MERRILL LYNCH
HIGH INCOME
MUNICIPAL BOND
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
This report, including the financial information herein, is transmitted
to the shareholders of Merrill Lynch High Income Municipal Bond Fund,
Inc. for their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the Fund
or any securities mentioned in the report. Past performance results
shown in this report should not be considered a representation of future
performance. Statements and other information herein are as dated and
are subject to change.
Merrill Lynch High Income
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #11677 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch High Income Municipal Bond Fund, Inc.
DEAR SHAREHOLDER
For the year ended August 31, 1997, Merrill Lynch High Income Municipal
Bond Fund, Inc. earned $0.648 per share income dividends, representing a
net annualized yield of 5.73%, based on a month-end per share net asset
value of $11.34. Over the same period, the Fund's total investment
return was +10.20%, based on a change in per share net asset value from
$10.94 to $11.34, and assuming reinvestment of $0.654 per share income
dividends and $0.037 per share capital gains distributions.
For the three-month period ended August 31, 1997, the Fund's total
investment return was +3.00%, based on a change in per share net asset
value from $11.17 to $11.34, and assuming reinvestment of $0.163 per
share income dividends.
The Municipal Market Environment
During the three months ended August 31, 1997, a number of very
favorable factors combined to push both tax-exempt and taxable bond
yields to recent historic lows. A slowing domestic economy, a
continued benign, if not improving, inflationary environment, a
declining Federal budget deficit with resultant reduced Treasury
borrowing needs, and a successful Congressional budget accord all
resulted in significant declines in fixed-income yields. By the end of
July, 30-year US Treasury bond yields had declined approximately 60
basis points (0.60%) to 6.30%, their lowest level in over a year.
Similarly, as measured by the Bond Buyer Revenue Bond Index, long-term
municipal revenue bond yields fell over 40 basis points to 5.49%, their
lowest level since early 1994.
However, during August the fixed-income markets retraced a part of their
earlier gains. Investors and traders developed new fears that domestic
economic growth would reaccelerate during the remainder of the calendar
year and cause the Federal Reserve Board to raise interest rates prior
to 1998. During August, long-term US Treasury bond yields increased by
approximately 30 basis points to end the period at 6.61%. Long-term,
tax-exempt revenue bond yields rose by approximately 20 basis points to
end the August 31, 1997 period at 5.60%. Over the last three months, the
overall positive combination of moderate economic growth and minimal
inflation fostered a decline in long-term US Treasury bond yields of
approximately 30 basis points, while long-term municipal bond yields
fell approximately 25 basis points.
The decline in tax-exempt yields in recent months was even more
impressive given that the municipal market lost much of the technical
support it enjoyed for over a year. In previous quarters, new tax-exempt
bond issuance declined, or remained stable. During the six months ended
August 31, 1997, approximately $100 billion in new long-term municipal
securities was underwritten, an increase of over 7.5% versus the
comparable period in 1996. As tax-exempt bond yields declined, many
municipal bond issuers took this opportunity to both issue new debt as
well as refinance older, higher-couponed debt with new, lower-yielding
issues. This refinancing led to a surge in tax-exempt issuance in recent
months. Over the three months ended August 31, 1997, new long-term, tax-
exempt bond issuance totaled approximately $55 billion, an increase of
over 15% versus the August 31, 1996 quarter.
The decline in municipal bond yields also resulted in some reduction in
retail investor demand. In earlier episodes of rapidly declining
interest rates, individual investor demand initially fell until
investors became more acclimated to the lower interest rate levels.
Should interest rates stabilize, we expect investor demand to increase
once again. Also, this past June and July, municipal bond investors
received over $50 billion in assets from coupon income payments, bond
maturities, and the proceeds from early bond redemptions. Despite the
continued attraction of the US equity market, it is likely that much of
these assets will be reallocated to the municipal bond market as
investors adjust to the new investment environment.
Looking ahead, given the extent of the recent bond market rally, some
retrenchment or at least a period of consolidation is likely. However,
the positive backdrop of modest economic growth and low inflation
suggests that any such adjustment is not likely to be excessive. Despite
recent increases in new bond issuance, supply for all of 1997 is not
expected to be materially different than earlier estimates of
approximately $175 billion. It is likely that the recent increase in
issuance is largely borrowed from financings that originally were
scheduled for later this year. Additionally, any significant increase in
tax-exempt bond yields will prevent any further bond refinancings,
reducing future supply. Unless the current positive economic
fundamentals undergo immediate and meaningful deterioration, we are
likely to view any increase in municipal bond yields as an opportunity
to purchase more attractively priced tax-exempt securities.
Portfolio Strategy
Merrill Lynch High Income Municipal Bond Fund, Inc. exhibited little of
the volatility that characterized the tax-exempt market during the year
ended August 31, 1997. To a large degree, this muted volatility can be
explained by the portfolio's structure and composition. Many of the
Fund's holdings consist of securities purchased years ago in a higher
interest rate environment. These bonds are valued at substantial
premiums, possess limited call protection and respond minimally to
interest rate fluctuations. In addition, a continuation of the dramatic
narrowing of credit spreads contributed to the Fund's ability to weather
a sometimes unsettled market. Strong institutional demand for high-
yield, tax-exempt bonds consistently overwhelmed the small amount of
supply that trickled into the marketplace, further strengthening an
already firm technical environment. As a result, valuations in the
municipal high-yield market tracked those of the taxable corporate
market and are at the highest levels seen in several years.
For some time now, our strategy was to actively manage the Fund's call
exposure in an effort to lock in premiums when available, ensure
stability of the dividend stream, and redeploy assets toward new
commitments with better performance characteristics. Toward that end, we
purchased almost $34 million in high-yield, tax-exempt securities in the
last year bearing an average weighted yield of 7.36%. Since the Fund's
assets grew only modestly, we must rely on proceeds from the sale of
existing holdings in order to finance the purchase of new acquisitions.
We raised approximately $24 million through the sale of $21.3 million in
par value of bonds possessing poor protection from early redemption. An
additional $10.5 million came from the sale of bonds that exhibited
signs of having maximized their upside potential. While this portfolio
restructuring will be an ongoing process, the progress that we have made
thus far is significant and should enhance stability of the shareholder's
return in the years ahead.
With regard to the unprecedented narrowing of credit spreads, it is
possible that the risk of a correction toward historical norms is real
and credible. However, such an event appears unlikely to us in the
absence of a significant economic decline, which we do not anticipate at
this time given the overall balanced nature of the current economic
environment. Nonetheless, we continue to carefully monitor the
portfolio's holdings for signs of emerging credit weakness and excessive
valuations as part of our fundamental strategy designed to seek out
value and capitalize on opportunities as they present themselves in the
marketplace.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/THEODORE R. JAECKEL JR.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
/S/JOHN M. LOFFREDO
John M. Loffredo
Vice President and Portfolio Manager
September 30, 1997
We are pleased to announce that effective August 27, 1997, John M.
Loffredo became Vice President and Portfolio Manager of Merrill Lynch
High Income Municipal Bond Fund, Inc. Mr. Loffredo has been a First Vice
President of the Investment Adviser since 1997, and Vice President of
the Investment Adviser since 1991.
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
Alabama -- 1.3% B+ NR* $1,000 Brewton, Alabama, IDB, PCR, Refunding (Container
Corporation American Project), 8% due 4/01/2009 $1,083
BBB- Baa3 1,500 Mobile, Alabama, IDB, Solid Waste Disposal Revenue
Refunding Bonds (Mobile Energy Services Company
Project), 6.95% due 1/01/2020 1,631
Arizona -- 2.8% B B2 3,000 Coconino County, Arizona, Pollution Control
Corporation, Revenue Refunding Bonds (Tuscon
Electric Power - Navajo), AMT, Series A, 7.125%
due 10/01/2032 3,123
NR* NR* 1,500 Navajo County, Arizona, IDA, IDR (Stone Container
Corporation Project), AMT, 7.20% due 6/01/2027 1,598
NR* NR* 1,235 Pima County, Arizona, IDA, Revenue Bonds (La
Hacienda Project), 9.50% due 12/01/2016 1,272
California -- 1.3% AAA Aaa 10,000 Foothill/Eastern Transportation Corridor Agency,
California, Toll Road Revenue Bonds (Senior Lien),
Series A, 6.50%** due 1/01/2028 (h) 1,786
NR* NR* 1,500 Long Beach, California, Redevelopment Agency, M/F
Housing Revenue Bonds (Pacific Court Apartments),
AMT, Issue B, 6.80% due 9/01/2013 (f) 975
Colorado -- 7.4% NR* NR* 1,700 Colorado Postsecondary Educational Facilities
Authority Revenue Bonds (Colorado Ocean Journey
Incorporated Project), 8.30% due 12/01/2017 1,769
Denver, Colorado, City and County Airport Revenue
Bonds:
BBB Baa1 900 AMT, Series A, 8% due 11/15/2025 1,005
BBB Baa1 2,000 AMT, Series D, 7.75% due 11/15/2013 2,471
AAA Baa1 1,500 Series A, 7.25% due 11/15/2002 (d) 1,718
AAA NR* 500 Series A, 7.25% due 11/15/2002 (d) 573
NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax
Increment Revenue Bonds (Downtown Denver), AMT,
Series A, 7.75% due 9/01/2017 3,080
NR* NR* 2,000 Mountain Village Metropolitan District, Colorado,
Refunding Bonds (San Miguel County), UT, 8.10% due
12/01/2011 2,254
Public Highway Authority, Colorado, Revenue
Refunding Bonds (E-470), Senior Series B (b):
AAA Aaa 5,000 5.47%** due 9/01/2019 1,474
AAA Aaa 5,000 5.50%** due 9/01/2020 1,378
Connecticut -- 1.7% NR* NR* 1,500 Connecticut State Health and Educational Facilities
Authority Revenue Bonds (Edgehill Issue), Series A,
6.875% due 7/01/2027 1,525
NR* B1 1,875 New Haven, Connecticut, Facilities Revenue Bonds
(Hill Health Corporation Project), 9.25% due
5/01/2017 2,083
Florida -- 1.8% NR* NR* 1,000 Arbor Greene, Florida, Community Development
District, Special Assessment Revenue Bonds, 7.60%
due 5/01/2018 1,032
AA- VMIG1+ 800 Dade County, Florida, IDA, Exempt Facilities Revenue
Refunding Bonds (Florida Power and Light Company),
VRDN, 3.75% due 6/01/2021 (a) 800
NR* NR* 1,000 Grand Haven Community Development District, Florida,
Special Assessment, Series B, 6.90% due 5/01/2019 988
BB+ NR* 960 Jacksonville, Florida, Port Authority, IDR, Refunding
(United States Gypsum Company Project), 7.25% due
10/01/2014 1,040
Georgia -- 5.2% NR* Aaa 2,465 Atlanta, Georgia, Urban Residential Finance
Authority, College Facilities Revenue Bonds (Morris
Brown College Project), 9.50% due 12/01/2001 (d) 3,000
NR* NR* 1,975 Atlanta, Georgia, Urban Residential Finance
Authority, M/F Housing Mortgage Revenue Bonds
(Northside Plaza Apartments Project), 9.75% due
11/01/2020 2,143
NR* NR* 2,000 Hancock County, Georgia, COP, 8.50% due 4/01/2015 2,207
NR* NR* 1,485 Rockdale County, Georgia, Development Authority,
Solid Waste Disposal Revenue Bonds (Visy Paper Inc.
Project), AMT, 7.40% due 1/01/2016 1,587
NR* NR* 2,000 Savannah, Georgia, EDA, IDR (Stone Container
Corporation Project), AMT, 7.40% due 4/01/2026 2,152
Hawaii -- 0.9% AA+ NR* 1,750 Hawaii State Department of Budget and Finance,
Special Purpose Mortgage Revenue Bonds (Citizens
Utility Company), RIB, AMT, Series 91-B, 9.132% due
11/01/2021 (g) 1,984
Illinois -- 6.2% BBB - Baa2 4,000 Chicago, Illinois, O'Hare International Airport,
Special Facilities Revenue Refunding Bonds (American
Airlines Inc. Project), 8.20% due 12/01/2024 4,784
NR* NR* 3,195 Illinois Development Finance Authority, Acquisition
Program Revenue Bonds (Prime Health Care Centers
Facilities), 7.75% due 12/01/2016 3,406
NR* NR* 2,000 Illinois Educational Facilities Authority Revenue
Bonds (Chicago Osteopathic Health System), 7.25% due
11/15/2019 (d) 2,419
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds
(Holy Cross Hospital Project), 6.75% due 3/01/2024 1,319
BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding
Bonds (Sales Tax - Landings Redevelopment), 7% due
12/01/2008 1,108
Indiana -- 1.8% A NR* 1,500 Indiana Bond Bank, Special Hospital Program
(Hendricks Community Hospital), Series A, 7.125%
due 4/01/2013 1,647
NR* NR* 2,000 Wabash, Indiana, Solid Waste Disposal Revenue Bonds
(Jefferson Smurfit Corporation Project), AMT, 7.50%
due 6/01/2026 2,145
Iowa -- 0.9% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities
Revenue Refunding Bonds (Care Initiatives Project),
9.25% due 7/01/2025 1,959
Kentucky -- 2.2% AAA Aaa 4,000 Louisville, Kentucky, Hospital Revenue Bonds,
INFLOS, 9.288% due 10/01/2014 (b)(g) 4,605
Louisiana -- 4.0% NR* A3 3,500 Lake Charles, Louisiana, Harbor and Terminal
District, Port Facilities Revenue Refunding Bonds
(Trunkline LNG Company Project), 7.75% due 8/15/2022 3,998
NR* A3 1,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds (Woman's Hospital Foundation Project),
7.25% due 10/01/2002 (d) 1,138
BB NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding
(Continental Grain Company Project), 7.50% due
7/01/2013 3,277
Maryland -- 1.0% NR* NR* 2,000 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration -
AES Warrior Run), AMT, 7.40% due 9/01/2019 2,151
Massachusetts -- 7.4% NR* NR* 1,145 Boston, Massachusetts, Industrial Development
Financing Authority, Solid Waste Disposal Facility
Revenue Bonds (Jet-A-Way Project), AMT, 10.50% due
1/01/2011 1,293
NR* Ba2 530 Lawrence, Massachusetts, GO, 9.875% due 12/15/1998 562
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
NR* B 1,810 (New England Memorial Hospital Project), Series C,
7% due 4/01/2014 1,700
NR* NR* 305 (North Adams Regional Hospital), Issue B, 8% due
7/01/1998 312
NR* B2 3,000 Refunding (New England Memorial Hospital), Series B,
6.125% due 7/01/2013 2,590
Massachusetts State Industrial Finance Agency Revenue
Bonds:
NR* B1 1,675 (Bay Cove Human Services Incorporated), 8.375% due
4/01/2019 1,861
BBB Ba1 1,600 (Vinfen Corporation), 7.10% due 11/15/2018 1,734
NR* NR* 5,000 Massachusetts State Port Authority, Special Project
Revenue Bonds (Harborside Hyatt), AMT, 10% due
3/01/2026 5,582
Missouri -- 4.6% BBB- NR* 2,830 Joplin, Missouri, IDA, Hospital Facilities Revenue
Refunding and Improvement Bonds (Tri-State
Osteopathic), 8.25% due 12/15/2014 3,122
BB NR* 3,690 Missouri State Health and Educational Facilities
Authority Revenue Bonds (Southwest Baptist University
Project), 9.50% due 10/01/2011 4,347
AAA Aaa 2,000 Phelps County, Missouri, Hospital Revenue Bonds
(Phelps County Regional Medical Center), 8.30% due
3/01/2000 (d) 2,227
New Jersey -- 12.3% Camden County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Holt Hauling & Warehousing),
Series A:
NR* NR* 4,600 9.625% due 1/01/2011 5,298
NR* NR* 2,000 9.875% due 1/01/2021 2,334
BB B2 4,000 Camden County, New Jersey, Pollution Control
Financing Authority, Solid Waste Resource Recovery
Revenue Bonds, Series D, 7.25% due 12/01/2010 4,093
NR* NR* 1,500 New Jersey, EDA, IDR, Refunding (Newark Airport
Marriott Hotel), 7% due 10/01/2014 1,596
NR* Aaa 8,070 New Jersey, EDA, Revenue Bonds (Saint Barnabas
Project), 5.625%** due 7/01/2024 (b) 1,839
New Jersey Health Care Facilities Financing Authority
Revenue Bonds (d):
NR* NR* 4,725 (Riverwood Center Issue), Series A, 9.90% due
7/01/2001 5,686
AAA Aaa 4,700 (Saint Elizabeth Hospital), Series B, 8.25% due
7/01/2000 5,236
New Mexico -- 0.5% B B2 1,000 Farmington, New Mexico, PCR (Tucson Electric Power
Company - San Juan), Series A, 6.95% due 10/01/2020 1,046
New York -- 5.1% BBB+ Baa1 310 New York City, New York, GO, UT, Series C, Sub-Series
C-1, 7.50% due 8/01/2021 348
BB+ Baa3 2,750 New York City, New York, IDA, Special Facilities
Revenue Bonds (United Airlines Inc. Project), AMT,
5.65% due 10/01/2032 2,686
Port Authority of New York and New Jersey, Special
Obligation Revenue Bonds (Special Project - KIAC),
AMT, Series 4:
NR* NR* 1,000 3rd Installment, 7% due 10/01/2007 1,114
NR* NR* 2,750 5th Installment, 6.75% due 10/01/2019 2,961
Utica, New York, Public Improvement, UT:
CCC B 635 8.50% due 8/15/2007 706
CCC B 635 8.50% due 8/15/2008 708
CCC B 500 8.50% due 8/15/2009 557
CCC B 500 8.50% due 8/15/2010 557
CCC B 500 8.50% due 8/15/2011 557
CCC B 500 8.50% due 8/15/2012 557
Ohio -- 0.9% AAA Aaa 1,700 Ohio, HFA, S/F Mortgage Revenue Bonds, RIB, AMT,
Series A-2, 9.72% due 3/24/2031 (c)(g) 1,895
Oregon -- 1.5% NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration
Project Revenue Bonds (Wauna Cogeneration Project),
AMT, Series B, 7.40% due 1/01/2016 1,069
B+ NR* 1,955 Yamhill County, Oregon, PCR, Refunding (Smurfit
Newsprint Corporation Project), 8% due 12/01/2003 2,126
Pennsylvania -- 10.4% NR* NR* 2,000 Lehigh County, Pennsylvania, General Purpose
Authority Revenue Bonds (Wiley House Kids Peace),
8.75% due 11/01/2014 2,092
BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority
Revenue Bonds (Bradford Hospital Project), 8.875%
due 10/01/2020 5,685
Montgomery County, Pennsylvania, IDA, Revenue Bonds:
NR* Ba3 3,400 (Pennsburg Nursing and Rehabilitation Center),
7.625% due 7/01/2018 3,832
NR* NR* 1,500 Refunding (1st Mortgage - Meadowood Corporation
Project), Series A, 10.25% due 12/01/2020 1,663
NR* NR* 5,000 Pennsylvania Economic Development Financing
Authority, Recycling Revenue Bonds (Ponderosa Fibres
Project), AMT, Series A, 9.25% due 1/01/2022 3,262
NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR,
Refunding (Commercial Development - Philadelphia
Airport), AMT, 7.75% due 12/01/2017 5,511
Rhode Island -- 0.8% AAA NR* 1,500 Rhode Island State Health and Educational Building
Corporation, Hospital Financing Revenue Bonds (South
County Hospital), 7.25% due 11/01/2001 (d) 1,671
Tennessee -- 1.2% BBB Baa2 2,500 Memphis - Shelby County, Tennessee, Airport
Authority, Special Facilities and Projects Revenue
Refunding Bonds (Federal Express Corporation), 5.35%
due 9/01/2012 2,528
Texas -- 8.6% BBB- Baa2 3,000 Dallas - Fort Worth, Texas, International Airport
Facilities Improvement Corporation Revenue Bonds
(American Airlines, Inc.), AMT, 7.25% due 11/01/2030 3,297
BB Ba2 3,000 Houston, Texas, Airport System Revenue Bonds,
Special Facilities (Continental Airline Airport
Improvement), AMT, Series C, 6.125% due 7/15/2027 3,043
BB Ba1 4,650 Jefferson County, Texas, Health Facilities
Development Corporation, Hospital Revenue Bonds
(Baptist Healthcare System Project), 8.875% due
6/01/2021 4,897
BB Ba 3,270 Odessa, Texas, Junior College District, Revenue
Refunding Bonds, Series A, 8.125% due 12/01/2018 3,624
NR* VMIG1+ 2,200 Port Arthur, Texas, Navigational District, PCR,
Refunding (Texaco Incorporated Project), VRDN,
3.80% due 10/01/2024 (a) 2,200
NR* NR* 1,845 Swisher County, Texas, Jail Facilities Financing
Corporation Revenue Bonds (Criminal Detention
Center), 9.75% due 8/01/2009 (f) --
BBB Baa2 1,000 West Side Calhoun County, Texas, Navigation
District, Solid Waste Disposal Revenue Bonds (Union
Carbide Chemicals and Plastics), AMT, 8.20% due
3/15/2021 1,114
Utah -- 2.9% AAA Aaa 3,000 Salt Lake City, Utah, Hospital Revenue Refunding
Bonds (IHC Hospitals, Incorporated), INFLOS, 9.616%
due 5/15/2020 (e)(g) 3,514
NR* NR* 2,600 Tooele County, Utah, PCR, Refunding (Laidlaw
Environmental), AMT, Series A, 7.55% due 7/01/2027 2,675
Vermont -- 0.8% NR* NR* 1,500 Vermont Educational and Health Buildings Financing
Agency Revenue Bonds (College of Saint Joseph's
Project), 8.50% due 11/01/2024 1,692
Virginia -- 1.8% A+ A2 1,500 Henry County, Virginia, IDA, Hospital Revenue
Refunding Bonds (Martinsville and Henry Memorial
Hospital), 6% due 1/01/2027 1,539
NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Multi-Trade
Revenue Bonds, AMT, Series A, 7.50% due 1/01/2014 2,176
Total Investments (Cost -- $189,991) -- 97.3% 206,001
Other Assets Less Liabilities -- 2.7% 5,619
--------
Net Assets -- 100.0% $211,620
========
(a) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate
in effect at August 31, 1997.
(b) MBIA Insured.
(c) GNMA Collateralized.
(d) Prerefunded.
(e) AMBAC Insured.
(f) Non-income producing security.
(g) The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest
rate shown is the rate in effect at August 31, 1997.
(h) FSA Insured.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch High Income Municipal Bond
Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the list
below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $189,990,692) (Note 1a) $206,000,786
Cash 51,512
Receivables:
Interest $3,832,233
Securities sold 1,876,749
Capital shares sold 544,416 6,253,398
-----------
Prepaid registration fees and other assets (Note 1e) 43,400
-------------
Total assets 212,349,096
-------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 360,144
Investment adviser (Note 2) 178,298
Administrator (Note 2) 46,920 585,362
-----------
Accrued expenses and other liabilities 143,599
-------------
Total liabilities 728,961
-------------
Net Assets: Net assets $211,620,135
=============
Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $1,865,498
Consist of: Paid-in capital in excess of par 191,672,043
Undistributed realized capital gains on investments -- net 2,072,500
Unrealized appreciation on investments -- net 16,010,094
-------------
Net assets -- Equivalent to $11.34 per share based on 18,654,978 shares of
capital outstanding $211,620,135
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
<S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $14,933,718
(Note 1d):
Expenses: Investment advisory fees (Note 2) 1,950,602
Administrative fees (Note 2) 513,316
Transfer agent fees (Note 2) 119,690
Advertising 66,715
Printing and shareholder reports 60,505
Accounting services (Note 2) 52,907
Professional fees 51,421
Registration fees (Note 1e) 48,359
Listing fees 35,882
Directors' fees and expenses 24,683
Custodian fees 18,746
Pricing services 14,215
Other 6,476
------------
Total expenses 2,963,517
------------
Investment income -- net 11,970,201
------------
Realized & Realized gain on investments -- net 4,093,259
Unrealized Change in unrealized appreciation on investments -- net 4,045,233
Gain on ------------
Investments -- Net Net Increase in Net Assets Resulting from Operations $20,108,693
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year Ended
August 31, 1997
Increase (Decrease) in Net Assets 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $11,970,201 $11,898,053
Realized gain on investments -- net 4,093,259 1,967,290
Change in unrealized appreciation on investments -- net 4,045,233 (2,408,692)
------------- -------------
Net increase in net assets resulting from operations 20,108,693 11,456,651
------------- -------------
Dividends & Investment income -- net (11,970,201) (11,898,053)
Distributions to Realized gain on investments -- net (680,014) --
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends and distributions
to shareholders (12,650,215) (11,898,053)
------------- -------------
Capital Share Net increase in net assets derived from capital share transactions 4,609,228 1,418,958
Transactions ------------- -------------
(Note 4):
Net Assets: Total increase in net assets 12,067,706 977,556
Beginning of year 199,552,429 198,574,873
------------- -------------
End of year $211,620,135 $199,552,429
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $10.94 $10.97 $10.92 $11.44 $10.74
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .65 .66 .65 .65 .68
Realized and unrealized gain (loss) on
investments -- net .44 (.03) .23 (.45) .75
--------- --------- --------- --------- ---------
Total from investment operations 1.09 .63 .88 .20 1.43
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.65) (.66) (.65) (.65) (.68)
Realized gain on investments -- net (.04) -- (.15) (.07) (.05)
In excess of realized gain on investments -- net -- -- (.03) -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.69) (.66) (.83) (.72) (.73)
--------- --------- --------- --------- ---------
Net asset value, end of year $11.34 $10.94 $10.97 $10.92 $11.44
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 10.20% 5.81% 8.68% 1.75% 13.83%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.44% 1.50% 1.52% 1.48% 1.37%
Net Assets: ========= ========= ========= ========= =========
Expenses 1.44% 1.50% 1.52% 1.48% 1.47%
========= ========= ========= ========= =========
Investment income -- net 5.83% 5.90% 6.11% 5.81% 6.17%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $211,620 $199,552 $198,575 $212,958 $216,922
Data: ========= ========= ========= ========= =========
Portfolio turnover 43.07% 28.54% 21.28% 28.51% 28.74%
========= ========= ========= ========= =========
* Total investment returns exclude the effects of the early withdrawal charge, if any. The Fund is a continuously offered
closed-end fund, the shares of which are offered at net asset value. Therefore, no separate market exists.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a continuously
offered, non-diversified, closed-end management investment company. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the over-
the-counter municipal bond and money markets and are valued at the last
available bid price in the over-the-counter market or on the basis of
yield equivalents as obtained from one or more dealers that make markets
in the securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their settlement prices as
of the close of such exchanges. Options, which are traded on exchanges,
are valued at their last sale price as of the close of such exchanges
or, lacking any sales, at the last available bid price. Short-term
investments with remaining maturities of sixty days or less are valued
at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix system
for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision
of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Discounts
and market premiums are amortized into interest income. Realized gains
and losses on security transactions are determined on the identified
cost basis.
(e) Prepaid registration fees -- Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions -- Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.95% of the
Fund's average daily net assets.
The Fund also has entered into an Administrative Services Agreement with
MLAM whereby the Fund pays a monthly fee at an annual rate of 0.25% of
the Fund's average daily net assets, in return for the performance of
administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund.
For the year ended August 31, 1997, Merrill Lynch Funds Distributor,
Inc. ("MLFD") earned early withdrawal charges of $44,647 relating to the
tender of the Fund's shares.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $86,555,822 and $85,811,091,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $4,093,259 $16,010,094
----------- -----------
Total $4,093,259 $16,010,094
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $15,989,952, of which $18,452,554 related to
appreciated securities and $2,462,602 related to depreciated securities.
The aggregate cost of investments at August 31, 1997 for Federal income
tax purposes was $190,010,834.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
August 31, 1997 Shares Amount
Shares sold 2,126,310 $23,757,046
Shares issued to share-
holders in reinvestment of
dividends and distributions 447,856 4,995,614
----------- -----------
Total issued 2,574,166 28,752,660
Shares tendered (2,153,158) (24,143,432)
----------- -----------
Net increase 421,008 $4,609,228
=========== ===========
For the Year Ended Dollar
August 31, 1996 Shares Amount
Shares sold 1,986,078 $21,952,170
Shares issued to share-
holders in reinvestment
of dividends 435,140 4,809,103
----------- -----------
Total issued 2,421,218 26,761,273
Shares tendered (2,283,709) (25,342,315)
----------- -----------
Net increase 137,509 $1,418,958
=========== ===========
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch High Income Municipal
Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch High Income
Municipal Bond Fund, Inc. as of August 31, 1997, the related statements
of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with gener-ally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned at August 31, 1997 by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch High Income Municipal Bond Fund, Inc. as of August 31,
1997, the results of its operations, the changes in its net assets, and
the financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by Merrill
Lynch High Income Municipal Bond Fund, Inc. during its taxable year
ended August 31, 1997 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, the following table summarizes the per
share capital gains distributions paid by the Fund during the year:
Record Payable Short-Term Long-Term
Date Date Capital Gains Capital Gains
12/18/96 12/31/96 $.005275 $.032177
Please retain this information for your records.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
John M. Loffredo, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
