<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-6156
POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT AS STATED BELOW
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 9 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
THOMAS R. SMITH, JR., ESQ. PATRICK D. SWEENEY, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the 'Securities Act'), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Stock ($.10 par value) 5,000,000 shares $11.41 $57,050,000 $ 17,288(3)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to the filing date to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
(3) The amount of the registration fee does not include $41,041 which has
previously been paid to the Commission for registration fees relating to
10,008,465 shares registered pursuant to Securities Act File No. 33-50861
and unissued as of October 31, 1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS IN THIS
REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO REGISTRATION
STATEMENT NO. 33-50861, AS AMENDED, PREVIOUSLY FILED BY THE REGISTRANT ON FORM
N-2. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT NO. 33-50861, AND SUCH POST-EFFECTIVE AMENDMENT SHALL
HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS
REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES
ACT. THE REGISTRATION STATEMENT AND THE REGISTRATION STATEMENT AMENDED HEREBY
ARE COLLECTIVELY REFERRED TO HEREUNDER AS THE 'REGISTRATION STATEMENT.'
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
<S> <C> <C>
PART A
Item 1. Outside Front Cover Page...... Cover Page
Item 2. Inside Front and Outside Back
Cover Pages................. Cover Page
Item 3. Fee Table and Synopsis........ Prospectus Summary; Fee
Table
Item 4. Financial Highlights.......... Financial Highlights
Item 5. Plan of Distribution.......... Prospectus Summary; Purchase
of Shares
Item 6. Selling Shareholders.......... Not Applicable
Item 7. Use of Proceeds............... Investment Objective and
Policies
Item 8. General Description of the
Registrant.................. The Fund; Prospectus Summary
Item 9. Management.................... Directors and Officers;
Investment Advisory and
Administrative Arrangements
Item 10. Capital Stock, Long-Term Debt
and Other Securities........ Description of Capital Stock;
Automatic Dividend
Reinvestment Plan
Item 11. Defaults and Arrears on Senior
Securities.................. Not Applicable
Item 12. Legal Proceedings............. Not Applicable
Item 13. Table of Contents of the
Statement of Additional
Information................. Not Applicable
PART B
Item 14. Cover Page.................... Not Applicable
Item 15. Table of Contents............. Not Applicable
Item 16. General Information and
History..................... The Fund
Item 17. Investment Objective and
Policies.................... Investment Objective and
Policies; Investment
Restrictions
Item 18. Management.................... Directors and Officers;
Investment Advisory and
Administrative Arrangements
Item 19. Control Persons and Principal
Holders of Securities....... Investment Advisory and
Administrative Arrangements,
Securities
Item 20. Investment Advisory and Other
Services.................... Investment Advisory and
Administrative Arrangements;
Custodian; Transfer Agent,
Dividend Disbursing Agent
and Shareholder Servicing
Agent; Independent Auditors
Item 21. Brokerage Allocation and Other
Practices................... Portfolio Transactions
Item 22. Tax Status.................... Taxes
Item 23. Financial Statements.......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 7, 1997
PROSPECTUS
DECEMBER , 1997
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
that seeks 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, in the opinion of bond counsel to the issuer, is
exempt from Federal income taxes. The Fund may invest in certain tax-exempt
securities that 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
$ . 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 that 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 $5.35) for confirming purchases and repurchases.
Purchases made directly through the Fund's transfer agent are not subject to the
processing fee. 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 that 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 and 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. The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains material incorporated by reference herein and
other information regarding the Fund.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE 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)
----------- ------- -----------
Per Share....................... $ None $
Total(3)........................ $ None $
</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 $ to $ 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 $ , 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
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
<PAGE>
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 the Distributor and
other securities dealers that have entered into selected dealer agreements with
the Distributor, including 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, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes. 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 September 30, 1997, the Investment
Adviser or its affiliate, Fund Asset Management, L.P. had a total of
approximately $272.5 billion in investment company and other portfolio assets
under management (approximately $33.1 billion of which were invested in
municipal securities), including accounts of certain affiliates of the
Investment Adviser. See 'Investment Advisory and Administrative Arrangements.'
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
2
<PAGE>
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 that have been held for less than three years and
that 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, $5.35) 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
processing fee.
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. 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 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 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
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
3
<PAGE>
terms of the obligation. Even securities rated BBB by S&P or by Fitch or Baa by
Moody's, ratings that 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.
High yield securities may have call or redemption features that 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 that 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.
4
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
<S> <C>
RATED OBLIGATIONS..................................................................... 60.5%
AAA: 15.5%; AA: 1.4%; A: 4.1%; BBB: 16%; BB: 14.1% and
B: 9.4%; CCC: 0%.
UNRATED OBLIGATIONS*.................................................................. 39.5%
</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 4% are of comparable quality to obligations rated AAA, 0% are
of comparable quality to obligations rated A, 0% are of comparable quality to
obligations rated BBB, 17.3% are of comparable quality to obligations rated
BB, 17.7% are of comparable quality to obligations rated B and 0.5% 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.
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 that may
be considered 'derivative securities' including municipal obligations 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 short-term market rates increase and increase as short-term
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.'
5
<PAGE>
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)
<S> <C>
Investment Advisory Fee(c).............................................................................. 0.95%
Other Expenses(d)....................................................................................... 0.49
----
Total Annual Expenses................................................................................... 1.44%
----
----
</TABLE>
- ------------------------
(a) Shareholders tendering shares within three years of their purchase may be
subject to the Early Withdrawal Charge. See 'Early Withdrawal Charge'--page
23.
(b) See 'Early Withdrawal Charge'--page 23.
(c) See 'Investment Advisory and Administrative Arrangements'--page 27.
(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 27.
<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 1.44%, (2) a 5% annual return throughout the
periods and (3) tender at the end of the period............................ $ 45* $56* $79 $172
An investor would pay the following expenses on a $1,000 investment assuming
no tender at the end of the period......................................... $ 15 $46 $79 $172
</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 $5.35) for
confirming purchases and repurchases. Purchases and repurchases made directly
through the Transfer Agent are not subject to the processing fee.
6
<PAGE>
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 fiscal
year ended August 31, 1997 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) -------------------------------------------------------------------- AUGUST 31,
in Net Asset Value: 1997 1996 1995 1994 1993 1992 1991
- ------------------------------ -------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29 $ 10.00
-------- -------- -------- -------- -------- -------- ------------
Investment income--net.... .65 .66 .65 .65 .68 .71 .63
Realized and unrealized
gain (loss) on
investments-- net....... .44 (.03) .23 (.45) .75 .50 .29
-------- -------- -------- -------- -------- -------- ------------
Total from investment
operations.................. 1.09 .63 .88 .20 1.43 1.21 .92
-------- -------- -------- -------- -------- -------- ------------
Less Dividends and
Distributions:
Investment income--net.... (.65) (.66) (.65) (.65) (.68) (.71) (.63)
Realized gain on
investments--net........ (.04) -- (.15) (.07) (.05) (.05) --
In excess of realized gain
on investments--net..... -- -- (.03) -- -- -- --
-------- -------- -------- -------- -------- -------- ------------
Total dividends and
distributions............... (.69) (.66) (.83) (.72) (.73) (.76) (.63)
-------- -------- -------- -------- -------- -------- ------------
Net asset value, end of
period...................... $ 11.34 $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
TOTAL INVESTMENT RETURN*:
Based on net asset value
per share............... 10.20% 5.81% 8.68% 1.75% 13.83% 12.29% 9.43%++
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............... 1.44% 1.50% 1.52% 1.48% 1.37% 1.30% .84%**
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
Expenses...................... 1.44% 1.50% 1.52% 1.48% 1.47% 1.55% 1.76%**
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
Investment income--net........ 5.83% 5.90% 6.11% 5.81% 6.17% 6.85% 7.43%**
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $211,620 $199,552 $198,575 $212,958 $216,922 $170,735 $114,628
-------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- ------------
Portfolio turnover........ 43.07% 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.
7
<PAGE>
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, in the opinion of bond counsel to the issuer, is exempt from
Federal income taxes. 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 that, 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 that are rated in any one of the medium and lower rating
categories of a nationally recognized statistical rating organization or are
unrated but considered by the Investment Adviser to be of comparable quality. In
the case of Moody's, S&P or 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 potential 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 that 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.
These 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
and are less affected by interest rate fluctuations than higher rated tax-exempt
securities of similar maturity but are subject to greater overall 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 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.
8
<PAGE>
Additionally, the priority of liens and the overall structure of the particular
issue may be factors that 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 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 that 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 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
9
<PAGE>
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 that 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 that 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 that may be located in the same geographic area, or
that 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 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 short-term market rates increase and increase as short-term
market rates decline. The Fund's return on these 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 that 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 that have shorter term maturities or that contain
limitations on the extent to which the
10
<PAGE>
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 that 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 that 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.
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 that
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
11
<PAGE>
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
for which construction is complete 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
alternate facilities, scarcity of fuel, reduction or loss of rents or the impact
of environmental considerations. Other transportation 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 that 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 also may 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.
- ------------------
* For purposes of the description of users of facilities, all references to
'corporations' shall be deemed to include any other nongovernmental person or
entity.
12
<PAGE>
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 that 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.
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 the 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.
13
<PAGE>
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 Investment
Adviser 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.
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 also will 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 (the '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
14
<PAGE>
regard, borrowed funds are subject to interest costs that may offset or exceed
the return earned on the securities that 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% 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.
15
<PAGE>
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 that it intends
to purchase. The Fund will not purchase options on securities if, as a result of
such purchase, the aggregate cost of all 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
that 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 that may become available if the Investment Adviser and the Directors of
the Fund
16
<PAGE>
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 that 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 are considered by the staff of the 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 that 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 that 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 that 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.
17
<PAGE>
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 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 that 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.
18
<PAGE>
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 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.
(For the purposes of this restriction, tax-exempt securities issued by
states, municipalities and their political subdivisions are not considered
to be part of any industry.)
Additional investment restrictions adopted by the Fund, that may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. 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.
b. 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. ('ML&Co.'). Because of the affiliation of Merrill
Lynch with the Investment Adviser, the Fund is prohibited from engaging in
certain transactions involving Merrill Lynch except pursuant to an exemptive
order of the 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 Merrill Lynch acts as principal. An
exemptive order has been obtained that permits the Fund to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities 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.'
19
<PAGE>
PURCHASE OF SHARES
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 that 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 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 that 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 on that day, 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 processing fee (presently $5.35) to confirm a purchase
of shares by such customers. Purchases made directly through the Fund's Transfer
Agent are not subject to the processing fee.
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 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 fiscal years ended August 31, 1995, 1996 and 1997 the Distributor
20
<PAGE>
paid approximately $408,920, $651,224 and $689,503, 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 that 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 that 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 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 that 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
21
<PAGE>
authorities or any suspension of payment by banks in the United States or
New York State, that is material to the Fund, (c) limitation imposed by
Federal or state authorities on the extension of credit by lending
institutions, (d) commencement of war, armed hostilities or other international
or national calamity directly or indirectly involving the United States that is
material to the Fund, or (e) other event or condition that would have a material
adverse effect on the Fund or its 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 Commission relating to Tender
Offers that 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 alternate 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 that the Board of
Directors may consider is the listing of the Fund's Common Stock 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 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.
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 processing fee (presently, $5.35) to
22
<PAGE>
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 processing fee.
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. Class D shares are subject to an ongoing
account maintenance fee at an annual rate of up to 0.25% of the average daily
net asset value of the applicable investment company. Before taking advantage of
this investment option, shareholders of the Fund should obtain a currently
effective prospectus of the mutual fund that 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 that 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 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.
23
<PAGE>
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 fiscal years ended August 31, 1995, 1996 and 1997, the amount paid
to the Distributor in Early Withdrawal Charges aggregated $130,764, $62,110 and
$44,647, 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 is 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 (65) -- President and Director (1) (2) -- President of the
Investment Adviser (which term, as used herein, includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ('FAM')
(which term, as used herein, includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ('Princeton Services') since
1993; Executive Vice President of ML&Co. since 1990.
RONALD W. FORBES (57) -- Director (2) -- 1400 Washington Avenue, Albany,
New York 12222. Professor of Finance, School of Business, State University of
New York at Albany, since 1989.
CYNTHIA A. MONTGOMERY (45) -- Director (2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant 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 (66) -- 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 (65) -- Director (2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director 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 (59) -- 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) and Alexander's Inc. (real estate company).
24
<PAGE>
TERRY K. GLENN (57) -- 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 (53) -- Senior Vice President (1) (2) -- Senior Vice
President of the Investment Adviser and FAM since 1984; Senior Vice President of
Princeton Services since 1993; Vice President of the Investment Adviser from
1980 to 1984.
DONALD C. BURKE (37) -- Vice President (1) (2) -- First Vice President of
the Investment Adviser since 1997; Vice President and Director of Taxation of
the Investment Adviser since 1990.
KENNETH A. JACOB (46) -- Vice President (1) (2) -- First Vice President of
the Investment Adviser since 1997; Vice President of the Investment Adviser
since 1984.
THEODORE R. JAECKEL, JR. (38) -- Vice President and Portfolio Manager (1)
(2) -- Director (Municipal Tax-Exempt Fund Management) of the Investment Adviser
since 1997; Vice President of the Investment Adviser since 1991; prior thereto,
Vice President of Chemical Bank.
JOHN LOFFREDO, CFA (33) -- Vice President and Portfolio Manager (1) (2) --
First Vice President of the Investment Adviser since 1997; Vice President of the
Investment Adviser since 1991.
GERALD M. RICHARD (48) -- Treasurer (1) (2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
PATRICK D. SWEENEY (43) -- Secretary (1) (2) -- First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser since
1990.
At October 31, 1997, the Directors and officers of the Fund as a group
(14 persons) owned an aggregate of less than 1% of the outstanding Common Stock
of the Fund. 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.
- ------------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of certain other investment companies for which the
Investment Adviser or FAM acts as investment adviser.
COMPENSATION OF DIRECTORS
Pursuant to the terms of its investment advisory agreement with the Fund
(the 'Investment Advisory Agreement'), the Investment Adviser pays all
compensation of officers and employees of the Fund as well as the fees of
all Directors of the Fund who are affiliated persons of ML&Co. or its
subsidiaries. The Fund pays each Director not affiliated with the Investment
Adviser (each a 'non-affiliated Director') a fee of $3,000 per year plus $400
per meeting attended and pays all Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also pays its Audit and Nominating
Committee (the 'Committee'), which consists of all of the non-affiliated
Directors, an annual fee of $900. The Chairman of the Committee receives an
additional annual fee of $1,000. For the fiscal year ended August 31, 1997, fees
and expenses paid to the non-affiliated Directors that were allocated to the
Fund aggregated $24,683.
The following table sets forth the compensation paid by the Fund to the
non-affiliated Directors for the fiscal year ended August 31, 1997 and the
aggregate compensation paid by all investment companies advised by
25
<PAGE>
MLAM and its affiliate, FAM ('MLAM/FAM Advised Funds') to the non-affiliated
Directors for the calendar year ended December 31, 1996.
<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 $142,500
Cynthia A. Montgomery............................... $4,600 None $142,500
Charles C. Reilly................................... $5,600 None $293,833
Kevin A. Ryan....................................... $4,600 None $142,500
Richard R. West..................................... $4,600 None $272,833
</TABLE>
- ------------------
(1) The Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (28 registered investment companies consisting of 41
portfolios); Ms. Montgomery (28 registered investment companies consisting
of 41 portfolios); Mr. Reilly (46 registered investment companies consisting
of 59 portfolios); Mr. Ryan (28 registered investment companies consisting
of 41 portfolios); and Mr. West (47 registered investment companies
consisting of 69 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 140 registered investment companies and also offers
investment advisory services to individuals and institutions. As of September
30, 1997, the Investment Adviser and FAM had a total of approximately $272.5
billion in investment company and other assets under management (including $33.1
billion in municipal securities), 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.
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. and John Loffredo
serve as the Portfolio Managers of the Fund and are primarily responsible for
the Fund's day-to-day management.
26
<PAGE>
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.
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 fiscal years ended August 31, 1995, 1996 and 1997, the fee paid by
the Fund to the Investment Adviser pursuant to the Investment Advisory Agreement
was $1,923,921, $1,911,059 and $1,950,602, respectively, and the fee paid by the
Fund pursuant to the Administration Agreement was $506,295, $502,910, and
$513,316, respectively (based on average daily net assets of approximately
$202.5 million, $200 million and $205.9 million, respectively).
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 the issuance of preferred shares or any borrowing, Commission fees, fees and
expenses of non-interested 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 fiscal years ended August 31, 1995, 1996 and 1997, the
reimbursement for such services aggregated $49,486, $70,139 and $52,907,
respectively.
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
27
<PAGE>
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 that 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).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the 'Transfer Agent'), which
is a 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 Transfer Agent receives an annual
fee of up to $14.00 per shareholder account, and is entitled to reimbursement
for certain transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly
closed account charge will be assessed on all accounts that close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term 'account'
includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the year ended August 31, 1997, the
Fund's payments to the Transfer Agent pursuant to the Transfer Agency Agreement,
including reimbursement for out-of-pocket expenses, aggregated $119,690.
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, 1995, 1996 and 1997, the Fund did not pay any brokerage
commissions.
28
<PAGE>
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 that 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 fiscal years ended August 31,
1995, 1996 and 1997, 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.
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 fiscal years ended August 31, 1996 and 1997, the Fund's
portfolio turnover rate was 28.54% and 43.07%, 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
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. As long as 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.
29
<PAGE>
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 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. Recent legislation creates additional
categories of capital gains taxable at different rates. Although the legislation
does not explain how gain in these categories will be taxed to shareholders of
RICs, it authorizes the issuance of regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. It is anticipated that guidance from the Internal Revenue Service
permitting categories of gain and related rates to be passed through to
shareholders would also require the Fund to designate the amounts of various
categories of capital gain income included in capital gain dividends in a
written notice sent to shareholders. 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
30
<PAGE>
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 that, although tax-exempt, are used for
purposes other than those generally performed by governmental units and that
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 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
31
<PAGE>
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.
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 the
applicable category of capital gain and related tax rate will depend on 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 that 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.
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 'marked 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 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
32
<PAGE>
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.
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 to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with 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. The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks. 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 business day during which the NYSE is open for trading. The
NYSE is not open on New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, 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 and dividends 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
33
<PAGE>
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
September 30, 1997, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AS OF SEPTEMBER 30,
1997 (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 0 18,654,978
</TABLE>
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,
34
<PAGE>
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 Commission for the full text of these provisions.
PERFORMANCE DATA
From time to time the Fund may include its yield, tax equivalent 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 fiscal year ended August 31, 1997, the Fund
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. Tax-equivalent
yield quotations will be computed by dividing (a) the part of the Fund's yield
that is tax-exempt by (b) one minus a stated tax rate and (c) adding the result
to that part, if any, of the Fund's yield that is not tax-exempt. The
tax-equivalent yield for the fiscal year ended August 31, 1997 (based on a
Federal income tax rate of 28%) was 7.96%.
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 fiscal year ended August 31, 1997, the annual total return
of the Fund was 5.91%, based on the change in per share net asset value from
$10.94 to $11.34, and assuming reinvestment of $0.654 per share income
dividends.
The calculation of yield, tax-equivalent yield, and total return does not
reflect the imposition of any Early Withdrawal Charges or the amount of any
shareholder's tax liability.
Yield, tax-equivalent 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.
35
<PAGE>
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
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.
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.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch High Income Municipal Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch High Income Municipal Bond Fund,
Inc. as of August 31, 1997, the related statements of operations for the year
then ended and changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch High
Income Municipal Bond Fund, Inc. as of August 31, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1997
37
<PAGE>
<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
</TABLE>
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
38
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
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
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
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
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
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
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
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
========
</TABLE>
(a) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate
in effect at August 31, 1997.
(b) MBIA Insured.
(c) GNMA Collateralized.
(d) Prerefunded.
(e) AMBAC Insured.
(f) Non-income producing security.
(g) The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest
rate shown is the rate in effect at August 31, 1997.
(h) FSA Insured.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
42
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
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
=============
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (Continued)
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): ============
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (Continued)
Statement of Changes in Net Assets
For the Year Ended
August 31, 1997
Increase (Decrease) in Net Assets 1997 1996
<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
============= =============
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (Concluded)
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<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%
========= ========= ========= ========= =========
</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.
See Notes to Financial Statements.
46
<PAGE>
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
47
<PAGE>
Merrill Lynch High Income Municipal Bond Fund, Inc. August 31, 1997
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Prepaid registration fees -- Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions -- Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.95% of the
Fund's average daily net assets.
The Fund also has entered into an Administrative Services Agreement with
MLAM whereby the Fund pays a monthly fee at an annual rate of 0.25% of
the Fund's average daily net assets, in return for the performance of
administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund.
For the year ended August 31, 1997, Merrill Lynch Funds Distributor,
Inc. ("MLFD") earned early withdrawal charges of $44,647 relating to the
tender of the Fund's shares.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $86,555,822 and $85,811,091,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $4,093,259 $16,010,094
----------- -----------
Total $4,093,259 $16,010,094
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $15,989,952, of which $18,452,554 related to
appreciated securities and $2,462,602 related to depreciated securities.
The aggregate cost of investments at August 31, 1997 for Federal income
tax purposes was $190,010,834.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
August 31, 1997 Shares Amount
Shares sold 2,126,310 $23,757,046
Shares issued to share-
holders in reinvestment of
dividends and distributions 447,856 4,995,614
----------- -----------
Total issued 2,574,166 28,752,660
Shares tendered (2,153,158) (24,143,432)
----------- -----------
Net increase 421,008 $4,609,228
=========== ===========
For the Year Ended Dollar
August 31, 1996 Shares Amount
Shares sold 1,986,078 $21,952,170
Shares issued to share-
holders in reinvestment
of dividends 435,140 4,809,103
----------- -----------
Total issued 2,421,218 26,761,273
Shares tendered (2,283,709) (25,342,315)
----------- -----------
Net increase 137,509 $1,418,958
=========== ===========
48
<PAGE>
[This page intentionally left blank]
49
<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') MUNICIPAL BOND
RATINGS
<TABLE>
<S> <C>
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 payment 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 payments 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.
</TABLE>
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.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/ VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes 'best
quality. . .strong protection by established cash flows'; MIG 2/VMIG2 denotes
'high quality' with ample margins of protection; MIG 3/ VMIG3 notes are of
'favorable quality. . .but. . .lacking the undeniable strength of the preceding
grades'; MIG 4/VMIG4
50
<PAGE>
notes are of 'adequate quality. . .[p]rotection commonly regarded as required of
an investment security is present. . .there is specific risk.'
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 ability of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of 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 earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of 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.
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.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ('STANDARD & POOR'S')
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, 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 obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's 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.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligations; and
51
<PAGE>
III. Protection afforded by, 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.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to meet its financial
commitment on the obligation is very strong.
AA Debt rated 'AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very strong.
A Debt rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation to pay interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB Debt rated 'BB,' 'B,' 'CCC,' 'CC' and 'C' are regarded as having significant speculative characteristics.
B 'BB' indicates the least degree of speculation and 'C' the highest degree of speculation. While such debt
CCC will likely have some quality and protective characteristics, these may be outweighed by large
CC uncertainties or major exposures to adverse conditions.
C
D Debt rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's
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 or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
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 STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from 'A' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This designation 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 an 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.
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
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
Standard & Poor's believes that such payments will be made during such grace period.
</TABLE>
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
o Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to
pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some vulnerability to adverse financial and
economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
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 of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying 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.
53
<PAGE>
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 any other reasons.
<TABLE>
<S> <C>
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.
</TABLE>
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.
<TABLE>
<S> <C>
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.
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.
</TABLE>
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 particular 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
54
<PAGE>
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, 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.
Bonds 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.
<TABLE>
<S> <C>
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 which, 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 Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative
DD and should be valued on the basis of their ultimate recovery value in liquidation or
D reorganization of the obligor. 'DDD' represents the highest potential for recovery on these bonds,
and 'D' represents the lowest potential for recovery.
</TABLE>
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 INVESTMENT GRADE 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.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
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-S 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.
</TABLE>
56
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| | | | | | | | | |
(PLEASE PRINT) Social Security No.
or Taxpayer Identification No.
Name ...........................................................
First Name Initial Last Name
Name of Co-Owner (if any) ......................................
First Name Initial Last 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.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE OF OWNER ........................................ SIGNATURE OF CO-OWNER (IF ANY) .............................
</TABLE>
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>
<CAPTION>
<S> <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.
57
<PAGE>
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
AUTHORIZATION FORM--(CONTINUED)
- --------------------------------------------------------------------------------
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
| | | | | | | | .........................
Branch Code F/C No. F/C Last Name
| | | | | | | |
Dealer's Customer F/C No.
58
<PAGE>
Investment Adviser
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributors
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
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................................... 3
Fee Table...................................... 6
Financial Highlights........................... 7
The Fund....................................... 8
Investment Objective and Policies.............. 8
Investment Restrictions........................ 18
Purchase of Shares............................. 20
Tender Offers.................................. 21
Early Withdrawal Charge........................ 23
Directors and Officers......................... 24
Investment Advisory and Administrative
Arrangements................................. 26
Portfolio Transactions......................... 28
Dividends and Distributions.................... 29
Taxes.......................................... 29
Automatic Dividend Reinvestment Plan........... 33
Net Asset Value................................ 33
Description of Capital Stock................... 34
Performance Data............................... 35
Custodian...................................... 35
Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent.................. 36
Legal Opinions................................. 36
Independent Auditors........................... 36
Independent Auditors' Report................... 37
Financial Statements........................... 38
Appendix--Ratings of Municipal Obligations..... 50
Authorization Form............................. 57
</TABLE>
Code #11263-1297
MERRILL LYNCH
HIGH INCOME MUNICIPAL
BOND FUND, INC.
(ART)
PROSPECTUS
December , 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
PART A:
Financial Highlights for each of the years in the six-year period
ended August 31, 1997 and for the period November 2, 1990 (commencement
of operations) to August 31, 1991.
PART B:
Schedule of Investments as of August 31, 1997.
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1997.
Financial Highlights for each of the years in the five-year
period ended August 31, 1997.
(2) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
<S> <C> <C>
(a) -- Articles of Incorporation of Registrant.(a)
(b) -- Form of By-Laws of Registrant.(a)
(c) -- Not applicable.
(d) (1) -- Portions of the Articles of Incorporation and By-Laws of the Registrant defining the rights of holders
of shares of the Registrant.(b)
(2) -- Specimen certificate for shares of Common Stock of Registrant.(a)
(e) -- Not applicable.
(f) -- Not applicable.
(g) (1) -- Investment Advisory Agreement between Registrant and Merrill Lynch Asset Management, L.P.(a)
(2) -- Administration Agreement between Registrant and Merrill Lynch Asset Management, L.P.(a)
(h) (1) -- Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(a)
(2) -- Form of Selected Dealer Agreement.(a)
(i) -- Not applicable.
(j) -- Custodian Contract between Registrant and The Bank of New York.(a)
(k) (1) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between
Registrant and Merrill Lynch Financial Data Services, Inc.(a)
(2) -- Agreement between Merrill Lynch & Co., Inc. and Registrant relating to the use by Registrant of the
Merrill Lynch Name.(a)
(l) -- Opinion of Brown & Wood LLP, counsel to the Registrant.
(m) -- Not applicable.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
(o) -- Not applicable.
(p) -- Certificate of Merrill Lynch Asset Management, L.P.(a)
(q) -- Not applicable.
(r) -- Financial data schedule.
</TABLE>
- ------------------
(a) Previously filed pursuant to the Electronic Data Gathering, Analysis and
Retrieval ('EDGAR') phase-in requirements on November 6, 1995 as an exhibit
to Post-Effective Amendment No. 2 to the Registration Statement.
(b) Reference is made to Article V, Article VI (Sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
the Registrant's Registration Statement under the Securities Act of 1933, as
amended (the 'Registration Statement'); and to Article II, Article III
(Sections 1, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to
the Registrant's Registration Statement.
C-1
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS.
Previously provided as Exhibits 7(a) and 7(b) to the Registrant's
Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
<TABLE>
<CAPTION>
<S> <C>
Registration...................................... $ 17,288
Printing (other than stock certificates).......... 75,000
Legal fees and expenses........................... 10,000
NASD fees......................................... 6,205
--------
Total........................................ $108,493
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS
TITLE OF CLASS AUGUST 31, 1997
--------------- ---------------
<S> <C>
Shares of common stock, par value $0.10 per
share........................................... 6,595
</TABLE>
- ------------------
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ('Merrill Lynch').
ITEM 29. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to receive from
the Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Directors, or an independent legal
counsel
C-2
<PAGE>
in a written opinion shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch Funds
Distributor, Inc. (the 'Distributor') and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the 'Act'),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. (the 'Investment Adviser' or 'MLAM'),
acts as the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund., Inc., Merrill Lynch Intermediate Government Bond Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Puerto Rico Tax-Exempt
Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis
and Wiley, a division of MLAM) and the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ('FAM'), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund., Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.
and The Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced
Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniHoldings Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings
C-3
<PAGE>
Florida Insured Fund, MuniHoldings New York Insured Fund, Inc., MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania
Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and WorldWide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Intermediate Government Bond Fund is One
Financial Center, 23rd Floor, Boston, Massachusetts 02110-2646. The address of
the Investment Adviser, FAM, Princeton Services, Inc. ('Princeton Services') and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch and Merrill Lynch & Co., Inc.
('ML&CO.') is World Financial Center, North Tower, 250 Vesey Street, New York,
New York 10281. The address of Merrill Lynch Financial Data Services, Inc.
('MLFDS') is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
August 31, 1995 for his, her or its own account or in the capacity of director,
officer, employee, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Glenn is Executive Vice President and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the first two
paragraphs of this Item 30. Messrs. Zeikel, Glenn and Richard also hold the same
position with all or substantially all of the investment companies advised by
FAM as they do with those advised by the Investment Adviser. Messrs. Giordano,
Harvey, Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION WITH
INVESTMENT OTHER SUBSTANTIAL BUSINESS,
NAME ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Merrill Lynch & Co., Limited Partner Financial Services Holding Company;
Inc...................... Limited Partner of FAM
Princeton Services....... General Partner General Partner of FAM
Arthur Zeikel............ President President of FAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.
Terry K. Glenn........... Executive Vice Executive Vice President of FAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFDS;
Director of Financial Data
Services, Inc.; President of
Princeton Administrators, L.P.
Linda L. Federici........ Senior Vice Senior Vice President of FAM
President
Vincent R. Giordano...... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Elizabeth Griffin........ Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Norman R. Harvey......... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Michael J. Hennewinkel... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Philip L. Kirstein....... Senior Vice Senior Vice President, General
President, Counsel and Secretary of FAM;
Counsel and Senior Vice President, Secretary
Secretary General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss.......... Senior Vice Senior Vice President and
President and Controller of FAM; Senior Vice
Controller President and Controller of
Princeton Services
Debra Landsman-Yaros..... Senior Vice Senior Vice President of FAM
President
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
INVESTMENT OTHER SUBSTANTIAL BUSINESS,
NAME ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Stephen M.M. Miller...... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr.... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Michael L. Quinn......... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller........ Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services; Director of MLFD
Gerald M. Richard........ Senior Vice Senior Vice President and Treasurer
President and of FAM; Senior Vice President and
Treasurer Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Gregory Upah............. Senior Vice Senior Vice President of FAM
President
Ronald L. Welburn........ Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 and MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to
be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
C-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO AND STATE OF
NEW JERSEY, ON THE 6TH DAY OF NOVEMBER, 1997.
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
(Registrant)
By /s/ TERRY K. GLENN
------------------------------------------
(TERRY K. GLENN, EXECUTIVE VICE PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------- ------------- -----------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President (Principal Executive Officer) and November 6, 1997
- ------------------------------------------ Director
(ARTHUR ZEIKEL)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and November 6, 1997
- ------------------------------------------ Accounting Officer)
(GERALD M. RICHARD)
/s/ RONALD W. FORBES Director November 6, 1997
- ------------------------------------------
(RONALD W. FORBES)
/s/ CYNTHIA A. MONTGOMERY Director November 6, 1997
- ------------------------------------------
(CYNTHIA A. MONTGOMERY)
/s/ CHARLES C. REILLY Director November 6, 1997
- ------------------------------------------
(CHARLES C. REILLY)
Director
- ------------------------------------------
(KEVIN A. RYAN)
/s/ RICHARD R. WEST Director November 6, 1997
- ------------------------------------------
(RICHARD R. WEST)
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------
<S> <C>
(l) -- Opinion of Brown & Wood LLP, counsel for the Registrant.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
(r) -- Financial Data Schedule.
</TABLE>
<PAGE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
November 7, 1997
Merrill Lynch High Income Municipal
Bond Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch High Income Municipal Bond Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the registration
of 5,000,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), under the Securities Act of 1933, as amended, pursuant to a
registration statement on Form N-2 to be filed with the Securities and Exchange
Commission on the date hereof (the "Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Common Stock. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Common Stock, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and nonassessable shares of common stock of the Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus constituting
a part thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch High Income Municipal Bond Fund, Inc.:
We consent to the use in this Registration Statement on Form N-2 of our report
dated September 30, 1997 and to the reference to us under the caption 'Financial
Highlights' appearing in the Prospectus, which is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 7, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000867189
<NAME> MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 189990692
<INVESTMENTS-AT-VALUE> 206000786
<RECEIVABLES> 6253398
<ASSETS-OTHER> 94912
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212349096
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 728961
<TOTAL-LIABILITIES> 728961
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 193537541
<SHARES-COMMON-STOCK> 18654978
<SHARES-COMMON-PRIOR> 18233970
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2072500
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16010094
<NET-ASSETS> 211620135
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14933718
<OTHER-INCOME> 0
<EXPENSES-NET> (2963517)
<NET-INVESTMENT-INCOME> 11970201
<REALIZED-GAINS-CURRENT> 4093259
<APPREC-INCREASE-CURRENT> 4045233
<NET-CHANGE-FROM-OPS> 20108693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11970201)
<DISTRIBUTIONS-OF-GAINS> (680014)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2126310
<NUMBER-OF-SHARES-REDEEMED> (2153158)
<SHARES-REINVESTED> 447856
<NET-CHANGE-IN-ASSETS> 12067706
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1340746)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1950602
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2963517
<AVERAGE-NET-ASSETS> 205890624
<PER-SHARE-NAV-BEGIN> 10.94
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> .44
<PER-SHARE-DIVIDEND> (.65)
<PER-SHARE-DISTRIBUTIONS> (.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.34
<EXPENSE-RATIO> 1.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
