Exhibit (a)(5)(iii)
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Merrill Lynch Investment Managers
Semi-Annual Report
February 28, 2001
Merrill Lynch
High Income
Municipal
Bond Fund, Inc.
www.mlim.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
High Income
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
Merrill Lynch High Income Municipal Bond Fund, Inc.
DEAR SHAREHOLDER
For the six months ended February 28, 2001, Merrill Lynch High Income Municipal
Bond Fund, Inc. earned $0.265 per share income dividends, representing a net
annualized yield of 5.76%, based on a month-end per share net asset value of
$9.26. Over the same period, the Fund's total investment return was +0.81%,
based on a change in per share net asset value from $9.45 to $9.26, and assuming
reinvestment of $0.266 per share income dividends.
The Municipal Market Environment During the six months ended February 28, 2001,
long-term fixed- income bond yields generally declined. The strength seen in the
US
economy in 1999 and early 2000 clearly has moderated in recent months. After
growing approximately 5% in the first half of 2000, US gross domestic product
(GDP) declined to 2.2% during the third quarter of 2000. An estimate of fourth
quarter 2000 GDP growth was recently released at 1.1%. Additionally, over the
past six months, inflationary pressures have remained well contained, largely in
the 2% - 3% range. As a result of moderating economic growth and low inflation,
US Treasury bond yields remained relatively stable into late October 2000.
However, rising oil and natural gas prices rekindled investors' inflationary
fears and US Treasury bond yields quickly rose to nearly 6% by early November
2000. During late November and early December, long-term bond yields fluctuated
in response to declining commodity prices and the considerable uncertainty
surrounding the presidential election. In December 2000, significant declines in
US equity markets, especially the NASDAQ, as well as another series of weak
economic indicators, combined to reestablish the decline in long-term US
Treasury bond yields. By mid-December, the Federal Reserve Board announced that
current economic conditions warranted the cessation of the series of short-term
interest rate increases they had initiated in February 2000. Given the favorable
economic environment and, at least, a neutral Federal Reserve Board policy,
investors were free again to focus on the ongoing US Treasury debt reduction
program and forecasts of sizeable Federal budgetary surpluses going forward.
Many analysts and investors concluded that there would be a significant future
shortage of longer-maturing US Treasury securities. These factors helped push US
Treasury bond yields lower. By the end of December, US Treasury bond yields
declined to 5.45%, their lowest monthly closing level in almost two years.
In early January 2001, the Federal Reserve Board lowered short-term interest
rates by 50 basis points (0.50%), citing declining consumer confidence and
weakening industrial production and retail sales growth. Similar reasons were
given for an additional 50 basis point reduction in short-term interest rates by
the Federal Reserve Board at the end of January 2001. However, despite recent
reductions in short-term interest rates, US equity markets remained weak. This
has led many investors to seek the safety of fixed-income markets, causing bond
yields to decline further. By the end of the six-month period ended February 28,
2001, US Treasury bonds declined overall by nearly 30 basis points to close the
period at 5.30%.
Long-term tax-exempt bonds also responded well to the economic environment that
developed during the last six months. While municipal bond yields followed a
downward pattern similar to that of US Treasury bonds, tax-exempt bond price
volatility was limited. Municipal bond yields traded in a relatively narrow
range, generally declining steadily throughout the last six months. Overall
investor demand for municipal bonds has remained very positive, allowing tax-
exempt bond yields, as measured by the Bond Buyer Revenue Bond Index, to decline
25 basis points to end the period at 5.47%, their lowest monthly closing level
in more than 18 months.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
The underperformance of the municipal bond market mainly reflected the dramatic
increase in tax-exempt bond issuance over the past few months. The decline in
tax-exempt bond yields triggered a large number of municipalities to refinance
outstanding higher-couponed issues as well as issue new debt to support capital
projects such as school buildings and general infrastructure needs. During the
past 12 months, more than $211 billion in new long-term municipal
2
securities was issued, an increase of almost 5% compared to the same 12-month
period a year ago. During the last six months, nearly $110 billion in new
tax-exempt bonds was underwritten, an increase of over 12% when compared to the
same six-month period a year ago. More than $55 billion in new long-term
municipal bonds was financed during the past three months, a staggering increase
of over 40% compared to the same three-month period a year ago. This dramatic
response to falling tax-exempt bond yields by municipalities can be seen in the
monthly issuance for February 2001 as over $20 billion in new long-term
municipal bonds was underwritten, an increase of more than 60% compared to
monthly issuance in February 2000.
The recent increase in tax-exempt bond issuance prevented municipal bond yields
from declining as much as US Treasury bond yields. Overall investor demand for
municipal bonds remained strong and came from a number of non-traditional and
conventional sources. Derivative/arbitrage programs and insurance companies
remained the dominant buyers, while individual retail investor demand also
remained strong. Tax-exempt bond funds experienced renewed investor interest.
Rising equity market valuations throughout most of last year siphoned away much
of the demand from municipal bond mutual funds. In January 2000, tax-exempt
mutual bond funds experienced net cash outflows of more than $4 billion as
investors withdrew from bond funds mainly to finance the purchase of various
equity securities. The increased demand for tax-exempt issues to a great extent
resulted from the continued decline of US equity markets, but even more, from
the attractive tax-exempt bond yield ratios currently available. Many investors
fled the instability and uncertainty of the equity market for the safety and
security of municipal bond issues yielding 90% - 95% of comparable US Treasury
bond yields.
The outlook for the tax-exempt bond market in 2001 appears quite favorable. The
steeply positive yield curve and relatively high credit quality that the
municipal bond market offers should continue to attract retail and institutional
investors seeking both tax- exempt income and a ready substitute for relatively
scarce US Government securities. Strong state and local governmental financial
conditions also suggest that issuance should remain manageable in the coming
months. Research analysts suggest that annual issuance in 2001 is likely to
remain in the $200 billion range. Additionally, while it appears likely that
President Bush will keep his campaign promise to lower Federal income tax rates
in 2001, any legislation is unlikely to be enacted before late summer. These
factors suggest that the strong technical position the municipal bond market has
enjoyed is likely to continue. Given recent market performance, the strong
returns illustrate the excellent investment diversification municipal bonds can
provide to investors.
Portfolio Strategy
In contrast to the six-month period ended August 31, 2000, in which the
high-yield tax-exempt market deteriorated significantly, the six- month period
ended February 28, 2001 saw a marked improvement in valuations for much of the
high-yield sector. The more constructive environment was attributable to the
abrupt and forceful shift in monetary policy by the Federal Reserve Board in
January 2001 brought on by the rapid deterioration in economic fundamentals.
Encouraged by prospects of steadily declining short-term interest rates, fixed-
income investors increased exposure to speculative-grade credits in anticipation
of the stimulative effect of an easier monetary policy. Implicit in the decision
to reallocate asset weightings in this manner was the belief that credit spreads
already reflected current weak economic conditions. The anticipatory nature of
markets suggests that investors are looking beyond present circumstances and are
beginning to discount an eventual economic rebound. In effect, investors are
confident that the Federal Reserve Board will be
3
successful in its efforts to reignite growth.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
While these developments indicate that a brighter outlook lies ahead, the months
leading up to the Federal Reserve Board's first interest rate reduction proved
to be a difficult environment for investors in the high-yield market. Poor
liquidity and an anemic investor demand continued to chip away at valuations.
The effect was even more pronounced as the late year bond market rally was
largely confined to the higher investment-grade sectors. By year end, with
investor sentiment at its lowest point and credit spreads near their widest
point in several years, the stage was set for the Federal Reserve Board's
monetary policy easing and the ensuing turnaround.
Our investment strategy for the Fund remains largely unchanged as we
consistently seek to manage reinvestment risk in an effort to stablilize the
Fund's dividend income in a variety of interest rate environments. The
distressed nature of the high-yield market provided us with the opportunity to
continue the gradual restructuring of the Fund at some of the most attractive
yields in recent years. Examples of recent additions to the Fund include
investments in long-term care providers in New Jersey, Wisconsin and North
Carolina. Favorable demographic trends and strong management track records
suggest that the historically low valuations currently in this sector may not
last long. Despite the well-publicized financial woes affecting California's two
largest privately owned utilities, the utility sector remains a favorite given
current trends toward consolidation within the industry. The Fund had no
exposure to either utility and was unaffected by the subsequent decline in
market value of their respective debt obligations.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch High Income Municipal Bond
Fund, Inc., and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Theodore R. Jaeckel Jr.)
Theodore R. Jaeckel Jr.
Vice President and
Portfolio Manager
(John M. Loffredo)
John M. Loffredo
Vice President and
4
Portfolio Manager
March 26, 2001
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
PROXY RESULTS
During the six-month period ended
February 28, 2001, Merrill Lynch High
Income Municipal Bond Fund, Inc.'s
shareholders voted on the following
proposals. The proposals were approved
at a shareholders' meeting on July 25,
2000. The description of each proposal
and number of shares voted are as
follows:
Shares Voted Shares Withheld
For From Voting
1.To elect the Fund's Board of Directors: Terry K. Glenn 16,936,877 358,385
Ronald W. Forbes 16,928,381 366,881
Cynthia A. Montgomery 16,937,999 357,263
Charles C. Reilly 16,918,280 376,982
Kevin A. Ryan 16,990,283 304,979
Roscoe S. Suddarth 16,991,302 303,960
Richard R. West 16,992,445 302,817
Arthur Zeikel 16,985,647 309,615
Edward D. Zinbarg 16,988,099 307,163
Shares Voted Shares Voted Shares Voted
For Against Abstain
2.To ratify the selection of Deloitte & Touche LLP as the Fund's
independent auditors for the current fiscal year. 16,428,942 79,551 786,769
3.To approve to convert the Fund to a "master/feeder" structure. 15,529,924 449,115 1,316,223
ABOUT INVERSE FLOATERS
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, interest rates on inverse
floaters will decrease when short- term interest rates increase and increase
when short-term interest rates decrease. Investments in inverse floaters may be
characterized as derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested principal. In
addition, inverse floaters have the effect of providing investment leverage and,
as a result, the market value of such securities will generally be more volatile
than that of fixed rate, tax-exempt securities. To the extent the Fund invests
in inverse securities, the market value of the Fund's portfolio and the net
asset value of the Fund's shares may also be more volatile than if the Fund did
not invest in such securities.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
Alabama--1.0% B NR* $1,000 Brewton, Alabama, IDB, PCR, Refunding (Container
Corporation of America-Jefferson Smurfit Corp. Project),
8% due 4/01/2009 $ 1,020
CCC NR* 5,285 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding
Bonds (Mobile Energy Services Co. Project), 6.95%
due 1/01/2020 (e) 264
Arizona--8.1% B+ Ba3 3,000 Coconino County, Arizona, Pollution Control Corporation,
5
Revenue Refunding Bonds (Tucson Electric Power-Navajo),
AMT, Series A, 7.125% due 10/01/2032 3,048
NR* NR* 1,280 Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds
(Sun King Apartments Project), Sub-Series C, 9.50%
due 11/01/2031 1,312
NR* B1 4,600 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 3,919
NR* NR* 1,235 Pima County, Arizona, IDA, Industrial Revenue Bonds
(La Hacienda Project), 9.50% due 12/01/2016 1,302
B+ Ba3 400 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds
(Tucson Electric Power Company Project), Series C,
6% due 9/01/2029 361
Sedona, Arizona, Wastewater Municipal Property Corporation,
Excise Tax Revenue Refunding Bonds (d):
AAA NR* 1,410 5.20%** due 7/01/2021 487
AAA NR* 500 5.24%** due 7/01/2023 154
California--0.3% A1+ NR* 445 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, Series D, 6% due 11/01/2026 (a) 445
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 28, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
Colorado--7.4% NR* NR* $1,700 Colorado Post-Secondary Educational Facilities Authority
Revenue Bonds (Colorado Ocean Journey Inc. Project),
8.30% due 12/01/2017 $ 1,953
A A2 2,000 Denver, Colorado, City and County Airport Revenue Bonds,
AMT, Series D, 7.75% due 11/15/2013 2,457
NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment and
Allocation Bonds, AMT, 7.75% due 9/01/2017 3,197
San Miguel County, Colorado (Mountain Village Metropolitan
District), GO, Refunding:
NR* NR* 1,350 8.10% due 12/01/2002 (f) 1,466
NR* NR* 650 8.10% due 12/01/2011 686
Connecticut NR* NR* 1,900 Connecticut State Development Authority, IDR
- --2.8% (AFCO Cargo BDL-LLC Project), AMT, 8% due 4/01/2030 1,936
NR* B1 1,745 New Haven, Connecticut, Facility Revenue Bonds
(Hill Health Corporation Project), 9.25% due 5/01/2017 1,800
Florida--4.1% NR* NR* 940 Arbor Greene Community Development District, Florida,
Special Assessment Revenue Bonds, 7.60% due 5/01/2018 1,000
NR* NR* 970 Grand Haven Community Development District, Florida,
Special Assessment Bonds, Series B, 6.90% due 5/01/2019 984
NR* NR* 3,400 Parkway Center, Florida, Community Development District
Special Assessment Refunding Bonds, Series B,
8% due 5/01/2010 3,406
Georgia--1.5% NR* NR* 1,860 Atlanta, Georgia, Urban Residential Finance Authority,
M/F Mortgage Revenue Bonds (Northside Plaza Apartments
Project), AMT, 9.75% due 11/01/2020 1,906
6
Illinois--7.9% 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 4,442
NR* NR* 3,195 Illinois Development Finance Authority, Primary Health Care
Centers Facilities, Acquisition Program Revenue Bonds,
7.75% due 12/01/2016 3,456
NR* NR* 2,000 Illinois Educational Facilities Authority, Revenue Refunding
Bonds (Chicago Osteopathic Health System), 7.25%
due 11/15/2019 (f) 2,467
Indiana--1.5% NR* NR* 2,000 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club
Project), Series B, 7.50% due 10/01/2029 1,990
Iowa--1.4% 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--4.3% 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 1,751
AAA Aaa 3,600 Louisville, Kentucky, Hospital Revenue Refunding Bonds,
INFLOS, 9.034% due 10/01/2014 (d)(h) 3,883
Louisiana--2.3% BB- NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental
Grain Company Project), 7.50% due 7/01/2013 3,035
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
Maryland--3.8% NR* NR* $ 5,000 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration-AES Warrior Run),
AMT, 7.40% due 9/01/2019 $ 5,045
Massachusetts-- NR* NR* 1,045 Boston, Massachusetts, Industrial Development Financing
2.8% Authority, Solid Waste Disposal Facility Revenue Bonds
(Jet-A-Way Project), AMT, 10.50% due 1/01/2011 1,089
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) 295
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) 549
NR* AAA 1,580 Massachusetts State Industrial Finance Agency, Revenue
Refunding Bonds (Bay Cove Human Services Inc.),
8.375% due 4/01/2004 (f) 1,779
Mississippi-- BBB- Ba1 1,000 Mississippi Business Finance Corporation, Mississippi, PCR,
0.7% Refunding (System Energy Resources Inc. Project),
5.875% due 4/01/2022 957
Missouri--0.8% NR* NR* 1,000 Fenton, Missouri, Tax Increment Revenue Refunding and
Improvement Bonds (Gravois Bluffs), 6.75% due 10/01/2015 990
Nevada--1.5% BBB Baa2 2,500 Henderson, Nevada, Health Care Facility Revenue Bonds
(Catholic Healthcare West-Saint Rose Dominican Hospital),
5.375% due 7/01/2026 1,974
New Jersey--18.8% Camden County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Holt Hauling & Warehousing),
AMT, Series A:
CC NR* 4,600 9.625% due 1/01/2011 4,454
CC NR* 2,000 9.875% due 1/01/2021 1,935
CCC B2 3,525 Camden County, New Jersey, Pollution Control Financing
Authority, Solid Waste Resource Recovery Revenue Bonds,
Series D, 7.25% due 12/01/2010 3,327
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 5,763
NR* NR* 3,000 New Jersey EDA, Economic Development Revenue Bonds
(Glimcher Properties LP Project), AMT, 6% due 11/01/2028 2,641
NR* NR* 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel),
7% due 10/01/2014 1,515
NR* NR* 3,000 New Jersey EDA, Retirement Community Revenue Bonds
(Seabrook Village Inc.), Series A, 8.125% due 11/15/2023 2,943
BBB- Baa3 2,000 New Jersey Health Care Facilities Financing Authority
Revenue Refunding Bonds (Trinitas Hospital Obligation Group),
7.375% due 7/01/2015 2,030
New Mexico--0.8% B+ Ba3 1,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric
Power Co.-San Juan Project), Series A, 6.95% due 10/01/2020 994
7
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
New York--2.8% Utica, New York, GO, Public Improvement:
BB Ba3 $ 635 8.50% due 8/15/2007 $ 706
BB Ba3 635 8.50% due 8/15/2008 705
BB Ba3 500 8.50% due 8/15/2009 555
BB Ba3 500 8.50% due 8/15/2010 555
BB Ba3 500 8.50% due 8/15/2011 555
BB Ba3 500 8.50% due 8/15/2012 555
North NR* NR* 1,200 North Carolina Medical Care Commission, Health Care
Carolina-- Facilities, First Mortgage Revenue Refunding Bonds
0.9% (Presbyterian Homes Project), 7% due 10/01/2031 1,209
Ohio--0.6% AAA Aaa 800 Ohio, HFA, S/F Mortgage Revenue Bonds, RIB, AMT, Series A,
9.72% due 3/24/2031 (c)(h) 840
Oregon--1.9% NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project
Revenue Bonds (Wauna Cogeneration Project), AMT, Series B,
7.40% due 1/01/2016 1,024
B NR* 1,455 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint
Corporation Project), 8% due 12/01/2003 1,481
Pennsylvania NR* Ba2 1,000 Lehigh County, Pennsylvania, General Purpose Authority,
- --7.1% Revenue Refunding Bonds (Kidspeace Obligation Group),
6% due 11/01/2023 831
5 Northhampton Pulp LLC (e)(g) 665
NR* NR* 5,000 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, AMT, 7.75% due 12/01/2017 5,261
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 2,488
South BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue
Carolina-- Bonds (Westminster Presbyterian Center), 7.75% due 11/15/2030 2,068
1.6%
Texas--0.1% A1+ VMIG1++ 100 Sabine River Authority, Texas, PCR, Refunding
(Texas Utilities Electric Company Project), VRDN,
Series A, 3.15% due 3/01/2026 (a)(b) 100
Utah--0.1% NR* NR* 3,200 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental),
AMT, Series A, 7.55% due 7/01/2027 (e) 91
Vermont--1.2% NR* NR* 1,395 Vermont Educational and Health Buildings Financing Agency,
Revenue Refunding Bonds (College of Saint Joseph Project),
8.50% due 11/01/2024 1,539
Virginia--8.0% NR* NR* 4,560 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds
(Port Facility-Zeigler Coal), 6.90% due 5/02/2022 1,573
NR* NR* 2,000 Pittsylvania County, Virginia, IDA, Revenue Refunding Bonds,
Exempt-Facility, AMT, Series A, 7.50% due 1/01/2014 1,904
Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds:
NR* Ba1 5,500 1st Tier, Sub-Series C, 6.25%** due 8/15/2027 747
NR* Ba1 9,000 1st Tier, Sub-Series C, 6.25%** due 8/15/2035 668
BBB- Baa3 48,400 Senior Series B, 5.95%** due 8/15/2031 5,611
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Issue Value
Wisconsin--0.7% NR* NR* $ 1,000 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (Oakwood Village Project), Series A,
7.625% due 8/15/2030 $ 974
Total Investments (Cost--$141,200)--96.8% 126,903
8
Other Assets Less Liabilities--3.2% 4,221
--------
Net Assets--100.0% $131,124
========
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at February 28, 2001.
(b)AMBAC Insured.
(c)GNMA Collateralized.
(d)MBIA Insured.
(e)Non-income producing security.
(f)Prerefunded.
(g)These shares represent 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 28, 2001.
*Not Rated.
**Represents a zero coupon; the interest rate shown is the effective
yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
QUALITY PROFILE
The quality ratings of securities in the Fund as of February 28,
2001 were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 5.4%
A/A 1.9
BBB/Baa 13.0
BB/Ba 10.2
B/B 13.2
CCC/Caa 0.2
CC/Ca 5.3
NR (Not Rated) 47.2
Other++ 0.4
++ Temporary investments in short-term municipal securities.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of February 28, 2001
Assets: Investments, at value (identified cost--$141,200,038) $126,903,035
Cash 55,972
Receivables:
Securities sold $ 5,098,000
9
Interest 2,687,847
Capital shares sold 19,997 7,805,844
------------
Prepaid registration fees and other assets 16,089
------------
Total assets 134,780,940
------------
Liabilities: Payables:
Securities purchased 3,154,265
Dividends to shareholders 273,231
Investment adviser 83,797
Administration 22,052 3,533,345
------------
Accrued expenses and other liabilities 123,917
------------
Total liabilities 3,657,262
------------
Net Assets: Net assets $131,123,678
============
Net Assets Common stock, $.10 par value, 200,000,000 shares authorized $ 1,416,360
Consist of: Paid-in capital in excess of par 152,949,403
Accumulated realized capital loss on investments--net (5,794,220)
Accumulated distributions in excess of realized capital gains--net (3,150,862)
Unrealized depreciation on investments--net (14,297,003)
------------
Net assets--Equivalent to $9.26 per share based on 14,163,600 shares of
capital outstanding $131,123,678
============
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
FINANCIAL INFORMATION
Statement of Operations
For the Six Months Ended
February 28, 2001
Investment Income: Interest and amortization of premium and discount earned $ 5,145,147
Expenses: Investment advisory fees $ 669,103
Administrative fees 176,080
Professional fees 58,379
Transfer agent fees 44,698
Advertising fees 39,526
Printing and shareholder reports 31,475
Accounting services 30,959
Registration fees 19,370
Directors' fees and expenses 18,465
Custodian fees 6,516
Pricing services 4,723
Other 6,046
------------
Total expenses 1,105,340
------------
Investment income--net 4,039,807
------------
Realized & Realized loss on investments--net (1,187,096)
Unrealized Change in unrealized depreciation on investments--net (1,942,499)
Loss on ------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 910,212
============
See Notes to Financial Statements.
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2001 2000
Operations: Investment income--net $ 4,039,807 $ 9,966,828
Realized loss on investments--net (1,187,096) (4,607,124)
10
Change in unrealized appreciation/depreciation on
investments--net (1,942,499) (10,597,603)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 910,212 (5,237,899)
------------ ------------
Dividends to Investment income--net (4,039,807) (9,966,828)
Shareholders: ------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (4,039,807) (9,966,828)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions: shares transactions (15,140,505) (36,975,237)
------------ ------------
Net Assets: Total decrease in net assets (18,270,100) (52,179,964)
Beginning of period 149,393,778 201,573,742
------------ ------------
End of period $131,123,678 $149,393,778
============ ============
See Notes to Financial Statements.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
FINANCIAL INFORMATION (concluded)
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 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997
Per Share Net asset value, beginning of period $ 9.45 $ 10.24 $ 11.46 $ 11.34 $ 10.94
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .26 .55 .55 .61 .65
Realized and unrealized gain (loss) on
investments--net (.19) (.79) (.89) .32 .44
-------- -------- -------- -------- --------
Total from investment operations .07 (.24) (.34) .93 1.09
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.26) (.55) (.55) (.61) (.65)
Realized gain on investments--net -- -- (.18) (.20) (.04)
In excess of realized gain on investments--net -- -- (.15) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.26) (.55) (.88) (.81) (.69)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.26 $ 9.45 $ 10.24 $ 11.46 $ 11.34
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 0.81%++ (2.29%) (3.16%) 8.43% 10.20%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.57%* 1.46% 1.46% 1.48% 1.44%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.74%* 5.68% 5.07% 5.37% 5.83%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $131,124 $149,394 $201,574 $233,713 $211,620
Data: ======== ======== ======== ======== ========
Portfolio turnover 5.10% 13.42% 39.53% 36.45% 43.07%
======== ======== ======== ======== ========
* 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 28, 2001
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
11
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 conformity with accounting principles generally
accepted in the United States of America, 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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
12
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.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
NOTES TO FINANCIAL STATEMENTS (continued)
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective September 1, 2001, as now required under the new AICPA
Audit and Accounting Guide for Investment Companies. The cumulative effect of
this accounting change will have no impact on the total net assets of the Fund.
The impact of this accounting change has not been determined, but will result in
an adjustment to the cost of securities and a corresponding adjustment to net
unrealized appreciation/depreciation, based on securities held as of August 31,
2001.
(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 future 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner.
MLIM 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 MLIM
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 28, 2001, FAM Distributors, Inc. ("FAMD"),
which is a wholly-owned subsidiary of Merrill Lynch Group, Inc., earned early
withdrawal charges of $27,909 relating to the
13
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 were provided to the Fund by MLIM through December 31, 2000.
Up to this date, the Fund reimbursed MLIM $20,076 for these services. As of
January 1, 2001, accounting services are provided for the Fund by State Street
Bank and Trust Company ("State Street") pursuant to an agreement between State
Street and the Fund. The Fund will pay the cost of these services. In addition,
the Fund will reimburse MLIM for the cost of certain additional accounting
services.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended February 28, 2001 were $6,990,066 and $24,714,908, respectively.
Net realized losses for the six months ended February 28, 2001 and net
unrealized losses as of February 28, 2001 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(1,187,096) $(14,297,003)
----------- ------------
Total $(1,187,096) $(14,297,003)
=========== ============
As of February 28, 2001, net unrealized depreciation for Federal income tax
purposes aggregated $14,297,003, of which $4,724,153 related to appreciated
securities and $19,021,156 related to depreciated securities. The aggregate cost
of investments at February 28, 2001 for Federal income tax purposes was
$141,200,038.
Merrill Lynch High Income Municipal Bond Fund, Inc.
February 28, 2001
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Shares Transactions:
Transactions in capital shares were as follows:
For the Six Months Ended Dollar
February 28, 2001 Shares Amount
Shares sold 234,083 $ 2,174,544
Shares issued to share-
holders in reinvestment
of dividends 167,625 1,559,354
------------ ------------
Total issued 401,708 3,733,898
Shares tendered (2,042,397) (18,874,403)
------------ ------------
Net decrease (1,640,689) $(15,140,505)
============ ============
14
For the Year Ended Dollar
August 31, 2000 Shares Amount
Shares sold 420,954 $ 4,098,154
Shares issued to share-
holders in reinvestment of
dividends 410,736 3,963,637
------------ ------------
Total issued 831,690 8,061,791
Shares tendered (4,709,915) (45,037,028)
------------ ------------
Net decrease (3,878,225) $(36,975,237)
============ ============
5. Capital Loss Carryforward:
At August 31, 2000, the Fund had a net capital loss carryforward of
approximately $2,052,000, all of which expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
John M. Loffredo, Vice President
Donald C. Burke, Vice President and Treasurer
Jodi M. Pinedo, Secretary
Arthur Zeikel, Director of Merrill Lynch High Income Municipal Bond
Fund, Inc., has recently retired. The Fund's Board of Trustees
wishes Mr. Zeikel well in his retirement.
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
15