AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1998
SECURITIES ACT FILE NO. 333-39839
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. 1 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 10 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
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:
THOMAS R. (SM)ITH, 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
---------------
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. [ ]
---------------
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.
===============================================================================-
<PAGE>
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
<TABLE>
<CAPTION>
FORM N-2
ITEM NUMBER 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; Risk Factors and Special
Considerations; 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; Risk Factors and Special
Considerations; Investment Objective and Policies;
Investment Restrictions
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 .......................... Annual Report dated August 31, 1998
</TABLE>
* Incorporated by reference into the Prospectus.
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>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION STATEMENT
CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 30, 1998
PROSPECTUS
December , 1998
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. The Fund 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 to an alternative minimum tax. At times, the Fund
may seek to hedge its portfolio using options and futures transactions. There
can be no assurance that the investment objective of the Fund will be realized.
INVESTMENTS IN 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 ALSO SUBJECT TO GREATER MARKET AND
CREDIT RISK. As a result, an investment in the Fund is 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.
Currently, there is no secondary market for the Fund's common stock. To
provide liquidity, the Fund generally makes quarterly tender offers for its
shares. In a tender offer, the Fund repurchases outstanding shares at the
Fund's net asset value on the last day of the offer. If the Fund does not make
a tender offer, investors may not be able to sell their shares.
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 from Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., from selected other securities
dealers, including Merrill Lynch, Pierce, Fenner & (SM)ith Incorporated.
----------------
This Prospectus contains information you should know before investing,
including information about risks.
Please read it before you invest and keep it for future reference. The
Securities and Exchange
Commission has not approved or disapproved these securities or passed upon the
adequacy
of this Prospectus. Any representation to the contrary is a criminal offense.
================================================================================
<TABLE>
<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD(2) FUND(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ None $
- -------------------------------------------------------------------------------
Total(3) .......... $ None $
</TABLE>
================================================================================
(1) Net asset value ranged from $[ ] to $[ ] per share between November 2,
1990 (commencement of operations) to the date of this prospectus.
(2) The Distributor pays all offering expenses (other than registration fees)
and sales commissions to selected dealers (primarily Merrill Lynch) from
its own assets. Therefore, all of the proceeds of this offering will be
available to the Fund for investment in portfolio securities.
(3) These amounts (a) do not take into account prepaid registration fees,
(approximately $[ ]), which are being charged to income as the related
shares are issued, and (b) assume all shares currently registered are sold
in the continuous offering.
----------------
Merrill Lynch Funds Distributor -- Distributor
Merrill Lynch Asset Management -- Investment Adviser
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION INCLUDED IN THIS PROSPECTUS.
THE FUND...................... Merrill Lynch High Income Municipal Bond
Fund, Inc. is a continuously offered,
non-diversified, closed-end fund.
THE OFFERING.................. Shares of common stock of the Fund are
offered by the Distributor and selected other
securities dealers, including Merrill Lynch,
Pierce, Fenner & (SM)ith Incorporated.
The Fund offers its common stock at a price
equal to 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.
Any order may be rejected by the Distributor
or the Fund.
INVESTMENT OBJECTIVE
AND POLICIES.................. The Fund seeks to provide shareholders with
high current income exempt from Federal income
taxes by investing primarily in a portfolio of
medium to lower grade municipal bonds. The Fund
generally will maintain at least 75% of its
portfolio in municipal bonds rated in the
medium and lower rating categories (Baa or
lower by Moody's Investors Service, Inc. or BBB
or lower by Standard & Poor's Ratings Services
or Fitch IBCA, Inc.) or in unrated bonds that
the Investment Adviser believes are of
comparable quality.
HIGH YIELD OR "JUNK" BONDS. The Fund will
invest a substantial portion of its assets in
municipal bonds rated in lower, non-investment
grade categories (Ba or lower by Moody's or BB
or lower by Standard & Poor's or Fitch) or
comparable unrated bonds. These so-called
"junk bonds" potentially yield the high
current income that the Fund seeks to provide
shareholders. However, these investments also
subject the Fund and its shareholders to
greater market and credit risk. The Fund seeks
to reduce these risks through investment in
multiple issuers, credit analysis and
monitoring of current developments and trends
in both the economy and financial markets.
2
<PAGE>
The following table sets forth the percentage,
by Standard & Poor's rating category,+ of the
Municipal Bonds held by the Fund as of August
31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
NET ASSETS
<S> <C>
RATED OBLIGATIONS ................... 60.3%
(AAA: 9.9%; A: 2.6%; BBB: 15.7%; BB:
15.1%; B: 14.5% and CCC: 2.5%)
UNRATED OBLIGATIONS ................ 39.6%
OTHER OBLIGATIONS++................. 1.7%
</TABLE>
--------
+ Municipal Bonds not rated by Standard &
Poor's are reflected in the table based on
comparable ratings issued by Moody's, rather
than as Unrated Obligations. Municipal bonds
rated only by Fitch are reflected as Unrated
Obligations. Municipal Bonds assigned
different ratings by Standard & Poor's and
Moody's are reflected in the higher rating
category.
++ Temporary investments in short-term
municipal securities.
MUNICIPAL BONDS. The general term "municipal
bonds" encompasses a broad variety of debt
obligations issued by political subdivisions
or public agencies in the United States to
obtain funds for public purposes. Certain
municipal bonds are supported by the issuer's
full faith, credit and taxing power, while
others are payable only from a specific
revenue source. Still others are issued to
finance various privately-operated facilities
and are generally supported only by the credit
of the user of the facility. The Fund invests
in high yield municipal bonds of one or more
of the following types, among others:
o General Obligation Bonds o Health Care
Revenue Bonds o Housing Bonds o
Transportation Revenue Bonds o Water and
Sewage Revenue Bonds
o Solid Waste and Resource Recovery Bonds
o Pollution Control Facility Revenue Bonds
o Educational Facility Revenue Bonds
o Tax Increment Bonds
o Commercial Facility Revenue Bonds.
o Industrial Development Bonds.
Each type of investment carries unique risks
as well as the risks inherent in investing in
high yield municipal bonds generally.
INDEXED AND INVERSE FLOATING OBLIGATIONS. The
Fund may invest in municipal bonds yielding
returns based on a particular index of value
or interest rates. The Fund also may invest in
"inverse floating obligations" or "residual
interest bonds." These securities generally
pay interest at floating interest rates that
decline as
3
<PAGE>
short-term market rates increase and increase
as short-term market rates decline. The
Investment Adviser believes that investing in
indexed and inverse floating obligations allows
the Fund to vary the degree of investment
leverage relatively efficiently under different
market conditions.
HIGHER-RATED BONDS AND SHORT-TERM INVESTMENTS.
The Fund may invest as much as 25% of its
assets in municipal bonds rated in
the higher rating categories (A or higher by
Moody's, Standard & Poor's or Fitch). In
addition, the Fund may temporarily invest in
short-term tax-exempt obligations or taxable
money market securities when prevailing market
conditions warrant.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may
hedge its portfolio against fluctuations in
interest rates using options and financial
futures contracts. The Fund's hedging
transactions are designed to reduce
volatility, but come at some cost. For
example, the Fund may limit its risk of loss
from a decline in price of a portfolio
security by purchasing a put option. However,
the Fund must pay for the option and the price
of the security may not in fact drop. In large
part, the success of the Fund's hedging
activities depends on its ability to forecast
movements in securities prices and interest
rates. The Fund does not, however, enter
options and futures transactions for
speculative purposes.
INVESTMENT ADVISER
AND ADMINISTRATOR............. Merrill Lynch Asset Management, L.P., the
Investment Adviser, provides investment
advisory and administrative services to the
Fund. For advisory services, the Fund pays the
Investment Adviser a monthly fee at the annual
rate of 0.95% 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 the Fund's average
net assets. While the combined advisory and
administrative fees are higher than that paid
by most funds, they are similar to those paid
by other continuously offered closed-end
funds.
TENDER OFFERS................. Currently, there is no secondary market for
the Fund's common stock, and it is not expected
that a secondary market will develop. To
provide liquidity, the Board of Directors
considers, on a quarterly basis, whether the
Fund should make a tender offer for its shares.
In a tender offer, the Fund repurchases
outstanding shares at the Fund's net asset
value on the last day of the offer.
EARLY WITHDRAWAL CHARGE....... Tendered shares of common stock held for less
than three years at the date of tender are
subject to an early withdrawal charge in most
cases. The charge varies with the amount of
time the shares have been held. It is based on
the lesser of cost or net asset value of the
tendered shares.
4
<PAGE>
DIVIDENDS, CAPITAL GAINS
AND TAXES..................... The Fund intends to distribute any net
investment income monthly, and any net realized
long- or short-term capital gains at least
annually. The Fund may also pay a special
distribution at the end of the calendar year to
comply with federal tax requirements. Dividends
and distributions are automatically reinvested
in shares of the Fund. If your account is with
Merrill Lynch and you would like to receive
dividends and distributions in cash, contact
your Merrill Lynch Financial Consultant. If
your account is with the Fund's transfer agent
and you would like to receive dividends and
distributions in cash, contact the transfer
agent.
TAXES. To the extent that the dividends
distributed by the Fund are from municipal
bond interest income, they are exempt from
Federal income tax. However, certain investors
may be subject to an alternative minimum tax
on dividends attributable to investments in
"private activity bonds" that are received
from the Fund. Interest income from other
investments may produce taxable distributions.
Dividends, or portions thereof, that are
derived from capital gains may qualify as
either long- or short-term capital gains,
which are taxable at different rates for
Federal income tax purposes.
Generally, within 60 days after the end of the
Fund's taxable year, the Fund will tell you
the amount of exempt-interest dividends,
ordinary income dividends or capital gain
dividends you received that year. The tax
rates applicable to capital gain dividends
depend on how long the Fund held an asset
before selling it for a gain; it is not
related to how long you have held your shares.
The tax treatment of distributions from the
Fund is the same whether you choose to receive
distributions in cash or to have them
reinvested in shares of the Fund.
If you cannot provide a taxpayer
identification number or social security
number, Fund distributions of capital gains,
certain ordinary income dividends and
redemptions will be subject to a 31%
withholding tax deduction.
If you tender Fund shares, any gain on the
transaction will be subject to Federal income
tax.
This section summarizes some of the
consequences of an investment in the Fund
under current Federal tax laws. It is not a
substitute for personal tax advice. Consult
your personal tax adviser about the potential
tax consequences to you of an investment in
the Fund under all applicable tax laws.
5
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
ILLIQUIDITY OF SHARES. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
Currently, there is no secondary market for the Fund's common stock, and it is
not expected that a secondary market will develop. To provide liquidity to
shareholders, the Board of Directors of the Fund intends to consider making
tender offers on a quarterly basis to repurchase the Fund's shares at net asset
value. However, the Fund's shares are less liquid than shares of funds traded
on a stock exchange, and shareholders who tender Fund shares held for less than
three years will pay an early withdrawal charge. The Fund's Board is not
obligated to authorize any tender offer, and there may be quarters in which no
tender offer is made. If the Board does not authorize a tender offer,
shareholders may be unable to sell their shares. Merrill Lynch and other
selected dealers are prohibited from making a market in the Fund's common stock
while the Fund either is offering its shares or is making a tender offer.
Closed-end funds that do trade in a secondary market are subject to the
risk that the net asset value of the shares may be higher than the market
price, commonly referred to as "trading at a discount." As long as there is no
secondary market for the Fund's shares, the Fund is not subject to this risk.
HIGH YIELD OR "JUNK" BONDS. The Fund invests primarily in a portfolio of
high yielding, medium to lower grade and unrated municipal bonds. Investments in
high yield securities entail a higher level of credit risk (loss of income
and/or principal) than investments in higher-rated securities. Securities rated
in the lower rating categories are considered to be predominantly speculative
with respect to capacity to pay interest and repay principal. Securities rated
in the medium category may have some speculative characteristics as well.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. New issuers also may be
inexperienced in managing their debt burden. The issuer's ability to serve its
debt obligations may be adversely affected by business developments unique to
the issuer, the issuer's inability to meet specific projected business
forecasts, or the inability of the issuer to obtain additional financing. High
yield securities may be unsecured and may be subordinated to other creditors of
the issuer.
High yield securities also tend to be more sensitive to economic
conditions than investment grade securities. The financial condition of a high
yield issuer is usually more susceptible to a general economic downturn or a
sustained period of rising interest rates.
High yield securities may have call or redemption features that 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.
There is no established trading market for many high yield securities. If
a market exists, it is usually thinly traded and not as liquid as the secondary
market for higher-rated securities. The Fund anticipates that high-yield
securities can be sold only to a limited number of dealers or institutional
investors. Illiquidity may impair the Fund's ability to realize the full value
of its investments in high-yield municipal bonds if the Fund must dispose of
them quickly.
Adverse publicity and investor perceptions also may reduce the value and
liquidity of high yield securities. When the market value of high yield
securities goes down, the Fund's net asset value is also likely to decrease. In
addition, the Fund may incur additional expenses if it is forced to seek
recovery upon a default of a portfolio holding or if it participates in the
restructuring of the obligation.
6
<PAGE>
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified
investment company, meaning that the Fund may invest a greater percentage of
its assets in the obligations of a single issuer than a diversified investment
company. Even as a non-diversified fund, the Fund is still subject to the
diversification requirements of the Federal tax laws. However, since the Fund
may invest a higher percentage of its assets in obligations of a single issuer
than a diversified fund, it is more susceptible to any economic, political or
regulatory occurrence that affects an individual issuer.
FOCUS ON SPECIFIC REGIONS OR PROJECTS. The Fund may invest a large portion
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. A focus on any
particular type of investment will make the Fund more susceptible to any
economic, political, or regulatory occurrences affecting that type of
investment. Also, the Fund may invest in municipal bonds issued by entities or
secured by facilities with a relatively short operating history.
INVERSE FLOATING OBLIGATIONS. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage by
increasing or decreasing in market value in response to a market change at a
rate that is a multiple of the rate at which a long-term, fixed-rate municipal
bond would respond to the same change. The market values of these securities
are designed to have greater volatility than the market values of long-term,
fixed-rate municipal bonds.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in certain hedging
transactions using options and futures to reduce its exposure to interest rate
movements. If the Fund incorrectly forecasts market values, interest rates or
other applicable factors, the Fund's performance could suffer. The Fund also
may suffer a loss if the other party to the transaction defaults.
7
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
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)(a) ...................... 3.0% during the first year,
decreasing 1.0% annually
thereafter to 0.0%
after the third year
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fee(b) ........................................... 0.95%
Other Expenses(c) .................................................... 0.53
-----
Total Annual Expenses ................................................ 1.48%
=====
</TABLE>
- --------
(a) See "Early Withdrawal Charge" -- page 25.
(b) See "Investment Advisory and Administrative Arrangements" -- page 28.
(c) Includes administrative fees, which are payable to the Investment Adviser
by the Fund at the rate of 0.25% of net assets attributable to common
shares. See "Investment Advisory and Administrative Arrangements" -- page
28.
EXAMPLE
<TABLE>
<CAPTION>
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 1.48%, (2) a 5% annual return
throughout the periods and (3) tender at the end of the period ......... $ 45* $ 57* $81 $177
An investor would pay the following expenses on a $1,000 investment
assuming no tender at the end of the period ............................ $ 15 $ 47 $81 $177
</TABLE>
- --------
* Reflects the early withdrawal charge.
The 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,
Pierce, Fenner & (SM)ith Incorporated ("Merrill Lynch") may charge its customers
a processing fee (presently $5.35) for confirming purchases and repurchases.
Purchases and repurchases made directly through Financial Data Services, Inc.
(the "Transfer Agent") are not subject to the processing fee.
8
<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, 1998 and the independent auditors' report thereon
appear in the annual report of the Fund for the fiscal year ended August 31,
1998, which is incorporated by reference herein. Further information about the
performance of the Fund is contained in the annual report, which may be
obtained, without charge, by calling or by writing the Fund at the address on
the front cover of this Prospectus or by calling (609) 282-2800.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period .............................. $ 11.34 $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29
------- ------- ------- ------- ------- ------- -------
Investment income -- net ........... .61 .65 .66 .65 .65 .68 .71
Realized and unrealized gain
(loss) on investments -- net...... .32 .44 (.03) .23 (.45) .75 .50
------- ------- -------- ------- -------- ------- -------
Total from investment operations..... .93 1.09 .63 .88 .20 1.43 1.21
------- ------- -------- ------- -------- ------- -------
Less Dividends and Distributions:
Investment income -- net ........... (.61) (.65) (.66) (.65) (.65) (.68) (.71)
Realized gain on
investments -- net ............... (.20) (.04) -- (.15) (.07) (.05) (.05)
In excess of realized gain on
investments -- net ............... -- -- -- (.03) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions.... (.81) (.69) (.66) (.83) (.72) (.73) (.76)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 11.46 $ 11.34 $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN*:
Based on net asset value per
share .............................. 8.43% 10.20% 5.81% 8.68% 1.75% 13.83% 12.29%
======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ...... 1.48% 1.44% 1.50% 1.52% 1.48% 1.37% 1.30%
======== ======== ======== ======== ======== ======== ========
Expenses ............................ 1.48% 1.44% 1.50% 1.52% 1.48% 1.47% 1.55%
======== ======== ======== ======== ======== ======== ========
Investment income -- net ............ 5.37% 5.83% 5.90% 6.11% 5.81% 6.17% 6.85%
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ..................... $233,713 $211,620 $199,552 $198,575 $212,958 $216,922 $170,735
======== ======== ======== ======== ======== ======== ========
Portfolio turnover .................. 36.45% 43.07% 28.54% 21.28% 28.51% 28.74% 31.74%
======== ======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
NOVEMBER 2,
1990+ TO
AUGUST 31,
1991
--------------
<S> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period .............................. $ 10.00
-------
Investment income -- net ........... .63
Realized and unrealized gain
(loss) on investments -- net...... .29
-------
Total from investment operations..... .92
-------
Less Dividends and Distributions:
Investment income -- net ........... (.63)
Realized gain on
investments -- net ............... --
In excess of realized gain on
investments -- net ............... --
--------
Total dividends and distributions.... (.63)
--------
Net asset value, end of period ...... $ 10.29
========
TOTAL INVESTMENT RETURN*:
Based on net asset value per
share .............................. 9.43%++
========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ...... .84%**
========
Expenses ............................ 1.76%**
========
Investment income -- net ............ 7.43%**
========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ..................... $ 114,628
=========
Portfolio turnover .................. 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.
9
<PAGE>
THE FUND
Merrill Lynch High Income Municipal Bond Fund, Inc. 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 Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services ("Standard & Poor's") or Fitch IBCA, Inc. ("Fitch"), these
ratings are currently Baa (Moody's) or BBB (Standard & Poor's 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 investment 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, Standard & Poor's and Fitch's
ratings of Municipal Bonds.
10
<PAGE>
The following table sets forth the percentage, by Standard & Poor's rating
category,+ of the Municipal Bonds held by the Fund as of August 31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
NET ASSETS
<S> <C>
RATED OBLIGATIONS ................................................. 60.3%
(AAA: 9.9%; A: 2.6%; BBB: 15.7%; BB: 15.1%; B: 14.5% and CCC: 2.5%)
UNRATED OBLIGATIONS ............................................... 39.6%
OTHER OBLIGATIONS++................................................ 1.7%
</TABLE>
--------
+ Temporary investments in short-term municipal securities.
++ Municipal Bonds not rated by Standard & Poor's are reflected in the
table based on comparable ratings issued by Moody's, rather than as
Unrated Obligations. Municipal bonds rated only by Fitch are
reflected as Unrated Obligations. Municipal Bonds assigned different
ratings by Standard & Poor's and Moody's are reflected in the higher
rating category.
The Fund seeks to reduce risk through investing in multiple issuers,
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. 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 asses(SM)ent 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 Federal tax laws. 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 (SM)all 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 asses(SM)ent of
the issuers.
11
<PAGE>
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 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 private activity bonds. 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 with a relatively short operating history
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 economic, political, or
regulatory occurrences affecting similar investments. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases. Therefore, investors should also be aware of
the risks which these investments might entail, as discussed below.
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
12
<PAGE>
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 cannot 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 (SM)aller than expected mortgage portfolios due to the inability
to originate mortgages. To the extent the Fund invests in housing bonds issued
by an entity or entities located in the same geographic area, the Fund may be
subject to the risks associated with the general economy of such area.
PUBLIC POWER REVENUE BONDS. General problems of the electric utility
industry include difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased costs and delays
attributable to environmental considerations; the difficulty of the capital
markets in absorbing utility debt and equity securities; the availability of
fuel for electric generation at reasonable prices, including among other
considerations the potential rise in fuel costs and the costs associated with
conversion to alternate fuel sources such as coal; technical cost factors and
other problems associated with construction, licensing, regulation and
operation of nuclear facilities for electric generation, including among other
considerations the problems associated with the use of radioactive materials
and the disposal of radioactive waste; and the effects of energy conservation.
Certain of the issuers of these bonds may own or operate nuclear generating
facilities. Federal, state and municipal governmental authorities may from time
to time review and revise existing requirements and impose additional
requirements governing the licensing, construction and operation of nuclear
power plants. In addition, the licensing of certain nuclear power plants
nearing completion of construction or 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
13
<PAGE>
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.
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,
- --------
* For purposes of the description of users of facilities, all references to
"corporations" shall be deemed to include any other nongovernmental person
or entity.
14
<PAGE>
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 also may 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.
MUNICIPAL LEASE OBLIGATIONS. 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.
NON-MUNICIPAL TAX-EXEMPT SECURITIES. The Fund also may 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
15
<PAGE>
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.
INDEXED AND INVERSE FLOATING OBLIGATIONS. The Fund may invest in Municipal
Bonds (and Non-Municipal Tax-Exempt Securities) yielding a return 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. The principal amount payable upon maturity of certain Municipal
Bonds also may be based on the value of an index. 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, including
reduced or eliminated interest payments and losses of invested principal. The
Fund also may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically vary inversely with a
short-term floating rate (which may be reset periodically by a dutch auction, a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). The Fund may purchase synthetically created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest rates on inverse
floating rate bonds will decrease when short-term rates increase, and will
increase when short-term rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes 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 interest rate may vary. The Investment Adviser believes
that indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund that allows the Investment Adviser to vary
the degree of investment leverage relatively efficiently under different market
conditions.
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 engages 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 are 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,
16
<PAGE>
which means that so long as the Fund is obligated as the writer of a call
option, it will own the underlying securities subject to the option. The Fund
may not write covered call options on underlying securities in an amount
exceeding 15% of the market value of its total assets.
The Fund receives a premium from writing a call option that 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 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.
17
<PAGE>
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 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 engages 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.
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.
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<PAGE>
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund engages in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund do 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 only engages in hedging transactions from
time to time and may not necessarily be engaging in hedging transactions when
movements in interest rates occur.
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, Standard &
Poor's or Fitch). In addition, the Fund reserves the right to temporarily invest
more than 20% of its assets in short-term tax-exempt obligations or 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 Standard & Poor's, 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 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), Standard &
Poor's (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
19
<PAGE>
$1 billion, except that the Fund may invest in certificates of deposit of
(SM)aller institutions if such certificates of deposit are Federally insured.
See "Appendix -- Ratings of Municipal Obligations."
The Fund also has adopted certain other policies as set forth below:
BORROWINGS. The Fund is authorized to borrow money in amounts of up to 33%
of the value of its total assets at the time of such borrowings to finance the
purchase of its own shares pursuant to tender offers, if any, or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund
will not be required to sell portfolio securities to purchase tendered shares
but, at the same time, such borrowings may increase the Fund's expenses. In
this regard, borrowed funds are subject to interest costs that may offset or
exceed the return earned on the securities that otherwise may have been sold by
the Fund.
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 15% 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.
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.
20
<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 and Merrill Lynch, Pierce, Fenner & (SM)ith
Incorporated ("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 Securities and
Exchange Commission or otherwise in compliance with the provisions of the 1940
Act and the rules and regulations thereunder. Included among such restricted
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which 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. An additional exemptive order has been
obtained that permits the Fund to purchase shares in a private placement
transaction
21
<PAGE>
in which Merrill Lynch acts as the placement agent. The Fund does not presently
intend to request an order permitting other principal transactions with Merrill
Lynch. See "Portfolio Transactions."
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 on a best efforts basis
through the Distributor and other selected securities dealers that have entered
into 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 Financial Data
Services, Inc., the Fund's transfer agent. 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.
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 are not 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 (generally, 4:00 p.m., Eastern
time), which includes orders received after the close of business on the
previous day, the applicable offering price is 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 are 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. In addition, the Distributor compensates
Merrill Lynch and such dealers at an annual rate equal to 0.25% of the value of
Fund shares that remain outstanding after one year from the date of their
original purchase sold by Merrill Lynch and such dealers. The payments made by
the Distributor will be made from its own assets and will not be an expense
borne by the Fund, although the Distributor may recover some of these payments
by imposing an early withdrawal charge (as described below) against
shareholders who tender shares owned less than three years. See "Early
Withdrawal Charge." Total compensation paid to Merrill Lynch, other selected
dealers and the Distributor, including the compensation paid at the time of
purchase, the 0.25% annual payments mentioned
22
<PAGE>
above and the early withdrawal charge, if any, will not 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,
1996, 1997 and 1998 the Distributor paid approximately $651,224, $689,503 and
$1,102,026 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 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 takes certain actions that provide liquidity to
shareholders. Since the Fund's inception, it has made tender offers to purchase
its shares of common stock from all beneficial holders at a price per share
equal to the net asset value per share determined at the close of business on
the day an offer terminates. Commencing with the second quarter of Fund
operations, the Board of Directors has considered making 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 undertake
the making of any 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
are beneficial to shareholders, the acquisition of shares of common stock by
the Fund will decrease the total assets of the Fund. Tender offers are
therefore likely to increase 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 Federal
tax laws (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
23
<PAGE>
tender offer or otherwise materially adversely affecting the Fund, (b)
declaration of a banking moratorium by Federal or state authorities or any
suspension of payment by banks in the United States or New York State, 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 reduce significantly 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.
In the event that circumstances arise under which the Fund does not
conduct the tender offers regularly, the Board of Directors will consider
alternate means of providing liquidity for shareholders. Such action would
include evaluating any secondary market that then exists for the common stock
and determining whether it provides liquidity for shareholders. If the Board of
Directors determines that such market, if any, fails to provide liquidity for
the shareholders, the Board plans to consider alternative means of providing
liquidity. Among the alternatives that the Board of Directors may consider is
listing of the Fund's common stock on a major domestic stock exchange or on the
Nasdaq National Market. 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 plans to cause the Fund to
take whatever action it deems necessary or appropriate to provide liquidity for
shareholders in light of the facts and circumstances existing at such time.
Consummating a tender offer may require the Fund 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 is 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 contain information
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 pays all costs and expenses associated with making any tender offer.
An early withdrawal charge (as described below) is imposed on most shares
accepted for tender that 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 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 have an investment option consisting of the right to reinvest
the net proceeds from a sale of shares (the "Original Shares") in a tender
offer by the Fund in Class D shares of certain MLAM-sponsored open-end funds
("Eligible Class D Shares"), without the imposition of an 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
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<PAGE>
immediately reinvested in Eligible Class D Shares. Second, the investment
option is available only with respect to the proceeds of shares as to which no
early withdrawal charge (as described below) is applicable. Shareholders who
already own Class A shares of the fund in which they wish to invest proceeds of
the Original Shares, in the same account into which they will purchase the
additional shares, 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 fund. Before taking
advantage of this investment option, shareholders should obtain a currently
effective prospectus of the fund in which they intend to invest and should
consult their Merrill Lynch Financial Consultant.
EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover distribution expenses incurred by
the Distributor is 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 repurchased pursuant to a tender offer. The
early withdrawal charge is 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 or the cost of the shares. 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
acquired by reinvesting dividends or capital gains distributions. The early
withdrawal charge imposed varies 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 is determined in the manner
that results in the lowest possible amount being charged. It is assumed that
the shareholder first tenders shares held for over three years and shares
acquired by reinvesting dividends or distributions, followed by shares of
common stock held longest during the three-year period. The Fund waives the
early withdrawal charge on shares tendered following the death of all
beneficial owners of such shares, provided the shares are tendered within one
year of death (a death certificate and other applicable documents may be
required). At the time of tender, the record or succeeding beneficial owner
must notify the Transfer Agent either directly or indirectly through the
Distributor that the early withdrawal charge should be waived. Upon
confirmation of the owner's entitlement, the waiver will be granted; otherwise,
the waiver will be lost.
EXAMPLE:
Assume an investor purchased 1,000 shares of common stock (at a cost of
$10,000). Two years after purchase, the net asset value per share is $12.00
and, during the two year period, the investor has acquired 100 additional
shares by reinvesting dividends. If the investor first tenders 500 shares at
this time (proceeds of $6,000), 100 shares will not be subject to the early
withdrawal charge because they were acquired by reinvesting dividends. With
respect to the remaining 400 shares tendered, 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).
25
<PAGE>
For the fiscal years ended August 31, 1996, 1997 and 1998, the amount of
early withdrawal charges paid to the Distributor amounted to $62,615, $44,647
and $50,316, 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 portfolio managers and of each Director and executive officer
is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Investment Adviser (which term, as used herein, includes its corporate
predecessors) since 1997; Chairman of Fund Asset Management, L.P. ("FAM")
(which term, as used herein, includes its corporate predecessors) since 1997;
President of the Investment Adviser and FAM from 1977 to 1997; Chairman of
Princeton Services, Inc. ("Princeton Services") from 1993 to 1997; Executive
Vice President of ML & Co. since 1990.
RONALD W. FORBES (58) -- DIRECTOR(2) -- 1400 Washington Avenue, Albany,
New York 12222. Professor of Finance, School of Business, State University of
New York at Albany since 1989; Consultant, Urban Institute, Washington, D.C.
since 1995.
CYNTHIA A. MONTGOMERY (46) -- 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 (67) -- 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.
KEVIN A. RYAN (66) -- 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 (60) -- 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
Realty Trust, Inc. (real estate holding company) and Alexander's Inc. (real
estate company).
TERRY K. GLENN (58) -- 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 Princeton
Funds Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991.
VINCENT R. GIORDANO (54) -- 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.
26
<PAGE>
DONALD C. BURKE (38) -- VICE PRESIDENT(1)(2) -- First Vice President of
the Investment Adviser since 1997; Vice President of the Investment Adviser
from 1990 to 1997; and Director of Taxation of the Investment Adviser since
1990.
KENNETH A. JACOB (47) -- VICE PRESIDENT(1)(2) -- First Vice President of
the Investment Adviser since 1997; Vice President of the Investment Adviser
from 1984 to 1997.
THEODORE R. JAECKEL, JR. (39) -- 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 M. LOFFREDO, CFA (34) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2)
- -- First Vice President of the Investment Adviser since 1997; Vice President of
the Investment Adviser from 1991 to 1997.
GERALD M. RICHARD (49) -- 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 PFD since
1981 and Treasurer since 1984.
PATRICK D. SWEENEY (44) -- SECRETARY(1)(2) -- First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997.
At October 1, 1998, 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 an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each Director not affiliated with the Investment
Adviser a fee of $3,000 per year plus $300 per meeting attended and pays all
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also pays members of the Board's 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, 1998, fees and expenses paid to
the non-affiliated Directors that were allocated to the Fund aggregated
$28,561.
The following table sets forth the compensation earned by non-affiliated
Directors from the Fund for the fiscal year ended August 31, 1998 and the
aggregate compensation paid to non-affiliated Directors from all registered
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds") for the calendar year ended December 31, 1997.
27
<PAGE>
<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 .............. $5,400 None $153,500
Cynthia A. Montgomery ......... $5,400 None $153,500
Charles C. Reilly ............. $6,400 None $313,000
Kevin A. Ryan ................. $5,400 None $153,500
Richard R. West ............... $5,400 None $299,000
</TABLE>
- --------
(1) The Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (35 registered investment companies consisting of 48
portfolios); Ms. Montgomery (35 registered investment companies consisting
of 48 portfolios); Mr. Reilly (54 registered investment companies
consisting of 67 portfolios); Mr. Ryan (35 registered investment companies
consisting of 46 portfolios); and Mr. West (56 registered investment
companies consisting of 81 portfolios).
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
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 Asset
Management Group of ML & Co. (which includes the Investment Adviser) acts as
the investment adviser to more than 100 registered investment companies and
offers portfolio management services to individuals and institutions. As of
September 1998, the Asset Management Group had a total of approximately $467.2
billion in investment company and other portfolio assets under management
(including $37.7 billion in municipal securities). This amount includes assets
managed for certain affiliates of the Investment Adviser. The Investment
Adviser is a limited partnership the partners of which are ML & Co. and
Princeton Services, Inc. The principal business address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Fund's Investment Advisory Agreement with the Investment Adviser
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 M. Loffredo, CFA serve as the Portfolio
Managers of the Fund and are primarily responsible for the Fund's day-to-day
management.
For investment advisory services, the Fund pays the Investment Adviser a
monthly fee at an annual rate of 0.95% 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
Investment Adviser 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
28
<PAGE>
space for officers and employees performing investment and economic research,
trading and investment management for the Fund, as well as the compensation of
all Directors of the Fund who are affiliated persons of ML & Co. or its
subsidiaries.
For administrative services, the Fund pays the Investment Adviser a
monthly fee at an annual rate of 0.25% 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, 1996, 1997 and 1998, the fee paid by
the Fund to the Investment Adviser pursuant to the Investment Advisory
Agreement was $1,911,059, $1,950,602 and $2,144,677, respectively, and the fee
paid by the Fund pursuant to the Administration Agreement was $502,910,
$513,316 and $564,389, respectively (based on average daily net assets of
approximately $200 million, $205.9 million and $226.4 million, respectively).
The Fund pays all other expenses incurred in its operations, including,
among other things, legal and auditing expenses, taxes, costs of printing
proxies, stock certificates and shareholder reports, charges of the Fund's
custodian and transfer 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, Securities and Exchange Commission fees,
fees and expenses of non-affiliated 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, 1996, 1997 and 1998, the
reimbursement for such services aggregated $70,139, $52,907 and $60,910,
respectively.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the 1940 Act
because of their ownership of its voting securities and their power to exercise
a controlling influence over its management or policies.
Unless earlier terminated as described below, the Investment Advisory and
Administrative Agreements 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 affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other 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. Transactions effected by the Investment Adviser (or
its affiliate) on behalf of more than one of its clients during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.
29
<PAGE>
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).
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, 1996, 1997 and 1998, the Fund did not pay any
brokerage commissions.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the
best price and execution, securities firms that provide investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of services performed by the Investment Adviser and the expenses of the
Investment Adviser will not be reduced because it receives supplemental
research information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with 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, including Merrill Lynch, 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
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
Investment Adviser, the Fund may engage in principal transactions with Merrill
Lynch in high quality, short-term securities. See "Investment Restrictions."
For the fiscal years ended August 31, 1996, 1997 and 1998, the Fund engaged in
no transactions pursuant to such order. However, affiliated persons of the
Fund, including Merrill Lynch, serve as its brokers in certain over-the-counter
transactions conducted on an agency basis.
30
<PAGE>
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the length of 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, it is presently anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, 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 value of the portfolio securities owned by the Fund during
the year. For purposes of determining this rate, all securities whose
maturities at the time of acquisition are one year or less are excluded. A high
portfolio turnover rate bears certain tax consequences and results in greater
transaction costs, which are borne directly by the Fund. For the fiscal years
ended August 31, 1997 and 1998, the Fund's portfolio turnover rate was 43.07%
and 36.45%, 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. 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.
TAXES
GENERAL
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (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.
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
31
<PAGE>
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 created additional
categories of capital gains taxable at different rates. Additional legislation
eliminates the highest 28% category for most sales of capital assets occurring
after December 31, 1997. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends as well as the amounts of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, are not
eligible for the dividends received deduction allowed to corporations under the
Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the RIC and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds 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
32
<PAGE>
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, as well as plan participants, might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding are 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.
TENDER OFFERS
Under current law, a shareholder who, pursuant to any tender offer,
tenders all of its shares 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
33
<PAGE>
as capital gain or loss if the shares are held as capital assets and will be
long-term if the shares have been held for more than one year. Different tax
consequences may apply to tendering and nontendering shareholders in connection
with a tender offer, and these consequences will be disclosed in the related
offering documents. For example, if a shareholder 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 shareholders may be considered to have received a deemed
distribution that may be a taxable dividend in whole or in part. Shareholders
may wish to consult their tax advisers prior to tendering. Likewise, if
shareholders 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 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.
34
<PAGE>
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 (provided that,
in the event that a payment on an account maintained at the Transfer Agent
would amount to $10 or less, a shareholder will not receive such payment in
cash and such payment will be automatically reinvested in additional shares).
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 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.
The automatic reinvestment of dividends and distributions does 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, the NYSE
closes at 4:00 p.m., Eastern 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, Presidents' 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. Market illiquidity may make it difficult for the Fund to obtain
accurate quotations for its holdings of high-yield Municipal Bonds. Municipal
bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Obligations with remaining maturities of
60 days or less are valued at amortized cost, unless this method no longer
produces fair valuations. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are traded,
or if market quotations are not readily available, are valued at fair value on
a consistent basis using methods determined in good faith by the Board of
Directors.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as common
stock. The Board of Directors is authorized, however, to classify and
35
<PAGE>
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, are 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 sends 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
August 31, 1998, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AS OF
AUGUST 31, 1998
AMOUNT HELD (EXCLUSIVE OF AMOUNT
AMOUNT BY FUND ON HELD BY FUND
CLASS OF SHARES AUTHORIZED OWN ACCOUNT FOR OWN ACCOUNT)
- ---------------------- ------------- ------------- ---------------------
<S> <C> <C> <C>
Common stock ......... 200,000,000 0 20,400,072
</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,
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with
the by-laws, in which case the affirmative vote of a majority of the Fund's
shares of capital stock is required.
The Board of Directors has determined that the 66 2/3% voting requirements
described in the foregoing paragraph and under "Certain Provisions of the
Articles of Incorporation," which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of these
provisions.
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<PAGE>
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, 1998, the Fund
earned $0.613 per share income dividends, representing a net annualized yield
of 5.36%, based on a month-end per share net asset value of $11.46.
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, 1998
(based on a Federal income tax rate of 28%) was 7.44%.
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, 1998, the annual total
return of the Fund was 8.43%, based on the change in per share net asset value
from $11.34 to $11.46, and assuming reinvestment of $0.645 per share income
dividends and 0.166 per share capital gains distributions.
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
varies 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.
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<PAGE>
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
The transfer agent for the shares of the Fund is Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289, a subsidiary of ML &
Co.
Pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement with the Fund (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. The transfer agent
receives an annual fee of $14.00 per shareholder account, and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by it under the Agreement. Additionally, a $.20 monthly closed account
charge is assessed on all accounts that close during the calendar year.
Application of this fee commences the month following the month the account is
closed and terminates at the end of the calendar year. 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, 1998, the Fund's payments
to the transfer agent pursuant to the Transfer Agency Agreement, including
reimbursement for out-of-pocket expenses, aggregated $108,285.
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:
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 Financial Data Services, Inc. at 800-637-3863.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem prior to January 1,
2000. The Investment Adviser has established a dedicated group to analyze these
issues and to implement any systems modifications necessary to prepare for the
Year 2000. Currently, the Investment Adviser does not anticipate that the
transition to the Year 2000 will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the Investment
Adviser has sought assurances from the Fund's other service providers that they
are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the Fund's other service providers have anticipated every step necessary to
avoid any adverse effect on the Fund attributable to the Year 2000 Problem.
38
<PAGE>
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.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated by reference in
this prospectus to its 1998 annual report to shareholders. You may request a
copy of the annual report at no charge by calling 1-800-456-4587 ext. 789
between 8:00 a.m. and 8:00 p.m. on any business day.
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.
39
<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the (SM)allest 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 (SM)all.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the issue
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic category.
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<PAGE>
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/ VMIG2 and MIG 3/VMIG3; 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".
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;
-- 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 senior short-term debt 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, ina(SM)uch 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.
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<PAGE>
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
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.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest-rated obligations only in
(SM)all 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.
BB, B, Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. CCC, CC, "BB" indicates the least
degree of speculation and "C" the highest degree of speculation. While C such
debt will likely have some quality and protective characteristics, these may be
outweighed by large CC uncertainties or major exposures to adverse conditions.
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.
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 asses(SM)ent 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:
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.
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<PAGE>
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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.
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 asses(SM)ent.
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:
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.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest-preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA" -- "BBB" categories; short-term "F1" --
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB" -- "D"; short-term "B -- D") either signal a higher probability of default
or that a default has already occurred. Ratings imply no specific prediction of
default probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect (SM)all differences in the degrees of credit risk.
Fitch credit and other 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 any payments of any security. The 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
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<PAGE>
or verify the truth or accuracy of such information. Ratings may be changed or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization, as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+". The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation
of credit risk. They indicate AA
strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit
risk. The capacity for timely A
payment of financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a
low expectation of credit risk. BBB
The capacity for timely payment of financial commitments is considered
adequate, but adverse changes
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<PAGE>
in circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment grade category.
SPECULATIVE GRADE
BB SPECULATIVE. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk
is present, but a limited margin B
of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely CCC
reliant upon sustained, favorable business or economic developments. A
"CC" rating indicates that CC
default of some kind appears probable. "CC" ratings signal imminent
default.
C
DEFAULT. Securities are not meeting current obligations and are
extremely speculative. "DDD" designates DDD
the highest potential for recovery of amounts outstanding on any
securities involved. For U.S. corporates, DD
for example, "DD" indicates expected recovery 50%-90% such
outstandings, and "D" the lowest D
potential, I.E. below 50%.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the F2
margin of safety is not as great as in the case of the higher ratings.
FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, F3
near-term adverse changes could result in a reduction to
non-investment grade.
SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to B
near-term adverse changes in financial and economic conditions.
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely C
reliant upon a sustained, favorable business and economic environment.
DEFAULT. Denotes actual or imminent payment default.
D
- --------
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term rating
category, to categories below "CCC", or to short-term ratings other than "F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingWatch is typically resolved over a relatively
short period.
45
<PAGE>
[This page intentionally left blank.]
<PAGE>
POTENTIAL
INVESTORS
OPEN AN ACCOUNT (TWO OPTIONS).
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
OR SECURITIES DEALER P.O. Box 45289
Jacksonville, Florida 32232-5289
Advises shareholders on their 1-800-221-7210
fund investments. Performs recordkeeping and
reporting services.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL CUSTODIAN
BROWN & WOOD LLP THE FUND THE BANK OF NEW YORK
One World Trade Center 90 Washington Street
New York, New York 10048 THE BOARD OF 12th Floor
DIRECTORS New York, New York 10286
Provides legal advice OVERSEES THE FUND. Holds the fund's assets
to the fund. for safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP MERRILL LYNCH ASSET MANAGEMENT, LP.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the fund's day-to-day
activities.
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
<PAGE>
INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE
SEC, WASHINGTON, D.C. 20549-6009
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE
IS AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary ............................... 2
Risk Factors and Special Considerations .......... 6
Fee Table ........................................ 8
Financial Highlights ............................. 9
The Fund ......................................... 10
Investment Objective and Policies ................ 10
Investment Restrictions .......................... 20
Purchase of Shares ............................... 22
Tender Offers .................................... 23
Early Withdrawal Charge .......................... 25
Directors and Officers ........................... 26
Investment Advisory and Administrative
Arrangements .................................. 28
Portfolio Transactions ........................... 30
Dividends and Distributions ...................... 31
Taxes ............................................ 31
Automatic Dividend Reinvestment Plan ............. 35
Net Asset Value .................................. 35
Description of Capital Stock ..................... 35
Performance Data ................................. 37
Custodian ........................................ 37
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent ............... 38
Year 2000 Issues ................................. 38
Legal Opinions ................................... 39
Financial Statements ............................. 39
Independent Auditors ............................. 39
Appendix -- Ratings of Municipal Bonds ........... 40
</TABLE>
Code #11263-1298
(MERRILL LYNCH Logo appears here)
MERRILL LYNCH
HIGH INCOME MUNICIPAL
BOND FUND, INC.
(compass appears here)
PROSPECTUS
December , 1998
Distributor:
Merrill Lynch
Funds Distributor
a division of
Princeton 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 seven-year period ended
August 31, 1998 and for the period
November 2, 1990 (commencement of operations) to August 31, 1991.
Incorporated by reference in Part B:
Schedule of Investments as of August 31, 1998.*
Statement of Assets and Liabilities as of August 31, 1998.*
Statement of Operations for the year ended August 31, 1998.*
Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1998.*
Financial Highlights for each of the years in the five-year period ended
August 31, 1998.*
- ---------
* Included in the Registrant's 1998 Annual Report to shareholders filed with
the Securities and Exchange Commission for the year ended August 31, 1998
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as amended
("1940 Act").
(2) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- ----------------------------------------------------------------------------------------------------
<S> <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. now known as 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) -- Not applicable.
(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) Filed on November 6, 1995, as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement (No. 33-50861).
(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.
Not applicable.
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, 1998
- ---------------------------------------------------------- ----------------
<S> <C>
Shares of common stock, par value $0.10 per share......... 6,790
</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 & (SM)ith 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 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.
C-2
<PAGE>
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 Growth
Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
(SM)allCap 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 Real Estate Fund, Inc.,
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 Advisors 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
Corporate High Yield 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., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, 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 California Insured Fund, Inc., MuniHoldings California Insured
Fund II, Inc., MuniHoldings California Insured Fund III, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings
Florida Insured Fund III, MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured Fund
II, 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
C-3
<PAGE>
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Senior High Income Portfolio, Inc. and WorldWide
DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that 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 Princeton Funds Distributor, Inc. ("PFD")
and of Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton,
New Jersey 08543-9081. The address of Merrill Lynch Pierce, Fenner & (SM)ith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is
World Financial Center, 250 Vesey Street, New York, New York 10281. The address
of Financial Data Services, Inc. ("FDS") 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, 1996 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 OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co. .................... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services .......... General Partner General Partner of FAM
Arthur Zeikel ............... Chairman Chairman of FAM; President of MLAM and
FAM from 1977 to 1997; Chairman and
Director of Princeton Services; President of
Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.
Jeffrey M. Peek ............. President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.
Terry K. Glenn .............. Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director of
Princeton Services; President and Director
of PFD; Director of FDS, Inc.; President of
Princeton Administrators, L.P.
Mark De Sario ............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Linda L. Federici ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano ......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel ...... Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein .......... Senior Vice President Senior Vice President of FAM; Senior Vice
President, Director and Secretary of
Princeton Services
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- ----------------------- ---------------------------------------------
<S> <C> <C>
Ronald M. Kloss ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra Land(SM)an-Yaros ........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Senior Vice
President of PFD
Stephen M.M. Miller ......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr ....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael L. Quinn ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Brian A. Murdock ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director of
PFD
Gerald M. Richard ........... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory Upah ................ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Ronald L. Welburn ........... Senior Vice President Senior Vice President of FAM; 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 FDS, 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
Post-Effective Amendment to the 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 29th day of October, 1998.
MERRILL LYNCH HIGH INCOME MUNICIPAL
BOND FUND, INC.
(Registrant)
By: /S/ TERRY K. GLENN
-------------------------------------
(TERRY K. GLENN, EXECUTIVE VICE PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
ARTHUR ZEIKEL* President (Principal Executive Officer)
----------------------------------
(ARTHUR ZEIKEL) and Director
GERALD M. RICHARD* Treasurer (Principal Financial and
----------------------------------
(GERALD M. RICHARD) Accounting Officer)
RONALD W. FORBES* Director
----------------------------------
(RONALD W. FORBES)
CYNTHIA A. MONTGOMERY* Director
----------------------------------
(CYNTHIA A. MONTGOMERY)
CHARLES C. REILLY* Director
----------------------------------
(CHARLES C. REILLY)
KEVIN A. RYAN* Director
----------------------------------
(KEVIN A. RYAN)
RICHARD R. WEST* Director
----------------------------------
(RICHARD R. WEST)
*By: /S/ TERRY K. GLENN October 29, 1998
------------------------------
(TERRY K. GLENN, ATTORNEY-IN-FACT)
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------
<S> <C> <C>
(n) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(r) -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 221351279
<INVESTMENTS-AT-VALUE> 237349661
<RECEIVABLES> 4573182
<ASSETS-OTHER> 23163
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 241946006
<PAYABLE-FOR-SECURITIES> 7528018
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 705080
<TOTAL-LIABILITIES> 8233098
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213503232
<SHARES-COMMON-STOCK> 20400072
<SHARES-COMMON-PRIOR> 18654978
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4211294
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 233712908
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15444485
<OTHER-INCOME> 0
<EXPENSES-NET> (3331024)
<NET-INVESTMENT-INCOME> 12113461
<REALIZED-GAINS-CURRENT> 5912960
<APPREC-INCREASE-CURRENT> (11712)
<NET-CHANGE-FROM-OPS> 18014709
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12113461)
<DISTRIBUTIONS-OF-GAINS> (3774165)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3217057
<NUMBER-OF-SHARES-REDEEMED> (2056458)
<SHARES-REINVESTED> 584495
<NET-CHANGE-IN-ASSETS> 22092773
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2072500
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2144677
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3331024
<AVERAGE-NET-ASSETS> 226375688
<PER-SHARE-NAV-BEGIN> 11.34
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> .32
<PER-SHARE-DIVIDEND> (.61)
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.46
<EXPENSE-RATIO> 1.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
EXHIBIT N
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch High Income Municipal Bond Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 1 to this Registration Statement on Form N-2 of our report dated October 8,
1998 appearing in the annual report to shareholders of Merrill Lynch High
Income Municipal Bond Fund, Inc. for the year ended August 31, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 28, 1998
