion of bond counsel to the issuer. See
"Investment Objective and Policies".
INVESTMENT ADVISER AND ADMINISTRATOR
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
is the Fund's investment adviser and is responsible for the management of the
Fund's investment portfolio and for providing administrative services to the
Fund. For its advisory services, the Fund pays the Investment Adviser a monthly
fee at the annual rate of 0.95 of 1% of the Fund's average daily net assets. For
administrative services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.25 of 1% of the Fund's average daily net assets. While the
aggregate of the advisory and administrative fees is higher than that paid by
most other investment companies, it is similar to that paid by other
continuously offered closed-end funds. The Investment Adviser is owned and
controlled by Merrill Lynch & Co., Inc. As of November 30, 1996, the Investment
Adviser or its affiliate, Fund Asset Management, L.P. had a total of
approximately $223.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser. See "Investment Advisory and Administrative Arrangements".
2
<PAGE> 3
DISTRIBUTIONS
The Fund intends to declare dividends daily and to pay dividends monthly
and to distribute substantially all of its net investment income to holders of
Common Stock. Net capital gains, if any, will be distributed at least annually
to holders of Common Stock.
TENDER OFFERS
No market presently exists for the Fund's Common Stock and it is not
currently anticipated that a secondary market will develop. In view of this, the
Board of Directors of the Fund intends to consider the making of tender offers
on a quarterly basis to purchase Common Stock of the Fund from shareholders at a
price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates. The Board of
Directors is under no obligation to authorize the making of a tender offer and
no assurance can be given that in any particular quarter a tender offer will be
made. If a tender offer is not made, shareholders may be unable to sell their
shares. Shares of Common Stock which have been held for less than three years
and which are purchased by the Fund pursuant to tender offers will be subject to
an early withdrawal charge. See "Early Withdrawal Charge". In addition, Merrill
Lynch charges its customers a processing fee (presently, $4.85) to confirm a
repurchase of shares from such customers pursuant to a Tender Offer. Tenders
made directly through the Fund's Transfer Agent are not subject to the postage
and handling charge.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The Fund invests in medium to lower grade or unrated municipal obligations
and has been structured as a "non-diversified" closed-end investment company. In
addition, the Fund will concentrate its investments in obligations of issuers in
the health care industry. As a result, investment in the Fund involves special
considerations. See "Risk Factors".
The Fund expects that there will be no secondary market for its Common
Stock. Moreover, Merrill Lynch and other selected dealers are prohibited under
applicable law from making a market in the Fund's Common Stock while the Fund is
making either a public offering of or a tender offer to purchase its Common
Stock. To the extent a secondary market does develop, however, investors should
be aware that the shares of closed-end funds frequently trade in the secondary
market at a discount. Should there be a secondary market for the Fund's shares
of Common Stock, the market price of the shares may vary from net asset value.
Because of the lack of a secondary market and the early withdrawal charge,
the Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving holders of Common Stock an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. See "Description of Capital
Stock -- Certain Provisions of the Articles of Incorporation".
The Fund is authorized to borrow money in amounts of up to 33% of the value
of its total assets at the time of such borrowings to finance the purchase of
its own shares pursuant to tender offers, if any, or for
3
<PAGE> 4
temporary, extraordinary or emergency purposes. Borrowings by the Fund (commonly
known as "leveraging") create an opportunity for greater total return but, at
the same time, may increase the Fund's expenses. See "Risk Factors".
RISK FACTORS
Emphasis on Health Care Industry. At least 25% of the Fund's assets will
be concentrated in obligations of issuers in the health care industry.
Accordingly, the Fund will be more susceptible to factors affecting that
industry than will be a municipal bond mutual fund that does not concentrate its
investments in such industry. In view of this, an investment in the Fund should
be made with an understanding of the characteristics of investments in the
health care industry and the risks that such investments may entail. See
"Investment Objective and Policies -- Description of Municipal Bonds".
Lower-Rated Securities. Investment in the Fund's shares involves special
risk considerations because a substantial portion of the portfolio will consist
of high yielding, medium to lower grade and unrated securities ("high yield
securities"). See "Investment Objective and Policies". Because investments in
high yield securities entail a somewhat higher risk of loss of income or
principal than investments in higher rated securities, an investment in the Fund
should not constitute a complete investment program and may not be appropriate
for all investors.
The market values of high yield securities tend to reflect individual
issuer developments to a greater extent than do higher rated securities, which
react primarily to fluctuations in the general level of interest rates. High
yield securities also tend to be more sensitive to economic conditions and
generally will involve more credit risk than securities in the higher rating
categories. Securities rated in the medium and lower rating categories by
Standard & Poor's Ratings Services ("S&P"), Moody's Investors Service, Inc.
("Moody's") and Fitch Investors Service, Inc. ("Fitch"), sometimes referred to
as "junk" bonds, are considered, on balance, to be predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Even securities rated BBB by S&P or by Fitch or Baa
by Moody's, ratings which are considered investment grade, may possess some
speculative characteristics.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risk
associated with acquiring the securities of such issuers generally is greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield securities
is relatively new and has not weathered a major economic recession, and it is
unknown what effect such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to serve its debt obligations also may
be adversely affected by specific issuer developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. In its selection of high yield securities, however, the Investment
Adviser will give preference to securities that are secured and not subordinated
to other creditors.
4
<PAGE> 5
High yield securities may have call or redemption features which would
permit an issuer to repurchase the securities from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders. Under ordinary circumstances, the Investment Adviser will give
preference to securities which have, at a minimum, ten year call protection.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
high yield securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
The Fund acquires a significant portion of its high yield securities upon
issuance, which involves special risks because the securities so acquired are
new issues. In such instances the Fund may be a substantial purchaser of the
issue and therefore have the opportunity to participate in structuring the terms
of the offering. Although this may enable the Fund to seek to protect itself
against certain of such risks, the special considerations discussed herein would
nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to affect adversely the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
The following table sets forth the average monthly dollar-weighted market
value by S&P rating category of the obligations held by the Fund during the
fiscal year ended August 31, 1996:
<TABLE>
<S> <C>
RATED OBLIGATIONS............................................. 54.53%
AAA: 9.75%; AA: 1.87%; A: 1.94%; BBB: 19.25%; BB: 17.40% and
B: 2.63%; CCC: 1.69%.
UNRATED OBLIGATIONS*.......................................... 45.47%
</TABLE>
- ---------------
* Obligations which are not rated by S&P. Such obligations may be rated by
nationally recognized statistical rating organizations other than S&P, or may
not be rated by any of such organizations. With respect to the percentage of
the Fund's assets invested in such securities, the Fund's Investment Adviser
believes that 2.72% are of comparable quality to obligations rated AAA, 0.10%
are of comparable quality to obligations rated A, 3.53% are of comparable
quality to obligations rated BBB, 27.02% are of comparable quality to
obligations rated BB, 11.48% are of comparable quality to obligations rated B
and 0.62% are of comparable quality to obligations rated CCC. This
determination is based on the Investment Adviser's own internal evaluation and
does not necessarily reflect how such securities would be rated by S&P if it
were to rate the securities.
5
<PAGE> 6
In addition, the Fund may invest in certain types of investments, such as
"inverse floating obligations" or "residual interest bonds", the market values
of which will generally be more volatile than the market values of fixed rate
Municipal Bonds. See "Investment Objective and Policies -- Description of
Municipal Bonds".
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company so that it will be able to invest more than 5% of the value
of its assets in the obligations of a single issuer subject to the
diversification requirements of subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to the Fund. To the extent the Fund
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Fund may be more susceptible than a more widely
diversified fund to any single economic, political or regulatory occurrence or
to changes in an issuer's financial condition or in the market's assessment of
the issuers.
Leverage. The Fund is authorized to borrow money in amounts of up to 33%
of the value of its total assets at the time of such borrowings to finance the
purchase of its own shares pursuant to tender offers, if any, or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return but, at the same
time, such borrowings may increase the Fund's expenses. The Fund may be required
to maintain specified minimum available balances in cash or cash equivalents in
connection with borrowings (which may be higher than the Fund would otherwise
maintain) or to pay a commitment or other fee to maintain a line of credit;
either of these requirements will increase the cost of borrowing over the stated
interest rate. As a result, the use of leverage may diminish the investment
performance of the Fund compared with what it would have been without leverage.
The Fund's willingness to borrow, as opposed to selling portfolio securities,
may depend on several factors, including market conditions and interest rates.
Derivative Securities. The Fund may invest in certain securities which may
be considered "derivative securities" including Municipal Bonds the return on
which is based on a particular index of value or interest rates, and inverse
floating obligations or residual interest bonds on which the interest rates
typically decline as market rates increase and increase as market rates decline.
Such securities have the effect of providing a degree of investment leverage,
which will generally result in the market values of such instruments having
greater volatility than the market values of fixed-rate tax-exempt securities.
See "Investment Objective and Policies -- Derivative Securities".
6
<PAGE> 7
FEE TABLE
The following table is intended to assist Fund investors in understanding
the various costs and expenses associated with investing in the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES(A)
- ----------------------------------------------------------------------
<S> <C>
Sales Load (as a percentage of offering price)........................ None
Dividend Reinvestment Plan Fees....................................... None
Early Withdrawal Charge (as a percentage of original purchase price or
net asset value at the time of repurchase)(b)....................... 3.0% during the first
year, decreasing 1.0%
annually thereafter
to 0.0% after the
third year
</TABLE>
<TABLE>
<CAPTION>
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)(C)
- ------------------------------------------------------------------------------------
<S> <C>
Investment Advisory Fee............................................................. 0.95%
Other Expenses(d)................................................................... 0.55
----
Total Annual Expenses............................................................... 1.50%
====
</TABLE>
- ---------------
(a) Shareholders tendering shares within three years of their purchase may be
subject to the Early Withdrawal Charge. See "Early Withdrawal
Charge" -- page 25.
(b) See "Early Withdrawal Charge" -- page 25.
(c) See "Investment Advisory and Administrative Arrangements" -- page 28.
(d) Includes administrative fees, which are payable to the Investment Adviser by
the Fund at the rate of 0.25% of net assets attributable to common shares.
See "Investment Advisory and Administrative Arrangements" -- page 28.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) total annual expenses of 1.50%, (2) a
5% annual return throughout the periods and (3) tender at the
end of the period............................................ $ 45* $57* $82 $179
An investor would pay the following expenses on a $1,000
investment assuming no tender at the end of the period....... $ 15 $47 $82 $179
</TABLE>
- ---------------
* Reflects the Early Withdrawal Charge.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's current fiscal year. The example set forth
above assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and repurchases directly through
the Transfer Agent are not subject to the processing fee.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended August 31, 1996 and the independent auditors' report thereon are set forth
herein under "Financial Statements".
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
FOR THE
PERIOD
NOVEMBER 2,
FOR THE YEAR ENDED AUGUST 31, 1990+ TO
INCREASE (DECREASE) IN NET ASSET -------------------------------------------------------- AUGUST 31,
VALUE: 1996 1995 1994 1993 1992 1991
- --------------------------------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.................... $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29 $ 10.00
-------- -------- -------- -------- -------- -----------
Investment income -- net..... .66 .65 .65 .68 .71 .63
Realized and unrealized gain
(loss) on
investments -- net........ (.03) .23 (.45) .75 .50 .29
-------- -------- -------- -------- -------- -----------
Total from investment
operations................ .63 .88 .20 1.43 1.21 .92
-------- -------- -------- -------- -------- -----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net..... (.66) (.65) (.65) (.68) (.71) (.63)
Realized gain on
investments............... -- (.15) (.07) (.05) (.05) --
In excess of realized gain on
investments -- net........ -- (.03) -- -- -- --
-------- -------- -------- -------- -------- -----------
Total dividends and
distributions............. (.66) (.83) (.72) (.73) (.76) (.63)
-------- -------- -------- -------- -------- -----------
Net asset value, end of
period.................... $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29
========= ========= ========= ========= ========= ==========
TOTAL INVESTMENT RETURN*:
Based on net asset value per
share..................... 5.81% 8.68% 1.75% 13.83% 12.29% 9.43%++
========= ========= ========= ========= ========= ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............. 1.50% 1.52% 1.48% 1.37% 1.30% .84%**
========= ========= ========= ========= ========= ==========
Expenses..................... 1.50% 1.52% 1.48% 1.47% 1.55% 1.76%**
========= ========= ========= ========= ========= ==========
Investment income -- net..... 5.90% 6.11% 5.81% 6.17% 6.85% 7.43%**
========= ========= ========= ========= ========= ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................ $199,552 $198,575 $212,958 $216,922 $170,735 $ 114,628
========= ========= ========= ========= ========= ==========
Portfolio turnover........... 28.54% 21.28% 28.51% 28.74% 31.74% 75.92%
========= ========= ========= ========= ========= ==========
</TABLE>
- ---------------
* 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.
** Annualized.
+ Commencement of Operations.
++ Aggregate total investment return.
8
<PAGE> 9
THE FUND
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is a
continuously offered non-diversified, closed-end, management investment company.
The Fund was incorporated under the laws of the State of Maryland on August 16,
1990, and has registered as an investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund's principal office is located
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone
number is (609) 282-2800.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders 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 with remaining maturities of greater than one year
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies or instrumentalities paying
interest which, in the opinion of bond counsel to the issuer, is exempt from
Federal income taxes ("Municipal Bonds"). The Fund at all times, except during
temporary defensive periods, will maintain at least 75% of its assets in
Municipal Bonds which are rated in any one of the medium and lower rating
categories of a nationally recognized statistical rating organization or are
unrated. In the case of Moody's Investors Service ("Moody's"), Standard & Poor's
Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch"), these
ratings are currently Baa (Moody's) or BBB (S&P or Fitch) or lower,
respectively. These are fundamental policies of the Fund and, therefore, may not
be changed without a vote of a majority of the outstanding shares of the Fund.
The Fund presently contemplates that it will not invest more than 25% of its
total assets (taken at market value) in Municipal Bonds whose issuers are
located in the same state. There can be no assurance that the investment
objective of the Fund will be realized.
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal income taxes by
investing in a professionally managed portfolio of high-yielding Municipal
Bonds. Additionally, investment research and credit analysis relating to the
municipal securities in which the Fund seeks to invest are not readily
available. Moreover, many of these securities are not widely traded and the
execution of transactions in such securities requires expertise. Consequently,
the professional portfolio management which is provided by the Investment
Adviser is particularly important in the sector of the municipal securities
market in which the Fund invests. The Fund also relieves the investor of the
burdensome administrative details involved in managing a portfolio of Municipal
Bonds. The benefits are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the advisory
and administrative fees and operational costs.
Investments in lower rated Municipal Bonds generally provide a higher yield
than higher rated tax-exempt securities of similar maturity but are subject to
greater market risk and are also subject to a greater degree of risk with
respect to the ability of the issuer to meet its principal and interest
obligations. See the Appendix to this Prospectus for a description of Moody's,
S&P's and Fitch's ratings of Municipal Bonds.
The Fund will seek to reduce risk through diversification, credit analysis
and monitoring of current developments and trends in both the economy and
financial markets. The Investment Adviser will use various means to research the
stability and/or potential for improvement of various municipal issuers in
connection
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with the proposed purchase of their securities by the Fund. Evaluation of each
Municipal Bond may include the analysis of financial performance, debt
structure, economic factors and the administrative structure of the issuer.
Additionally, the priority of liens and the overall structure of the particular
issue may be factors which will determine suitability for purchase. Further
investigation may be performed and may include, among other things, discussions
with project management, corporate officers and industry experts as well as site
inspections, area analysis, and project and financial projection analysis. All
purchases and sales also may be subject to the review of market data, economic
projections and the performance of the financial markets. Certain economic
indicators also may be monitored. Additionally, the Investment Adviser will vary
the average maturity of the Fund's portfolio securities based upon the
Investment Adviser's assessment of economic and market conditions.
The Fund expects that there will be no secondary market for its Common
Stock. Moreover, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and other selected dealers are prohibited under applicable law from
making a market in the Fund's Common Stock while the Fund is making either a
public offering of or a tender offer to purchase its Common Stock. To the extent
a secondary market does develop, however, investors should be aware that the
shares of closed-end investment companies frequently trade at a discount from
their net asset value. The net asset value of the shares of a closed-end
investment company, such as the Fund, which invests primarily in fixed income,
tax-exempt securities, changes as the general levels of interest rates
fluctuate. When interest rates decline, the value of a fixed income portfolio
can be expected to rise. Conversely, when interest rates rise, the value of a
fixed income portfolio can be expected to decline.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund as a "regulated
investment company" for purposes of the Code. See "Taxes". To qualify, among
other requirements, the Fund will limit its investments so that, at the close of
each quarter of the taxable year, (i) not more than 25% of the market value of
the Fund's total assets will be invested in the securities (other than U.S.
Government securities) of a single issuer and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities (other than U.S. Government
securities) of a single issuer. A fund which elects to be classified as
"diversified" under the 1940 Act must satisfy the foregoing 5% requirement with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's net asset
value may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include primarily debt obligations issued to obtain funds
for various public purposes, including construction and equipping of a wide
range of public facilities, refunding of outstanding obligations and obtaining
funds for general operating expenses and loans to other public or private
institutions for the construction of facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities to
finance various privately-operated facilities and certain local facilities,
including pollution control facilities. For purposes of this Prospectus, such
obligations are Municipal Bonds if the
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interest paid thereon is exempt from Federal income tax, even though such bonds
may be "private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit, and taxing power for
the payment of principal and interest. The taxing power of any governmental
entity may be limited, however, by provisions of state constitutions or laws,
and an entity's credit will depend on many factors, including potential erosion
of the tax base due to population declines, natural disasters, declines in the
state's industrial base or inability to attract new industries, economic limits
on the ability to tax without eroding the tax base, state legislative proposals
or voter initiatives to limit ad valorem real property taxes, and the extent to
which the entity relies on Federal or state aid, access to capital markets or
other factors beyond the state's or entity's control. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the user of the
facility being financed. Industrial development bonds are in most cases revenue
bonds and generally are not secured by a pledge of the credit or taxing power of
the issuer of such bonds. The payment of the principal and interest on such
industrial development bonds depends solely on the ability of the user of the
facility financed by the bonds to meet its financial obligations, and the
pledge, if any, of real and personal property so financed as security for such
payment. Municipal Bonds also may include "moral obligation" bonds which
normally are issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
The Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of the Fund's assets that
may be invested in Municipal Bonds which may subject certain investors to an
alternative minimum tax. See "Taxes".
Federal tax legislation has limited the types and volume of bonds
qualifying for the Federal income tax exemption of interest. As a result, this
legislation and legislation which may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Fund.
The Fund may invest a relatively high percentage of its assets in Municipal
Bonds issued by entities which may be located in the same geographic area, or
which may pay their interest obligations from the revenues derived from similar
projects such as hospitals, multi-family housing, nursing homes, continuing care
facilities, commercial facilities (including hotels), electric utility systems
or industrial companies. This may make the Fund more susceptible to similar
economic, political, or regulatory occurrences. As the similarity in issuers
increases, the potential for fluctuation of the net asset value of shares of the
Fund also increases. Also, it is anticipated that a significant percentage of
the Municipal Bonds in the Fund's portfolio will be issued by entities or
secured by facilities with a relatively short operating history. Therefore,
investors should also be aware of the risks which these investments might
entail, as discussed below. See also "Industrial Development Bonds" below.
Derivative Securities. The Fund may invest in Municipal Bonds (and
Non-Municipal Tax-Exempt Securities, as defined herein) the return on which is
based on a particular index of value or interest rates. For example, the Fund
may invest in Municipal Bonds that pay interest based on an index of Municipal
Bond
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interest rates or based on the value of gold or some other commodity. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of an index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates decline.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the value
of the particular index. Interest and principal payable on the Municipal Bonds
may also be based on relative changes among particular indices. Also, the Fund
may invest in so-called "inverse floating obligations" or "residual interest
bonds" on which the interest rates typically decline as market rates increase
and increase as market rates decline. The Fund's return on such types of
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Investment Adviser
believes, however, that indexed and inverse floating obligations represent
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or to vary
the degree of investment leverage relatively efficiently under different market
conditions.
Health Care Revenue Bonds. These securities include Municipal Bonds issued
to finance hospitals, nursing homes and continuing care facilities and which are
generally secured by the revenues of particular facilities. The ability of the
issuers of such securities to meet their obligations is dependent upon, among
other things, the revenues, costs and occupancy levels of the subject facilities
and the competitive nature of these industries. In addition, a major portion of
hospital and nursing home revenues typically is derived from Federal or state
programs such as Medicare and Medicaid and from various insurers. Changes in the
compensation and reimbursement formulae of these governmental programs or in the
rates paid by insurers may reduce revenues available for the payment of
principal of or interest on such bonds. New governmental legislation or
regulations and other factors, such as the inability to obtain sufficient
malpractice insurance, may also adversely affect the revenues or costs of these
issuers. Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial lump-sum
deposit paid by occupants of the facility, there may be risk if the facility
does not maintain adequate financial resources to secure estimated actuarial
liabilities.
A number of legislative proposals concerning health care have been
introduced in Congress in recent years or have been reported to be under
consideration. These proposals span a wide range of topics, including cost
controls, national health insurance, incentives for competition in the provision
of health care services, tax incentives and penalties related to health care
insurance premiums, and promotion of prepaid health care plans. The Fund is
unable to predict the effect of any of these proposals, if enacted.
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Single Family Housing Bonds and Multifamily Housing Bonds. Single family
housing bonds and multifamily housing bonds are obligations of state and local
housing authorities that have been issued in connection with a variety of single
and multifamily housing projects. Economic developments, including fluctuations
in interest rates, increasing construction and operating costs, increasing real
estate taxes and declining occupancy rates, and real estate investment risks may
have an adverse effect upon the revenues of such projects and such housing
authorities. Multifamily housing bonds may be subject to mandatory redemption
prior to maturity, including redemption from non-completion of the project or
upon receipt of FHA or certain other insurance proceeds. Bonds issued by state
or local units or authorities and payable from revenues from single family
residential mortgages may be subject to mandatory redemption prior to maturity,
including redemption from mortgage loan prepayments and undisbursed bond
proceeds reserved for the purpose of purchasing mortgage loans. Housing bonds
may also be subject to changes in creditworthiness due to potential weaknesses
of mortgage insurance companies providing various policies; fluctuations in the
valuation of invested funds and the strengths of banks and other entities which
may provide investment agreements; and smaller than expected mortgage portfolios
due to the inability to originate mortgages. To the extent the Fund invests in
housing bonds issued by an entity or entities located in the same geographic
area, the Fund may be subject to the risks associated with the general economy
of such area.
Public Power Revenue Bonds. General problems of the electric utility
industry include difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased costs and delays
attributable to environmental considerations; the difficulty of the capital
markets in absorbing utility debt and equity securities; the availability of
fuel for electric generation at reasonable prices, including among other
considerations the potential rise in fuel costs and the costs associated with
conversion to alternate fuel sources such as coal; technical cost factors and
other problems associated with construction, licensing, regulation and operation
of nuclear facilities for electric generation, including among other
considerations the problems associated with the use of radioactive materials and
the disposal of radioactive waste; and the effects of energy conservation.
Certain of the issuers of these bonds may own or operate nuclear generating
facilities. Federal, state and municipal governmental authorities may from time
to time review and revise existing requirements and impose additional
requirements governing the licensing, construction and operation of nuclear
power plants. In addition, the licensing of certain nuclear power plants nearing
completion of construction or constructed has been delayed indefinitely by the
refusal of state and local officials to cooperate in emergency planning
exercises that are a prerequisite to licensing. Each of the problems referred to
above could adversely affect the ability of the issuer of public power revenue
bonds to make payments of principal and/or interest on such bonds. Certain
municipal utilities or agencies may have entered into contractual arrangements
with investor-owned utilities and large industrial users and consequently may be
dependent in varying degrees on the performance of such contracts for payment of
bond debt service. Also, the enforceability against municipalities of
"take-and-pay" and "take-or-pay" contracts which contracts secure bonds issued
by other municipal issuers has been successfully challenged in recent years.
Transportation Revenue Bonds. Bonds in this category include bonds issued
for airport facilities, bridges, turnpikes, port facilities, railroad systems,
or mass transit systems. Generally, airport facility revenue bonds are payable
from and secured by the revenues derived from the ownership and operation of a
particular airport. Payment on other transportation bonds is often dependent
primarily or solely on revenues from financed facilities, including user fees,
charges, tolls and rents. Such revenues may be adversely affected by increased
construction and maintenance costs or taxes, decreased use, competition from
alternative facilities, scarcity of fuel, reduction or loss of rents or the
impact of environmental considerations. Other transportation
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<PAGE> 14
bonds may be dependent primarily or solely on Federal, state or local assistance
including motor fuel and motor vehicle taxes, fees and licenses, and therefore
may be subject to fluctuations in such assistance.
Water and Sewage Revenue Bonds. Bonds in this category include securities
issued to finance public water supply, treatment and distribution facilities,
and sewage collection, treatment and disposal facilities. Repayment of these
bonds is dependent primarily on revenues derived from the billing of
residential, commercial and industrial customers for water and sewer services,
as well as, in some instances, connection fees and hook-up charges. Such revenue
bonds may be adversely affected by the lack of availability of Federal and state
grants and by decisions of Federal and state regulatory bodies and courts.
Solid Waste and Resource Recovery Revenue Bonds. Bonds in this category
include securities issued to finance facilities for removal and disposal of
solid waste. Repayment of these bonds is dependent on factors which may include
revenues from appropriations from a governmental entity, the financial condition
of the private project corporation* and revenues derived from the collection of
charges for disposal of solid waste. In addition, construction of such
facilities may be subject to cost overruns and the actual costs of operating
such facilities may exceed the costs anticipated at the time the bonds were
issued. Repayment of resource recovery bonds may also be dependent to various
degrees on revenues from the sale of electric energy or steam. Bonds in this
category may be subject to mandatory redemption in the event of project
noncompletion, if the project is rendered uneconomical, if the project fails to
meet certain performance criteria, or if it is considered an environmental
hazard.
Pollution Control Facility Revenue Bonds. Bonds in the pollution control
facilities category include securities issued on behalf of private corporations
including utilities, to provide facilities for the treatment of air, water and
solid waste pollution. Repayment of these bonds is dependent upon income from
the specified pollution control facility and/or the financial condition of the
project corporation. In addition, governmental entities may from time to time
impose additional restrictions or regulations which could adversely affect the
cost or operation of the facility. The Fund will not acquire more than 5% of the
outstanding voting securities of more than one public utility company as defined
by the Public Utility Holding Company Act of 1935.
Educational Facility Revenue Bonds. Educational facility revenue bonds
include debt of state and private colleges, universities and systems, and
parental and student loan obligations for dormitories, classrooms, libraries,
research and training facilities and student aid. The ability of universities
and colleges to meet their obligations is dependent on various factors,
including the revenues, costs and enrollment levels of the institutions. In
addition, their ability may be affected by declines in Federal, state and alumni
financial support, fluctuations in interest rates and construction costs,
increased maintenance and energy costs, failure or inability to raise tuition or
room charges and adverse results of endowment fund investments.
Tax Increment Bonds. Tax increment bonds are issued to finance various
public improvements and redevelopment projects in blighted areas. Interest on
such bonds is payable from increases in real property taxes attributable to
increases in assessed value resulting from the redevelopment of the blighted
project area. Repayment risks include, among other things, a reduction in
taxable value in the project areas, reduction in tax rates, delinquencies in tax
payments or a general shortfall in forecasted tax revenues.
- ---------------
* For purposes of the description of users of facilities, all references to
"corporations" shall be deemed to include any other nongovernmental person or
entity.
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Commercial Facility Revenue Bonds. The Fund may also invest in bonds for
other commercial facilities (including hotels) and industrial enterprises. The
viability of such facilities depends on, among other things, general economic
factors affecting those industries and affecting those geographic areas in which
such facilities are situated, as well as the ability of the individual
management of those facilities to maximize earnings and to remain competitive
within its service area.
Industrial Development Bonds ("IDBs"). The Fund reserves the right to
invest a portion of its assets in IDBs. IDBs are tax-exempt securities issued by
states, municipalities or public authorities and are issued to provide funds,
usually through a loan or lease arrangement, to a private corporation for the
purpose of financing construction or improvement of a facility to be used by the
corporation. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the corporation which may or may not be
guaranteed by a parent company or otherwise secured. In view of this, an
investor should be aware that repayment of such bonds depends on the revenues of
a private corporation and be aware of the risks that such an investment may
entail. Continued ability of a corporation to generate sufficient revenues for
the payment of principal and interest on such bonds will be affected by many
factors including the size of the corporation, capital structure, demand for
products or services, competition, general economic conditions, government
regulation and the corporation's dependence for revenues on the operation of the
particular facility being financed.
IDBs are often issued to provide funds for corporations from the industries
described above and, consequently, are subject to similar risks. IDBs are also
issued to provide funds to industrial companies. Investment in particular
industries may expose the Fund to risks associated with such industries.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation is frequently
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
The Fund may also invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities to be exempt from Federal income taxation
("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities
could include trust certificates or other instruments evidencing interests in
one or more long-term municipal securities. Non-Municipal Tax-Exempt Securities
also may include securities issued by other investment companies that invest in
municipal bonds, to the extent such investments are permitted by the 1940 Act.
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OTHER INVESTMENT POLICIES
The Fund has the authority to invest as much as 25% of its assets in
Municipal Bonds in the higher rating categories of nationally recognized
statistical rating organizations (ratings of A or higher by Moody's, S&P or
Fitch). In addition, the Fund reserves the right to temporarily invest more than
20% of its assets in short-term municipal securities, or short-term taxable
money market securities (including commercial paper, certificates of deposit and
repurchase agreements) for defensive purposes when, in the opinion of the
Investment Adviser, prevailing market or financial conditions warrant. Taxable
commercial paper must be rated A-1+ through A-3 by S&P, Prime-1 through Prime-3
by Moody's, F-1+ through F-3 by Fitch or have credit characteristics equivalent
to such ratings in the opinion of the Investment Adviser. The short-term
tax-exempt municipal obligations will also be in the highest rating categories
as determined either by Moody's (currently, MIG-1 through MIG-2 for notes and
Prime-1 through Prime-3 for commercial paper), S&P (currently, SP-1+ through
SP-3 for notes and A-1+ through A-3 for commercial paper), or Fitch (currently,
F-1 and F-2 for notes and F-1 for commercial paper). Certificates of deposit
must be issued by depository institutions with total assets of at least $1
billion, except that the Fund may invest in certificates of deposit of smaller
institutions if such certificates of deposit are Federally insured. In
connection with an exemption the Fund has obtained from the Securities and
Exchange Commission relating to its tender offers, the Fund will not purchase
non-investment grade or unrated Municipal Bonds in secondary market transactions
during the five business days preceding the termination of a tender offer. See
"Tender Offers" and "Appendix -- Ratings of Municipal Obligations".
The Fund also has adopted certain other policies as set forth below:
Leverage. The Fund is authorized to borrow money in amounts of up to 33%
of the value of its total assets at the time of such borrowings to finance the
purchase of its own shares pursuant to tender offers, if any, or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund will
not be required to sell portfolio securities to purchase tendered shares but, at
the same time, such borrowings may increase the Fund's expenses. In this regard,
borrowed funds are subject to interest costs that may offset or exceed the
return earned on the securities which otherwise may have been sold by the Fund.
See "Risk Factors".
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or when-issued
basis at fixed purchase or sale terms. These transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in the
future. The purchase will be recorded on the date the Fund enters into the
commitment and the value of the obligation will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the obligation on the
delivery date may be more or less than its purchase price. A separate account of
the Fund will be established with its custodian consisting of cash, cash
equivalents or liquid securities having a market value at all times at least
equal to the amount of the forward commitment.
Repurchase Agreements. The Fund may invest in Municipal Bonds and U.S.
Government securities pursuant to repurchase agreements. Repurchase agreements
may be entered into only with a member bank of the Federal Reserve System or a
primary dealer in U.S. Government securities. Under such agreements, the bank or
primary dealer agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. The Fund may not invest
more than 10%
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of its total assets in repurchase agreements maturing in more than seven days.
In the event of default by the seller under a repurchase agreement, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposal of the collateral. Income from repurchase agreements distributed to
shareholders will be taxable as ordinary income to shareholders.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts. While the Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of Fund shares, the Fund's net
asset value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes -- Tax Treatment of Options and Futures Transactions".
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and risks
associated therewith. The investment policies with respect to the hedging
transactions of the Fund are not fundamental policies and may be modified by the
Board of Directors of the Fund without the approval of the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund writes
only covered options, which means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option. The Fund may not write covered call options on underlying securities in
an amount exceeding 15% of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options serve as a partial hedge
against a decline in the price of the underlying security. The Fund may engage
in closing transactions in order to terminate outstanding options that it has
written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be
terminated by entering into a closing sale transaction. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options, or on securities which it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all
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outstanding options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts ("financial futures
contracts") and options thereon solely for the purpose of hedging its
investments in Municipal Bonds against declines in value and to hedge against
increases in the cost of securities it intends to purchase. A financial futures
contract obligates the seller of a contract to deliver and the purchaser of a
contract to take delivery of the type of financial instrument covered by the
contract, or in the case of index-based futures contracts to make and accept a
cash settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge against
an increase in the cost of securities intended to be purchased, because such
appreciation may be offset, in whole or in part, by an increase in the value of
the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or U.S. Treasury bills equal to approximately 5% of the contract
amount must be deposited with the broker. This amount is known as initial
margin. Subsequent payments to and from the broker, called variation margin, are
made on a daily basis as the price of the futures contract fluctuates making the
long and short positions in the futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large recently issued tax-exempt bonds, and purchase and sell put and call
options on such futures contracts for the purpose of hedging Municipal Bonds
which the Fund holds or anticipates purchasing against adverse changes in
interest rates. The Fund also may purchase and sell financial futures contracts
on U.S. Government securities and purchase and sell put and call options on such
futures contracts for such hedging purposes. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, Treasury notes, GNMA Certificates and three-month U.S.
Treasury bills.
Subject to policies adopted by the Directors, the Fund also may engage in
transactions in other financial futures contracts transactions and options
thereon, such as financial futures contracts or options on other municipal bond
indices which may become available if the Investment Adviser and the Directors
of the Fund should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in which
the Fund invests to make such hedging appropriate.
Over-the-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets. In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. Over-the-counter options ("OTC
options") transactions are two-party contracts with price and terms negotiated
by the buyer and seller. See "Restrictions on OTC Options" below for information
as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in OTC options only with
member banks of the Federal Reserve System and primary dealers in United States
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. OTC options and assets used to cover OTC
options written by the Fund
18
<PAGE> 19
are considered by the staff of the Securities and Exchange Commission to be
illiquid. The illiquidity of such options or assets may prevent a successful
sale of such options or assets, result in a delay of sale, or reduce the amount
of proceeds that might otherwise be realized. As a result, the Fund will acquire
only those OTC options for which the Investment Adviser believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option).
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the security which is
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of such security. There is a risk of imperfect correlation where
the securities underlying futures contracts have different maturities, ratings,
geographic compositions or other characteristics than the security being hedged.
In addition, the correlation may be affected by additions to or deletions from
the index which serves as a basis for a financial futures contract. Finally, in
the case of futures contracts on U.S. Government securities and options on such
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Municipal Bonds
may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool", as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon only for bona fide
hedging purposes, as defined under CFTC regulations, and may not purchase or
sell any such futures contracts or options if, immediately thereafter, the sum
of the amount of initial margin deposits on the Fund's existing futures position
and premiums paid for outstanding options would exceed 5% of the market value of
its net assets. Margin deposits may consist of cash or securities acceptable to
the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term high-grade fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
and variation margin held in the account of its broker equals the market value
of the futures contract, thereby ensuring that the use of such futures contract
is unleveraged. It is not anticipated that transactions in futures contracts
will have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will engage in options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions. The
Fund must meet certain Federal income tax requirements under the Code in order
to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain diversification
requirements under the Code.
19
<PAGE> 20
The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of OTC options, the
Investment Adviser believes the Fund can receive on each business day at least
two independent bids or offers. There can be no assurance, however, that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures transaction. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio. There is also the risk of loss by
the Fund of margin deposits or collateral in the event of bankruptcy of a broker
with whom the Fund has an open position in an options or futures contract.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a futures contract is held by the Fund or move
in a direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to time
and may not necessarily be engaging in hedging transactions when movements in
interest rates occur.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the 1940 Act
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter's or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets would be invested
in such securities.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real
20
<PAGE> 21
estate or interests therein and the Fund may purchase and sell financial
futures contracts and options thereon.
4. Issue senior securities or borrow money, except as permitted by
Section 18 of the 1940 Act.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons except that the Fund may purchase
Municipal Bonds and other debt securities and enter into repurchase
agreements in accordance with its investment objective, policies and
limitations.
7. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on Municipal Bonds, United
States Government obligations and related indices or otherwise in
connection with bona fide hedging activities.
9. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry,
except that the Fund will invest 25% or more of its assets in Municipal
Bonds issued to finance projects in the health care industry. (For purposes
of this restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry.)
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
1. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the Municipal Bonds of any one state.
2. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in (4) above or
except as may be necessary in connection with transactions in financial
futures contracts and options thereon.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch share a common parent,
Merrill Lynch & Co., Inc. Because of the affiliation of Merrill Lynch with the
Fund, the Fund is prohibited from engaging in certain transactions involving
Merrill Lynch except pursuant to an exemptive order of the Securities and
Exchange Commission or otherwise in compliance with the provisions of the 1940
Act and the rules and regulations thereunder. Included among such restricted
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal. An exemptive order has been obtained
which permits the Fund to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities
21
<PAGE> 22
subject to conditions set forth in such order. The Fund does not presently
intend to request an order permitting other principal transactions with Merrill
Lynch. See "Portfolio Transactions".
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Investment Adviser and Merrill Lynch, acts as the distributor of shares
of Common Stock of the Fund. The Fund is engaged in a continuous offering of its
shares of Common Stock through the Distributor and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch. Shares of the Fund may be purchased from the
Distributor or selected dealers, including Merrill Lynch, or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50. In connection with an
exemption the Fund has obtained from the Securities and Exchange Commission
relating to its tender offers, the Fund will not offer its shares during the
five business days preceding the termination of a tender offer. See "Tender
Offers".
To permit the Fund to invest the net proceeds from the sale of its shares
of Common Stock in an orderly manner, the Fund may, from time to time, suspend
the sale of its shares of Common Stock, except for sales to existing holders of
Common Stock and dividend reinvestments.
Due to the administrative complexities associated with the continuous
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of Common Stock) of shares of Common Stock which it may wish to resell.
Such shares of Common Stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share without a front-end sales charge. The
applicable offering price for purchase orders is based on the net asset value of
the Fund next determined after receipt of the purchase order by the Distributor.
As to purchase orders received by securities dealers prior to the close of
business on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New
York time), which includes orders received after the close of business on the
previous day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that day
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. Any order may be rejected by the Distributor or the Fund. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
to the general public at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. The Distributor is required to advise
the Fund promptly of all purchase orders and cause payments for shares of Common
Stock to be delivered promptly to the Fund. Merrill Lynch charges its customers
a postage and handling charge (presently $4.85) to confirm a purchase of shares
by such customers. Purchases directly through the Fund's Transfer Agent are not
subject to the postage and handling charge.
The Distributor compensates Merrill Lynch and other selected dealers at a
rate of 3.0% of amounts purchased. If the shares remain outstanding after one
year from the date of their original purchase, the
22
<PAGE> 23
Distributor will compensate Merrill Lynch and such dealers at an annual rate
equal to 0.25% of the value of Fund shares sold by Merrill Lynch and such
dealers and remaining outstanding. These amounts do not represent an expense to
the Fund and its shareholders since the payments made by the Distributor will be
made from its own assets, which may include amounts received by the Distributor
as early withdrawal charges. See "Early Withdrawal Charge". The compensation
paid to selected dealers and the Distributor, including the compensation paid at
the time of purchase, the 0.25% annual payments mentioned above and the early
withdrawal charge, if any, will not in the aggregate exceed the applicable limit
(presently, 8%), as determined from time to time by the National Association of
Securities Dealers, Inc. For the years ended August 31, 1994, 1995 and 1996 the
Distributor paid approximately $971,952, $408,920 and $651,224, respectively, to
Merrill Lynch in connection with the sale of shares of Common Stock of the Fund.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name will be opened
automatically, without charge, at the Fund's transfer agent, dividend disbursing
agent and shareholder servicing agent. Shareholders should be aware that it will
not be possible to transfer their shares from Merrill Lynch to another brokerage
firm or financial institution. Shareholders interested in transferring their
brokerage accounts from Merrill Lynch and who do not wish to have an account
maintained for such shares at the Fund's transfer agent must tender the shares
for repurchase by the Fund as described under "Tender Offers" so that the cash
proceeds can be transferred to the account at the new firm.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity to
shareholders. The Fund may from time to time make offers to purchase its shares
of Common Stock from all beneficial holders of the Fund's Common Stock at a
price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates ("Tender
Offer"). Commencing with the second quarter of Fund operations, the Board of
Directors has considered the making of Tender Offers on a quarterly basis, and
the Board of Directors intends to continue this practice. There can be no
assurance, however, that the Board of Directors will decide to undertake the
making of a Tender Offer. Subject to the Fund's investment restriction with
respect to borrowings, the Fund may borrow money to finance the repurchase of
shares pursuant to any Tender Offers. See "Investment Restrictions".
The Fund expects that ordinarily there will be no secondary market for the
Fund's Common Stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the Common Stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the Common Stock of
the Fund. A Tender Offer for shares of Common Stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may otherwise develop. However, there can be no assurance that such action
would result in the Fund's Common Stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that the Tender Offers generally
would be beneficial to holders of the Fund's Common Stock, the acquisition of
shares of Common Stock by the Fund will decrease the total
23
<PAGE> 24
assets of the Fund and therefore have the likely effect of increasing the Fund's
expense ratio (assuming such acquisition is not offset by the issuance of
additional shares of Common Stock). Furthermore, if the Fund borrows to finance
the making of Tender Offers, interest on such borrowing will reduce the Fund's
net investment income.
It is the Board's announced policy, which may be changed by the Board, not
to purchase shares pursuant to a Tender Offer if (1) such purchases would impair
the Fund's status as a regulated investment company under the 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 shareholders who receive
dividends from the Fund); (2) the Fund would not be able to liquidate portfolio
securities in a manner which is orderly and consistent with the Fund's
investment objective and policies in order to purchase Common Stock tendered
pursuant to the Tender Offer; or (3) there is, in the Board's judgment, any (a)
legal action or proceeding instituted or threatened challenging the Tender 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 which is material to the Fund, or (e) other event or condition
which would have a material adverse effect on the Fund or its shareholders if
shares of Common Stock tendered pursuant to the Tender Offer were purchased.
Thus, there can be no assurance that the Board will proceed with any Tender
Offer. The Board of Directors may modify these conditions in light of
circumstances existing at the time. If the Board of Directors determines to
purchase the Fund's shares of Common Stock pursuant to a Tender Offer, such
purchases could significantly reduce the asset coverage of any borrowing or
outstanding senior securities. The Fund may not purchase shares of Common Stock
to the extent such purchases would result in the asset coverage with respect to
such borrowing or senior securities being reduced below the asset coverage
requirement set forth in the 1940 Act. Accordingly, in order to purchase all
shares of Common Stock tendered, the Fund may have to repay all or part of any
then outstanding borrowing or redeem all or part of any then outstanding senior
securities to maintain the required asset coverage. See "Other Investment
Policies -- Leverage". In addition, the amount of shares of Common Stock for
which the Fund makes any particular Tender Offer may be limited for the reasons
set forth above or in respect of other concerns related to liquidity of the
Fund's portfolio.
The Fund has been granted an exemption by the Securities and Exchange
Commission relating to Tender Offers which is based on representations by the
Fund that no secondary market for shares of the Fund's Common Stock 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. In the event
that circumstances arise under which the Fund does not conduct the Tender Offers
regularly, the Board of Directors would consider alternative means of providing
liquidity for holders of Common Stock. Such action would include an evaluation
of any secondary market that then existed and a determination of whether such
market provided liquidity for holders of Common Stock. If the Board of Directors
determines that such market, if any, fails to provide liquidity for the holders
of Common Stock, the Board expects that it will consider all then available
alternatives to provide such liquidity. Among the alternatives which the Board
of Directors may consider is the listing of the Fund's Common shares on a major
domestic stock exchange or on the NASDAQ National Market System in order to
provide such liquidity. The Board of Directors also may
24
<PAGE> 25
consider causing the Fund to repurchase its shares from time to time in
open-market or private transactions when it can do so on terms that represent a
favorable investment opportunity. In any event, the Board of Directors expects
it will cause the Fund to take whatever action it deems necessary or appropriate
to provide liquidity for the holders of Common Stock in light of the facts and
circumstances existing at such time.
To consummate a Tender Offer in order to repurchase its shares of Common
Stock, the Fund may be required to liquidate portfolio securities, and realize
gains or losses, at a time when the Investment Adviser would otherwise consider
it disadvantageous to do so. In such event gains may be realized on securities
held for less than three months. In order to qualify as a regulated investment
company under the Code, the Fund must limit such gains and, accordingly, the
amount of gain that the Fund could realize in the ordinary course of its
portfolio management from sales of other securities held for less than three
months would be reduced. This may adversely affect the Fund's yield. See
"Taxes".
Each Tender Offer will be made and shareholders notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either
by publication or mailing or both. The offering documents will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. The repurchase of tendered shares by the Fund is a
taxable event. See "Taxes". The Fund will pay all costs and expenses associated
with the making of any Tender Offer. An Early Withdrawal Charge will be imposed
on most shares accepted for tender which have been held for less than three
years. See "Early Withdrawal Charge". In addition, Merrill Lynch charges its
customers a postage and handling charge (presently, $4.85) to confirm a
repurchase of shares from such customers pursuant to a Tender Offer. Tenders
made directly through the Fund's Transfer Agent are not subject to the postage
and handling charge.
Shareholders of the Fund have an investment option consisting of the right
to reinvest the net proceeds from a sale of shares of the Fund's Common Stock
(the "Original Shares") pursuant to a tender offer by the Fund in Class D
initial sales charge shares of certain MLAM-sponsored open-end investment
companies ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, net proceeds from the sale of the Original Shares in the
tender offer must be immediately reinvested in Eligible Class D Shares. Second,
the investment option is available only with respect to the proceeds of shares
of the Fund's Common Stock as to which no Early Withdrawal Charge is applicable.
Shareholders who already own Class A shares of the investment company in the
account in which they are purchasing shares of such investment company may
purchase Class A rather than Class D shares so long as all the other
requirements of this paragraph are met. Before taking advantage of this
investment option, shareholders of the Fund should obtain a currently effective
prospectus of the mutual fund which they intend to purchase. To exercise this
investment option, shareholders should consult their Merrill Lynch Financial
Consultant.
EARLY WITHDRAWAL CHARGE
An Early Withdrawal Charge to recover distribution expenses incurred by the
Distributor will be charged against the shareholder's investment account and
paid to the Distributor in connection with most shares of Common Stock held for
less than three years which are accepted by the Fund for repurchase pursuant to
a Tender Offer in the manner described below. The Early Withdrawal Charge will
be imposed on those shares of Common Stock accepted for tender based on an
amount equal to the lesser of the then current net asset value of the shares of
Common Stock or the cost of the shares of Common Stock being tendered.
Accordingly, the Early Withdrawal Charge is not imposed on increases in the net
asset value above the initial purchase price. In addition, the Early Withdrawal
Charge is not imposed on shares derived from reinvestments of dividends or
25
<PAGE> 26
capital gains distributions. The Early Withdrawal Charge imposed will vary
depending on the length of time the Common Stock has been owned since purchase
(separate purchases shall not be aggregated for these purposes), as set forth in
the following table:
<TABLE>
<CAPTION>
YEAR OF REPURCHASE AFTER PURCHASE EARLY WITHDRAWAL CHARGE
---------------------------------------------------------------- -----------------------
<S> <C>
First........................................................... 3.0%
Second.......................................................... 2.0%
Third........................................................... 1.0%
Fourth and following............................................ 0%
</TABLE>
In determining whether an Early Withdrawal Charge is applicable to a tender
of shares of Common Stock, 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 of Common Stock held for over three
years and shares of Common Stock acquired pursuant to reinvestment of dividends
or distributions and then of shares of Common Stock 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.
EXAMPLE:
Assume an investor purchased 1,000 shares of Common Stock (at a cost of
$10,000) and in the second year after purchase, the net asset value per share is
$12.00 and, during such time, the investor has acquired 100 additional shares of
Common Stock upon dividend reinvestment. If at such time the investor makes his
first redemption of 500 shares of Common Stock (proceeds of $6,000), 100 shares
will not be subject to the Early Withdrawal Charge because of dividend
reinvestment. With respect to the remaining 400 shares of Common Stock, the
Early Withdrawal Charge is applied only to the original cost of $10 per share
and not to the increase in net asset value of $2.00 per share. Therefore, $4,000
of the $6,000 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase).
For the years ended August 31, 1994, 1995 and 1996, the amount paid to the
Distributor in Early Withdrawal Charges aggregated $191,033, $130,764 and
$62,615, respectively.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
managers of the Fund, including their ages and their principal occupations for
at least the last five years are set forth below. Unless otherwise noted, the
address of each Director and executive officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Investment Adviser (which term as used herein includes its corporate
predecessor) since 1977; President of Fund Asset Management, L.P. ("FAM") (which
term as used herein includes its corporate predecessor) since 1977; President
and Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990;
Director of the Distributor since 1977.
RONALD W. FORBES (56) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989, and Associate Professor prior thereto; Member, Task
Force on Municipal Securities Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY (44) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 20163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant
26
<PAGE> 27
Professor, Graduate School of Business Administration, The University of
Michigan from 1979 to 1985; Director, UNUM Corporation since 1990 and Director
of Newell Co. since 1995.
CHARLES C. REILLY (65) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (64) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (58) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's Inc. (real estate company).
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
VINCENT R. GIORDANO (52) -- Vice President(1)(2) -- Portfolio Manager of
the Investment Adviser and FAM since 1977 and Senior Vice President of the
Investment Adviser and FAM since 1984; Vice President of the Investment Adviser
from 1980 to 1984; Senior Vice President of Princeton Services since 1993.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
KENNETH A. JACOB (45) -- Vice President and Portfolio Manager(1)(2) -- Vice
President of the Investment Adviser since 1984; employed by the Investment
Adviser since 1978.
THEODORE R. JAECKEL, JR. (37) -- Vice President and Portfolio
Manager(1)(2) -- Vice President of the Investment Adviser since 1991; prior
thereto, Vice President of Chemical Bank.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Vice President of the
Distributor since 1981 and Treasurer since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; employee of the Distributor since
1978.
ROBERT HARRIS (44) -- Secretary(1)(2) -- Vice President of the Investment
Adviser since 1984; Secretary of the Distributor since 1982.
- ---------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, officer or member of the advisory
board of certain other investment companies for which the Investment Adviser
or FAM acts as investment adviser.
27
<PAGE> 28
At September 30, 1996, the Directors and officers of the Fund as a group
(13 persons) owned an aggregate of less than 1% of the outstanding Common Stock
of ML&Co. At such date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML&Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $400 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings. The
Fund also pays members of its audit committee, which consists of all of the
Directors not affiliated with the Investment Adviser, an annual fee of $1,000;
the chairman of the audit committee receives an additional annual fee of $1,000.
For the year ended August 31, 1996, fees and expenses paid to the unaffiliated
Directors of the Fund aggregated $24,597.
The following table sets forth for the fiscal year ended August 31, 1996
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1995 the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------------------------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Ronald W. Forbes........................... $4,600 None $147,100
Cynthia A. Montgomery...................... $4,600 None $$147,100
Charles C. Reilly.......................... $4,600 None $269,600
Kevin A. Ryan.............................. $4,600 None $147,100
Richard R. West............................ $5,600 None $294,600
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (23 registered investment companies consisting of 36 portfolios); Ms.
Montgomery (23 registered investment companies consisting of 36 portfolios);
Mr. Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. Ryan (23 registered investment companies consisting of 36 portfolios);
and Mr. West (41 registered investment companies consisting of 54
portfolios).
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
Merrill Lynch Asset Management, L.P. (the "Investment Adviser"), which is
owned and controlled by ML&Co., a financial services holding company and the
parent of Merrill Lynch, provides the Fund with investment advisory and
administrative services. The Investment Adviser or FAM, acts as the investment
adviser for more than 130 registered investment companies and also offers
investment advisory services to individuals and institutions. As of November 30,
1996, the Investment Adviser and FAM had a total of approximately $223.7 billion
in investment company and other assets under management, including accounts of
certain affiliates of the Investment Adviser. The Investment Adviser is a
limited partnership the partners of which are ML&Co. and Princeton Services. The
principal business address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
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<PAGE> 29
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources, make the
necessary investment decisions, and place orders for transactions accordingly.
The Investment Adviser also will be responsible for the performance of certain
management services for the Fund. Theodore R. Jaeckel, Jr. has served as the
Portfolio Manager of the Fund since 1995 and is primarily responsible for the
Fund's day-to-day management. He has served as Vice President of the Investment
Adviser since 1991.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund pays a monthly fee at an annual rate of 0.95 of 1%
of the Fund's average daily net assets (i.e., the average daily value of the
total assets of the Fund, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock, if any). For purposes of
this calculation, average daily net assets is determined at the end of each
month on the basis of the average net assets of the Fund for each day during the
month.
Under the terms of an administration agreement with the Fund (the
"Administration Agreement"), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including paying all compensation of and furnishing office space
for officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the Custodian and
the Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent,
expenses of registering the shares under Federal and state securities laws, fees
and expenses with respect to any issuance of preferred shares or any borrowing,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Investment Adviser, and the Fund reimburses the Investment Adviser
for its costs in connection with such services. For the years ended August 31,
1994, 1995 and 1996, the reimbursement for such services aggregated $39,397,
$49,486 and $70,139, respectively.
For the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual rate
of 0.25 of 1% of the Fund's average daily net assets determined in the same
manner as the fee payable by the Fund under the Investment Advisory Agreement.
The combined advisory and administration fees are greater than the advisory fees
paid by most funds, but are similar in amount to the fees paid by other
continuously offered, closed-end funds.
For the year ended August 31, 1994, the fee paid by the Fund to the
Investment Adviser pursuant to the Investment Advisory Agreement was $2,111,003
and the fee paid by the Fund pursuant to the Administration Agreement was
$555,227 (based on average daily net assets of approximately $222.2 million).
During the year
29
<PAGE> 30
the Investment Adviser voluntarily reimbursed the Fund $3,563 of such amount.
For the year ended August 31, 1995, the fee paid by the Fund to the Investment
Adviser pursuant to the Investment Advisory Agreement was $1,923,921 and the fee
paid by the Fund pursuant to the Administration Agreement was $506,295 (based on
average daily net assets of approximately $202.5 million). The Investment
Adviser did not reimburse any portion of such amount to the Fund. For the year
ended August 31, 1996, the fee paid by the Fund to the Investment Adviser
pursuant to the Investment Advisory Agreement was $1,911,059 and the fee paid by
the Fund pursuant to the Administration Agreement was $502,910 (based on average
daily net assets of approximately $200 million). The Investment Adviser did not
reimburse any portion of such amount to the Fund during the year.
Unless earlier terminated as described below, the Investment Advisory and
Administrative Agreements will remain in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliate act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Investment Adviser for the Fund or other funds for
which it acts as investment adviser or for advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliate during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
30
<PAGE> 31
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML&Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and tender of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent an annual fee of $14.00 per shareholder account, and the Transfer Agent is
entitled to certain nominal miscellaneous charges and reimbursement for
out-of-pocket expenses incurred by it under the Transfer Agency Agreement. For
the year ended August 31, 1996, the Fund's payments to the Transfer Agent
pursuant to the Transfer Agency Agreement, including reimbursement for
out-of-pocket expenses, aggregated $123,874. At October 31, 1996, the Fund had
7,002 shareholder accounts. At this level of accounts, the annual fee payable to
the Transfer Agent would aggregate approximately $98,000, plus out-of-pocket
expenses.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available. For the
years ended August 31, 1994, 1995 and 1996, the Fund did not pay any brokerage
commissions.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms which provide supplemental investment
research to the Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the dealers
who make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the 1940 Act, except
as permitted by exemptive order, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principals for their own accounts, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions except that, pursuant to an exemptive order
obtained by the Investment Adviser, the Fund may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. See "Investment Restrictions". For the years ended August 31, 1994,
1995 and 1996, the Fund engaged in no transactions pursuant to such order.
However, affiliated persons of the Fund may serve as its brokers in
over-the-counter transactions conducted on an agency basis.
31
<PAGE> 32
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances after the Fund's
portfolio is invested in accordance with its investment objective, will be less
than 100%. The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded. For the years ended August 31, 1995 and 1996, the Fund's portfolio
turnover rate was 21.28% and 28.54%, respectively.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to continue to distribute all its net investment income.
Dividends from such net investment income are paid monthly. All net realized
long- or short-term capital gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends and distributions may be
automatically reinvested in shares of the Fund. Dividends and distributions are
taxable to shareholders as discussed below whether they are reinvested in shares
of the Fund or received in cash.
TAXES
GENERAL
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax to the extent that it distributes its net investment income and net
realized capital gains. The Fund intends to distribute substantially all of such
income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest" dividends as defined
in Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund will be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders
32
<PAGE> 33
within 60 days after the close of its taxable year. To the extent that the
dividends distributed to the Fund's shareholders are derived from interest
income exempt from Federal income tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security benefits and railroad retirement benefits subject to
Federal income taxes. Interest on indebtedness incurred or continued to purchase
or carry shares of a RIC paying exempt-interest dividends, such as the Fund,
will not be deductible by the investor for Federal income tax purposes, to the
extent attributable to exempt-interest dividends. Shareholders are advised to
consult their tax advisers with respect to whether exempt-interest dividends
retain the exclusion under Code Section 103(a) if such shareholder would be
treated as a "substantial user" or "related person" under Code Section 147(a)
with respect to property financed with the proceeds of an issue of "industrial
development bonds" or "private activity bonds," if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for Federal income tax purposes. Distributions,
if any, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities or from certain transactions
in futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares. Distributions by the Fund, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the dividends received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which such dividend
was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund intends to
purchase such "private activity bonds" and will report to shareholders within 60
days after its taxable year end the portion of its dividends declared during the
year which constitutes an item of tax preference for alternative minimum tax
purposes. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between
33
<PAGE> 34
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings", which more closely reflect a corporation's economic
income. Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Fund may invest in high yield securities, as described herein.
Furthermore, the Fund may also invest in instruments the return on which
includes nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or nontraditional instruments could be recharacterized as taxable ordinary
income.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan which have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed as
a taxable distribution, it is also possible that the taxable character of this
discount would be allocable to all the shareholders, including shareholders who
do not participate in the dividend reinvestment plan. Thus, shareholders who do
not participate in the dividend reinvestment plan might be required to report as
ordinary income a portion of their distributions equal to their allocable share
of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
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<PAGE> 35
OFFERS TO PURCHASE SHARES
Under current law, a holder of Common Stock who, pursuant to any Tender
Offer, tenders all shares of Common Stock owned by such shareholder and who,
after such Tender Offer, is not considered to own any shares under attribution
rules contained in the Code will realize a taxable gain or loss depending upon
such shareholder's basis in the shares. Such gain or loss will be treated as
capital gain or loss if the shares are held as capital assets and will be
long-term or short-term depending upon the shareholder's holding period for the
shares. Different tax consequences may apply to tendering and nontendering
holders of Common Stock in connection with a Tender Offer, and these
consequences will be disclosed in the related offering documents. For example,
if a tendering holder of Common Stock tenders less than all shares owned by or
attributed to such shareholder, and if the distribution to such shareholder does
not otherwise qualify as a sale or exchange, the proceeds received will be
treated as a taxable dividend or, if the Fund has insufficient earnings and
profits, a return of capital or capital gain, depending on the shareholder's
basis in the tendered shares. Also, there is a remote risk that non-tendering
holders of Common Stock may be considered to have received a deemed distribution
which may be a taxable dividend in whole or in part. Holders of Common Stock may
wish to consult their tax advisers prior to tendering. Likewise, if holders of
Common Stock whose shares are acquired by the Fund in the open market sell less
than all shares owned by or attributed to them, a risk exists that these
shareholders will be subject to taxable dividend treatment and a remote risk
exists that the remaining shareholders may be considered to have received a
deemed distribution.
ENVIRONMENTAL TAX
The Code previously imposed a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction for
the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax has
expired for taxable years beginning after December 31, 1995, but may be
reinstated in the future. The Environmental Tax was imposed even if the
corporation was not required to pay an alternative minimum tax because the
corporation's regular income tax liability exceeded its minimum tax liability.
The Code provides, however, that a RIC, such as the Fund, would not be subject
to the Environmental Tax. However, exempt-interest dividends paid by the Fund
that create alternative minimum tax preferences for corporate shareholders (as
described above) could subject corporate shareholders of the Fund to the
Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are "Section 1256 contracts" will be "mark to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value on
the last day of the taxable year, and any gain or loss attributable to such
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of the mark-to-market rules to Section 1256 contracts held by
the Fund may alter the timing and character of distributions to shareholders.
The mark-to-market rules outlined above, however, will not
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<PAGE> 36
apply to certain transactions entered into by the Fund solely to reduce the risk
of changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract.
STATE AND LOCAL TAXES
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are advised
to consult their own tax advisers concerning state and local tax matters.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch financial consultant or by
written notification or by telephone (1-800-MER-FUND) to the Transfer Agent,
elect to have subsequent dividends or capital gains distributions, or both, paid
in cash, rather than reinvested, in which event payment will be mailed on or
about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No Early Withdrawal Charge will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal income tax that may be payable (or required to be
withheld) on such dividends or distributions. See "Taxes".
NET ASSET VALUE
The net asset value per share of Common Stock is determined once daily as
of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New
York time), on each day during which the NYSE is open for trading. The NYSE is
not open on New Year's Day, President's Day, Good Friday, Memorial Day,
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<PAGE> 37
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued expenses)
is divided by the total number of shares of Common Stock outstanding at such
time. Expenses, including the fees payable to the Investment Adviser, are
accrued daily.
The Municipal Bonds in which the Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, the Fund utilizes the
valuations of portfolio securities furnished by a pricing service approved by
the Board of Directors. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are readily
available. Municipal Bonds for which quotations are not readily available are
valued at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine 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. The Board of Directors
has determined in good faith that the use of a pricing service is a fair method
of determining the valuation of portfolio securities. Obligations with remaining
maturities of 60 days or less are valued at amortized cost, unless this method
no longer produces fair valuations. Positions in futures contracts are valued at
closing prices for such contracts established by the exchange on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the Board
of Directors.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify and reclassify
any unissued shares of each class or series of capital stock by setting or
changing in any one or more respects the designation and number of shares of any
such class or series, and the nature, rates, amounts and times at which and the
conditions under which dividends shall be payable on, and the voting,
conversion, redemption and liquidation rights of, such class or series and any
other preferences, rights, restrictions and qualifications applicable thereto.
Shares of Common Stock when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
The Fund will send unaudited reports at least semi-annually and audited
financial statements to all of its shareholders of record. The following table
sets forth the authorized shares of the Fund, the number of shares held by the
Fund for its own account and the total number of shares outstanding as of
October 31, 1996, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AS OF OCTOBER 31,
1996 (EXCLUSIVE OF
AMOUNT HELD AMOUNT HELD BY
AMOUNT BY FUND ON FUND FOR OWN
CLASS OF SHARES AUTHORIZED OWN ACCOUNT ACCOUNT)
------------------------------------------- ----------- ----------- ------------------
<S> <C> <C> <C>
Common Stock............................... 200,000,000 -- 18,530,948
</TABLE>
37
<PAGE> 38
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by holders of capital
stock may be removed from office only for cause by vote of the holders of at
least 66 2/3% of the shares of capital stock of the Fund entitled to be voted on
the matter.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations;
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities); or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
by-laws, in which case the affirmative vote of a majority of the Fund's shares
of capital stock is required.
The Board of Directors has determined that the 66 2/3% voting requirements
described in the foregoing paragraph and under "Certain Provisions of the
Articles of Incorporation", which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of these
provisions.
PERFORMANCE DATA
From time to time the Fund may include its yield and/or total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders.
The yield of the Fund refers to the income generated by an investment in
the Fund over a stated period. Yield is calculated by annualizing the
distribution over a stated period and dividing the product by the average per
share net asset value. For the year ended August 31, 1996, the Fund earned
$0.657 per share income dividends, representing a net annualized yield of 5.95%,
based on a month-end per share net asset value of $10.94.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period. For the year ended August 31, 1996, the annual total return of the
Fund was 5.81%, based on the change in per share net asset value from $10.97 to
$10.94, and assuming reinvestment of $0.661 per share income dividends.
38
<PAGE> 39
The calculation of yield and total return does not reflect the imposition
of any Early Withdrawal Charges or the amount of any shareholder's tax
liability.
Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Municipal Bonds and other securities comprising the
Fund's portfolio, the Fund's operating expenses and the amount of net realized
and unrealized capital gains or losses during the period.
On occasion, the Fund may compare its yield and tax-equivalent yield to
yield data published by Lipper Analytical Services, Inc. or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. Yield comparisons should not be considered indicative of the
Fund's yield and tax-equivalent yield or relative performance for any future
period.
CUSTODIAN
The Fund's securities and cash are held under a Custody Agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
The Transfer Agent for the shares of the Fund is Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289, a wholly
owned subsidiary of ML&Co.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed on for the Fund by Brown & Wood LLP, One World Trade Center, New
York, New York 10048-0557.
39
<PAGE> 40
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
have been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the financial statements
of the Fund.
40
<PAGE> 41
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
41
<PAGE> 42
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
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%
</TABLE>
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.
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
42
<PAGE> 43
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
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
</TABLE>
43
<PAGE> 44
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
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
</TABLE>
44
<PAGE> 45
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
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
</TABLE>
45
<PAGE> 46
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
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
========
<FN>
(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.
</TABLE>
46
<PAGE> 47
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
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.
</TABLE>
47
<PAGE> 48
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For The Year Ended
August 31, 1996
<S> <S> <C>
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.
</TABLE>
48
<PAGE> 49
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
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.
</TABLE>
49
<PAGE> 50
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
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
<S> <S> <C> <C> <C> <C>
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%
======== ======== ======== ======== ========
<FN>
*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.
</TABLE>
50
<PAGE> 51
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.
51
<PAGE> 52
(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)
============ ============
52
<PAGE> 53
APPENDIX
RATINGS OF MUNICIPAL OBLIGATIONS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") MUNICIPAL BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payment or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
53
<PAGE> 54
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, MIG 3/VMIG 3 and MIG 4/VMIG 4; MIG 1/VMIG 1 denotes
"best quality, enjoying strong protection from established cash flows"; MIG
2/VMIG 2 denotes "high quality" with ample margins of protection; MIG 3/VMIG 3
notes are of "favorable quality . . . but lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG 4 notes are of "adequate quality, carrying
specific risk but having protection . . . and not distinctly or predominantly
speculative".
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representations and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
54
<PAGE> 55
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("S&P") MUNICIPAL DEBT RATINGS
An S&P municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
II. Nature of and provisions of the obligations.
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC, C Debt rated "BB", "B", "CCC", "CC" and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless
55
<PAGE> 56
S&P believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
56
<PAGE> 57
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A -- Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures, or is called
or refinanced, and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.
57
<PAGE> 58
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term and should be resolved
within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative". The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a security. The ratings ("BB" to
"C") represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, the
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
It should be noted that issues that have the same rating are of similar but
not necessarily identical credit quality since rating categories cannot fully
reflect the differences in degrees of credit risk.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC -- Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
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<PAGE> 59
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" and "F-1" ratings.
F-3 -- Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-5 -- Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
D -- Default. Issues assigned this rating are in actual or imminent payment
default.
LOC -- The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
59
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[This Page Has Been Left Blank Intentionally]
60
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MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
AUTHORIZATION FORM
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ..... shares of Merrill Lynch High
Income Municipal Bond Fund, Inc. and establish an Investment Account as
described in the Prospectus.
Basis for establishing an Investment Account:
I enclose a check for $..... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000). (Subsequent
investments $50 or more.) I understand that this purchase will be executed at
the applicable offering price next to be determined after this Application is
received by you.
<TABLE>
<S> <C>
(PLEASE PRINT) --------------------------------
Name.........................................................
First Name Initial Last
Name
--------------------------------
Name of Co-Owner (if any).................................... Social Security No.
First Name Initial Last or Taxpayer Identification No.
Name
Address......................................................
............................................................. ..........................................................
(Zip Code) Date
</TABLE>
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) that I am not
subject to backup withholding (as discussed in the Prospectus under "Taxes")
either because I have not been notified that I am subject thereto as a result of
a 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 if you have not
received a notice from the IRS that backup withholding has been terminated. The
undersigned authorizes the furnishing of this certification to other Merrill
Lynch-sponsored investment companies.
SIGNATURE OF OWNER .................................... SIGNATURE OF CO-OWNER
(IF ANY)........................................................................
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
Until you are notified by me, the following options with respect to dividends
and distributions are elected.
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch High Income Municipal Bond Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
- --------------------------------------------------------------------------------
61
<PAGE> 62
3. FOR DEALER ONLY
Branch, Office Address, Stamp
- ----------
- ----------
- --------
- --------
- --------
- --------
- ----------
- ----------
This form when completed should be mailed to:
Merrill Lynch High Income Municipal Bond Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289.
We guarantee the Shareholder's Signature.
......................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- ---------- --------------
...................
- ---------- --------------
Branch-Code F/C No. F/C Last Name
- ---------- -----------------
- ---------- -----------------
Dealer's Customer F/C No.
</TABLE>
62
<PAGE> 63
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 4
Fee Table............................. 7
Financial Highlights.................. 8
The Fund.............................. 9
Investment Objective and Policies..... 9
Investment Restrictions............... 20
Purchase of Shares.................... 22
Tender Offers......................... 23
Early Withdrawal Charge............... 25
Directors and Officers................ 26
Investment Advisory and Administrative
Arrangements........................ 28
Portfolio Transactions................ 31
Dividends and Distributions........... 32
Taxes................................. 32
Automatic Dividend Reinvestment
Plan................................ 36
Net Asset Value....................... 36
Description of Capital Stock.......... 37
Performance Data...................... 38
Custodian............................. 39
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent............................... 39
Legal Opinions........................ 39
Independent Auditors.................. 40
Independent Auditors' Report.......... 41
Financial Statements.................. 42
Appendix--Ratings of Municipal
Obligations......................... 53
Authorization Form.................... 61
Code #11263-1296
</TABLE>
YZa
MERRILL LYNCH
HIGH INCOME MUNICIPAL
BOND FUND, INC.
LOGO
PROSPECTUS
December 20, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 64
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus
graph paper and Merrill Lynch
logo including stylized market
bull.
</TABLE>
