Exhibit (a)(5)(iii)
Merrill Lynch High Income Municipal Bond Fund, Inc. (Unaudited)
February 29, 2000
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
<C> <C> <C> <C> <S> <C>
Alabama--1.6% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container
Corporation of America Project), 8% due 4/01/2009 $ 1,040
CCC Ca 5,285 Mobile, Alabama, IDB, Solid Waste Disposal Revenue
Refunding Bonds (Mobile Energy Services Co. Project),
6.95% due 1/01/2020 1,720
Arizona--6.2% B+ Ba3 3,000 Coconino County, Arizona, Pollution Control Corporation
Revenue Refunding Bonds (Tucson Electric Power--Navajo),
AMT, Series A, 7.125% due 10/01/2032 2,955
NR* B1 4,600 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding
Bonds (America West Airlines Inc.), AMT, 6.30% due 4/01/2023 4,065
NR* NR* 1,235 Pima County, Arizona, IDA, Industrial Revenue Bonds (La
Hacienda Project), 9.50% due 12/01/2016 1,339
B+ Ba3 1,500 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds
(Tucson Electric Power Company Project), Series C, 6%
due 9/01/2029 1,275
Sedona, Arizona, Wastewater Municipal Property Corporation,
Excise Tax Revenue Refunding Bonds (d):
AAA NR* 1,510 5.20%** due 7/01/2021 425
AAA NR* 1,310 5.24%** due 7/01/2023 325
California-- AAA Aaa 10,000 Foothill/Eastern Corridor Agency, California, Toll Road Revenue
4.7% Bonds, Series A, 5.775%** due 1/01/2028 (a)(b) 1,845
NR* NR* 1,500 Long Beach, California, M/F Housing Redevelopment Agency
Revenue Bonds (Pacific Court Apartments), AMT, Issue B,
6.80% due 9/01/2013 (e) 930
AAA NR* 5,865 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, RIB, Series 144, 7.56% due 6/15/2029 (b)(h) 5,149
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch High Income Municipal Bond
Fund, Inc.'s portfolio holdings in the Schedule of Investments, we
have abbreviated the names of many of the securities according to
the list below and at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
<C> <C> <C> <C> <S> <C>
Colorado--5.7% NR* NR* $ 1,700 Colorado Post-Secondary Educational Facilities Authority
Revenue Bonds (Colorado Ocean Journey Inc. Project),
8.30% due 12/01/2017 $ 1,880
BBB+ Baa1 2,000 Denver, Colorado, City and County Airport Revenue Bonds, AMT,
Series D, 7.75% due 11/15/2013 2,291
NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment and
Allocation Bonds, AMT, 7.75% due 9/01/2017 3,170
San Miguel County, Colorado, GO, Refunding (Mountain Village
Metropolitan District):
NR* NR* 1,350 8.10% due 12/01/2002 (f) 1,472
NR* NR* 650 8.10% due 12/01/2011 696
Connecticut-- NR* NR* 1,500 Connecticut State Health and Educational Facilities Authority
1.9% Revenue Bonds (Edgehill Issue), Series A, 6.875% due 7/01/2027 1,387
NR* B1 1,805 New Haven, Connecticut, Facility Revenue Bonds (Hill Health
Corporation Project), 9.25% due 5/01/2017 1,889
Florida--2.7% NR* NR* 970 Florida, Arbor Greene Community Development District, Special
Assessment Revenue Bonds, 7.60% due 5/01/2018 1,010
NR* NR* 1,000 Florida, Grand Haven Community Development District, Special
Assessment Bonds, Series B, 6.90% due 5/01/2019 979
NR* NR* 3,000 Orlando, Florida, Special Assessment Bonds (Conroy Road
Interchange Project), Series A, 5.80% due 5/01/2026 2,567
Georgia--1.2% NR* NR* 1,895 Atlanta, Georgia, Urban Residential Finance Authority, M/F
Mortgage Revenue Bonds (Northside Plaza Apartments Project),
AMT, 9.75% due 11/01/2020 1,966
Illinois--6.6% BBB- Baa1 4,000 Chicago, Illinois, O'Hare International Airport, Special Facility
Revenue Refunding Bonds (American Airlines Inc. Project),
8.20% due 12/01/2024 4,360
NR* NR* 3,195 Illinois Development Finance Authority, Primary Health Care
Centers Facilities, Acquisition Program Revenue Bonds, 7.75%
due 12/01/2016 3,442
NR* NR* 2,000 Illinois Educational Facilities Authority, Revenue Refunding
Bonds (Chicago Osteopathic Health System), 7.25% due
11/15/2019 (f) 2,286
BBB NR* 1,000 Lansing, Illinois, Tax Increment Revenue Refunding Bonds
(Sales Tax--Landings Redevelopment), 7% due 12/01/2008 1,050
Indiana--2.1% A+ NR* 1,500 Indiana Bond Bank Revenue Bonds, Special Hospital Program
(Hendricks Community Hospital), Series A, 7.125% due 4/01/2013 1,571
NR* NR* 2,000 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club
Project), Series B, 7.50% due 10/01/2029 1,926
Iowa--1.1% NR* NR* 1,500 Iowa Finance Authority, Health Care Facilities Revenue Refunding
Bonds (Care Initiatives Project), 9.25% due 7/01/2025 1,791
Kentucky--3.5% NR* NR* 1,850 Kenton County, Kentucky, Airport Board, Special Facilities Revenue
Bonds (Mesaba Aviation Inc. Project), AMT, Series A, 6.70%
due 7/01/2029 1,741
AAA Aaa 3,700 Louisville, Kentucky, Hospital Revenue Refunding Bonds, INFLOS,
9.572% due 10/01/2014 (d)(h) 4,084
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
<C> <C> <C> <C> <S> <C>
Louisiana--1.8% CC NR* $ 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 $ 3,045
Maryland--3.0% NR* NR* 5,000 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration-AES Warrior Run),
AMT, 7.40% due 9/01/2019 5,109
Massachusetts NR* NR* 1,145 Boston, Massachusetts, Industrial Development Financing
--6.6% Authority, Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way
Project), AMT, 10.50% due 1/01/2011 1,218
NR* NR* 1,475 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (New England Memorial Hospital Project), Series C,
7% due 4/01/2014 (e) 371
NR* Ca 2,745 Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (New England Memorial Hospital),
Series B, 6.125% due 7/01/2013 (e) 690
AAA Ba1 1,600 Massachusetts State Industrial Finance Agency Revenue Bonds
(Vinfen Corporation), 7.10% due 11/15/2003 (f) 1,747
NR* Aaa 1,675 Massachusetts State Industrial Finance Agency, Revenue Refunding
Bonds (Bay Cove Human Services Inc.), 8.375% due 4/01/2004 (f) 1,874
NR* NR* 5,000 Massachusetts State Port Authority, Special Project Revenue Bonds
(Harborside Hyatt Project), AMT, 10% due 3/01/2026 5,253
Mississippi-- NR* NR* 2,275 Mississippi Development Bank, Special Obligation Revenue
1.3% Refunding Bonds (Diamond Lakes Utilities), Series A, 6.25%
due 12/01/2017 2,144
Nevada--1.1% BBB+ Baa1 2,500 Henderson, Nevada, Health Care Facility Revenue Bonds
(Catholic Healthcare West--Saint Rose Dominican Hospital),
5.375% due 7/01/2026 1,891
New Jersey-- Camden County, New Jersey, Improvement Authority, Lease
14.3% Revenue Bonds (Holt Hauling & Warehousing), AMT, Series A:
BB- NR* 4,600 9.625% due 1/01/2011 5,089
BB- NR* 2,000 9.875% due 1/01/2021 2,236
CCC B2 4,000 Camden County, New Jersey, Pollution Control Financing Authority,
Solid Waste Resource Recovery Revenue Bonds, Series D, 7.25%
due 12/01/2010 3,777
CCC B2 6,000 Camden County, New Jersey, Pollution Control Financing Authority,
Solid Waste Resource Recovery Revenue Refunding Bonds, AMT,
Series A, 7.50% due 12/01/2010 5,637
NR* NR* 3,000 New Jersey EDA, Economic Development Revenue Bonds
(Glimcher Properties LP Project), AMT, 6% due 11/01/2028 2,675
NR* NR* 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel),
7% due 10/01/2014 1,515
BBB- NR* 1,500 New Jersey EDA, Revenue Bonds, First Mortgage (Fellowship
Village Project), Series C, 5.50% due 1/01/2028 1,154
BBB- Baa3 2,000 New Jersey Health Care Facilities Financing Authority, Revenue
Refunding Bonds (Trinitas Hospital Obligation Group), 7.375%
due 7/01/2015 1,974
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
<C> <C> <C> <C> <S> <C>
New Mexico-- B+ Ba3 $ 1,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric
0.6% Power Co.--San Juan Project), Series A, 6.95% due 10/01/2020 $ 978
New York--2.1% Utica, New York, GO, Public Improvement:
CCC B2 635 8.50% due 8/15/2007 698
CCC B2 635 8.50% due 8/15/2008 699
CCC B2 500 8.50% due 8/15/2009 551
CCC B2 500 8.50% due 8/15/2010 551
CCC B2 500 8.50% due 8/15/2011 551
CCC B2 500 8.50% due 8/15/2012 550
Ohio--4.1% NR* Ba2 6,800 Cleveland, Ohio, Airport Special Revenue Refunding Bonds
(Continental Airlines Inc. Project), AMT, 5.70% due 12/01/2019 5,796
AAA Aaa 1,050 Ohio HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A,
9.466% due 3/24/2031 (c)(h) 1,109
Oregon--1.5% NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project Revenue
Bonds (Wauna Cogeneration Project), AMT, Series B, 7.40% due
1/01/2016 1,031
B NR* 1,455 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint
Corporation Project), 8% due 12/01/2003 1,504
Pennsylvania-- NR* NR* 1,000 Lehigh County, Pennsylvania, General Purpose Authority, Revenue
10.4% Refunding Bonds (Kidspeace Obligation Group), 6% due 11/01/2023 834
BBB- NR* 5,000 McKean County, Pennsylvania, Hospital Authority, Hospital Revenue
Bonds (Bradford Hospital Project), 8.875% due 10/01/2020 5,223
5 Northhampton Pulp LLC (a)(e)(g) 672
NR* NR* 3,270 Pennsylvania Economic Development Financing Authority,
Exempt Facilities Revenue Bonds (National Gypsum Company),
AMT, Series A, 6.25% due 11/01/2027 2,964
NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, AMT, 7.75% due 12/01/2017 5,243
NR* NR* 3,125 Philadelphia, Pennsylvania, Authority for Industrial Development,
Health Care Facility Revenue Refunding Bonds (Paul's Run),
Series A, 5.875% due 5/15/2028 2,490
South BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue Bonds
Carolina--1.4% (Westminster Presbyterian Center), 7.75% due 11/15/2030 1,972
NR* NR* 500 South Carolina Jobs, EDA, Health Facilities Revenue Bonds,
First Mortgage (Lutheran Homes Project), 6.625% due 5/01/2028 463
Texas--1.6% A1+ NR* 100 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN,
3.85% due 12/01/2025 (i) 100
BB Ba1 3,000 Houston, Texas, Airport System Revenue Bonds (Special Facilities--
Continental Airlines), AMT, Series C, 6.125% due 7/15/2027 2,597
Utah--1.9% NR* NR* 3,200 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental),
AMT, Series A, 7.55% due 7/01/2027 3,199
Vermont--0.9% NR* NR* 1,450 Vermont Educational and Health Buildings Financing Agency,
Revenue Refunding Bonds (College of Saint Joseph Project),
8.50% due 11/01/2024 1,582
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
<C> <C> <C> <C> <S> <C>
Virginia--8.6% NR* NR* $ 4,560 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds
(Port Facility--Zeigler Coal), 6.90% due 5/02/2022 $ 3,756
NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Revenue Refunding Bonds,
Exempt-Facility, AMT, Series A, 7.50% due 1/01/2014 2,051
Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds:
NR* Ba1 5,500 1st Tier, Sub-Series C, 6.25%** due 8/15/2027 669
NR* Ba1 9,000 1st Tier, Sub-Series C, 6.25%** due 8/15/2035 593
BBB- Baa3 48,400 Senior Series B, 5.95%** due 8/15/2031 5,041
NR* NR* 2,500 Virginia, Community Development Authority, Special Assessment
Tax (Dulles Town Center Project), 6.25% due 3/01/2026 2,316
Total Investments (Cost--$176,588)--98.5% 165,808
Other Assets Less Liabilities--1.5% 2,480
--------
Net Assets--100.0% $168,288
========
</TABLE>
(a) Escrowed to maturity.
(b) FSA Insured.
(c) GNMA Collateralized.
(d) MBIA Insured.
(e) Non-income producing security.
(f) Prerefunded.
(g) Represents an equity interest in the reorganization of Ponderosa
Fibres PA. The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act of 1933.
(h) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at February 29, 2000.
(i) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at February 29, 2000.
* Not Rated.
** Represents a zero coupon; the interest rate shown is the effective
yield at the time of purchase by the Fund.
See Notes to Financial Statements.
QUALITY PROFILE
The quality ratings of securities in the Fund as of February 29,
2000 were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 9.8%
A/A 0.9
BBB/Baa 14.8
BB/Ba 13.2
B/B 12.8
CCC/Caa 1.0
CC/Ca 2.2
NR (Not Rated) 43.7
Other++ 0.1
++Temporary investments in short-term municipal securities.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 29, 2000
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$176,587,519) $165,807,609
Cash 53,696
Receivables:
Interest $ 3,392,721
Securities sold 1,631,057
Capital shares sold 35,004 5,058,782
------------
Prepaid registration fees and other assets 17,301
------------
Total assets 170,937,388
------------
Liabilities: Payables:
Securities purchased 1,960,640
Dividends to shareholders 320,412
Investment adviser 104,590
Administration 27,524 2,413,166
------------
Accrued expenses and other liabilities 235,772
------------
Total liabilities 2,648,938
------------
Net Assets: Net assets $168,288,450
============
Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $ 1,751,196
Consist of: Paid-in capital in excess of par 183,696,409
Accumulated realized capital loss on investments--net (3,228,383)
Accumulated distributions in excess of realized capital
gains--net (3,150,862)
Unrealized depreciation on investments--net (10,779,910)
------------
Net assets--Equivalent to $9.61 per share based on
17,511,962 shares of capital outstanding $168,288,450
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended
February 29, 2000
<C> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 6,726,430
(Note 1d):
Expenses: Investment advisory fees $ 899,584
Administrative fees 236,733
Transfer agent fees 55,981
Professional fees 48,696
Registration fees 38,288
Advertising 36,766
Printing and shareholder reports 34,742
Directors' fees and expenses 14,406
Custodian fees 10,537
Pricing services 8,026
Accounting services 5,827
Other 4,462
------------
Total expenses 1,394,048
------------
Investment income--net 5,332,382
------------
Realized & Realized loss on investments--net (3,228,383)
Unrealized Change in unrealized depreciation on investments--net (9,023,009)
Loss on ------------
Investments--Net: Net Decrease in Net Assets Resulting from Operations $ (6,919,010)
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 2000 1999
<C> <S> <C> <C>
Operations: Investment income--net $ 5,332,382 $ 11,419,261
Realized loss on investments--net (3,228,383) (569,093)
Change in unrealized appreciation/depreciation on
investments--net (9,023,009) (17,755,283)
------------ ------------
Net decrease in net assets resulting from operations (6,919,010) (6,905,115)
------------ ------------
Dividends & Investment income--net (5,332,382) (11,419,261)
Distributions to Realized gain on investments--net -- (3,642,201)
Shareholders: In excess of realized gain on investments--net -- (3,150,862)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (5,332,382) (18,212,324)
------------ ------------
Capital Share Net decrease in net assets derived from capital shares
Transactions: transactions (21,033,900) (7,021,727)
------------ ------------
Net Assets: Total decrease in net assets (33,285,292) (32,139,166)
Beginning of period 201,573,742 233,712,908
------------ ------------
End of period $168,288,450 $201,573,742
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.24 $ 11.46 $ 11.34 $ 10.94 $ 10.97
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .28 .55 .61 .65 .66
Realized and unrealized gain (loss) on
investments--net (.63) (.89) .32 .44 (.03)
-------- -------- -------- -------- --------
Total from investment operations (.35) (.34) .93 1.09 .63
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.28) (.55) (.61) (.65) (.66)
Realized gain on investments--net -- (.18) (.20) (.04) --
In excess of realized gain on investments--net -- (.15) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.28) (.88) (.81) (.69) (.66)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.61 $ 10.24 $ 11.46 $ 11.34 $ 10.94
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (3.47%)++ (3.16%) 8.43% 10.20% 5.81%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.47%* 1.46% 1.48% 1.44% 1.50%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.62%* 5.07% 5.37% 5.83% 5.90%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $168,288 $201,574 $233,713 $211,620 $199,552
Data: ======== ======== ======== ======== ========
Portfolio turnover 8.08% 39.53% 36.45% 43.07% 28.54%
======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effect of the early withdrawal
charge, if any. The Fund is a continuously offered closed- end fund, the
shares of which are offered at net asset value. Therefore, no separate
market exists.
++ Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
continuously offered, non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles, which may
require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal recurring nature. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Options written
or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-
the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Short-term
investments with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put and call options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 29, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions and post-October losses.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .95% of
the Fund's average daily net assets.
The Fund also has entered into an Administrative Services Agreement with MLAM
whereby the Fund pays a monthly fee at an annual rate of .25% of the Fund's
average daily net assets, in return for the performance of administrative
services (other than investment advice and related portfolio activities)
necessary for the operation of the Fund.
For the six months ended February 29, 2000, Merrill Lynch Funds
Distributor ("MLFD"), a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidary of Merrill Lynch
Group, Inc., earned early withdrawal charges of $94,390 relating to
the tender of the Fund's shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 29, 2000 were $15,007,827 and
$37,628,439, respectively.
Net realized losses for the six months ended February 29, 2000 and
net unrealized losses as of February 29, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(3,228,383) $(10,779,910)
----------- ------------
Total $(3,228,383) $(10,779,910)
=========== ============
As of February 29, 2000, net unrealized depreciation for Federal
income tax purposes aggregated $10,779,910, of which $5,084,166
related to appreciated securities and $15,864,076 related to
depreciated securities. The aggregate cost of investments at
February 29, 2000 for Federal income tax purposes was $176,587,519.
4. Capital Shares Transactions:
Transactions in capital shares were as follows:
For the Six Months Ended Dollar
February 29, 2000 Shares Amount
Shares sold 274,318 $ 2,717,630
Shares issued to share-
holders in reinvestment
of dividends 218,116 2,146,110
------------ ------------
Total issued 492,434 4,863,740
Shares tendered (2,662,986) (25,897,640)
------------ ------------
Net decrease (2,170,552) $(21,033,900)
============ ============
For the Year Ended Dollar
August 31, 1999 Shares Amount
Shares sold 1,231,384 $ 13,670,459
Shares issued to share-
holders in reinvestment of
dividends and distributions 732,001 7,958,787
------------ ------------
Total issued 1,963,385 21,629,246
Shares tendered (2,680,943) (28,650,973)
------------ ------------
Net decrease (717,558) $ (7,021,727)
============ ============
