As filed with the Securities and Exchange Commission on March 20, 1998.
File No. 333-47971
File No. 811-08699
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 <CHECKED-BOX>
Pre-Effective Amendment No. 1 <CHECKED-BOX>
Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940<CHECKED-BOX>
Amendment No. 1 <CHECKED-BOX>
(Check appropriate box or boxes)
_____________
Merrill Lynch Corporate High Yield Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Corporate High Yield Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
_____________
Copies to:
Philip M. Mandel, Esq. Leonard B. Mackey, Jr., Esq.
Fund Asset Management, L.P. Rogers & Wells LLP
P.O. Box 9011 200 Park Avenue
Princeton, New Jersey 08543-9011 New York, NY 10166
_____________
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the
effective date of this Registration Statement.
_____________
==========================================================================
<PAGE>
MERRIL LYNCH CORPORATE HIGH YIELD FUND, INC.
CROSS REFERENCE SHEET
Form N-1A
Item Location
Part A
1. Cover Page.......................................Cover Page
2. Synopsis.........................................Table
*3. Condensed Financial Information..................*
4. General Description of Registrant................Investment Objectives
and Policies;
Additional Information
5. Management of the Fund...........................Fee Table; Comparative
Performance Information;
Investment Adviser;
Directors; Portfolio
Transactions; Additional
Information
*5A. Management's Discussion of Fund Performance......*
6. Capital Stock and Other Securities...............Cover Page; Dividends,
Distributions and Taxes;
Additional Information;
7. Purchase of Securities Being Offered.............Fee Table; Purchase of
Shares; Merrill Lynch
Select Pricing
<service-mark>
System; Additional
Information
8. Redemption or Repurchase.........................Fee Table; Redemption
of Shares; Merrill
Lynch Select
Pricing<service-mark>
System; Shareholder
Services
*9. Pending Legal Proceedings........................*
Part B
10. Cover Page.......................................Cover Page
11. Table of Contents................................Table of Contents
12. General Information and History..................Additional Information
13. Investment Objectives and Policies...............Investment Objectives
and Policies;
Investment Restrictions;
Portfolio Transactions
14. Management of the Fund...........................Management of the Fund
15. Control Persons and Principal Holders
of Securities....................................Management of the Fund;
Control Persons;
Additional Information
16. Investment Advisory and Other Services...........Management of the Fund;
Purchase of Shares
17. Brokerage Allocation and Other Practices.........Portfolio Transactions
18. Capital Stock and Other Securities...............Additional Information
19. Purchase, Redemption and Pricing of Securities
being Offered....................................Purchase of Shares;
Determination of Net
Asset Value; Redemption
of Shares; Systematic
Withdrawal Plans;
Retirement Plans;
Exchange Privilege;
Additional Information
20. Tax Status.......................................Dividends, Distributions
and Taxes
21. Underwriters.....................................Distributor
22. Calculation of Performance Data..................Performance Data
23. Financial Statements.............................Statement of Assets
and Liabilities
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
- ----------------------
* Item inapplicable or answer negative.
<PAGE>
[RED INK:] SUBJECT TO COMPLETION,DATED MARCH 20, 1998
PRELIMINARY PROSPECTUS
March , 1998
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609)282-2800
------------
Merrill Lynch Corporate High Yield Fund, Inc. (the "Fund") is a
professionally managed, diversified, open-end investment company that seeks to
provide shareholders with current income. As a secondary objective, the Fund
seeks capital appreciation when consistent with its primary objective. The
Fund invests primarily in a diversified portfolio of corporate fixed-income
securities, such as corporate bonds and notes, convertible securities and
preferred stocks. THE FUND MAY INVEST SUBSTANTIALLY ALL OF ITS ASSETS IN
FIXED-INCOME SECURITIES THAT ARE RATED IN THE LOWER RATING CATEGORIES OF THE
ESTABLISHED RATING SERVICES (BAA OR LOWER BY MOODY'S INVESTORS SERVICE, INC. OR
BBB OR LOWER BY STANDARD & POOR'S RATINGS SERVICES), OR IN UNRATED SECURITIES
THAT FUND ASSET MANAGEMENT, L.P. ("FAM" OR THE "INVESTMENT ADVISER") CONSIDERS
TO BE OF COMPARABLE QUALITY. Lower rated securities, commonly known as "junk
bonds," generally involve greater risks, including risk of default, volatility
of price and risks to principal and income, than securities in the higher
rating categories. BECAUSE INVESTMENT IN JUNK BONDS ENTAILS RELATIVELY GREATER
RISK OF LOSS OF INCOME OR PRINCIPAL THAN AN INVESTMENT IN HIGHER-RATED
SECURITIES, AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
THE FUND SHOULD BE CONSIDERED AS A MEANS OF DIVERSIFYING AN INVESTMENT
PORTFOLIO AND NOT IN ITSELF A BALANCED INVESTMENT PLAN. Investors should
consider these risks carefully before investing. See "Investment Objectives
and Policies," page 8. There can be no assurance that the objectives of the
Fund will be realized.
(CONTINUED ON FOLLOWING PAGE)
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------
This Prospectus sets forth in concise form the information about
the Fund that is relevant to making an investment in the Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Fund dated March , 1998 (the "Statement of Additional
Information") has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or writing the
Fund at the above telephone number or address. The Commission maintains a web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information about the
Fund. The Statement of Additional Information is incorporated by reference
into this prospectus.
----------
FUND ASSET MANAGEMENT - INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. - DISTRIBUTOR
<PAGE>
[RED INK:] Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in that such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE>
(CONTINUED FROM COVER PAGE)
FOR MORE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVES AND POLICIES,
PLEASE SEE "INVESTMENT OBJECTIVES AND POLICIES" ON PAGE 8.
Pursuant to the Merrill Lynch Select Pricing<service-mark> System, the
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing<service-mark> System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. See "Merrill Lynch Select
Pricing<service-mark> System" on page 4.
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9081,
Princeton, New Jersey 08543-9081 ((609) 282-2800), and other securities dealers
that have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for shares of the Fund during a period expected to
end on or about April 28, 1998, unless extended. On the third business day
after the conclusion of the subscription period, the subscriptions will be
payable, the shares will be issued and the Fund will commence operations. The
public offering price of the shares during the subscription offering will be
$10.00 per share in the case of Class B and Class C shares and $10.00 per share
plus a sales charge of $.40, subject to reductions on purchases in single
transactions of $25,000 or more, in the case of Class A and Class D shares.
After the completion of the initial subscription offering, the Fund will engage
in a continuous offering of its shares as described herein under "Merrill Lynch
Select Pricing<service-mark> System." The minimum initial purchase during the
subscription and continuous offering is $1,000 and the minimum subsequent
purchase in the continuous offering is $50, with certain exceptions. Merrill
Lynch may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
A shareholder may have his or her shares redeemed at the net asset value
per share of the Fund.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C Class D
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price).................. 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments................... None None None None
Deferred Sales Charge (as a
percentage of original
purchase price or redemption
proceeds, whichever is lower)... None(d) 4.00%(e) 1.00%(f) None(d)
Exchange Fee........................ None None None None
Annual Fund Operating Expenses:
Investment Adviser Fees(g)......... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Maintenance Fees........ None 0.25% 0.25% 0.25%
Distribution Fees............... None 0.50%(i) 0.55% None
Other Expenses (estimated):
Shareholder Servicing Costs(j).. 0.07 0.08 0.08 0.07
Other Fees...................... 0.17 0.17 0.17 0.17
Total Other Expenses............ 0.24 0.25 0.25 0.24
Total Fund Operating Expenses
(estimated)........................ 0.84 1.60 1.65 1.09
</TABLE>
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
fee-based programs. See "Purchase of Shares-Initial Sales Charge
Alternatives-Class A and Class D Shares"-page 20 and "Shareholder Services-
Fee-Based Programs"-page 32.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares-Deferred Sales
Charge Alternatives-Class B and Class C Shares"-page 22.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares-Initial Sales Charge Alternatives-Class A and Class D
Shares"-page 20.
(d) During the initial public offering, Class A and Class D shares are subject
to a sales charge of 4.00%, subject to reductions on purchases in single
transactions of $25,000 or more. Class A and Class D shares are not
subject to a contingent deferred sales charge ("CDSC"), except that certain
purchases of $1,000,000 or more that are not subject to an initial sales
charge may instead be subject to a CDSC of 1.0% of amounts redeemed within
the first year after purchase. Such CDSC may be waived in connection with
certain fee-based programs. See "Shareholder Services-Fee-Based Programs"-
page 32.
(e) Decreasing 1.0% annually thereafter to 0.0% after the fourth year. The
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services-Fee-Based Programs"-page 32.
(f) Decreasing 1.0% annually thereafter to 0.0% after the first year. The CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services-Fee-Based Programs"-page 32.
(g) See "Investment Adviser"-page 16.
(h) See "Purchase of Shares-Distribution Plans"-page 25.
(i) Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
(j) See "Investment Adviser-Transfer Agency Services"-page 17.
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
------------------------------------------
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
including the maximum $40 initial
sales charge (Class A and Class D
shares only) assuming (1) the Total
Fund Operating Expenses estimated
for each class set forth on page 3,
(2) a 5% annual return throughout
the periods and (3) redemption at
the end of the period (including
any applicable CDSC for Class B
and Class C shares):
Class A................................$48 $66 $85 $140
Class B................................$56 $70 $87 $190
Class C................................$27 $52 $90 $195
Class D................................$51 $73 $98 $168
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes the reinvestment of all
dividends and distributions and utilizes a five percent annual rate of return
as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN OF THE FUND
AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR THE PURPOSE OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and redemptions.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
MERRILL LYNCH SELECT PRICING<service-mark> SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing<service-mark> System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C are sold to investors choosing
the deferred sales charge alternatives. The Merrill Lynch Select
Pricing<service-mark> System is used by more than 50 registered investment
companies advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its
affiliate, FAM. Funds advised by MLAM or FAM that use the Merrill Lynch Select
Pricing System<service-mark> are referred to herein as "MLAM-advised mutual
funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares of the Fund, as well as the account
maintenance fees that are imposed on the Class D shares of the Fund, will be
imposed directly against those classes and not against all assets of the Fund
and, accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares will be calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services-Exchange
Privilege."
4
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing<service-mark>
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing<service-mark> System
that the investor believes is most beneficial under his or her particular
circumstances. More detailed information as to each class of shares is set
forth under "Purchase of Shares."
<TABLE>
<CAPTION>
Account
Class Sales Charge(1) Maintenance Distribution Conversion
Fee Fee Feature
<S> <C> <C> <C> <C>
Maximum 4.00% initial
A sales charge(2),(3) No No No
CDSC for a period of B shares convert
four years, at a rate to D shares
of 4.0% during the automatically
first year, decreasing after approximately
B 1.0% annually to 0.0%(4) 0.25% 0.50% ten years(5)
1.0% CDSC for one year
C decreasing to 0.0%(6) 0.25% 0.55% No
Maximum 4.0% initial
D sales charge(3) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the proceeds
of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares-Initial Sales
Charge Alternatives-Class A and Class D Shares-Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if the
initial sales charge is waived, may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
5
<PAGE>
CLASS A: Class A shares of the Fund incur an initial sales charge when they are
purchased and bear no ongoing distribution or account maintenance fees.
Class A shares of the Fund are offered to a limited group of investors
and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors who currently own Class A shares of the Fund
in a shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Other eligible investors include
certain retirement plans and participants in certain fee-based programs.
In addition, Class A shares will be offered at net asset value to
directors and employees of Merrill Lynch & Co., Inc. ("ML & Co.") and
its subsidiaries (the term "subsidiaries," when used herein with respect
to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and to members of
the Boards of MLAM-advised mutual funds. The maximum initial sales
charge of 4.00% is reduced for purchases of $25,000 and over, and waived
for purchases of Class A shares by certain retirement plans and
participants in connection with certain fee-based programs. Purchases
of $1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Sales charges also are reduced under a right of accumulation that takes
into account the investor's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares-Initial Sales Charge
Alternatives-Class A and Class D Shares."
CLASS B: Class B shares of the Fund do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance fee of
0.25% of the Fund's average net assets attributable to Class B shares,
an ongoing distribution fee of 0.50% of average net assets attributable
to Class B shares, and a CDSC if they are redeemed within four years of
purchase. Such CDSC may be modified in connection with certain fee-based
programs. Approximately ten years after issuance, Class B shares of the
Fund will convert automatically into Class D shares of the Fund, which
are subject to an account maintenance fee but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired. Automatic conversion
of Class B shares into Class D shares will occur at least once a month
on the basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal
income tax purposes. Shares purchased through reinvestment of dividends
on Class B shares also will convert automatically to Class D shares.
The conversion period for dividend reinvestment shares and the
conversion and holding periods for certain retirement plans is modified
as described under "Purchase of Shares-Deferred Sales Charge
Alternatives-Class B and Class C Shares-Conversion of Class B Shares to
Class D Shares."
CLASS C: Class C shares of the Fund do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance fee of
0.25% of the Fund's average net assets and an ongoing distribution fee
of 0.55% of the Fund's average net assets. Class C shares are also
subject to a 1.0% CDSC if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year, Class C
shares have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to distribution fees that will
be imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
CLASS D: Class D shares of the Fund incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee of 0.25%
of the Fund's average net assets. Class D shares are not subject to an
6
<PAGE>
ongoing distribution fee or any CDSC when they are redeemed. The
maximum initial sales charge of 4.00% is reduced for purchases of
$25,000 and over. Purchases of $1,000,000 or more may not be subject to
an initial sales charge but if the initial sales charge is waived such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year of purchase. Such CDSC may be waived in connection with
certain fee-based programs. The schedule of initial sales charges and
reductions for Class D shares is the same as the schedule for Class A
shares, except that there is no waiver for purchases in connection with
certain fee-based programs. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B." See
"Purchase of Shares-Initial Sales Charge Alternatives-Class A and Class
D Shares."
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing<service-mark> System that the investor believes is most
beneficial under his or her particular circumstances.
INITIAL SALES CHARGE ALTERNATIVES. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
DEFERRED SALES CHARGE ALTERNATIVES. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares of the Fund will be converted into
Class D shares of the Fund after a conversion period of approximately ten
years, and thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine
it to be most advantageous to have all their funds invested initially and
intend to hold their shares for an extended period of time. Investors in Class
B shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees
are further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares-Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to obtain current income.
As a secondary objective, the Fund seeks capital appreciation when consistent
with its primary objective. These investment objectives are a fundamental
policy of the Fund and may not be changed without a vote of the majority of the
outstanding voting securities of the Fund. The Fund seeks to achieve its
objectives by investing in a diversified portfolio of fixed-income securities,
such as corporate bonds and notes, convertible securities, preferred stocks and
government obligations. There can be no assurance that the objective of the
Fund can be attained.
The Fund seeks current income by investing primarily in fixed-income
securities that are rated in the lower rating categories of the established
rating services (Baa or lower by Moody's Investors Service, Inc. ("Moody's")
and BBB or lower by Standard & Poor's Ratings Group ("S&P")), or in unrated
securities of comparable quality. Securities rated below Baa by Moody's or
below BBB by S&P, and unrated securities of comparable quality, are commonly
known as "junk bonds." See "Appendix: Description of Corporate Bond Ratings"
for additional information concerning rating categories. Junk bonds may
constitute as much as 100% of the Fund's investments. Although junk bonds can
be expected to provide higher yields, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than
lower-yielding, higher-rated fixed-income securities. See "Risk Factors in
Transactions in Junk Bonds." BECAUSE INVESTMENT IN JUNK BONDS ENTAILS
RELATIVELY GREATER RISK OF LOSS OF INCOME OR PRINCIPAL THAN AN INVESTMENT IN
HIGHER-RATED SECURITIES, AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR
ALL INVESTORS. THE FUND SHOULD BE CONSIDERED AS A MEANS OF DIVERSIFYING AN
INVESTMENT PORTFOLIO AND NOT IN ITSELF A BALANCED INVESTMENT PLAN. Purchasers
should carefully assess the risks associated with an investment in the Fund.
The securities in which the Fund will invest will be varied from time to
time depending upon the judgment of management as to prevailing conditions in
the economy and the securities markets and the prospects for interest rate
changes among different categories of fixed-income securities. The Fund
anticipates that under normal circumstances more than 90% of its assets will be
invested in fixed-income securities, including convertible and nonconvertible
debt securities and preferred stock. In addition, as a matter of operating
policy at least 65% of the Fund's assets will under normal circumstances be
invested in corporate bonds. Up to 15% of the Fund's total assets may be
invested in Corporate Loans (as defined below). Up to 10% of the Fund's total
assets may be invested in Distressed Securities (as defined below), which
includes publicly offered or privately placed debt securities and Corporate
Loans that, at the time of investment, are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal or payment
of interest or are rated in the lowest rating categories (Ca or lower by
Moody's and CC or lower by S&P), or that, if unrated, are in the judgment of
the Investment Adviser of equivalent quality. FOR THESE REASONS, AN INVESTMENT
IN THE FUND MAY BE SPECULATIVE IN THAT IT INVOLVES A HIGH DEGREE OF RISK AND
SHOULD NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM. See "Risk Factors in
Transactions in Corporate Loans" and "Risk Factors in Transactions in
Distressed Securities." The remaining assets of the Fund may be held in cash
or, as described herein, may be used in connection with hedging transactions in
futures contracts, related options, and options on debt securities, or in
connection with non-hedging transactions in options on debt securities. The
Fund does not intend to invest in common stocks, rights or other equity
securities, but may acquire or hold such securities (if consistent with its
objectives) when such securities are acquired in unit offerings with
fixed-income securities or in connection with an actual or proposed conversion
or exchange of fixed-income securities.
Selection and supervision by the management of the Fund of portfolio
investments involve continuous analysis of individual issuers, general business
conditions and other factors that may be too time-consuming or too costly for
the average investor. The furnishing of these services does not, of course,
guarantee successful results. The Investment Adviser's analysis of issuers
includes, among other things, historic and current financial conditions,
current and anticipated cash flow and borrowing requirements, value of assets
in relation to historical cost, strength of management, responsiveness to
business conditions, credit standing, and current and anticipated results of
operations. Analysis of general business conditions and other factors may
include anticipated change in economic activity and interest rates, the
availability of new investment opportunities, and the economic outlook for
specific industries. While the Investment Adviser considers as one factor in
its credit analysis the ratings assigned by the rating services, the Investment
Adviser performs its own independent credit analysis of issuers and
consequently, the Fund may invest, without limit, in unrated securities. As a
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result, the Fund's ability to achieve its investment objective may depend to a
greater extent on the Investment Adviser's own credit analysis than mutual
funds that invest in higher-rated securities. Although the Fund will invest
primarily in lower-rated securities, other than with respect to Distressed
Securities (which are discussed below) it will not invest in securities in the
lowest rating categories (Ca or below for Moody's and CC or below for S&P)
unless the Investment Adviser believes that the financial condition of the
issuer or the protection afforded to the particular securities is stronger than
would otherwise be indicated by such low ratings. Securities that are
subsequently downgraded may continue to be held and will be sold only if, in
the judgment of the Investment Adviser, it is advantageous to do so.
In furtherance of its primary investment objective, the Fund may also
invest up to 15% of its total assets in secondary market purchases of loans
extended to corporate borrowers by commercial banks and other financial
institutions ("Corporate Loans"). As in the case of junk bonds, the Corporate
Loans in which the Fund may invest may be rated in the lower rating categories
of the established rating services (Baa or lower by Moody's and BBB or lower by
S&P), or may be unrated investments of comparable quality. As in the case of
junk bonds, such Corporate Loans can be expected to provide higher yields than
lower-yielding, higher-rated fixed income securities but may be subject to
greater risk of loss of principal and income. As discussed below under "Risk
Factors in Transactions in Corporate Loans," however, there are some
significant differences between Corporate Loans and junk bonds.
The Fund may also from time to time invest up to 10% of its assets in
securities that are the subject of bankruptcy proceedings or otherwise in
default or in significant risk of being in default ("Distressed Securities").
Distressed Securities that are in default or in risk of being in default but
not yet in bankruptcy proceedings may be the subject of a pre-bankruptcy
exchange offer pursuant to which holders of the Distressed Securities receive
securities or assets in exchange for the Distressed Securities. Holders of
Distressed Securities that are the subject of bankruptcy proceedings may,
following approval of a plan of reorganization by the bankruptcy court, receive
securities or assets in exchange for the Distressed Securities. Generally, the
Fund will invest in Distressed Securities when the Investment Adviser
anticipates that it is reasonably likely that the securities will be subject to
such an exchange offer or plan of reorganization, as to which there can be no
assurance. Normally, the Fund will invest in Distressed Securities at a price
that represents a significant discount from the principal amount due on
maturity of the securities. The Fund will invest in Distressed Securities when
the Investment Adviser believes that, based on its analysis of the asset values
of the issuer of the Distressed Securities and the issuer's overall business
prospects, upon completion of an exchange offer or plan of reorganization with
respect to the Distressed Securities the Fund would receive, in exchange for
its Distressed Securities, securities or assets with terms and credit
characteristics that offer the Fund significant opportunities for capital
appreciation and future high rates of current income. See "Risk Factors in
Transactions in Junk Bonds."
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield. In addition, under unusual market or
economic conditions, the Fund for temporary defensive or other purposes may
invest up to 100% of its assets in securities issued or guaranteed by the
United States Government or its instrumentalities or agencies, certificates of
deposit, bankers' acceptances and other bank obligations, commercial paper
rated in the highest category by an established rating agency, or other
fixed-income securities deemed by the Investment Adviser to be consistent with
a defensive posture, or may hold its assets in cash. The yield on such
securities may be lower than the yield on lower-rated fixed-income securities.
The Fund is permitted to enter into transactions in futures contracts and
options thereon solely for the purpose of hedging the Fund against adverse
movements in the market value of fixed-income securities held by the Fund, or
that it intends to purchase, and not for the purpose of speculation.
Transactions in options on debt securities also may be entered into for such
9
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hedging purposes, as well as for non-hedging purposes intended to increase the
Fund's returns. For a more complete description of futures and options
transactions, see "Interest Rate Futures and Options Thereon" below and
"Options on Debt Securities" below and in the Statement of Additional
Information.
RISK FACTORS IN TRANSACTIONS IN JUNK BONDS
Junk bonds are regarded as being predominantly speculative as to the
issuer's ability to make payments of principal and interest. Investment in
such securities involves substantial risk. Issuers of junk bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of junk bonds may be more likely to experience
financial stress, especially if such issuers are highly leveraged. In
addition, the market for junk bonds is relatively new and has not weathered a
major economic recession, and it is unknown what effects such a recession might
have on such securities. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While most of the high-yield
bonds in which the Fund may invest do not include securities that, at the time
of investment, are in default or the issuers of which are in bankruptcy, there
can be no assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs.
Junk bonds frequently have call or redemption features that would permit
an issuer to repurchase the security 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 security with a lower yielding security, thus
decreasing the net investment income to the Fund and dividends to shareholders.
Junk bonds tend to be more volatile than higher rated fixed-income
securities, so that adverse economic events may have a greater impact on the
prices of junk bonds than on higher rated fixed-income securities. Like higher
rated fixed-income securities, junk bonds are generally purchased and sold
through dealers who make a market in such securities for their own accounts.
However, there are fewer dealers in the junk bond market, that may be less
liquid than the market for higher rated fixed-income securities, even under
normal economic conditions. Also, there may be significant disparities in the
prices quoted for junk bonds by various dealers. Adverse economic conditions
or investor perceptions (whether or not based on economic fundamentals) may
impair the liquidity of this market, and may cause the prices the Fund receives
for its junk bonds to be reduced, or the Fund may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgment may play a greater role in valuing certain of the Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Factors adversely affecting the market value of such securities are likely to
affect adversely the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default on a portfolio holding or to participate in the restructuring of the
obligation.
RISK FACTORS IN TRANSACTIONS IN CORPORATE LOANS
As in the case of junk bonds, the Corporate Loans in which the Fund may
invest can be expected to provide higher yields than lower-yielding, higher-
rated fixed income securities but may be subject to greater risk of loss of
principal and income. There are, however, some significant differences between
Corporate Loans and junk bonds. Corporate Loan obligations are frequently
secured by pledges of liens and security interests in the assets of the
borrower, and the holders of Corporate Loans are frequently the beneficiaries
of debt service subordination provisions imposed on the borrower's bondholders.
These arrangements are designed to give Corporate Loan investors preferential
treatment over junk bond investors in the event of a deterioration in the
credit quality of the issuer. Even when these arrangements exist, however,
there can be no assurance that the principal and interest owed on the Corporate
Loans will be repaid in full. Corporate Loans generally bear interest at rates
set at a margin above a generally recognized base lending rate that may
fluctuate on a day-to-day basis, in the case of the Prime Rate of a U.S. bank,
or that may be adjusted on set dates, typically 30 days but generally not more
than one year, in the case of the London Interbank Offered Rate ("LIBOR").
Consequently, the value of Corporate Loans held by the Fund may be expected to
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fluctuate significantly less than the value of fixed rate junk bond instruments
as a result of changes in the interest rate environment. On the other hand,
the secondary dealer market for Corporate Loans is not as well developed as the
secondary dealer market for junk bonds, and therefore presents increased market
risk relating to liquidity and pricing concerns.
The Fund may acquire interests in Corporate Loans by means of a
novation, assignment or participation. In a novation, the Fund would succeed
to all the rights and obligations of the assigning institution and become a
contracting party under the credit agreement with respect to the debt
obligation. As an alternative, the Fund may purchase an assignment, in which
case the Fund may be required to rely on the assigning institution to demand
payment and enforce its rights against the borrower but would otherwise
typically be entitled to all of such assigning institution's rights under the
credit agreement. Participation interests in a portion of a debt obligation
typically result in a contractual relationship only with the institution
participating out the interest and not with the borrower. In purchasing a loan
participation, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement, nor any rights of set-off
against the borrower, and the Fund may not directly benefit from the collateral
supporting the debt obligation in which it has purchased the participation. As
a result, the Fund will assume the credit risk of both the borrower and the
institution selling the participation to the Fund.
RISK FACTORS IN TRANSACTIONS IN DISTRESSED SECURITIES
Investment in Distressed Securities is speculative and involves
significant risk. Distressed Securities frequently do not produce income while
they are outstanding and may require the Fund to bear certain extraordinary
expenses in order to protect and recover its investment. Therefore, to the
extent the Fund pursues its secondary objective of capital appreciation through
investment in Distressed Securities, the Fund's ability to achieve current
income for its shareholders may be diminished. The Fund will only make such
investments when the Investment Adviser believes it is reasonably likely that
the issuer of the securities will make an exchange offer or will be the subject
of a plan of reorganization; however, there can be no assurance that such an
exchange offer will be made or that such a plan of reorganization will be
adopted. In addition, a significant period of time may pass between the time
at which the Fund makes its investment in Distressed Securities and the time
that any such exchange offer or plan of reorganization is completed. During
this period, it is unlikely that the Fund will receive any interest payments on
the Distressed Securities, the Fund will be subject to significant uncertainty
as to whether or not the exchange offer or plan of reorganization will be
completed, and the Fund may be required to bear certain expenses to protect its
interest in the course of negotiations surrounding any potential exchange offer
or plan of reorganization. In addition, even if an exchange offer is made or a
plan of reorganization is adopted with respect to Distressed Securities held by
the Fund, there can be no assurance that the securities or other assets
received by the Fund in connection with such exchange offer or plan of
reorganization will not have a lower value or income potential than anticipated
when the investment was made. Moreover, any securities received by the Fund
upon completion of an exchange offer or plan of reorganization may be
restricted as to resale. In addition, as a result of the Fund's participation
in negotiations with respect to any exchange offer or plan of reorganization
with respect to an issue of Distressed Securities, the Fund may be precluded
from disposing of such securities.
INVESTMENTS IN FOREIGN SECURITIES
The Fund may invest in securities issued by foreign governments (or
political subdivisions or instrumentalities thereof) or foreign companies
(collectively, "Foreign Securities"). The Fund may only invest in Foreign
Securities if, at the time of acquisition, no more than 25% of its total assets
(taken at market value at the time of the investment) would be invested in
Foreign Securities following such investment. Certain Foreign Securities may
be subject to non-U.S. withholding taxes. In addition, investment in Foreign
Securities entails certain risks, which are discussed below.
PUBLIC INFORMATION. Many of the Foreign Securities held by the Fund will
not be registered with the Commission nor will the issuers thereof be subject
to the reporting requirements of such agency. Accordingly, there may be less
publicly available information about the foreign issuer of such securities than
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about a U.S. issuer, and such foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of U.S. issuers. Traditional investment measurements, as used in the United
States, may not be applicable to such securities, particularly those issued in
certain smaller, emerging foreign capital markets. Foreign issuers, and
issuers in smaller, emerging capital markets in particular, generally are not
subject to uniform accounting, auditing and financial reporting standards or to
practices and requirements comparable to those applicable to domestic issuers.
TRADING VOLUME, CLEARANCE AND SETTLEMENT. Foreign financial markets,
while often growing in trading volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices may be more volatile than securities of comparable
domestic companies. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Further,
satisfactory custodial services for investment securities may not be available
in some countries having smaller, emerging capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems or the risk of intermediary counterparty failures could cause the Fund
to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security, or
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
GOVERNMENT SUPERVISION AND REGULATION. There generally is less
governmental supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States. Further, brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
With respect to certain foreign countries there is a possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments that could affect investments in those countries.
In addition, certain Foreign Securities may be subject to non-U.S. withholding
taxes.
INTEREST RATE FUTURES AND OPTIONS THEREON
The Fund may engage in hedging transactions in bond futures contracts and
options thereon. The Fund currently may trade only in futures contracts on
U.S. Treasury bonds, bills and notes and Government National Mortgage
Association ("GNMA") mortgage-backed certificates and options on such futures
contracts. However, under its investment restrictions, the Fund is permitted
to trade in such additional types of interest rate futures contracts and
options thereon as its Board of Directors determines is appropriate for trading
by the Fund, subject to the restrictions noted below. Reference is made to the
Statement of Additional Information for a further description of the various
instruments and related portfolio strategies that may be used by the Fund.
FUTURES. The Fund may engage in transactions in futures contracts and
options thereon. Futures are standardized, exchange-traded derivatives
contracts that obligate a purchaser to take delivery, and a seller to make
delivery, of a specific amount of a commodity at a specified future date at a
specified price. The Fund does not intend to take delivery of the commodities
or instruments underlying its transactions in futures contracts. Options
on futures are options to either buy (call) or sell (put) a futures contract
at a specified price prior to a specified date. No price is paid upon
entering into a futures contract (although a fee, or option premium, is
generally paid to the seller of an option on a futures contract at the
initiation of the transaction). Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the
prior day or be entitled to a payment representing any profit experienced as a
result of the futures position the prior day.
The Fund may sell futures contracts or purchase put options on futures
contracts in anticipation of an increase in interest rates. Generally, as
interest rates rise, the market value of the fixed-income securities held by
the Fund will fall, reducing its net asset value. The sale of futures
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<PAGE>
contracts may limit the Fund's risk of loss through a decline in the market
value of portfolio holdings correlated with the futures contracts prior to the
futures contracts' expiration date. In the event the market value of the
portfolio holdings correlated with the futures contracts increases rather than
decreases, however, the Fund will realize a loss on the futures position and a
lower overall return than would have been realized without the purchase of the
futures contracts.
The Fund may purchase futures contracts or purchase call options on
futures contracts in anticipation of a decrease in interest rates. Generally,
as interest rates decrease, the market value of fixed-income securities that
the Fund may be considering purchasing will increase. The purchase of futures
contracts may protect the Fund from having to pay more for such securities when
it identifies specific securities it wishes to purchase. In the event that
such securities decline in value or the Fund determines not to purchase any
additional securities, however, it may realize a loss relating to the futures
position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying security
is a bond, bond index or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent it from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
RISK FACTORS IN FUTURES AND OPTIONS ON FUTURES. Use of futures and
options on futures for hedging purposes involves the risk of imperfect
correlation in movements in the value of the futures contract and the value of
the fixed-income securities being hedged. An increase or decrease in the
general level of interest rates can generally be expected to have a broadly
similar effect on the market value of government securities on which futures
contracts are based and on the market value of the corporate fixed-income
securities in which the Fund will primarily invest, but it is unlikely that the
changes in value of government securities and corporate fixed-income securities
will be perfectly correlated. In addition, disparities in the average maturity
of the Fund's investments compared to a financial instrument on which a futures
contract is based may also affect the correlation of price movements. If the
value of the futures contract moves more or less than the value of the hedged
corporate fixed-income securities that the Fund owns or anticipates purchasing,
the Fund will experience a gain or loss that will not be completely offset by
movements in the value of the hedged fixed-income securities.
Transactions in futures and options on futures may expose the Fund to
potential losses that exceed the amount originally invested by the Fund in such
instruments. When the Fund engages in such a transaction, it will deposit in a
segregated account at its custodian liquid securities with a value at least
equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as
calculated pursuant to requirements of the Securities and Exchange Commission).
Such segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
OTHER PORTFOLIO STRATEGIES
The Fund may engage in the portfolio strategies described below and may
also lend portfolio securities, and invest in restricted securities and foreign
securities. Reference is made to the Statement of Additional Information for a
more complete description of such strategies.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security from the Fund 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 for the Fund insulated
from market fluctuations during such period. In the event of default by the
seller under a repurchase agreement, the Fund will continue to hold the
seller's securities as collateral but may suffer time delays and incur costs or
possible losses in connection with such transactions.
FORWARD COMMITMENTS. The Fund may purchase securities on a when-issued
basis or forward commitment basis, and may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or
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sold by the Fund with payment and delivery taking place in the future to secure
what is considered an advantageous yield and price to the Fund at the time of
entering into the transaction. The value of the security on the delivery date
may be more or less than its purchase price. The Fund will establish a
segregated account in connection with such transactions in which the Fund will
deposit liquid securities with a value at least equal to the Fund's exposure,
on a mark-to-market basis, to the transaction (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund
has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss).
RESTRICTED SECURITIES. From time to time the Fund may invest in
securities the disposition of which is subject to legal restrictions, such as
restrictions imposed by the Securities Act of 1933 (the "Securities Act") on
the resale of securities acquired in private placements. If registration of
such securities under the Securities Act is required, such registration may not
be readily accomplished, and if such securities may be resold without
registration, such resale may be permissible only in limited quantities. In
either event, the Fund may not be able to sell its restricted securities at a
time that, in the judgment of the Investment Adviser, would be most opportune.
STANDBY COMMITMENT AGREEMENTS. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed-income security, which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement, the Fund may be paid a commitment fee, regardless
of whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security that the
Fund has committed to purchase. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
yield and price that is considered advantageous to the Fund. The Fund will not
enter into a standby commitment with a remaining term in excess of 45 days and
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to such commitments, together with the value of
portfolio securities subject to legal restrictions on resale, will not exceed
15% of its assets taken at the time of acquisition of such commitment or
security. The Fund will at all times maintain a segregated account with its
custodian of cash or liquid, high-grade debt obligations in an amount equal to
the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment
period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
OPTIONS ON DEBT SECURITIES. The Fund may write call and put options on
U.S. Treasury bills, notes and bonds in order to increase the return on their
investments and in order to hedge optionable U.S. Treasury securities held by
the Fund. The Fund will write only covered call options on debt securities
(i.e., options in which it owns the underlying security) or fully funded put
options on debt securities (i.e., options in which an amount of cash or
short-term securities equal to the exercise price of the put has been
segregated with the Fund's custodian). By writing covered options on U.S.
Treasury securities, the Fund will be able to increase its return on the
underlying securities by the amount of the premium, if the option expires
unexercised, or by the amount of any profits earned by closing out the option
position. The Fund may be required, however, to forego benefits that could
have been obtained from an increase in the value of securities on which a call
is written or a decrease in the value of securities on which a put is written.
As a result, the Fund may receive less total return, and at other times greater
total return, than if it had not written options.
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The Fund also may purchase put options on optionable U.S. Treasury bills,
notes and bonds held in the Fund and, under certain limited circumstances
described in the Statement of Additional Information, call options on such
instruments. Purchases of put options may enable the Fund to limit the risk of
declines in the value of the portfolio security underlying the put, until the
expiration of the option or the closing of the option transaction. By
purchasing a put, however, the Fund will be required to pay the premium, which
will reduce the benefits obtained from the transaction.
Although options written by the Fund may be terminated prior to exercise
or expiration by entering into an offsetting transaction, the ability to do so
depends upon the presence of a liquid secondary market on the exchange on which
the option is traded. If no such market is available, the Fund may be unable
to terminate existing positions and may be subject to exercise of the option
under unfavorable circumstances. The Fund will enter into transactions in
options on debt securities only when the management of the Fund believes that a
liquid secondary market for such options is available. Reference is made to
the Appendix to the Statement of Additional Information for further information
regarding the trading of options on debt securities. Exchanges generally
introduce options series on specific issues of U.S. Treasury bonds and notes as
such securities are issued. Such Exchanges, however, do not ordinarily
introduce new series of options on such issues to replace expiring series
inasmuch as trading interest tends to center on the most recently auctioned
issues of Treasury bonds and notes. Consequently, options representing a full
range of expirations will not usually be available for every issue on which
options are traded.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (including a majority of the shares of the
Fund). Among such restrictions are prohibitions against the Fund investing
more than 5% of its total assets in the securities of any one issuer and
investing more than 25% of its total assets in the securities of issuers
primarily engaged in the same industry. Investors are referred to the
Statement of Additional Information for a complete description of such
restrictions and policies.
COMPARATIVE PERFORMANCE INFORMATION
In managing the Fund's portfolio, the Investment Adviser will use the
same investment strategies and techniques that are used by the Investment
Adviser in managing the assets of the High Income Portfolio (the "High Income
Portfolio") of the Merrill Lynch Corporate Bond Fund, Inc. (the "Corporate Bond
Fund"), a professionally managed, diversified, open-end investment company
consisting of three separate portfolios. The Portfolio Managers of the Fund
and the High Income Portfolio are identical. See "Investment Adviser."
The investment objectives of the Fund and the High Income Portfolio
are substantially identical. See "Investment Objectives and Policies."
Set forth on the following page are the High Income Portfolio's average
annual total returns for the one, five and ten year periods ended on the last
day of the High Income Portfolio's most recent fiscal year. The investment
performance of the High Income Portfolio is not the investment performance of
the Fund. This information is provided solely to illustrate the historical
performance achieved by the Investment Adviser in managing a mutual fund with
investment objectives that are substantially identical to the investment
objectives of the Fund. Certain of the investment policies, strategies and
techniques currently applicable to or utilized by the Fund and the High Income
Portfolio were not applicable to or employed by the High Income Portfolio
during the entire period of its operations. It is important to recognize that
the fees and expenses of the Fund and the High Income Portfolio differ. The
investment performance of the Fund will therefore differ from the investment
performance of the High Income Portfolio. In addition, the past performance of
the High Income Portfolio should not be viewed as indicative of the Fund's
future investment performance. The following data should be read in
conjunction with the accompanying notes. PAST PERFORMANCE DOES NOT GUARANTEE
FUTURE RESULTS.
15
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS(1)
FOR PERIODS ENDED SEPTEMBER
30, 1997
CLASS OF SHARES ONE YEAR FIVE YEARS TEN YEARS
OR INCEPTION
<S> <C> <C> <C>
A 10.00% 10.53% 11.82%
B 9.86% 10.60% 11.60%(2)
C 12.66% N/A 12.80%(3)
D 9.72% N/A 11.87%(4)
</TABLE>
_______________
(1) The returns of the High Income Portfolio set forth below are net of
maximum sales charges applicable to the High Income Portfolio and net of
all fees (including monthly compensation paid to FAM at the annual
rate of 0.55% of the average daily net assets of the High Income
Portfolio, with reduced rates applicable to portions of the assets of the
High Income Portfolio to the extent that the aggregate of the average
daily net assets of the three combined portfolios of the Corporate
Bond Fund exceeds $250 million, $500 million and $750 million) and
expenses of the High Income Portfolio.
(2) The average annual total return indicated is for the period October 21,
1988 (commencement of operation of the Class B shares) through September
30, 1997.
(3) The average annual total return indicated is for the period October 21,
1994 (commencement of operations of the Class C shares) through September
30, 1997.
(4) The average annual total return indicated is for the period October 21,
1994 (commencement of operations of the Class D shares) through September
30, 1997.
(5) The financial information set forth above is based upon the annual audits
of the financial statements of the High Income Portfolio. Financial
statements of the High Income Portfolio for the fiscal year ended
September 30, 1997, and the independent auditors' report thereon, are
included in the Statement of Additional Information of the Corporate Bond
Fund. Further information about the performance of the High Income
Portfolio is contained in the Corporate Bond Fund's Annual Report, which
can be obtained, without charge, upon request.
INVESTMENT ADVISER
The Investment Adviser to the Fund is FAM, an affiliate of MLAM, an
indirect subsidiary of ML & Co., a financial services holding company and the
parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, New
Jersey 08543-9011. FAM or MLAM acts as the investment adviser for more than
100 registered investment companies. FAM and MLAM also offer portfolio
management services to individual and institutional accounts. As of January
1998, FAM and MLAM had a total of $460 billion in investment company and other
portfolio assets under management, including selected accounts of certain
affiliates of the FAM.
The Fund has entered into an investment advisory agreement with FAM (the
"Investment Advisory Agreement"). The Investment Advisory Agreement provides
that, subject to the general supervision of the Board of Directors of the Fund,
FAM renders investment advice to the Fund and is responsible for the overall
management of the Fund's business affairs. The responsibility for making
decisions to buy, sell or hold a particular security rests with FAM. As
described in the Investment Advisory Agreement, FAM will receive for its
services to the Fund monthly compensation at the annual rate of 0.60% of
the average daily net assets of the Fund. The Investment Advisory Agreement
obligates the Fund to pay certain expenses incurred in its operations,
including general administrative expenses.
The Investment Adviser has entered into a sub-advisory agreement
(the "Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly owned
subsidiary of ML & Co. and an affiliate of the Investmetn Adviser, pursuant
to which the Investment Adviser pays MLAM U.K. a fee for providing
16
<PAGE>
investment advisory services to the Investment Advisor with respect to the Fund
in an amount to be determined from time to time by the Investment Adviser and
MLAM U.K., but in no event in excess of the amount that the Investment Adviser
actually receives for providing services to the Fund pursuant to the
Investment Advisory Agreement. The address of MLAM U.K. is Milton Gate,
1 Moor Lane, London EC2Y 9HA, England.
Accounting services are provided to the Fund by FAM and the Fund
reimburses FAM for its costs in connection with such services.
Vincent T. Lathbury III and Aldona Schwartz serve as the Portfolio
Managers of the Fund and are primarily responsible for its day-to-day
management. Mr. Lathbury has served as First Vice President of MLAM since
1997, Vice President of MLAM from 1982 to 1997 and Portfolio Manager of the
Investment Adviser and MLAM since 1982. Ms. Schwartz has served as a Vice
President and Portfolio Manager of the Investment Adviser and MLAM since 1990.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act of 1940 (the "Investment Company 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 the Fund's 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" that prohibit trading by investment
personnel of the Fund within periods of trading by the Fund in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc., a subsidiary of ML & Co.,
acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer
Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and
the opening and maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Transfer Agent receives an annual fee of up to $11.00 per
Class A or Class D account of the Fund and up to $14.00 per Class B or Class C
account of the Fund, and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts that close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co.
17
<PAGE>
DIRECTORS
The Directors of the Fund consist of ___ individuals, ___ of whom are
"non-affiliated" persons of the Fund as defined in the Investment Company Act.
The Directors of the Fund are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the directors
of investment companies by the Investment Company Act. The Board of Directors
elects officers of the Fund annually.
The Directors of the Fund and their principal employment are as follows:
[ARTHUR ZEIKEL*-Chairman of the Investment Adviser and its affiliate,
MLAM; Chairman and Director of Princeton Services, Inc. ("Princeton Services");
and Executive Vice President of ML & Co.]
(OTHER DIRECTORS TO BE PROVIDED BY AMENDMENT)
- ----------------------------
*Interested person, as defined in the Investment Company Act, of the Fund.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc., a subsidiary of the Investment
Adviser and an affiliate of both MLAM and Merrill Lynch, will act as the
distributor of the shares of the Fund.
The Distributor, Merrill Lynch and other securities dealers that have
entered into selected dealer agreements with the Distributor will solicit
subscriptions for shares of the Fund during a period expected to end on or
about April 28, 1998. The subscription period may be extended upon agreement
between the Fund and the Distributor. On the third business day after the
conclusion of the subscription period,the subscriptions will be payable, the
Class A, Class B, Class C and Class D shares will be issued and the Fund will
commence operations. The subscription offering may be terminated by the Fund
or the Distributor at any time, in which event no Class A, Class B, Class C or
Class D shares will be issued (and, therefore, the Fund will not commence
operations and no amounts will be payable by subscribers, and no sales charges
will be assessed) or a limited number of shares will be issued.
18
<PAGE>
The public offering price of the Class A and Class D shares during the
subscription offering is set forth in the table below:
<TABLE>
<CAPTION>
Subscription Period
-------------------------------------------------------
Securities Dealers'
Sales Charge Concession
----------------------- ---------------------------
Percentage Percentage
Public of Public of Public
Offering Dollar Offering Dollar Offering
Amount of Purchase Price Amount Price Amount Price
- ----------------------------- -------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Less than $25,000 10.417 $.417 4.00% $.417 4.00%
$25,000 but less than $50,000 10.390 .390 3.75 .390 3.75%
$50,000 but less than $100,000 10.336 .336 3.25 .336 3.25%
$100,000 but less than $250,000 10.256 .256 2.50 .256 2.50%
$250,000 but less than $1,000,000 10.152 .152 1.50 .152 1.50%
$1,000,000 and over** 10,000 .000 0.00 .000 0.00%
- --------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more. If the sales charge is waived, such purchases may be
subject to a 1% CDSC if the shares are redeemed within one year after
purchase. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed. A
sales charge of 0.75% will be charged on purchases of $1,000,000 or more of
Class A or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933
(the "Securities Act").
The proceeds per share to the Fund from the sale of all Class A and Class
D shares of the Fund sold during the subscription period will be $10.00.
The public offering price of the Class B and Class C shares during the
subscription offering will be $10.00 per share. However, the Class B and Class
C shares may be subject to the CDSCs described below under "Deferred Sales
Charge Alternatives-Class B and Class C Shares" if redeemed within four years
of purchase, in the case of Class B shares, or one year of purchase, in the
case of Class C shares, and are subject to ongoing account maintenance and
distribution fees as described below.
The minimum initial purchase for Class A, Class B, Class C or Class D
shares during the subscription period is $1,000, except that (i) for retirement
plans, the minimum initial purchase is $100 and (ii) for shareholders who are
participants in a Mutual Fund Adviser ("MFA") program administered by Merrill
Lynch, the minimum initial purchase is $250.
CONTINUOUS OFFERING
Commencing immediately after completion of the subscription offering,
shares of the Fund will be offered continuously for sale by the Distributor and
other eligible securities dealers (including Merrill Lynch). During the
continuous offering, shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase during the continuous offering is $1,000 and the
minimum subsequent purchase is $50, except that (i) for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1, and
(ii) for shareholders who are participants in a MFA program administered by
Merrill Lynch, the minimum initial purchase is $250.
19
<PAGE>
The Fund will offer its shares in four classes during the continuous
offering at a public offering price equal to the net asset value plus varying
sales charges as set forth below. The Distributor, an affiliate of both the
Investment Adviser and Merrill Lynch, will act as the distributor of the
shares.
Shares may be purchased from the Distributor or from other securities
dealers, including Merrill Lynch, with whom the Distributor has entered into
selected dealer agreements. The minimum initial purchase in the Fund is $1,000
and the minimum subsequent purchase in the Fund is $50, except that for
retirement plans the minimum initial purchase in the Fund is $100 and the
minimum subsequent purchase is $1, and for participants in certain fee-based
programs the minimum initial purchase in the Fund is $500 and the minimum
subsequent purchase is $50. Merrill Lynch charges its customers a processing
fee (currently $5.35) to confirm a sale of shares to such customers.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing<service-mark> System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Class A and Class D shares are sold
to investors choosing the initial sales charge alternative and Class B and
Class C shares are sold to investors choosing the deferred sales charge
alternative. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge, as
discussed below, or to have the entire initial purchase price invested in the
Fund with the investment thereafter being subject to ongoing account
maintenance and distribution fees and a possible CDSC if shares are redeemed
during the applicable CDSC period. A discussion of the factors that investors
should consider in determining the method of purchasing shares under the
Merrill Lynch Select Pricing<service-mark> System is set forth under "Merrill
Lynch Select Pricing<service-mark> System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the Fund and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The deferred sales
charges, distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares of the Fund
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSC and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
20
<PAGE>
The following tables set forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing<service-mark>
System.
<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge(1) Fee Fee Feature
<S> <C> <C> <C> <C>
Maximum 4.00% initial
A sales charge (2),(3) No No No
CDSC for a period of
four years, at a rate B Shares convert
of 4.0% during the to D shares automatically
first year, decreasing after approximately
B 1.0% annually to 0.0%(4) 0.25% 0.50% ten years(5)
1.0% CDSC for one year
decreasing to 0.0%
C after the first year(6) 0.25% 0.55% No
Maximum 4.0% initial
D sales charge(3) 0.25% No No
</TABLE>
(1)Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges are imposed if the
redemption occurs within the applicable CDSC time period. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption
or the cost of the shares being redeemed.
(2)Offered only to eligible investors. See "Purchase of Shares-Initial Sales
Charge Alternatives-Class A and Class D Shares-Eligible Class A Investors."
(3)Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4)The CDSC may be modified in connection with certain fee-based programs.
(5)The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be "tacked"
onto the holding period for the shares acquired.
(6)The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES-CLASS A AND CLASS D SHARES
INVESTORS CHOOSING THE INITIAL SALES CHARGE ALTERNATIVES WHO ARE ELIGIBLE
TO PURCHASE CLASS A SHARES SHOULD PURCHASE CLASS A SHARES RATHER THAN CLASS D
SHARES BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.
Sales charges for purchases of Class A and Class D shares of the Fund,
computed as indicated below, are reduced on larger purchases. The Distributor
may reallow as a discount all or a part of such sales charge to securities
dealers with whom it has agreements and will retain any portion of the sales
charge not reallowed. If 90% or more of the sales charge is reallowed to a
dealer, such dealer may be deemed to be an underwriter within the meaning of
the Securities Act and subject to liability as such. The Distributor will
retain the entire sales charge on orders placed directly with it. The sales
charges applicable to the Fund, expressed as a percentage of the gross public
offering price and the net amount invested, and expected dealer discounts,
expressed as a percentage of the gross public offering price, are as follows:
21
<PAGE>
<TABLE>
<CAPTION>
Class A and Class D shares
-------------------------------------------------------------
Sales Load as a Discount to
Sales Load Percentage of Select Dealers
as a Percentage Net Amount as a Percentage
Amount of Purchase of Offering Price Invested* of Offering Price
- --------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Less than $25,000..................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000......... 3.75 3.90 3.50
$50,000 but less than $100,000........ 3.25 3.36 3.00
$100,000 but less than $250,000....... 2.50 2.56 2.25
$250,000 but less than $1,000,000..... 1.50 1.52 1.25
$1,000,000 and more**................. 0.00 0.00 0.00
</TABLE>
- --------------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A purchases by certain retirement plan
investors and participants in certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be imposed on purchases of $1
million or more of Class A or Class D shares by certain 401(k) plans.
Since securities dealers selling Class A and Class D shares of the Fund
will receive a concession equal to most of the sales charge, they may be deemed
to be underwriters under the Securities Act. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint<service-mark> Program, are entitled to purchase additional Class A
shares of the Fund in that account. Certain employer sponsored retirement or
savings plans, including eligible 401(k) plans, may purchase Class A shares of
the Fund at net asset value provided such plans meet the required minimum
number of eligible employees or required amount of assets advised by FAM or any
of its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the program
has $3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA<service-mark> Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch & Co., Inc.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain
persons who acquired shares of certain MLAM-advised closed-end funds in their
initial offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A or Class D shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met (for closed-end funds that
commenced operations prior to October 21, 1994). For example, Class A shares
of the Fund and certain other MLAM-advised mutual funds are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
("Senior Floating Rate Fund") and, if certain conditions set forth in the
Statement of Additional Information are met, to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") and Merrill Lynch
High Income Municipal Bond Fund, Inc. ("High Income Fund") who wish to reinvest
the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such funds in shares of the Fund and
certain other MLAM-advised mutual funds.
22
<PAGE>
As to purchase orders received by securities dealers prior to the close
of the New York Stock Exchange ("NYSE") (generally 4:00 p.m., New York City
time) on the day the order is placed with the Distributor, including orders
received after the close on the previous day, the applicable offering price
will be based on the net asset value determined as of 15 minutes after the
close of the NYSE on the day the order is placed with the Distributor, provided
the order is received by the Distributor not later than 30 minutes after the
close of business on the NYSE (generally 4:00 p.m., New York City time), on
that day. If the purchase orders are not received by the Distributor as of 30
minutes after the close of business on the NYSE such orders will be deemed
received on the next business day. Any order may be rejected by the
Distributor or the Fund. Neither the Distributor nor securities dealers are
permitted to withhold placing orders to benefit themselves by a price change.
The Fund reserves the right to suspend the sale of its shares to the public in
response to conditions in the securities markets, or otherwise.
REDUCED INITIAL SALES CHARGES. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services-Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A and
Class D shares are offered at net asset value to Employee Access<service-mark>
Accounts available through authorized employers. Subject to certain conditions
Class A and Class D shares are offered at net asset value to shareholders of
Municipal Strategy Fund and High Income Fund and Class A shares are offered at
net asset value to shareholders of Senior Floating Rate Fund who wish to
reinvest in shares of the Fund the net proceeds from a sale of certain of their
shares of common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to
an investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares are
offered with reduced sales charges and, in certain circumstances, at net asset
value, to participants in the Merrill Lynch Blueprint<service-mark> Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES-CLASS B AND CLASS C SHARES
INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME AND CLASS C SHARES IF THEY ARE UNCERTAIN AS TO THE LENGTH OF TIME THEY
INTEND TO HOLD THEIR ASSETS IN MLAM-ADVISED MUTUAL FUNDS.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the Fund are subject to a
four-year CDSC, which declines each year, while Class C shares are subject only
to a one-year CDSC. On the other hand, approximately ten years after Class B
shares are issued, such Class B shares, together with shares issued upon
dividend reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares" below.
Both Class B and Class C shares of the Fund are subject to an account
maintenance fee of 0.25% of net assets. Class B and Class C shares of the Fund
are subject to distribution fees of 0.50% and 0.55%, respectively, of net
assets. See "Distribution Plans." The proceeds from the account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.
23
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Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to Financial
Consultants for selling Class B and Class C shares, from its own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately ten years after
issuance, Class B shares of the Fund will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual funds
into which exchanges may be made convert into Class D shares automatically
after approximately eight years. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services-
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
CONTINGENT DEFERRED SALES CHARGES-CLASS B SHARES. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the CDSC on Class B shares:
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ ------------------
0-1......................................... 4.0%
1-2......................................... 3.0%
2-3......................................... 2.0%
3-4......................................... 1.0%
4 and thereafter............................ 0.0%
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The CDSC will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
24
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<PAGE>
To provide an example, assume an investor purchased 100 Class B shares of
the Fund at $10 per share (at a cost of $1,000) and in the third year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional shares upon dividend reinvestment. If at
such time the investor makes his first redemption of 50 shares (proceeds of
$600), 10 shares will not be subject to the CDSC because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged a CDSC at a rate of 2.0% (the applicable rate in the third year after
purchase) for shares purchased on or after October 21, 1994.
The Class B CDSC is waived on redemptions of shares made in connection
with certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares in connection with certain group plans through the
Merrill Lynch Blueprint<service-mark> Program. See "Shareholder Services-
Merrill Lynch Blueprint<service-mark> Program." The contingent deferred sales
charge is waived on redemption of shares by certain eligible 401(a) and
eligible 401(k) plans. The CDSC is also waived for any Class B shares that are
purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption and for
any Class B shares that were acquired and held at the time of the redemption in
an Employee Access<service-mark> Account available through employers providing
eligible 401(k) plans. The Class B CDSC also is waived for any Class B shares
that are purchased within qualifying Employee Access<service-mark> Accounts.
Additional information concerning the waiver of the Class B CDSC is set forth
in the Statement of Additional Information. The terms of the CDSC may be
modified for redemptions made in connection with certain fee-based programs.
See "Shareholder Services-Fee-Based Programs."
CONTINGENT DEFERRED SALES CHARGES-CLASS C SHARES. Class C shares that
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services-
Fee-Based Programs."
The following table sets forth the rates of the contingent deferred sales
charge on Class C shares of the Fund:
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -----------------
0-1........................................... 1.0%
Thereafter....................................... 0.0%
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
25
<PAGE>
<PAGE>
CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of the Fund's net assets, but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of any
sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class
B shares also will convert automatically to Class D shares. The Conversion
Date for dividend reinvestment shares will be calculated taking into account
the length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Class B shareholders holding share certificates must deliver such
certificates to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. Shares evidenced by certificates that are not
received by the Transfer Agent at least one week prior to the Conversion Date
will be converted into Class D shares on the next scheduled Conversion Date
after such certificates are delivered.
In general, Class B shares of MLAM-advised equity mutual funds will
convert approximately eight years after initial purchase, and Class B shares of
MLAM-advised taxable and tax-exempt fixed-income mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
In the event that all Class B shares of the Fund held in a single account
are converted to Class D shares on a Conversion Date, shares representing
reinvestment of declared but unpaid dividends on those Class B shares also will
be converted to Class D shares; otherwise, only Class B shares purchased
through reinvestment of dividends paid will convert to Class D shares on the
Conversion Date.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services-
Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee relating
26
<PAGE>
to the shares of the relevant class of the Fund, accrued daily and paid
monthly, at the annual rate of 0.25% of average daily net assets of the
relevant class for Class B, Class C and Class D shares of the Fund in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of 0.50%
and 0.55%, respectively, of average daily net assets attributable to the
relevant class of the Fund, in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing distribution services, and
bearing certain distribution-related expenses of the Fund, including payments
to financial consultants for selling Class B and Class C shares of the Fund.
The Distribution Plans relating to Class B and Class C shares are designed to
permit an investor to purchase Class B and Class C shares through dealers
without the assessment of an initial sales charge and at the same time permit
the dealer to compensate its financial consultants in connection with the sale
of the Class B and Class C shares. In this regard, the purpose and function of
the ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class A and Class D shares of the Fund in that
the CDSC and ongoing distribution fees provide for the financing of the
distribution of the Fund's Class B and Class C shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues
from the Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues and
expenses is presented to the Directors for their consideration in connection
with their deliberations as to the continuance of the Class B and Class C
Distribution Plans. This information is presented annually as of December 31
of each year on a "fully allocated accrual" basis and quarterly on a "direct
expense and revenue/cash" basis. On the fully allocated accrual basis,
revenues consist of the account maintenance fees, distribution fees, CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultation
compensation.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of Directors of the Fund will approve the continuance
of the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives-Class B and Class C Shares-
Conversion of Class B Shares to Class D Shares."
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares upon receipt of a
written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption in the case of the Fund's Class A or Class D shares, and is the net
asset value per share next determined after the initial receipt of proper
notice of redemption, less the applicable CDSC, if any, in the case of the
Fund's Class B or Class C Shares. Except for any CDSC that may be applicable
to Class B or Class C Shares of the Fund, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their total holdings also will receive upon redemption
all dividends declared on the shares redeemed. If a shareholder redeems all of
the shares in his account, he will receive, in addition to the net asset value
of the shares redeemed, a separate check representing all dividends declared
but unpaid. If a shareholder redeems a portion of the shares in his account,
27
<PAGE>
the dividends declared but unpaid on the shares redeemed will be distributed on
the next dividend payment date.
The value of shares at the time of redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held by
the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. The notice in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as their name(s) appears on the Transfer Agent's
register or on the certificate, as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution" as
such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient.
Examples of "eligible guarantor institutions" include most commercial banks and
broker dealers (including, for example, Merrill Lynch branch offices).
Information regarding other financial institutions that qualify as "eligible
guarantor institutions" may be obtained from the Transfer Agent. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days after receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares of the Fund
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time, not exceeding ten
days, as it has assured itself that good payment (e.g., cash or certified check
drawn on a United States bank) has been collected for the purchase of such
shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for purchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 p.m., New York time) on the day received, and such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor may impose a transaction charge on the shareholder for transmitting
the notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a repurchase of shares to such
customers. Repurchases made directly through the Fund's Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
Redemption payments will be made within seven days of the proper tender
of the certificates, if any, and stock power or letter requesting redemption,
in each instance with signatures guaranteed as noted above.
28
<PAGE>
REINSTATEMENT PRIVILEGE-CLASS A AND CLASS D SHARES
As described in further detail in the Statement of Additional
Information, holders of Class A or Class D shares of any of the Fund who have
redeemed their shares have a privilege to reinstate their accounts by
purchasing shares of the same class at net asset value without a sales charge
up to the dollar amount redeemed. The reinstatement privilege may be exercised
by sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income, if any. The net investment income of the Fund is declared
as dividends daily immediately prior to the determination of the net asset
value on that day and is reinvested monthly in additional full and fractional
shares of the Fund at net asset value unless the shareholder elects to receive
such dividends in cash. The net investment income of the Fund for dividend
purposes consists of interest and dividends earned on portfolio securities,
less expenses, in each case computed since the most recent determination of net
asset value. Expenses of the Fund, including the advisory fee and any account
maintenance and/or distribution fees (if applicable), are accrued daily.
Shares will accrue dividends as long as they are issued and outstanding. The
per share dividends and distributions on Class B and Class C shares will be
lower than the per share dividends and distributions on Class A and Class D
shares as a result of the account maintenance, distribution and higher transfer
agency fees applicable to the Class B and Class C shares. Similarly, the per
share dividends and distributions on Class D shares will be lower than the per
share dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
"Additional Information-Determination of Net Asset Value." Shares are issued
and outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order.
In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98% of the Fund's investment company income, with certain
adjustments, for such calendar year, plus 98% of the Fund's capital gain net
income for the one-year period ending on October 31 of such calendar year. All
net realized long- or short-term capital gains of the Fund, if any, including
gains from option and futures contract transactions, are declared and
distributed to shareholders annually after the close of the Fund's fiscal year.
See "Shareholder Services-Automatic Reinvestment of Dividends and Capital
Gain Distributions" for information concerning the manner in which dividends
and distributions may be automatically reinvested in shares of the Fund.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash, except that any dividend or distribution of
less than $10 payable to an account maintained directly with the Fund's
Transfer Agent will not be paid in cash but will be 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.
FEDERAL INCOME TAXES
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies under the Internal Revenue Code of 1986
(the "Code"). The Fund believes that it will qualify for such treatment. If
it so qualifies, the Fund (but not its shareholders) will be relieved of
29
<PAGE>
federal income tax on the amount it distributes to Class A, Class B, Class C
and Class D shareholders (together, the "shareholders"). If in any taxable
year the Fund does not qualify as a regulated investment company, all of its
taxable income will be taxed to the Fund at corporate rates.
The Fund contemplates declaring as dividends substantially all of its net
investment income. See "Dividends and Distributions." Dividends paid by the
Fund from its investment income and distributions of its net realized
short-term capital gains are taxable to shareholders as ordinary income.
Dividends and distributions will be taxable to shareholders as ordinary income
or capital gains, whether received in cash or reinvested in additional shares
of the Fund. Merrill Lynch Financial Data Services, Inc., the Fund's transfer
agent, will send each shareholder a monthly dividend statement that will
include the amount of dividends paid and identify whether such dividends
represent ordinary income or capital gains.
Upon sale or exchange of shares of the Fund, a shareholder will realize
short-or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares. Under the
Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax rates
applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more
than one year but not more than 18 months and (iii) 20% for capital assets held
for more than 18 months. 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 amount of capital gain dividends in the different categories of
capital gain referred to above. Shareholders should consult their tax advisers
regarding the availability and effect of a certain tax election to
mark-to-market shares of the Fund held on January 1, 2001. Capital gains or
losses recognized by corporate shareholders are subject to tax at the ordinary
income tax rates applicable to corporations. The new tax rates for capital
gains under the 1997 Tax Act described above apply to distributions of capital
gain dividends by regulated investment companies ("RICs") such as the Fund as
well as to sales and exchanges of shares in RICs such as the Fund.
The Fund will invest in securities rated in the lower rating categories
of nationally recognized rating organizations, in unrated securities (together
with lower-rated securities, "junk bonds") and in high-yield Corporate Loans,
as previously described. Some of these junk bonds and high-yield Corporate
Loans may be purchased at a discount and may therefore cause the Fund to accrue
and distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such junk bonds and high-yield
Corporate Loans may be treated as dividends for Federal income tax purposes; in
such case, if the issuer of the junk bonds or high-yield Corporate Loans is a
domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
The Fund may recognize interest attributable to it from holding zero
coupon securities. Current federal law requires that, for most zero coupon
securities, the Fund must accrue a portion of the discount at which the
security was purchased as income each year even though the Fund receives no
interest payment in cash on the security during the year. In addition, the
Fund may invest in pay-in-kind securities on which payments of interest consist
of securities rather than cash. As an investment company, the Fund must pay
out substantially all of its net investment income each year. Accordingly, the
Fund may be required to pay out as an income distribution each year an amount
that is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or
by sales of portfolio securities, if necessary. The Fund may realize a gain or
loss from such sales.
Some shareholders may be subject to a 31% withholding tax on ordinary
income dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom no certified taxpayer identification number is on file with the
Fund or who, to the Fund's knowledge, have furnished an incorrect number. An
investor when establishing an account must certify under penalty of perjury
that such number is correct and that he is not otherwise subject to backup
withholding.
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No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided under an applicable
treaty. Shareholders who are nonresident aliens or foreign entities are urged
to consult their own tax advisers concerning the applicability of the United
States withholding tax.
If a shareholder exercises his exchange privilege within 90 days after
the date such shares were acquired to acquire shares in a second Fund ("New
Fund"), then the loss, if any, recognized on the exchange will be reduced (or
the gain, if any, increased) to the extent the load charge paid to the Fund
reduces any load charge such shareholder would have been required to pay on the
acquisition of the New Fund shares in the absence of the exchange privilege.
Instead, such load charge will be treated as an amount paid for the New Fund
shares and will be included in the shareholder's basis for such shares.
Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month will be deemed to have been
received on December 31 of such year if actually paid during the following
January.
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 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 Regulations promulgated thereunder. The Code and Regulations are
subject to change by legislative or administrative action either prospectively
or retroactively.
The Statement of Additional Information describes the effect of other
provisions of the Code on the Fund's shareholders.
Ordinary income and capital gains dividends may also be subject to state
and local taxes.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund,
the Investment Adviser is responsible for the Fund's portfolio decisions and
the placing of the Fund's portfolio transactions. With respect to such
transactions, the Investment Adviser seeks to obtain the best net 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 will not necessarily be
paying the lowest commission or spread available.
The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to the policy
established by the Board of Directors, the Investment Adviser is primarily
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responsible for the portfolio decisions of the Fund and the placing of its
portfolio transactions. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Affiliated persons
of the Fund, including Merrill Lynch, may serve as its broker in
over-the-counter transactions conducted on an agency basis.
The Fund expects that its annual portfolio turnover rate should not
exceed 100%; however, during periods when interest rates fluctuate
significantly, as they have during the past few years, the Fund's portfolio
turnover rate may be substantially higher. In any particular year, however,
market conditions could result in portfolio activity at a greater or lesser
rate than anticipated. High portfolio turnover involves correspondingly
greater transaction costs in the form of commissions and dealer spreads, which
are borne directly by the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each
service and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has
an Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. These statements will also
show any other activity in the account since the previous statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by purchasing shares at the applicable public offering price either
through a securities dealer that has entered into a selected dealer agreement
with the Distributor or by mail directly to the Transfer Agent, acting as agent
for the Distributor.
Shareholders also may maintain their accounts through Merrill Lynch.
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 Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
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to his regular bank account. Investors who maintain CMA<reg-trade-mark> or
CBA<reg-trade-mark> accounts may arrange to have periodic investments made in
the Fund in their CMA<reg-trade-mark> or CBA<reg-trade-mark> accounts or
in certain related accounts in amounts of $100 or more through the
CMA<reg-trade-mark>/CBA<reg-trade-mark> Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value.
Under specified circumstances, participants in certain Programs may deposit
other classes of shares that will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class of
shares at net asset value, which may be shares of a money market fund. In
addition, upon termination of participation in a Program, shares that have been
held for less than specified periods within such Program may be subject to a
fee based upon the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account at Merrill
Lynch, to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
the Transfer Agent at (800) MER-FUND or (800) 637-3863.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested
automatically in full and fractional shares of the Fund, without sales charge,
at the net asset value per share next determined on the ex-dividend date of
such dividend or distribution. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch, or by written notification or by telephone call (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 paid in cash, rather than reinvested, in which event payment will
be mailed on or about the payment date, except that any dividend or
distribution of less than $10 payable to an account maintained directly with
the Fund's Transfer Agent will not be paid in cash but will be reinvested in
shares of the Fund. The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will be
imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from
his or her Investment Account in the form of payments by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. A shareholder whose shares are held within a
CMA<reg-trade-mark>, CBA<reg-trade-mark> or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA<reg-trade-mark> or CBA<reg-trade-mark> Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B and Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B
or Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares-Deferred Sales Charge
Alternatives-Class B and Class C Shares-Contingent Deferred Sales Charges-Class
B Shares" and "-Contingent Deferred Sales Charges-Class C Shares." Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
33
<PAGE>
plan will automatically be applied thereafter to Class D shares. See "Purchase
of Shares-Deferred Sales Charge Alternatives-Class B and Class C Shares-
Conversion of Class B Shares to Class D Shares."
RETIREMENT PLANS
As described in further detail in the Statement of Additional
Information, eligible shareholders of the Fund may participate in a variety of
qualified employee benefit plans that are available from Merrill Lynch.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing<service-mark> System Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares or the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in that
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares of the Fund will be exchangeable with
shares of the same class of any other MLAM-advised mutual fund.
Shares of the Fund that are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
as available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction of
the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to the Fund if such
schedule is higher than the CDSC schedule relating to the new Class B shares.
In addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
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Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for federal income tax purposes.
For further information, see "Shareholder Services-Exchange Privilege" in the
Statement of Additional Information.
MERRILL LYNCH BLUEPRINT<service-mark> PROGRAM
Class D shares of any of the Fund are offered to participants in the
Merrill Lynch Blueprint<service-mark> Program ("Blueprint"). In addition,
participants in Blueprint who own Class A shares of the Fund may purchase
additional Class A shares of the Fund through Blueprint. Blueprint is directed
to small investors, group or corporate IRAs and participants in certain
affinity groups such as benefit plans, credit unions and trade associations.
Investors placing orders to purchase Class A or Class D shares of the Fund
through a Blueprint account will acquire such Class A or Class D shares at a
reduced sales charge calculated in accordance with the standard Blueprint sales
charge schedules. Class B shares of any of the Fund are offered through
Blueprint only to members of certain affinity groups. The contingent deferred
sales load will be waived in connection with orders to purchase Class B shares
of the Fund through Blueprint provided that the shareholder is a participant in
a qualified group plan at the time of purchase. However, services available to
Fund shareholders through Blueprint may differ from those available to other
Fund shareholders. Orders for purchase and redemption of shares of the Fund
may be grouped for execution purposes that, in some circumstances, may involve
the execution of such orders two business days following the day such orders
are placed. There will be no minimum initial or subsequent purchase
requirement for participants who are part of an automatic investment plan.
Additional information concerning placing orders to purchase through Blueprint,
including any annual fees and transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint<service-mark>
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PERFORMANCE DATA
From time to time the Fund may include the average annual total return
and yield of the Fund for various specified time periods in advertisements or
information furnished to present or prospective shareholders. Average annual
total return and yield are computed separately for the Class A, Class B, Class
C and Class D shares of the Fund in accordance with formulas specified by the
Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any contingent deferred sales charge that
would be applicable to a complete redemption of the investment at the end of
the specified period such as in the case of Class B and Class C shares and the
maximum sales charge in the case of Class A and Class D shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. The
Fund will include performance data for all its classes of shares in any
advertisement or information including its performance data.
The Fund also may quote its total return and its aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual or annualized rate of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charge, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
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<PAGE>
aggregate total return generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares (such as investors in certain retirement plans) or to reduced sales
charges in the case of Class A and Class D shares, performance data may take
into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charges and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
contingent deferred sales charge, a lower amount of expenses is deducted. See
"Purchase of Shares." The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield to maturity of each security earned
during the period by (b) the average daily number of shares outstanding during
the period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
held by the Fund, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare the performance of the Fund to that of
the Standard & Poor's 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, or performance data contained in publications such as
Lipper Analytical Services, Inc., Morningstar Publications, Inc., MONEY
MAGAZINE, U.S. NEWS & WORLD REPORT, BUSINESS WEEK, CDA Investment Technology,
Inc., FORBES MAGAZINE or FORTUNE MAGAZINE. In addition, from time to time the
Fund may include the Fund's risk-adjusted performance ratings assigned by
Morningstar Publications, Inc. in advertising or supplemental sales literature.
As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is
determined once daily by the Investment Adviser immediately after the
declaration of dividends as of 15 minutes after the close of business on the
NYSE (generally 4:00 p.m., New York City time) on each day during which the
NYSE is open for trading and on any other day on which there is sufficient
trading in the Fund's portfolio securities that net asset value might be
materially affected but only if on any such day the Fund is required to sell or
redeem shares. The net asset value per share of the Fund is computed by
dividing the sum of the value of the portfolio securities held by the Fund plus
any cash or other assets minus all liabilities by the total number of shares of
the Fund outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory fee payable to the Investment Adviser and any
account maintenance and/or distribution fees payable to the Distributor, are
accrued daily. The Fund employs Merrill Lynch Securities Pricing Service
("MLSPS"), an affiliate of the Investment Adviser, to provide certain
securities prices for the Fund.
The per share net asset value of Class A shares of the Fund generally
will be higher than the per share net asset value of Class B, Class C and Class
D shares of the Fund, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fee applicable with respect to Class D shares. Moreover,
the per share net asset value of Class D shares generally will be higher than
the per share net asset value of the Class B and Class C shares, reflecting the
daily expense accruals of the distribution and higher transfer agency fees
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<PAGE>
applicable with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the four classes of the Fund
eventually will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount
of the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked
prices. Securities traded in the over-the-counter ("OTC") market are valued at
the mean of the most recent bid and ask prices as obtained from one or more
dealers that make markets in the securities. Portfolio securities that are
traded both in the OTC market and on a stock exchange are valued according to
the broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the OTC market. Options on debt securities,
which are traded on exchanges, are valued at the last asked price for options
written and the last bid price for options purchased. Interest rate futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing price at the close of such exchanges. The Fund employs Merrill
Lynch Securities Pricing Service ("MLSPS"), an affiliate of Merrill Lynch to
provide securities prices for the Fund. 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 use a matrix system for valuations. These procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Directors.
ORGANIZATION OF THE FUND
The Fund, a Maryland corporation, is a diversified, open-end management
company that was organized on March 13, 1998. The Fund is authorized to issue
four hundred million (400,000,000) shares of Common Stocks having a par value
$0.10 per share. The shares of Common Stock are divided into four classes,
each consisting of one hundred million (100,000,000) shares, designated as
follows: "Class A Common Stock," "Class B Common Stock," "Class C Common Stock"
and "Class D Common Stock". Each Class A, Class B, Class C and Class D share
of Common Stock of the Fund represents an interest in the same assets of the
Fund and is identical in all respects to shares of the other classes, except
that the Class B, Class C and Class D shares bear certain expenses related to
the account maintenance fees associated with such shares, and Class B and Class
C shares bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to such
account maintenance and distribution expenditures, as applicable (except that
Class B shares have certain voting rights with respect to the Class D
Distribution Plan). See "Purchase of Shares." The Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders unless under the Investment Company Act
shareholders are required to act on any of the following matters: (i) election
of Directors; (ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Voting rights for Directors are not cumulative. Shares issued
are fully paid and nonassessable and have no preemptive rights. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except that, as noted above, Class B,
Class C and Class D shares bear certain additional expenses.
CONTROL PERSONS
As of the date of this Prospectus, the Investment Adviser was the sole
shareholder of the Fund. So long as such ownership of shares continues to
exceed 25% of the outstanding shares of the Fund, the Investment Adviser will
be deemed to control the Fund by virtue of such ownership.
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SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
REPORTS TO SHAREHOLDERS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and/or mutual fund account numbers. If you have any questions
regarding this please call your Merrill Lynch Financial Consultant or Merrill
Lynch Financial Data Services, Inc. at 800-637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act, and the Investment Company Act with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the Commission.
The Statement of Additional Information, dated March , 1998, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained
without charge as provided on the cover page of this Prospectus. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
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 21st Century 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.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF
MOODY'S INVESTORS SERVICE, INC.:
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds that 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 that make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds that 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 that suggest a susceptibility to impairment sometime in
the future.
Baa Bonds that are rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
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 that 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 that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds that 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 that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that 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.
The modifier 1 indicates that the bond 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 rating
category.
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<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS OF
STANDARD & POOR'S RATINGS SERVICES:
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. BB
CC indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is being
paid.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
40
<PAGE>
[This Page Intentionally Left Blank]
41
<PAGE>
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. - AUTHORIZATION FORM (PART 1)
- ----------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint<service-mark>Program. You may request a Merrill Lynch
Blueprint<service-mark>Program application by calling (800) 637-3766.
- ----------------------------------------------------------------------------
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
/ / Class A Shares / / Class B Shares / / Class C Shares / / Class D Shares
of Merrill Lynch Corporate High Yield Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible
to purchase Class A share, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $......... payable to Merrill Lynch
Financial Data Services, Inc. as an initial investment (minimum $1,000). I
understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual
funds that would qualify for the Right of Accumulation as outlined in the
Statement of Additional Information: Please list all funds. (Use a separate
sheet of paper if necessary.)
1...................................... 4.................................
2...................................... 5.................................
3...................................... 6.................................
Name......................................................................
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address...................................................................
...........................................Date...........................
(Zip Code)
Occupation..................Name and Address of Employer..................
..............................................
..............................................
................................... ....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will
be presumed unless otherwise specified.)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-Term Capital Gains
Select / / Reinvest Select / / Reinvest
One / / Cash One / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: / /
Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Corporate High Yield Fund, Inc.
Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your account
Bank Name.................................................................
Bank Number..............................Account Number...................
Bank Address..............................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor....................................................
Signature of Depositor...........................Date.....................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
42
<PAGE>
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. - AUTHORIZATION FORM (PART 1) -
(Continued)
- ------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint<service-mark>Program. You may request a Merrill Lynch Blueprint
<service-mark>Program application by calling (800) 637-3766.
- ------------------------------------------------------------------------------
3. Social Security Number or Taxpayer Identification Number
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above
is my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Dividends,
Distributions and Taxes-Federal Income Taxes") either because I have not been
notified that I am subject thereto as a result of a failure to report all
interest or dividends, or the Internal Revenue Service ("IRS") has notified me
that I am no longer subject thereto.
Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to
under-reporting and if you have not received a notice from the IRS that backup
withholding has been terminated. the undersigned authorizes the furnishing of
this certification to other Merrill Lynch sponsored mutual funds.
....................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
4. Letter of Intention - Class A or Class D shares only. (See terms and
conditions in the Statement of Additional Information)
................, 19. . . .
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase / / Class
A or / / Class D (choose one) shares of the Merrill Lynch Corporate High
Yield Fund, Inc. or any other investment company with an initial sales charge
or deferred sales charge for which Merrill Lynch Funds Distributor, Inc. acts
as distributor over the next 13 month period which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable
to the amount checked above, as described in the Merrill Lynch Corporate High
Yield Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I
hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor,
Inc., my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch Corporate High Yield Fund, Inc.
held as security.
By.................................... .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (1) Name..............................
Account Number....................... Account Number....................
5. For Dealer Only
Branch Office, Address, Stamp. We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act
as our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under
a Letter of Intention, Automatic
Investment Plan or Systematic
withdrawal Plan. We guarantee
the Shareholder's signature.
................................
Dealer Name and Address
By..............................
Authorized Signature of Dealer
This form when completed should be ____ _______
mailed to: Branch-Code F/C No.
______ __________
Dealer's Customer A/C No.
Merrill Lynch Corporate High Yield Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
43
<PAGE>
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.-AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal or
Automatic Investment Plans only.
- -------------------------------------------------------------------------
1. Account Registration
(PLEASE PRINT) __________________________________
Social Security No.
or Taxpayer Identification No.
Name.........................................................
First Name Initial Last Name
Name of Co-Owner (if any)....................................
First Name Initial Last Name
Address.............................................. Account Number.....
.....................................................(if existing account)
(Zip Code)
2. Systematic Withdrawal Plan (See terms and conditions in the Statement of
Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A, / / Class B*, / / Class C* or / / Class D
shares of the Merrill Lynch Corporate High Yield Fund, Inc.
at cost or current offering price. Withdrawals to be made either (check one)
/ / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ______ or as soon as possible thereafter
(month)
Specify the amount of the withdrawal you would like paid to you (check one):
/ / $ of / / Class A, / / Class B*, / / Class C* or / / Class D shares
in the account.
Specify withdrawal method: / / check or / / direct deposit to bank
account (check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of.................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)............................................
Address.................................................................
.................................................................
Signature of Owner...............................Date............
Signature of Co-Owner (if any)...................................
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I
provide written notification to Merrill Lynch Financial Data Services, Inc.
amending or terminating this service.
Specify type of account (check one): / / checking / / savings
Name on your Account....................................................
Bank Name...............................................................
Bank Number...................................Account Number............
Bank Address............................................................
........................................................................
Signature of Depositor..............................Date................
Signature of Depositor..................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account shall accompany
this application.
________________________
*Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the systematic withdrawal plan
is made.
44
<PAGE>
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.-AUTHORIZATION FORM (PART 2) -
(Continued)
- ----------------------------------------------------------------------------
3. Application for Automatic Investment Plan
I hereby request that Merrill Lynch Financial Data Services, Inc. draw
an automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of the Merrill Lynch Corporate High Yield Fund, Inc. subject to the terms set
forth below. In the event that I am not eligible to purchase Class A shares,
I understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank account
for investment in Merrill Lynch
Corporate High Yield Fund, Inc.,
as indicated below:
Amount of each ACH debit $............
Account No............................
Please date and invest ACH debits on
the 20th of each month beginning . . .
. . . . . . . . . . (month) or as soon
thereafter as possible. I agree that
you are drawing these ACH debits
voluntarily at my request and that
you shall not be liable for any loss
arising from any delay in preparing or
failure to prepare any such debit. If
I change banks or desire to terminate
or suspend this program, I agree to
notify you promptly in writing. I
hereby authorize you to take any
action to correct erroneous ACH
debits of my bank account or
purchases of fund shares including
liquidating shares of the Fund and
crediting my bank account. I
further agree that if a debit is
not honored upon presentation,
Merrill Lynch Financial Data
Services, Inc. is authorized
to discontinue immediately the
Automatic Investment Plan and
to liquidate sufficient shares
held in my account to offset
the purchase made with the
dishonored debit.
............ ......................
Date Signature of Depositor
............. ........................
Date Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN
BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To.................................Bank
(Investor's Bank)
Bank Address...........................
City.........State.........Zip Code....
As a convenience to me, I hereby request
and authorize you to pay and charge
to my account ACH debits drawn on my
account by and payable to Merrill Lynch
Financial Data Services, Inc., I agree
that your rights in respect of each
such debit shall be the same as if it
were a check drawn on you and signed
personally by me. This authority is to
remain in effect until revoked by me
in writing. Until you receive such
notice, you shall be fully protected in
honoring any such debit. I further
agree that if any such debit be
dishonored, whether with or without
cause and whether intentionally or
inadvertently, you shall be under no
liability.
............. ........................
Date Signature of Depositor
............. ........................
Date Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is
elected, your blank, unsigned check
marked "VOID" should accompany this
application.
45
<PAGE>
[This Page Intentionally Left Blank]
46
<PAGE>
[This Page Intentionally Left Blank]
47
<PAGE>
Investment Adviser
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
_____________________
_______
_____________________
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
48
<PAGE>
============================================
[RED INK:] Information contained herein
is subject to completion or amendment. A
registration statement relating to these
securities has been filed with the
Securities and Exchange Commission (the
"Commission"). These securities may not
be sold nor may any offers to buy be
accepted prior to the time the registration
statement becomes effective. This Statement
of Additional Information does not constitute
a prospectus.
No person has been authorized to give
any information or to make any representations
other than those contained in this Prospectus,
in connection with the offer contained in this
Prospectus, and, if given or made, such other
information or representations must not be
relied upon as having been authorized by the
Fund, the Investment Adviser or the Distributor.
This Prospectus does not constitute an offering
in any state in which such offering may not
lawfully be made.
TABLE OF CONTENTS
Page
Fee Table 3
Merrill Lynch Select Pricing<service-mark>System 4
Investment Objectives and Policies 8
Risk Factors in Transactions in Junk Bonds 10
Risk Factors in Transactions in Corporate
Loans 10
Risk Factors in Transactions in Distressed
Securities 11
Investments in Foreign Securities 11
Interest Rate Futures and Options Thereon 12
Other Portfolio Strategies 13
Investment Restrictions 14
Comparative Performance Information 15
Investment Adviser 16
Code of Ethics 16
Transfer Agency Services 17
Directors 17
Purchase of Shares 17
Subscription Offering 17
Continuous Offering 18
Initial Sales Charge Alternatives-Class A
and Class D Shares 20
Deferred Sales Charge Alternatives-Class B and
Class C Shares 22
Distribution Plans 25
Redemption of Shares 26
Redemption 27
Repurchase 27
Reinstatement Privilege-Class A and Class
D Shares 28
Dividends, Distributions and Taxes 28
Dividends and Distributions 28
Federal Income Taxes 29
Portfolio Transactions 30
Shareholder Services 31
Investment Account 31
Automatic Investment Plans 31
Fee-Based Programs 32
Automatic Reinvestment of Dividends and
Capital Gains Distributions 32
Systematic Withdrawal Plans 32
Retirement Plans 33
Exchange Privilege 33
Merrill Lynch Blueprint<service-mark>Program 34
Performance Data 34
Additional Information 35
Determination of Net Asset Value 35
Organization of the Fund 36
Control Persons 36
Shareholder Inquiries 36
Reports to Shareholders 37
Additional Information 37
Year 2000 Issues 40
Appendix 38
Description of Corporate Bond Ratings 38
Code #
(CRC)
=====================================================
<PAGE>
=====================================================
(LOGO)
Merrill Lynch Corporate High Yield Fund, Inc.
(GRAPHIC)
[RED INK:]SUBJECT TO COMPLETION,
DATED MARCH 20, 1998
PRELIMINARY PROSPECTUS
March ____, 1998
Distributor:
Merrill Lynch Funds Distributor, Inc.
This prospectus should be retained for
future reference.
=====================================================
[RED INK:] SUBJECT TO COMPLETION, DATED MARCH 20, 1998
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
March __, 1998
Merrill Lynch Corporate High Yield Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
Phone No. (609) 282-2800
Merrill Lynch Corporate High Yield Fund, Inc. (the "Fund") is a
professionally managed, diversified, open-end investment that seeks
current income and, as a secondary objective, capital appreciation,
by investing in a diversified portfolio of lower-rated corporate
fixed-income securities such as corporate bonds and notes, convertible
securities and preferred stocks. Pursuant to the Merrill Lynch Select
Pricing<service-mark> System, the Fund offers four classes of shares
of Common Stock, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select
Pricing<service-mark> System permits an investor to choose the method
of purchasing shares that the investor believes is most beneficial
given the amount of the purchase, the length of time the investor expects
to hold the shares and other relevant circumstances.
This Statement of Additional Information should be read in conjunction
with the Prospectus of the Fund (the "Prospectus") dated March , 1998, which
has been filed with the Securities and Exchange Commission (the "Commission")
and is available upon oral or written request without charge. Copies of the
Prospectus can be obtained by calling or by writing the Fund at the above
telephone number or address. This Statement of Additional Information has
been incorporated by reference into the Prospectus.
--------------
Fund Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor, Inc. -- Distributor
<PAGE>
[RED INK:] Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These securities may not
be sold nor may any offers to buy be accepted prior to the time the
registration statement becomes effective. This Statement of Additional
Information of the Fund does not constitute a prospectus.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to obtain current
income. As a secondary objective, the Fund seeks capital appreciation
when consistent with its primary objective. The Fund seeks to achieve its
objectives by investing in a diversified portfolio of fixed-income
securities, such as corporate bonds and notes, convertible securities,
preferred stocks and government obligations.
Reference is made to "Investment Objectives and Policies" on page 8 of
the Prospectus for a discussion of the investment objectives and policies of
the Fund.
Transactions in Futures and Options Thereon
As described in the Prospectus, the Fund may purchase and sell interest
rate, bond and bond index futures contracts ("futures contracts") for the
purpose of hedging its portfolio of fixed-income securities against the
adverse effects of anticipated movements in interest rates. The Fund currently
trade futures contracts on U.S. Treasury bills, notes and bonds and GNMA
mortgage-backed certificates. The Fund may also purchase and sell
exchange-traded call and put options on such futures contracts. Set forth
below is information concerning options and futures contracts. Reference
is made to the Appendix for a more complete description of options and
futures transactions.
Call Options on Futures Contracts. As set forth in the Appendix, a call
option on a futures contract provides the purchaser with the right, but not
the obligation, to enter into a "long" position in the underlying futures
contract at any time up to the expiration of the option. The purchase of an
option on a futures contract presents more limited risk than the trading of
the underlying futures contract, although, depending on the price of the
option compared to either the futures contract upon which it is based, or the
underlying debt securities, exercise of the option may or may not be less
risky than ownership of the futures contract or underlying debt securities.
Like the purchase of a futures contract, the Fund will purchase a call option
on a futures contract to hedge against a market advance resulting from
declining interest rates when the Fund is not fully invested.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of fixed-income securities of the Fund,
if the futures price at expiration is below the exercise price of the option.
In such event, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in
the Fund's fixed-income investments. Conversely, if the futures price is
above the exercise price at any point prior to expiration, the option may be
exercised and the Fund would be required to enter into the underlying futures
contract at an unfavorable price.
Put Options on Futures Contracts. As set forth in the Appendix, a put
option on a futures contract provides the purchaser with the right, but not
the obligation, to enter into a "short" position in the futures contract at
any time up to the expiration of the option. The Fund will purchase a put
option on a futures contract to hedge its securities against the risk of a
decline in market value as a result of rising interest rates.
The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of fixed-income securities that the
Fund intends to purchase, if the futures price at expiration is higher than
the exercise price. In such event, the Fund will retain the full amount of
the option premium, which provides a partial hedge against any increase in the
price of fixed-income securities that the Fund intends to purchase.
Conversely, if the futures price is below the exercise price at any point
prior to expiration, the option may be exercised and the Fund would be
required to enter into the underlying futures contract at an unfavorable
price.
Options on Debt Securities
As described in the Prospectus, the Fund may purchase put options on debt
securities held by the Fund in connection with its hedging strategies and may
purchase call options on debt securities under the limited circumstances
2
<PAGE>
described below. The Fund is authorized to write (i.e., sell) covered call
options and covered put options on debt securities to hedge its portfolio and
increase its return. Such instruments, therefore, unlike futures contracts
and options thereon, will not be traded solely for hedging purposes. Such
options generally have a maximum exercise period of nine months.
The Fund may write call options that give the holder the right to buy the
underlying security covered by the option from the Fund at the stated exercise
price. The Fund also may write put options that give the holder the right to
sell the underlying security to the Fund at the stated exercise price. The
Fund will write only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the options and, in the case of put options, that the
Fund will, through its Custodian, have deposited and maintained short-term
U.S. Treasury obligations with a securities depository with a value equal to
or greater than the exercise price of the underlying securities. The writer
of a covered call option has no control over when he may be required to sell
his securities since he may be assigned an exercise notice at any time prior
to the termination of his obligation as a writer. If an option expires
unexercised, the writer realizes a gain in the amount of the premium. Such a
gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. In the former instance, the
Fund increases its return by retaining the premium without being required to
purchase or sell the underlying security. In the latter case, the Fund
increases its return by liquidating the option position at a profit. The
amount of the premium will reflect, among other factors, the current market
price of the underlying security, the relationship of the exercise price to
the market price, the time period until the expiration of the option and
interest rates. 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 so long as the Fund's obligation as a writer
continues. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of
that security at the time of exercise for as long as the option is
outstanding. In addition, in closing out an option position, the Fund may
incur a loss. Thus, in some periods the Fund will receive less total return
and in other periods greater total return from its option positions than it
otherwise would have received from the underlying securities. To the extent
that such transactions are engaged in for hedging purposes, any gain (or loss)
thereon may offset, in whole or in part, gains (or losses) on securities held
in the Fund or increases in the value of securities the Fund intends to
acquire. The Fund will attempt to achieve, through the receipt of premiums on
covered options, a more consistent average total return than it would
otherwise realize from holding the underlying securities alone. To facilitate
closing transactions, as described below, the Fund will ordinarily only write
options for which a liquid secondary market appears to exist.
The Fund may engage in closing transactions in order to terminate
outstanding options that it has written. To effect a closing transaction, the
Fund purchases, prior to the exercise of an outstanding option that it has
written, an option of the same series as that on which it desires to terminate
its obligation. Profit or loss from a closing purchase transaction will
depend on whether the cost of the transaction is more or less than the premium
received on the sale of the option plus the related transaction costs.
The Fund will purchase a call option only where the market price of the
underlying security declines substantially following the writing of a call
option, and the Fund either re-hedges the security by writing a second call
option at a lower exercise price or disposes of the security. In such event,
the Fund would usually enter into a closing transaction in connection with the
first option it wrote. However, if the first option has been held less than
three months, the Fund may desire not to enter into a closing transaction in
order to comply with certain provisions of the Internal Revenue Code of 1986,
as amended (the "Code"). In such circumstances, the Fund may purchase a call
option in an opening transaction with the same exercise price and expiration
date as the option it sold.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation"), which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York
Stock Exchange. Options referred to herein and in the Fund's Prospectus may
also be options traded on foreign securities exchanges such as the London
3
<PAGE>
Stock Exchange and the Amsterdam Stock Exchange. An option position may be
closed out only on an exchange that provides a secondary market for an option
of the same series. If a secondary market does not exist, it might not be
possible to effect closing transactions in particular options, with the
result, in the case of a covered call option, that the Fund will not be able
to sell the underlying security until the option expires or until it delivers
the underlying security upon exercise. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Clearing Corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
Risk Factors in Transactions in Futures and Options Thereon
The trading of futures contracts and options thereon involves the risk of
imperfect correlation between movements in the price of the futures contracts
or option and the price of the security being hedged. The hedge will not be
fully effective where there is imperfect correlation between the movements in
the two financial instruments. For example, if the price of the option or
futures contract moves more than the price of the hedged security, the Fund
would experience either a loss or gain on the option or future that is not
completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell options
or futures contracts in a greater dollar amount than the hedged securities if
the volatility of the hedged securities is historically greater than the
volatility of the futures contracts. Conversely, the Fund may purchase or
sell fewer futures contracts if the volatility of the price of the hedged
securities is historically less than that of the futures contracts, although
such transactions will in any event be entered into solely for hedging
purposes.
The Fund may also purchase futures contracts or options thereon to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in fixed-income securities. In such instances, it is
possible that the market may instead decline. If the Fund does not then
invest in such securities because of concern as to possible further market
decline or for other reasons, the Fund may realize a loss on the futures or
option contract that is not offset by a reduction in the price of securities
purchased.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of financial futures contracts solely for hedging purposes,
however, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset in whole or in part by increases in the
value of securities held by the Fund or decreases in the price of securities
the Fund intends to acquire.
The anticipated offsetting movements between the price of the futures or
option contracts and the hedged security may be distorted due to differences
in the nature of the markets, such as differences in initial and variation
margin requirements, the liquidity of such markets and the participation of
speculators in such markets.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In order to profit from an option purchased, however, it may be
necessary to exercise the option and to liquidate the underlying futures
contract, subject to the risks of the availability of a liquid offset market
described herein. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased. The writer of an option on a futures contract is subject to
the risks of commodity futures trading, including the requirement of variation
margin payments, as well as the additional risk that movements in the price of
the option may not correlate with movements in the price of the underlying
security or futures contract.
4
<PAGE>
Trading limits may also be imposed on the maximum number of contracts
that any person may trade on a particular trading day. A contract market may
order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Investment Adviser
does not believe that trading limits will have any adverse impact on the
portfolio strategies for hedging the Fund's investments.
The trading of futures contracts and options thereon also is subject to
certain market risks, such as trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of a brokerage
firm or clearing corporation or other disruptions of normal trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
The successful use of transactions in futures contracts and options
thereon also depends on the ability of the management of the Fund correctly to
forecast the direction and extent of interest rate movements within a given
time frame. To the extent interest rates remain stable during the period in
which a futures contract or option is held by the Fund or such rates 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.
The Commission has issued an order exempting the Fund from certain
provisions of the Investment Company Act of 1940 (the "Investment Company
Act") in connection with its transactions in interest rate futures contracts
and related options. The application for this exemptive order included a
number of representations to the Commission regarding the manner in which such
trading will be conducted.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, including a majority of the shares of the Fund affected
(which for this purpose and under the Investment Company 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).
Under the fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except further
that the Fund may lend its portfolio securities, provided that the lending of
portfolio securities may be made only in accordance with applicable law and
the guidelines set forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
5
<PAGE>
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33-⅓% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up to
an additional 5% of its total assets for temporary purposes, (iii) the Fund
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to time,
in connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except
to the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, which may be changed
by the Board of Directors without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on Section
12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment Company
Act at any time the Fund's shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of acquisition
more than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Board of Directors of the Fund has otherwise determined to
be liquid pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act (a "Rule 144A Security") and determined to
be liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (7) above, the
Fund will not borrow amounts in excess of 5% of its total assets, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. In
addition, the Fund will not purchase securities while borrowings are
outstanding.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch
except pursuant to an exemptive order or otherwise in compliance with the
provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions are (i) purchases
from or sales to Merrill Lynch of securities in transactions in which Merrill
Lynch acts as principal, and (ii) purchases of securities from underwriting
syndicates of which Merrill Lynch is a member.
Lending of Portfolio Securities. Subject to investment restriction (8)
above, the Fund from time to time may lend securities from its portfolio to
brokers, dealers and financial institutions and receive as collateral cash or
United States Treasury securities which at all times while the loan is
outstanding will be maintained in amounts equal to at least 100% of the
current market value of the loaned securities. Any cash collateral will be
invested in short-term securities, which will increase the current income of
the Fund. Such loans, which will not have terms longer than 30 days, will be
terminable at any time. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
6
<PAGE>
rights, subscription rights and rights of dividends, interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with
the Fund for services in arranging such loans. In the event of a default by
the borrower, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral.
Forward Commitments. U.S. Government securities and corporate debt
obligations may be purchased on a forward commitment basis at fixed purchase
terms with periods of up to 45 days between the commitment and settlement
dates. The purchase will be recorded on the date the Fund enters into the
commitment and the value of the security will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the security on the
delivery date may be more or less than its purchase price. A separate account
of the Fund will be established with the Custodian consisting of cash or
liquid high grade debt obligations having a market value at all times until
the delivery date at least equal to the amount of the forward commitment.
Although the Fund will generally enter into forward commitments with the
intention of acquiring securities for its portfolio, the Fund may dispose of a
commitment prior to settlement if the Investment Adviser deems it appropriate
to do so. There can, of course, be no assurance that the judgments upon which
these techniques are based will be accurate or that such techniques when
applied will be effective. The Fund will enter into forward commitment
arrangements only with respect to securities in which it may otherwise invest
as described under "Investment Objectives and Policies."
Repurchase Agreements. As described in the Prospectus, the Fund may
invest in securities pursuant to repurchase agreements. Under such
agreements, the seller 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. Such agreements
usually cover short periods, such as under one week. Repurchase agreements
may be construed to be collateralized loans by the purchaser to the seller
secured by the securities transferred to the purchaser. The Fund will require
the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. Instead of the contractual fixed rate of
return, the rate of return to the Fund will be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller
for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. From time to
time, the Fund also may invest in securities pursuant to purchase and sale
contracts. While the substance of purchase and sale contracts is similar to
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community. As a matter of operating policy, the
Fund will not enter into repurchase agreements or purchase and sale contracts
with greater than seven days to maturity if, at the time of such investment,
more than 15% of its total assets would be so invested.
Foreign Securities. Investments in foreign securities, particularly
those of nongovernmental issuers, involve considerations that are not
ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information prepared
under foreign accounting standards, less liquidity and more volatility in
foreign securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. If it should become necessary, the Fund could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs in foreign securities may be higher. The
Investment Adviser will consider these and other factors before investing in
foreign securities, and will not make such investments unless, in its opinion,
such investments will meet the Fund's standards and objectives. The Fund will
not concentrate its investments in any particular foreign country. The Fund
may purchase securities issued in dollar or foreign currency denominations.
In the case of any such investment in a security denominated in a foreign
currency, the Fund would be subject to the risk of changes in currency
exchange rates.
7
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The Directors and officers of the Fund, their ages, principal occupations
for at least the last five years and the public companies for which they serve
as directors are set forth below. Unless otherwise stated, the address of
each director and officer is P.O. Box 9011, Princeton, New Jersey 08540-9011.
ARTHUR ZEIKEL (65)--President and [Director](1)(2)--Chairman of Fund Asset
Management, L.P. ("FAM" or the "Investment Adviser"), and Merrill Lynch Asset
Management, L.P. ("MLAM") (which terms as used herein include their corporate
predecessors) since 1997; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997, Director since 1993, and President from 1993 to 1997; Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
(OTHER DIRECTORS TO BE PROVIDED BY AMENDMENT)
TERRY K. GLENN (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Merrill Lynch Funds Distributor, Inc. (the "Distributor ") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
JOSEPH T. MONAGLE, JR. (49)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
the Global Fixed Income Division of the Investment Adviser and MLAM since
1997; Senior Vice President of Princeton Services since 1993.
DONALD C. BURKE (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Director of Taxation of MLAM since 1990; and Vice President of
MLAM from 1990 to 1997.
VINCENT T. LATHBURY, III (57)--Senior Vice President and Portfolio
Manager (1)(2)--First Vice President of MLAM since 1997; Vice President of
MLAM from 1982 to 1997; Portfolio Manager of the Investment Adviser and MLAM
since 1982.
ALDONA SCHWARTZ (49)--Vice President and Portfolio Manager (1)(2)--
Vice President of MLAM since 1990.
GERALD M. RICHARD (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
PHILIP M. MANDEL (50)--Secretary (1)(2)--First Vice President of MLAM
since 1997; Assistant General Counsel of Merrill Lynch from 1989 to 1997.
- ----------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) The officers of the Fund are officers of certain other investment
companies for which the Investment Adviser or MLAM acts as investment
adviser (see "Investment Advisory Arrangements").
As of March __, 1998, the Directors and officers of the Fund as a group
(___ persons) owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
Pursuant to the terms of the Investment Advisory Agreement, the
Investment Adviser pays all compensation of officers and employees of the Fund
as well as the fees of all Directors of the Fund who are affiliated persons of
the Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-affiliated Director") an annual fee of
$_______ plus a fee of $______ per meeting attended, together with such
8
<PAGE>
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit and Nominating Committee (the
"Committee"), which consists of all of the non-affiliated Directors, with a
fee of $_____ per year. The Chairman of the Audit Committee is paid an
additional annual fee of $______.
The following table sets forth the estimated compensation to be paid by
the Fund to the non-affiliated Directors projected through the end of the
Fund's first full fiscal year, and the aggregate compensation paid by all
registered investment companies advised by MLAM or its affiliate, FAM
("MLAM/FAM-Advised Funds"), to the non-affiliated Directors for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
Aggregate
Compensation
Pension or from Fund and
Retirement Benefits MLAM/FAM-Advised
Name of Compensation Accrued as Part Funds Paid to
Director from Fund of Fund Expenses Directors*
- --------------------------- ------------------ ----------------------- ------------------
<S> <C> <C> <C>
_____________.............. $_________________ None $________________
_____________.............. $_________________ None $________________
_____________.............. $_________________ None $________________
_____________.............. $_________________ None $________________
_____________.............. $_________________ None $________________
- --------------------
*The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
____________ (_____ registered investment companies consisting of ____
portfolios); ____________ (_____ registered investment companies consisting
of _____ portfolios); ____________ (_____ registered investment companies
consisting of _____ portfolios); ____________ (_____ registered investment
companies consisting of ______ portfolios); and Mr. ____________ (_____
registered investment companies consisting of _____ portfolios).
</TABLE>
Investment Advisory Arrangements
The Investment Adviser, acts as the investment adviser for the Fund and
provides the Fund with management services. The Investment Adviser (the
general partner of which is Princeton Services Inc., a wholly owned subsidiary
of ML & Co.) is itself a wholly owned affiliate of ML & Co. and has its
principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey
08536. ML & Co., Inc. has its principal place of business at 250 Vesey
Street, New York, New York 10281.
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
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies. Similarly, the following entities may be considered "controlling
persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s parent), a
subsidiary of ML International Holdings, a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM, U.K., an indirect, wholly owned
subsidiary of ML & Co. and an affiliate of the Investment Adviser, pursuant to
which the Investment Adviser pays MLAM U.K.a fee for providing investment
advisory services to the Investment Adviser with respect to the Fund in an
amount to be determined from time to time by the Investment Adviser and MLAM
U.K. but in no event in excess of the amount that the Investment Adviser
actually receives for providing services to the Fund pursuant to the
Investment Advisory Agreement.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Fund and has responsibility for
making decisions to buy, sell or hold any particular security. The Investment
Adviser provides the portfolio manager for the Fund, who considers information
from various sources, makes the necessary investment decisions and effects
9
<PAGE>
transactions accordingly. The Investment Adviser is also obligated to perform
certain administrative and management services for the Fund and is obligated
to provide all the office space, facilities, equipment and personnel necessary
to perform its duties under the Agreement.
Securities held by the Fund may also be held by other funds for which the
Investment Adviser or MLAM acts as an adviser or by investment advisory
clients of MLAM. Because of different investment objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Fund or for other funds for which the Investment Adviser or MLAM acts
as investment adviser or for their advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Investment Adviser or MLAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
Advisory Fee. As compensation for its services to the Fund, the
Investment Adviser receives at the end of each month a fee at an annual rate
equal to 0.60% of the Fund's average daily net assets.
Payment of Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Fund connected with economic research, investment research, trading and
investment management of the Fund, as well as the fees of all directors of the
Fund who are affiliated persons of ML & Co. or any of its subsidiaries. The
Fund pays all other expenses incurred in its operation and a portion of its
general administrative expenses. Expenses that will be borne directly by the
Fund include redemption expenses, expenses of portfolio transactions,
shareholder servicing costs, expenses of registering the shares under federal
and state securities laws, pricing costs (including the daily calculation of
net asset value), interest, certain taxes, charges of the Custodian and
Transfer Agent and other expenses attributable to the Fund. Expenses that
will be allocated on the basis of size of the Fund include directors' fees,
legal expenses, state franchise taxes, auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and
statements of additional information (except to the extent paid by the
Distributor), Commission fees, accounting costs and other expenses properly
payable by the Fund. Accounting services are provided for the Fund by the
Investment Adviser and the Fund reimburses the Investment Adviser for its
costs in connection with such services. Depending upon the nature of the
lawsuit, litigation costs may be directly applicable to the Fund. The Board
of Directors of the Fund has determined that this is an appropriate method of
allocation of expenses. As required by the Distribution Agreement, the
Distributor will pay certain of the expenses of the Fund incurred in
connection with the offering of its shares, including the expenses of printing
the prospectuses and statements of additional information used in connection
with the continuous offering of shares by the Fund. See "Distributor."
Duration and Termination
The Investment Advisory Agreement was initially approved by the Board of
Directors, including a majority of the disinterested directors, and the vote
of the sole shareholder of the Fund, for the period , 1998 to
, 2000, on , 1998. Unless earlier terminated as described below, the
agreement will remain in effect until March __, 2000 and thereafter will
continue 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 Investment Company Act) of any such
party. The agreement is not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party or by the vote of the
shareholders of the Fund.
Transfer Agency Services Arrangements
The Transfer Agent, which is a subsidiary of ML & Co., acts as the
Trust's transfer agent pursuant to a Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
10
<PAGE>
opening and maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Transfer Agent receives an annual fee of up to $11.00
per Class A or Class D account and up to $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer
Agency Agreement. Additionally, a $.20 monthly closed account charge will be
assessed on all accounts that close during the calendar year. Application of
this fee will commence the month following the month the account is closed.
At the end of the calendar year, no further fees will be due. For purposes of
the Transfer Agency Agreement, the term "account" includes a shareholder
account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class
on a recordkeeping system, provided the recordkeeping system is maintained by
a subsidiary of ML & Co.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 35 of the Prospectus. The net asset value of the shares of the
Fund is determined once daily by the Investment Adviser immediately after the
declaration of dividends as of 15 minutes after the close of business on the
New York Stock Exchange ("NYSE") (generally 4:00 p.m., New York City time) on
days that the NYSE is open for business and on any other day on which there is
sufficient trading in the Fund's portfolio securities that net asset value
might be materially affected but only if on any such day the Fund is required
to sell or redeem shares. The NYSE is not open for business on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share of the Fund is computed by
dividing the sum of the value of the securities held by the Fund plus any cash
or other assets minus all liabilities by the total number of shares of the
Fund outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory fee payable to the Investment Adviser and
any account maintenance and/or distribution fees payable to the Distributor,
are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distribution which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are
being valued, or, lacking any sales, at the mean between closing bid and asked
prices. Securities traded in the over-the-counter ("OTC") market are valued
at the mean of the most recent bid and ask prices as obtained from one or more
dealers that make markets in the securities. Portfolio securities that are
traded both in the OTC market and on a stock exchange are valued according to
the broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the OTC market. Options on debt
securities, which are traded on exchanges, are valued at the last asked price
for options written and the last bid price for options purchased. Interest
rate futures contracts and options thereon, which are traded on exchanges, are
valued at their closing price at the close of such exchanges. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of
Merrill Lynch to provide securities prices for the Fund. 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 use a matrix system for valuations. These
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Directors.
11
<PAGE>
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objectives and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the Investment Company Act, persons affiliated with the Fund are
prohibited from dealing with the Fund as a principal in the purchase and sale
of securities unless such trading is permitted by an exemptive order issued by
the Commission. Since over-the-counter ("OTC") transactions are usually
principal transactions, affiliated persons of the Fund including Merrill
Lynch, may not serve as dealer in connection with transactions with the Fund.
Affiliated persons of the Fund may serve as broker for the Fund in
over-the-counter transactions conducted on an agency basis. Certain court
decisions have raised questions as to the extent to which investment companies
should seek exemptions under the Investment Company Act in order to seek to
recapture underwriting and dealer spreads from affiliated entities. The
Directors have considered all factors deemed relevant, and have made a
determination not to seek such recapture at this time. The Board will
reconsider this matter from time to time.
The Fund may not purchase securities, during the existence of any
underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission Staff.
Rule 10f-3 under the Investment Company Act sets forth conditions under which
the Fund may purchase corporate bonds from an underwriting syndicate of which
Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of corporate bonds purchased by the
Fund, the amount of corporate bonds that may be purchased in any one issue and
the assets of the Fund that may be invested in a particular issue.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. Where possible, the Fund will deal directly with the
dealers who make a market in the securities involved unless better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes.
The cost of portfolio securities transactions of the Fund will consist
primarily of dealer or underwriter spreads.
While the Investment Adviser seeks to obtain the best price and execution
in effecting transactions in the portfolio securities of the Fund, brokers who
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of
a company, industry, or economic sector. If, in the judgment of the
Investment Adviser, the Fund will be benefited by such supplemental research
services, the Investment Adviser is authorized to pay commissions to brokers
furnishing such services that are in excess of commissions that another broker
may charge for the same transaction. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under its Investment Advisory Agreement. The expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. In some cases, the Investment
Adviser may use such supplemental research in providing investment advice to
its other investment advisory accounts.
Portfolio Turnover
The rate of portfolio turnover is not a limiting factor when management
deems it appropriate to purchase or sell securities. The Fund expects that
its annual turnover rate should not generally exceed 100%; however, during
periods when interest rates fluctuate significantly, as they have during the
past few years, the Fund's portfolio turnover rate may be substantially
higher. In any particular year, however, market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. High
portfolio turnover involves correspondingly greater transaction costs in the
form of commissions and dealer spreads, which are borne directly by the Fund.
The calculation of the rate of portfolio turnover does not include the
purchase or sale of money market securities. High portfolio turnover can be
expected to result in the recognition of capital gains and losses. To the
extent the Fund distributes short-term capital gains, such distributions will
be taxable as dividends. The Fund's ability to enter into certain short-term
transactions will be limited by the requirement that gains on certain
securities held by the Fund for less than three months may not exceed 30% of
its annual gross income for federal income tax purposes.
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The Fund intends to continue to comply with the various requirements of
the Internal Revenue Code so as to qualify as a "regulated investment company"
thereunder. See "Dividends, Distributions and Taxes." Among such requirements
is a limitation to less than 30% on the amount of its gross income that the
Fund may derive from gain on the sale or other disposition of securities held
for less than three months. Accordingly, the Fund's ability to effect certain
portfolio transactions may be limited.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing<service-mark> System: Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives and Class B and Class C shares
are sold to investors choosing the deferred sales charge alternative. Each
Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the same portfolio of investments of the Fund and has
the same rights except that Class B, Class C and Class D shares bear the
expenses of the Class B, Class C and Class D exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to that the account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange
Privilege."
Investors should determine whether under their particular circumstances
it is more advantageous to incur an initial sales charge, as discussed below,
or to have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to ongoing account maintenance and
distribution fees and a possible CDSC if shares are redeemed during the
applicable CDSC period.
The Merrill Lynch Select Pricing<service-mark> System is used by
more than 50 registered investment companies advised by MLAM or its
affiliate, the Investment Adviser. Funds advised by MLAM or the
Investment Adviser that use the Merrill Lynch Select Pricing
<service-mark> System, are referred to herein as "MLAM-advised
mutual funds."
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with Merrill Lynch Funds Distributor, Inc. in
connection with the continuous offering of each of its classes of shares. The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Reduced Initial Sales Charge Alternatives--Class A and Class D Shares
Reduced Sales Charges. As described generally in the Prospectus, a
reduced sales charge is available for any purchase of Class A or Class D
shares of the Fund in excess of $25,000. The term "purchase," as used in the
Prospectus and this Statement of Additional Information in connection with an
investment in Class A and Class D shares of the Fund, refers to a single
purchase by an individual, or to concurrent purchases, which in the aggregate
are at least equal to the prescribed amounts, by an individual, his spouse and
their children under the age of 21 years purchasing shares for his or their
own account and to single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account (including a
pension, profit-sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Code) although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser. The term "purchase" also includes purchases by employee benefit
plans not qualified under Section 401 of the Code, including purchases by
employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a
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<PAGE>
company or non-qualified employee benefit plan will qualify for the quantity
discounts discussed above only if the Fund and the Distributor are able to
realize economies of scale in sales effort and sales related expense by means
of the company, employer or plan making the Fund's Prospectus available to
individual investors or employees and forwarding investments by such persons
to the Fund and by any such employer or plan bearing the expense of any
payroll deduction plan.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A or Class D shares of the Fund subject to initial sales charge at the
offering price applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then-current net
asset value or cost, whichever is higher, of the purchaser's combined holdings
of all classes of shares of the Funds and of any other MLAM-advised mutual
fund. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated
at any time. Shares held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
through any dealer aggregating $25,000 or more of Class A or Class D shares of
the Fund or any other MLAM-advised mutual funds made within a 13-month period
starting with the first purchase pursuant to a Letter of Intention in the form
provided by the Distributor. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not a binding obligation to purchase any amount of
Class A or Class D shares, but its execution will result in the purchaser's
paying a lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent Letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A and Class D shares of the Fund or of other MLAM-advised
mutual funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter. The reduced
sales charge applicable to the amount covered by the Letter of Intention will
be applied only to new purchases. If the total amount of shares purchased
does not equal the amount stated in the Letter of Intention, the investor will
be notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on Class A or Class D shares of the Fund
purchased at the reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class A or Class D shares equal to
five percent of the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser). The first
purchase under the Letter of Intention must be five percent of the dollar
amount of such Letter. If, during the term of such Letter, a purchase brings
the total amount invested to an amount equal to or in excess of the amount
indicated in the Letter, the purchaser will be entitled on that purchase and
subsequent purchases to the reduced percentage sales charge that would be
applicable to a single purchase equal to the total dollar value of the Class A
or Class D shares of the Fund then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention in the
Fund.
TMA<service-mark> Managed Trusts. Class A shares are offered to
TMA<service-mark> Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services at net asset value.
Merrill Lynch Blueprint<service-mark> Program. Class D shares of
the Fund are offered to participants in the Merrill Lynch Blueprint
<service-mark> Program ("Blueprint"). In addition, participants
in Blueprint who own Class A shares of the Fund may purchase additional
Class A shares of the Fund through Blueprint. Blueprint is directed
to small investors, Group IRAs and participants in certain affinity
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<PAGE>
groups such as benefit plans, credit unions and trade associations.
Investors placing orders to purchase Class A or Class D shares of
the Fund through Blueprint will acquire such Class A or Class D shares
at net asset value plus a sales charge calculated in accordance with
the Blueprint sales charge schedule (i.e., up to $5,000 at 3.5%. Purchases
greater than $5,000 will be at the standard sales charge rate disclosed in the
Prospectus). In addition, Class D shares of the Fund are being offered at net
asset value plus a sales charge of 0.50% for participants in corporate or
group IRA programs placing orders to purchase their shares through Blueprint.
However, services (including the exchange privilege) available to Class A and
Class D shareholders through Blueprint may differ from those available to
other investors in Class A or Class D shares. Class A and Class D shares are
offered at net asset value to participants in the Merrill Lynch
Blueprint<service-mark> Program through the Merrill Lynch Directed IRA Rollover
Program ("IRA Rollover Program") available from Merrill Lynch Business
Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program
is available to custodian rollover assets from Employer Sponsored Retirement
and Savings Plans (see definition below) whose Trustee and/or Plan Sponsor
offers the Merrill Lynch Directed IRA Rollover Program. Orders for purchases
and redemptions of Class A or Class D shares of the Fund may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100 with a $50 minimum for subsequent
purchases through Blueprint. Minimum initial or subsequent purchase
requirements are waived in connection with automatic investment plans for
Blueprint participants. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint
<service-mark> Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Purchase Privileges of Certain Persons. Directors of the Fund, directors
and trustees of other MLAM-advised mutual funds, ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.), and their directors or employees, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
Class A shares of the Fund and other MLAM-advised mutual funds are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. (formerly known as the Merrill Lynch Prime Fund, Inc.) who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of
the Fund. In order to exercise this investment option, Merrill Lynch Senior
Floating Rate Fund, Inc. shareholders must sell their Merrill Lynch Senior
Floating Rate Fund Inc. shares to the Merrill Lynch Senior Floating Rate
Fund, Inc. in connection with a tender offer conducted by the Merrill Lynch
Senior Floating Rate Fund, Inc. and reinvest the proceeds immediately in
the Fund. This investment option is available only with respect to the
proceeds of Merrill Lynch Senior Floating Rate Fund, Inc. shares as to
which no Early Withdrawal Charge (as defined in the Merrill Lynch Senior
Floating Rate Fund, Inc. prospectus) is applicable. Purchase orders from
Merrill Lynch Senior Floating Rate Fund, Inc. shareholders wishing to
exercise this investment option will be accepted only on the day that
the related Merrill Lynch Senior Floating Rate Fund, Inc. tender
offer terminates and will be effected at the net asset value of the
Fund at such day.
Employee Access<service-mark> Accounts. Provided applicable threshold
requirements are met, either Class A or Class D shares are offered at net
asset value to Employee Access<service-mark> Accounts available through
authorized employers. The initial minimum for such accounts is $500, except
that the initial minimum for shares purchased for such accounts pursuant to
the Automatic Investment Program is $50.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLAM who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing<service-mark> System commenced
operations) and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares of the
Fund. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares"). In order to exercise this investment
option, closed-end fund shareholders must (i) sell their closed-end fund
shares through Merrill Lynch and reinvest the proceeds immediately in the
Eligible Class A or Class D Shares of the Fund, (ii) either have acquired the
shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering, (iii)
have maintained their closed-end fund shares continuously in a Merrill Lynch
account, and (iv) purchase a minimum of $250 worth of Fund shares. Similarly,
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Class D shares of the Fund are offered at a net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") and
Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Fund") who
wish to purchase shares of the Fund with the net proceeds from a sale of
certain of their shares of common stock of Municipal Strategy Fund and High
Income Fund pursuant to a tender offer by Municipal Strategy Fund or High
Income Fund. This investment option is available only with respect to the
proceeds of Municipal Strategy Fund shares as to which no CDSC (as defined in
the Municipal Strategy Fund prospectus) is applicable, or with respect to the
proceeds of High Income Fund shares as to which no Early Withdrawal Charge (as
defined in the High Income Fund prospectus) is applicable.
Class D shares of the Fund are offered at the net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that he or she
will purchase Class D shares of the Fund with proceeds from a redemption of
such shares of other mutual funds and that such shares have been outstanding
for a period of no less than six months. Second, such purchase of Class D
shares must be made within 60 days after the redemption and the proceeds from
the redemption must have been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
it will purchase Class D shares with proceeds from a redemption of shares of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, the investor also must establish that such redemption had been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price
of Class D shares of the Fund may be reduced to the net asset value per Class
D share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a tax-free
transaction may in appropriate cases be adjusted to reduce possible adverse
tax consequences to the Fund that might result from an acquisition of assets
having net unrealized appreciation that is disproportionately higher at the
time of acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other acquisitions
of portfolio securities that (i) meet the investment objectives and policies
of the Fund; (ii) are acquired for investment and not for resale (subject to
the understanding that the disposition of the Fund's portfolio securities
shall at all times remain within its control); and (iii) are liquid
securities, the value of which is readily ascertainable, which are not
restricted as to transfer either by law or liquidity of market (except that
the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other
plans may purchase Class B shares with a waiver of the CDSC upon redemption,
based on similar criteria. Such Class B shares will convert into Class D
shares approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements
is available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
Distribution Plan
Reference is made to "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Distribution Plan" in the Prospectus
for certain information with respect to the separate distribution plans of the
Fund for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor shall
provide and the directors shall review quarterly reports of the disbursement
of the account maintenance fees and/or distribution fees paid to the
Distributor. In their consideration of each Distribution Plan, the directors
must consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and its related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan
will benefit the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders of
the Fund, and all material amendments are required to be approved by the vote
of directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further requires that
the Fund preserve copies of each Distribution Plan and any report made
pursuant to such plan for a period of not less than six years from the date of
such Distribution Plan or such report, the first two years in an easily
accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges, such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fees.
The maximum sales charge rule is applied separately by each class of the
Fund. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to the
sum of (1) 6.25% of eligible gross sales of Class B shares and Class C shares
of the Fund, computed separately (defined to exclude shares issued pursuant to
dividend reinvestment and exchanges) and (2) interest on the unpaid balance
for the respective class and portfolio computed separately at the prime rate
plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC). In
connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with Class B shares in
the Fund is 6.75% of eligible gross sales. The Distributor retains the right
to stop waiving the interest charge at any time. To the extent payments would
17
<PAGE>
exceed the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fees. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances, payment in excess of the
amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the
NYSE is restricted as determined by the Commission or the NYSE is closed
(other than customary weekend and holiday closings), for any period during
which an emergency exists as defined by the Commission as a result of which
disposal of portfolio securities or determination of the net asset value of
the Fund is not reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of shareholders of the
Fund. Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
The value of shares at the time of redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held
by the Fund at such time.
Repurchase
The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE on the day received and is received by the Fund from such dealer not
later than 30 minutes after the close of business on the NYSE (generally 4:00
p.m., New York City time), on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE (generally 4:00 p.m., New York City
time), in order to obtain that day's closing price.
For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted in the Prospectus.
Reinstatement Privilege
Shareholders who have redeemed Class A or Class D shares of the Fund,
including redemption through repurchase by the Fund, have a one-time privilege
to reinstate their accounts by purchasing Class A or Class D shares, as the
case may be, of the Fund at the net asset value of such shares without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised as follows. A notice to exercise this privilege along with a check
for the amount to be reinstated must be received by the Transfer Agent within
30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset
value per share next determined after the notice of reinstatement is received
and cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the shareholder only
the first time such shareholder makes a redemption. A redemption resulting in
a gain is a taxable event whether or not the reinstatement privilege is
exercised. A redemption resulting in a loss will not be a taxable event to
the extent the reinstatement privilege is exercised, and an adjustment will be
made to the shareholder's tax basis in shares acquired pursuant to the
reinstatement to reflect the disallowed loss.
If a shareholder disposes of shares within 90 days of their acquisition
and subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will
be reduced to the extent the load charge paid to the Fund upon the
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<PAGE>
shareholder's initial purchase reduces any load charge such shareholder would
have been required to pay on the subsequent acquisition in absence of the
reinstatement privilege. Instead, such load charge will be treated as an
amount paid for the subsequently acquired shares and will be included in the
shareholder's tax basis for such shares.
Deferred Sales Charge--Class B and Class C Shares
As discussed in the Prospectus under "Purchase of Shares--Alternative
Sale Arrangements--Deferred Sales Charge Alternative--Class B and Class C
Shares," while Class B shares of the Fund redeemed within four years of
purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
certain instances including in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawals are:
(a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59-1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of
an excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Internal Revenue Code) of
a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within
one year of the death or initial determination of disability.
Merrill Lynch Blueprint<service-mark> Program. Class B shares of the Fund
are offered to certain participants in the Merrill Lynch Blueprint<service-mark>
Program ("Blueprint").Blueprint is directed to small investors and participants
in certain affinity groups such as trade associations and credit unions. Class
B shares are offered through Blueprint only to members of certain affinity
groups. The contingent deferred sales charge is waived for shareholders who
are members of certain affinity groups at the time orders to purchase Class B
shares are placed through Blueprint. However, services (including the
exchange privilege) available to Class B shareholders through Blueprint may
differ from those available to other Class B investors. Orders for purchases
and redemptions of Class B shares may be grouped for execution purposes which,
in some circumstances, may involve the execution of such orders two business
days following the day such orders are placed. The minimum initial purchase
price is $100 with a $50 minimum for subsequent purchases through Blueprint.
Minimum investment amounts are waived in connection with automatic investment
plans for Blueprint participants. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint<service-mark> Program, P.O. Box 30441, New Brunswick, New Jersey
08989-0441.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Reference is made to "Dividends, Distributions and Taxes" on page 28 of
the Prospectus.
Federal Income Taxes
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as
it so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Recent
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legislation creates additional categories of capital gains taxable at
different rates. Although the legislation does not explain how gain in these
categories will be taxed to shareholders of RICs, it authorizes regulations
applying the new categories of gain and the new rates to sales of securities
by RICs. In the absence of guidance, there is some uncertainty as to the
manner in which the categories of gain and related rates will be passed
through to the shareholders in capital gain dividends. Any loss upon the sale
or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. 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).
Although the Fund may invest in certain municipal securities, it is not
anticipated that any portion of the dividends paid by the Fund will qualify
for tax-exempt treatment to shareholders.
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 advisors concerning the applicability of the United
States withholding tax.
Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not 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 penalties of
perjury that such number is correct and that he is not otherwise subject to
backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period of the converted Class B shares.
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 Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders
during the calendar year an amount equal to 98% of the Fund's investment
company income, with certain adjustments, for such calendar year, plus 98% of
the Fund's capital gain net income for the one-year period ending on October
31, of such calendar year. In addition, an amount equal to any undistributed
investment company taxable income or capital gain net income from the previous
calendar year must also be distributed to avoid the excise tax. While the
Fund intends to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. The excise tax is
imposed on the amount by which the regulated investment company does not meet
the foregoing distribution requirements.
Only dividends paid by the Fund that are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares
in the Fund for more than 45 days to qualify for the deduction on dividends
paid by the Fund. Because most of the income of the Fund will be interest
income, rather than dividends on common or preferred stock, it is unlikely
that any substantial proportion of its distributions will be eligible for the
dividends-received deduction available for corporations under the Code.
Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
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tax unless a reduced rate of withholding is provided under an applicable tax
treaty. Shareholders who are nonresident aliens or foreign entities are urged
to consult their own tax advisers concerning the applicability of the United
States withholding tax.
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 sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action.
Tax Treatment of Transactions in Options on Debt Securities, Futures Contracts
and Options Thereon
The Fund may purchase and sell interest rate futures contracts and may
write and purchase call and put options on such futures contracts and on
certain debt securities. The Fund may write or purchase options that will be
classified as "nonequity options" under the Code. Generally, gain and loss
resulting from transactions in options on debt securities, as well as gain and
loss from transactions in futures contracts and options thereon, will be
treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "blended gain or loss"). In the case of the exercise or
assignment of an option on a debt security, the premium paid or received by
the Fund generally will adjust the gain or loss on disposition of the
underlying security.
Any option or futures contract held by the Fund on the last day of a
fiscal year will be treated as sold for market value on that date, and gain or
loss recognized as a result of such deemed sale will be blended gain or loss.
The capital gains and losses of the Fund will be combined in each fiscal year
to determine the capital gains and losses of the Fund, as described above.
In addition, the Fund's trading strategies may constitute "straddle"
transactions with futures contracts, options thereon and options on debt
securities. "Straddles" may affect the taxation of futures contracts and
options, and may cause the postponement of recognition of losses incurred in
certain closing transactions.
The requirements for classification as a regulated investment company may
restrict the Fund's ability to engage in certain options and futures contract
transactions. The Fund expects to obtain a private letter ruling from the
Internal Revenue Service providing the Fund with relief from certain
provisions of the Code that might otherwise affect its ability to engage in
such transactions.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services
are available only to U.S. investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions.
The statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the Fund's
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing
all or only part of the full shares in an Investment Account may be requested
by a shareholder directly from the Fund's Transfer Agent.
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Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for
those Class A or Class D shares. Shareholders interested in transferring
their Class B or Class C shares from Merrill Lynch and who do not wish to have
an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the transfer agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if
the firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm, or such shareholder must continue to maintain a
retirement account with Merrill Lynch for those shares.
Automatic Investment Plans
A shareholder may make additions to an Investment Account (as described
in the Prospectus under "Shareholder Services--Investment Account" on page 31)
at any time by purchasing Class A shares (if he or she is an eligible Class A
investor as described in the Prospectus) or Class B, Class C or Class D shares
at the applicable public offering price either through the shareholder's
securities dealer or by mail directly to the Fund's Transfer Agent, acting as
agent for such securities dealer. Voluntary accumulation also can be made
through a service known as the Fund's Automatic Investment Plan whereby the
Fund is authorized through pre-authorized checks or automated clearing house
debits of $50 or more to charge the regular bank account of the shareholder on
a regular basis to provide systematic additions to the Investment Account of
such shareholder. For investors who buy shares of the fund through Blueprint
no minimum charge to the investors' bank accounts is required. An investor
whose shares of the Fund are held within a CMA<reg-trade-mark> or CBA<reg-
trade-mark> account may arrange to have periodic investments made in the
Fund in amounts of $100 or more ($1 for retirement accounts) through the
CMA<reg-trade-mark>/CBA<reg-trade-mark>Automated Investment Program.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value.
Under specified circumstances, participants in certain Programs may deposit
other classes of shares that will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the
redemption of shares held therein or the automatic exchange thereof to another
class at net asset value, which may be shares of a money market fund. In
addition, upon termination of participation in a Program, shares that have
been held for less than specified periods within such Program may be subject
to a fee based upon the current value of such shares. These Programs also
generally prohibit such shares from being transferred to another account at
Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in
limited circumstances (which may also involve an exchange as described above),
such shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
the Transfer Agent at (800) MER-FUND or (800) 637-3863.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions to the contrary are given as to the method
of payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund
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as of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND), if their acount is
maintained with the Transfer Agent that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Fund or vice
versa, and commencing ten days after receipt by the transfer agent of
such notice, those instructions will be effected. 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.
Systematic Withdrawal Plans
A shareholder of the Fund may elect to make systematic withdrawals from
an Investment Account of Class A, Class B, Class C or Class D shares in the
form of payments by check or through automatic payment by direct deposit to
such shareholder's bank account on either a monthly or quarterly basis as
provided below. Quarterly withdrawals are available for shareholders who have
acquired shares of the Fund having a value, based on cost or upon the current
net asset value, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of 15 minutes after the close of business on the
NYSE (generally 4:00 p.m., New York City time) on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is applicable.
If the NYSE is not open for business on such date, the shares will be redeemed
at the close of business on the following business day. The check for the
withdrawal payment will be mailed or the direct deposit of the withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are reinvested automatically in shares of
the Fund. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yields or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original
investment may be correspondingly reduced. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept purchase orders for shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account from which the
shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA<reg-trade-mark>, CBA<reg-trade-mark> or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the
CMA<reg-trade-mark>/CBA<reg-trade-mark> Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50.
The proceeds of systematic redemptions will be posted to the share-
holder's account five business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder
may elect to have his or her shares redeemed on the first, second,
third or fourth Monday of each month, in the case of monthly redemptions,
or of every other month, in the case of bimonthly redemptions. For
quarterly, semiannual or annual redemptions, the shareholder may select
the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second or fourth
Monday of the month. If the Monday selected is not a business day,
the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the
CMA<reg-trade-mark>/CBA<reg-trade-mark> Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch
Financial Consultant.
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With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Contingent Deferred Sales Charges--Class B Shares" and "--Contingent
Deferred Sales Charges--Class C Shares" in the Prospectus. Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of
the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will automatically be applied thereafter to Class D shares.
See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class
C Shares--Conversion of Class B Shares to Class D Shares" in the Prospectus;
if an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans
are available from Merrill Lynch. Under these plans, investments may be made
in the Fund and certain of the other mutual funds sponsored by Merrill Lynch
as well as in other securities. Merrill Lynch charges an initial
establishment fee and an annual custodial fee for each account. Information
with respect to these plans is available upon request from Merrill Lynch. The
minimum initial purchase to establish any such plan is $100 and the minimum
subsequent purchase is $1.
Retirement Plan
Any Retirement Plan that does not meet the qualifications to purchase
Class A or Class D shares at net asset value may purchase Class B shares with
a waiver of the CDSC upon redemption if the following qualifications are met.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares and
is also waived for Class B redemptions from a 401(a) plan qualified under the
Code, provided that each such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Class B shares ("Eligible
401(a) Plan"). Other tax qualified retirement plans within the meaning of
Section 401(a) and 403(b) of the Code that are provided specialized services
(e.g., plans whose participants may direct on a daily basis their plan
allocations among a menu of investments) by independent administration firms
contracted through Merrill Lynch may also purchase Class B shares with a
waiver of the CDSC. The CDSC is also waived for any Class B shares that are
purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and
held in such account at the time of redemption. The Class B CDSC is also
waived for shares purchased by a Merrill Lynch rollover IRA that was funded by
a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The minimum initial
and subsequent purchase requirements are waived in connection with all the
above-referenced Retirement Plans.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing<service-mark> System, Class A shareholders
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
second fund in the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of the a second MLAM-advised mutual fund, and the shareholder does not hold
Class A shares of the Fund or second fund in his account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the Fund
or second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D
shares of the Fund will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other fund as more fully described
below. Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
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below as available for exchange by holders of Class A, Class B, Class C or
Class D shares. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, and any shares utilized in an exchange
must have been held by the shareholder for at least 15 days. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of another MLAM-advised
mutual fund ("new Class A or Class D shares") are transacted on the basis of
relative net asset value per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A or Class D shares and the sales charge payable
at the time of the exchange on the new Class A or Class D shares. With
respect to outstanding Class A or Class D shares as to which previous
exchanges have taken place, the "sales charge previously paid" shall include
the aggregate of the sales charge paid with respect to such Class A or Class D
shares in the initial purchase and any subsequent exchange. Class A or Class
D shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A or Class D shares. For purposes of the
exchange privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to
the sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares of the
Fund generally may be exchanged into the Class A or Class D shares of the
other funds or into shares of the Class A and Class D money market funds with
a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares
outstanding ("outstanding Class B or Class C shares") offers to exchange its
Class B or Class C shares for Class B or Class C shares, respectively, ("new
Class B or Class C shares") of another MLAM-advised mutual fund on the basis
of relative net asset value per Class B or Class C share, without the payment
of any CDSC that might otherwise be due on redemption of the outstanding
shares. Class B shareholders of the fund exercising the exchange privilege
will continue to be subject to the fund's CDSC schedule if such schedule is
higher than the CDSC relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the fund acquired
through use of the exchange privilege will be subject to the higher of the
fund's CDSC schedule or the CDSC relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the sales
load that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the High Income Portfolio
of the Merrill Lynch Corporate Bond Fund, Inc. ("High Income Portfolio") for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% sales
load that generally would apply to a redemption would not apply to the
exchange. Two years later the investor may decide to redeem the Class B
shares of Merrill Lynch Special Value Fund and receive cash. There will be no
CDSC due on this redemption, since by "tacking" the two and a half year
holding period of High Income Portfolio Class B shares to the two year holding
period for the Merrill Lynch Special Value Fund Class B shares, the investor
will be deemed to have held the new Class B shares for more than four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a Class B money
market fund will not count towards satisfaction of the holding period
requirement for purposes of reducing the CDSC or with respect to Class B
shares, towards satisfaction of the conversion period. However, shares of a
money market fund that were acquired as a result of an exchange for Class B or
Class C shares of a fund may, in turn, be exchanged back into Class B or Class
C shares of any fund offering such shares, in which event the holding period
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<PAGE>
for Class B or Class C shares of that fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Class B shares
of the High Income Portfolio for two and a half years and two years later
decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 2% CDSC that would have been due had the Class B shares
of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Before effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege
by wire through their securities dealers. The Fund reserves the right to
require a properly completed Exchange Application. This exchange privilege
may be modified or terminated in accordance with the rules of the Commission.
The Fund reserves the right to limit the number of times an investor may
exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and may thereafter
resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, as well as yield, in advertisements or
information furnished to present or prospective shareholders. Total return
and yield figures are based on the Fund's historical performance and are not
intended to indicate future performance. Average annual total return and
yield are determined separately for Class A, Class B, Class C and Class D
shares of the Fund in accordance with formulas specified by the Commission and
take into account the maximum applicable sales charge.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage and
as a dollar amount based on a hypothetical $1,000 investment, for various
periods other than those noted below. Such data will be computed as described
above, except that (1) the rates of return calculated will not be average
annual rates, but rather, actual annual, annualized or aggregate rate of
return and (2) the maximum applicable sales charge will not be included with
respect to annual or annualized rates of return calculations. Aside from the
impact on the performance data calculations of including or excluding the
maximum applicable sales charge, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
In order to reflect the reduced sales charges applicable to certain
investors, as described under "Purchase of Shares," the total return data
quoted by the Fund in advertisements directed to such investors whose
purchases are subject to reduced sales load, in the case of Class A and Class
D shares, or waiver of the contingent deferred sales charge in the case of
Class B and Class C shares, may take into account the reduced, and not the
maximum, sales charge or may not take into account the contingent deferred
sales charge and therefore may reflect greater total return since, due to the
reduced sales charge, a lower amount of expenses is deducted.
On occasion, the Fund may compare its performance to that of the Standard
& Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, or performance data contained in publications such as Lipper
26
<PAGE>
Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine,
U.S. News & World Report, Business Week, CDA Investment Technology, Inc.,
Forbes Magazine or Fortune Magazine. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
Organization of the Fund
The authorized capital stock of the Fund consists of four hundred million
(400,000,000) shares of Common Stock, having a par value $0.10 per share. The
shares of Common Stock are divided into four classes, each consisting of one
hundred million (100,000,000) shares, as follows: "Class A Common Stock,"
"Class B Common Stock," "Class C Common Stock" and "Class D Common Stock".
Each of the Fund's shares has equal dividend, distribution, liquidation and
voting rights, except that Class B, Class C and Class D Shares bear certain
account maintenance expenses and expenses related to the distribution of such
shares and have exclusive voting rights with respect to matters relating to
such account maintenance and distribution expenditures (except that Class B
Shares have certain voting rights with respect to the Class D Distribution
Plan). Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the Fund and
in the net assets of the Fund upon liquidation or dissolution remaining
after satisfaction of outstanding liabilities. The shares of the Fund, when
issued, will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable. Stock
certificates will be issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any case. Holders of
shares of the Fund are entitled to redeem their shares as set forth under
"Redemption of Shares."
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $____________) will be paid
by the Fund and will be amortized over a period not exceeding five years. The
proceeds realized by the Investment Adviser upon the redemption of any of the
shares initially purchased by it will be reduced by the proportional amount of
the unamortized organizational expenses that the number of such initial shares
being redeemed bears to the number of shares initially purchased. As of the
date of this Statement of Additional Information, the Investment Adviser owned
100% of the outstanding shares of Common Stock of the Fund.
Under a separate agreement Merrill Lynch has granted the Fund the right
to use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Fund at any time, or to grant the use
of such name to any other company, and the Fund has granted Merrill Lynch,
under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch.
Control Persons
As of the date of this Statement of Additional Information, the
Investment Adviser was the sole record and beneficial shareholder of the
Fund. So long as such ownership of shares continues to exceed 25% of the
outstanding shares of the Fund, the Investment Adviser will be deemed to
control the Fund by virtue of such ownership. The mailing address of the
Investment Adviser is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A,
Class B, Class C and Class D shares of the Fund, based on the projected value
of the Fund's estimated net assets and projected number of shares outstanding
on the date its shares are offered for sale to public investors, is as
follows:
27
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net Assets.............. $50,000,000 $50,000,000 $50,000,000 $50,000,000
========= ========== =========== ==========
Number of Shares
Outstanding........... 5,000,000 5,000,000 5,000,000 5,000,000
========= ========== =========== ==========
Net Asset Value Per
Share (net assets
divided by number
of shares outstanding). $ 10.00 $ 10.00 $ 10.00 $ 10.00
Sales Charge* (for
Class A and Class
D shares: 4.00% of
offering price (4.17%
of net asset value ** **
per share))............ .42 .42
_________ __________ __________ ________
Offering Price.......... $ 10.42 $ 10.42 $ 10.42 $ 10.42
======== ======== ========= =========
________________
* Rounded to the nearest one hundredth percent, assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Deferred Sales Charge--Class B and Class
C Shares" herein.
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540
has been selected as the independent auditors of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
___________________________________,______________________________________
______________, acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on
the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc. 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts.
See "Management of the Fund--Transfer Agency Services" in the Prospectus.
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 acts as the Fund's Distributor. The Distributor
is responsible for soliciting subscriptions and purchases of shares of the
Fund. See "Purchase of Shares" in the Prospectus.
28
<PAGE>
LEGAL COUNSEL
Rogers & Wells LLP, New York, New York, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 of each year. The Fund
sends to its shareholders at least quarterly reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each
year. After the end of each year shareholders will receive federal income tax
information regarding dividends and capital gains distributions.
29
<PAGE>
APPENDIX
Interest Rate Futures, Options Thereon and Options on Debt Securities
The Fund may trade options on debt securities, purchase and sell interest
rate, bond and bond index futures contracts ("futures contracts") and purchase
and write call and put options on futures contracts. At the date hereof,
futures contracts (and options thereon) can be purchased and sold with respect
to U.S. Treasury notes and GNMA certificates on the Chicago Board of Trade and
with respect to U.S. Treasury bills on the International Monetary Market at
the Chicago Mercantile Exchange. Options directly on debt securities are
currently traded on the Chicago Board Options Exchange and the American Stock
Exchange.
Futures Contracts. A futures contract creates a binding obligation on
the purchaser (the "long") to accept delivery, and the seller (the "short") to
make delivery, of the face amount of the security underlying the futures
contract in a stated delivery month, at a price fixed in the contract or to
make a cash settlement in lieu of actual delivery. A majority of transactions
in futures contracts, however, do not result in actual delivery of the
underlying security, but are settled through liquidation, i.e., by entering
into an offsetting transaction. Futures contracts are traded only on
commodity exchanges--known as "contract markets"--approved for such trading by
the Commodity Futures Trading Commission ("CFTC"). Transactions in futures
contracts must be executed through a futures commission merchant ("FCM"), or
brokerage firm, which is a member of the relevant contract market.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to
the Fund's FCM and the relevant contract market, which varies, but may be 5%
or less of the contract amount, must be deposited with the FCM. This amount
is known as "initial margin," and represents a "good faith" deposit assuring
the performance of both the purchaser and the seller under the futures
contract. Subsequent payments to and from the FCM, known as "maintenance" or
"variation" margin, are required to be made on a daily basis as the price of
the futures contract fluctuates, making the long or short positions in the
futures contract more or less valuable, a process known as "marking to the
market." Prior to the settlement date of the futures contract, the position
may be closed out by taking an opposite position that will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the FCM, and the Fund realizes a loss or gain. In addition, a
commission is paid on each completed purchase and sale transaction.
The Fund will deal only in standardized contracts on recognized
exchanges. The clearing members of an exchange's clearing corporation
guarantee the performance of their futures contracts through the clearing
corporation, a nonprofit organization managed by the exchange membership which
is also responsible for handling daily accounting of deposits or withdrawals
of margin.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (known as the "holder") the right, but not the obligation, to enter
into a long position in the underlying futures contract (i.e., purchase the
futures contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put" option, at
a fixed price (the "exercise" or "strike" price) up to a stated expiration
date. The holder pays a non-refundable purchase price for the option, known
as the "premium." The maximum amount of risk the purchaser of the option
assumes is equal to the premium, the transaction costs and the unrealized
profits, if any, although this entire amount may be lost. Upon exercise of
the option by the holder, the contract market clearing corporation establishes
a corresponding short position for the seller, or "writer" of the option in
the case of a call option, or a corresponding long position in the case of a
put option, at the strike price. In the event that an option is exercised,
the holder will be subject to all the risks associated with the trading of
futures contracts. An option becomes worthless when it expires.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the holder of the
option may be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures
contracts, which are described on page 2.
30
<PAGE>
A position in an option may be terminated by the purchaser or seller
prior to its expiration by effecting a closing purchase or sale transaction,
which requires the purchase or writing of an option of the same series (i.e.,
the same exercise price and expiration date) as the option previously written
or purchased. The premium received from the holder on the closing transaction
may be more or less than the premium paid for the option, resulting in a gain
or loss on the transactions.
Exercise prices of options are set at specified intervals in relation to
the price of the underlying futures contract by the exchange on which they are
traded. Exercise prices are initially established when a new expiration cycle
commences and additional exercise prices may subsequently be introduced as the
futures contract price fluctuates. The expiration of an option is generally
based on the expiration of the underlying futures contract.
The holder of an option exercises it by notifying his broker of his
intention to exercise. The broker tenders the exercise notice to the clearing
house of the applicable exchange that assigns the notice on a random basis to
a broker with a customer who has written and outstanding an option of the same
series. That broker then assigns the exercise notice to such customer,
generally on a random basis, and the customer is then obligated to enter into
the underlying futures contract upon exercise. At that time, the contract
market clearing house establishes appropriate long and short futures positions
for the holder and writer. A corresponding short position for the writer
would be established in the case of a call option, or a corresponding long
position would be established in the case of a put option. The parties will
then be subject to initial and variation margin requirements with respect to
the underlying futures contract. By interposing itself between options
writers and purchasers, the clearing house in effect guarantees the
performance of the other side to each option purchased or sold.
Options on Debt Securities. An option on a U.S. Government security gives
the holder the right, but not the obligation, to purchase the underlying
security, in the case of a call option, or to sell the underlying security, in
the case of a put option, at the specified strike price up to a stated
expiration date. The holder pays a non-refundable premium upon purchasing the
option. The maximum amount of risk assumed by the holder is equal to the
premium, transaction costs and unrealized profits, if any, although this
entire amount may be lost. Upon exercise of the option, the holder purchases
or sells the underlying security at the strike price. Options on debt
instruments to be traded by the Fund are traded on national securities
exchanges regulated by the Commission. The Options Clearing Corporation is
interposed between the clearing members that are the parties to each such
option, thereby assuring the performance of the parties.
If a liquid market exists, a position in an option may be terminated by
the purchaser or seller prior to expiration by entering into an offsetting
purchase or sale transaction in an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
written. The premium paid or received by the trader on the closing
transaction may be more or less than the premium paid or received for the
option, resulting in a gain or loss on the transaction. If an option is not
exercised, it expires worthless to the holder.
Exercise prices of options are set at specified intervals in relation to
the price of the underlying security by the exchange on which they are
traded. Exercise prices are initially established when a new expiration cycle
commences and additional exercise prices may subsequently be introduced as the
price of the security fluctuates.
The holder of an option exercises it by notifying his broker of his
intention to exercise. The broker tenders the exercise notice to the clearing
house, which assigns the notice on a random basis to a broker with a customer
who has written and outstanding an option of the same series. That broker
then assigns the exercise notice to its customer, generally on a random
basis. As a call or put writer, the customer is obligated to sell or purchase
the underlying security.
31
<PAGE>
MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. (Note 2)
STATEMENT OF ASSETS AND LIABILITIES
____________, 1998
Assets:
Cash in Bank $100,000
Prepaid registration fees (Note 3)
Deferred organization expenses (Note 4) ___________
Total Assets
Liabilities-accrued expenses ___________
Net Assets (equivalent to $0.10 per share on 2,500 Class A
shares of Common Stock (par value $0.10), 2,500 Class B
shares of Common Stock (par value $0.10), 2,500 Class C
shares of Common Stock (par value $0.10) and 2,500 Class
D shares of Common Stock (par value $0.10) outstanding with
400,000,000 shares authorized) (Note 1) $100,000
________________________
Notes to Statement of Assets and Liabilities.
(1) Merrill Lynch Corporate High Yield Fund, Inc. (the "Fund") was organized as
a Maryland corporation on March 13, 1998. The Fund is registered under the
Investment Company Act of 1940 as an open-end management investment
company. To date, the Fund has not had any transactions other than those
relating to organizational matters and the sale of 2,500 Class A shares,
2,500 Class B shares, 2,500 Class C shares and 2,500 Class D shares of
Common Stock to Fund Asset Management, L.P. (the "Investment Adviser").
(2) The Fund has entered an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser, and distribution agree
ments (the "Distribution Agreements") with Merrill Lynch Funds
Distributor, Inc. (the "Distributor"). (See "Management of the Fund--
Investment Advisory Arrangements" in the Statement of Additional
Information.) Certain officers and/or directors of the Fund are
officers and/or directors of the Investment Adviser and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Investment Adviser (or any subsequent holder) redeems any of its
original shares prior to the end of the five-year period, the proceeds of
the redemption payable in respect of such shares shall be reduced by the
pro rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time
of redemption) of the unamortized deferred organization expenses as of
the date of such redemption. In the event that the Fund is liquidated
prior to the end of the five-year period, the Investment Adviser (or
any subsequent holder) shall bear the unamortized deferred organization
expenses.
32
<PAGE>
==================================================
[RED INK:] Information contained herein is
subject to completion or amendment. A registration
statement relating to these securities has been
filed with the Securities and Exchange Commission
(the "Commission"). These securities may not be
sold nor may any offers to buy be accepted prior
to the time the registration statement becomes
effective. This Statement of Additional Information
does not constitute a prospectus.
No person has been authorized to give any
information or to make any representations other
than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and,
if given or made, such other information or
representations must not be relied upon as having
been authorized by the Fund, the Investment Adviser
or the Distributor. This Prospectus does not
constitute an offering in any state in which such
offering may not lawfully be made.
TABLE OF CONTENTS
Page
Investment Objectives and Policies 2
Transactions in Futures and Options Thereon 2
Options on Debt Securities 2
Risk Factors in Transactions in Futures and
Options Thereon 4
Investment Restrictions 5
Management of the Fund 8
Directors and Officers 8
Investment Advisory Arrangements 9
Duration and Termination 10
Transfer Agency Services Arrangements 10
Determination of Net Asset Value 11
Portfolio Transactions 12
Portfolio Turnover 12
Purchase of Shares 13
Reduced Initial Sales Charges--Class A and
Class D Shares 13
Employer-Sponsored Retirement or Savings
Plans and Certain Other Arrangements 17
Distribution Plan 17
Limitations on the Payment of Deferred
Sales Charges 17
Redemption of Shares 18
Repurchase 18
Reinstatement Privilege 18
Deferred Sales Charge-Class B and Class
C Shares 19
Dividends, Distributions and Taxes 19
Dividends and Distributions 19
Federal Income Taxes 19
Tax Treatment of Transactions in Options on
Debt Securities, Futures Contracts and
Options Thereon 21
Shareholder Services 21
Investment Account 21
Automatic Investment Plans 22
Fee-Based Programs 22
Automatic Reinvestment of Dividends and
Capital Gains Distributions 22
Systematic Withdrawal Plans 23
Retirement Plans 24
Retirement Plan 24
Exchange Privilege 24
Performance Data 26
Additional Information 27
Organization of the Fund 27
Control Persons 27
Computation of Offering Price Per Share 27
Independent Auditors 28
Custodian 28
Transfer Agent 28
Distributor 28
Legal Counsel 29
Reports to Shareholders 29
Appendix 30
Interest Rate Futures, Options
Thereon and Options on Debt Securities 30
Code #
(CRC)
======================================================
(LOGO)
MERRILL LYNCH CORPORATE
HIGH YIELD FUND, INC.
(GRAPHIC)
[RED INK:]SUBJECT TO COMPLETION, DATED MARCH 20, 1998
PRELIMINARY
STATEMENT OF ADDITIONAL INFORMATION
March ____, 1998
Distributor:
Merrill Lynch Funds Distributor, Inc.
====================================================
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part B:
Report of Independent Auditors.
Statement of Assets and Liabilities, as of , 1998.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- -------------------------------------------------------------------------------
1 --Articles of Incorporation of the Registrant, dated March 12, 1998.(a)
2 --By-Laws of the Registrant.(a)
3 --None.
4 (a) --Portions of Articles of Incorporation and By-laws of the Registrant defining the
rights of holders of shares of common stock of the Registrant.(b)
(b) --Form of specimen certificate for shares of Common Stock of the Registrant.(c)
5 (a) --Investment Advisory Agreement between the Registrant and Fund Asset Management, L.P.
(the "Investment Adviser").(c)
(b) --Sub-Advisory Agreement between the Investment Adviser and Merrill Lynch Asset
Management U.K. Limited.(c)
6 (a) --Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (the "Distributor") (including Form of Selected Dealers
Agreement).(c)
(b) --Class B Distribution Agreement between the Registrant and the Distributor (including
Form of Selected Dealers Agreement).(c)
(c) --Class C Shares Distribution Agreement between the Registrant and the Distributor
(including Form of Selected Dealers Agreement).(c)
(d) --Class D Shares Distribution Agreement between the Registrant and the Distributor
(including Form of Selected Dealers Agreement).(c)
7 --None.
8 --Custody Agreement between the Registrant and _________________________.(c)
9 (a) --Transfer Agency, Divided Disbursing Agency and Shareholder Servicing Agency Agreement
between the Registrant and Merrill Lynch Financial Data Services, Inc. (the "Transfer
Agent").(c)
C-1
EXHIBIT
NUMBER DESCRIPTION
- -----------------------------------------------------------------------------------------------
(b) --Agreement relating to use of name between the Registrant and Merrill Lynch & Co.,
Inc.(c)
10 --Opinion of Rogers & Wells LLP, counsel for the Registrant.(c)
11 --Consent of Deloitte & Touche LLP, independent auditors for the Registrant.(c)
12 --None.
13 --None.
14 --None.
15 (a) --Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of the
Registrant.(c)
(b) --Class C Distribution Plan of the Registrant and Class C Distribution Plan Sub-
Agreement of the Registrant.(c)
(c) --Class D Distribution Plan of the Registrant and Class D Distribution Plan Sub-
Agreement of the Registrant.(c)
16 --None.
17 (a) --Financial Data Schedule for Class A Shares.(c)
(b) --Financial Data Schedule for Class B Shares.(c)
(c) --Financial Data Schedule for Class C Shares.(c)
(d) --Financial Data Schedule for Class D Shares.(c)
18 --Merrill Lynch Select Pricing<service-mark> System Plan pursuant to Rule 18f-3.(d)
________
(a) Previously filed on March 13, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-1A (File No. 333-47971) under the Securities Act of 1933, as
amended (the "Securities Act").
(b) Reference is made to Articles IV, V (Sections 3, 5, 6 and 7), VI, VII and IX of the
Registrant's Articles of Incorporation, filed herewith as Exhibit 1 to this
Registration Statement on Form N-1A; and to Articles II, III (Sections 1, 3, 5 and 6),
VI, VII, XIII and XIV of the Registrant's By-Laws, filed herewith as Exhibit 2 of this
Registration Statement on Form N-1A.
(c) To be filed by pre-effective amendment.
(d) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A under the Securities Act, filed on January 25,
1996, relating to shares of Merrill Lynch New York Municipal Bond Fund Series of
Merrill Lynch Multi-State Municipal Series Trust (File No. 2-99473).
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant has sold 2,500 Class A shares of its Common Stock, 2,500
Class B shares of its Common Stock, 2,500 shares of its Class C Common Stock
and 2,500 Class D shares of its Common Stock to the Investment Adviser for an
C-2
<PAGE>
aggregate of $100,000. The Investment Adviser is the sole shareholder
of the Fund. The Investment Adviser is organized as a limited
partnership.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD
HOLDERS AT MARCH
TITLE OF CLASS __, 1998*
- -------------------------------------------------------------------
Class A Common Stock, par value $0.10 per share...... 1
Class B Common Stock, par value $0.10 per share...... 1
Class C Common Stock, par value $0.10 per share...... 1
Class D Common Stock, par value $0.10 per share...... 1
* The number of holders shown in the table includes holders of record
plus beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification monies for
actions based on the Investment Company Act of 1940, as amended (the
"Investment Company Act") may be concerned, Article VI of the Registrant's By-
Laws provides that such payments will be made only on the following conditions:
(i) advances may be made only on receipt of a written affirmation of such
person's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay any such
advance if it is ultimately determined that the standard of conduct has not
been met and (ii) (a) such promise must be secured by a security for the
undertaking in form and amount acceptable to the Registrant, (b) the Registrant
is insured against losses arising by receipt of the advance, or (c) 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 at the time the advance is proposed to
be made, there is reason to believe that the person seeking indemnification
will ultimately be found to be entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act against certain types of
civil liabilities arising in connection with the Registration Statement or the
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Securities
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 Securities 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 Securities Act and will be governed by the final adjudication
of such issue.
C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. ("FAM" or 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., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings New York Insured Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, Inc., MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), acts as the investment
adviser for the following open-end registered investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, 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 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 for 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.
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
C-4
<PAGE>
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM and Princeton Services, Inc. ("Princeton
Services"), and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World
Financial Center, 250 Vesey Street, New York, New York 10281-1201. The address
of the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc.
("MLFDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since September 30, 1995, for his or her own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Glenn is Executive Vice President and Mr. Richard is Treasurer of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
Other Substantial Business,
Position with Profession, Vocation
NAME Investment Adviser of Employment
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services General Partner General Partner of MLAM.
Arthur Zeikel Chairman Chairman and President (1977 to 1997) of MLAM;
Chairman and Director of Princeton Services;
President of Princeton Services (1993-1997);
Executive Vice President of ML & Co.
Jeffrey M. Peek President President of MLAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.
Terry K. Glenn Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Linda L. Federici Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein Senior Vice President, General Senior Vice President, General Counsel, and
Counsel and Secretary Secretary of MLAM; Senior Vice President,
General Counsel, Director and Secretary of
Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of MLAM and Senior Vice
President of Princeton Services
Elizabeth A. Griffin Senior Vice President Senior Vice President of MLAM and Senior Vice
President of Princeton Services
Norman R. Harvey Senior Vice President Senior Vice President of MLAM and Senior Vice
President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Other Substantial Business,
Position with Profession, Vocation
NAME Investment Adviser of Employment
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael J. Hennewinkel Senior Vice President Services Senior Vice President of MLAM and Senior Vice
President of Princeton Services
Ronald M. Kloss Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra Landsman-Yaros Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD and Senior Vice President
of Princeton Services
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 MLAM; Senior Vice
President of Princeton Services
Michael L. Quinn Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services and Director
of MLFD
Gerald M. Richard Senior Vice President and Vice Senior Vice President Treasurer of MLAM;
President Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Gregory D. Upah Senior Vice President Services Senior Vice President Treasurer of MLAM and
Senior Vice President of Princeton Services
Ronald L. Welburn Senior Vice President Services Senior Vice President Treasurer of MLAM;
Senior Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies; Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, 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 Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
C-6
<PAGE>
Series Trust Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., and Worldwide DollarVest Fund,
Inc. The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
Other Substantial Business,
Position with Profession, Vocation
NAME Investment Adviser of Employment
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arthur Zeikel Director and Chairman Chairman of the Investment Adviser and MLAM;
Chairman and Director of Princeton Services,
Executive Vice President of ML & Co.
Alan J. Albert Senior Managing Director Vice President of the Investment Adviser
Terry K. Glenn Director Director of Merrill Lynch Europe PLC; General
Counsel of Merrill Lynch International
Private Banking Group
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of the
Investment Adviser and FAM; Senior Vice
President and Treasurer of Princeton Service;
Vice President and Treasurer of the MLFD
Caroll Ann Langham Company Secretary None
Debra Anne Searle Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for
each of the open-end investment companies referred to in the first two
paragraphs of Item 28 except 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. and The
Municipal Fund Accumulation Program, Inc., and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer
of the Distributor. The principal business address of each such person is P.O.
Box 9011, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Crook, Aldrich, Brady, Breen, Fatseas, and Wasel is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665.
C-7
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION(S) AND OFFICE(S) POSITIONS AND OFFICES
WITH DISTRIBUTOR WITH REGISTRANT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Richard L. Reller Director None
Thomas J. Verage Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Michael G. Clark Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
<PAGE>
ITEM 30. 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 are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its Transfer Agent (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484)
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Investment Adviser" in the
Prospectus constituting Part A of the Registration Statement and under the
caption "Management of the Fund--Management and Advisory Arrangements" in the
Statement of Additional Information constituting Part B of the Registration
Statement, the Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS.
(a) The Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months
from the effective date of the Registrant's registration statement under the
Securities Act.
(b) The Fund, if requested to do so by the holders of at least 10% of
the Fund's outstanding shares, will call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors and
will assist communications with other shareholders as required by Section 16(c)
of the Investment Company Act.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this Pre-Effective Amendment No. 1 to Registrant's 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 ___
day of March, 1998.
MERRILL LYNCH CORPORATE HIGH YIELD FUND,
INC.
(Registrant)
By: /s/ PHILIP L. KIRSTEIN
_______________________________________
(Philip L. Kirstein, President)
Each person whose signature appears below hereby authorizes Philip L.
Kirstein, as attorney-in-fact, to sign on his or her behalf, individually and
in each capacity stated below, any amendments to the Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registrant's Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ----------------------------- --------------------------- -------------------
/s/ PHILIP L. KIRSTEIN President and Director
- ----------------------------- (Principal Executive Officer) ------------ , 1998
(Philip L. Kirstein)
/s/ PHILIP M. MANDEL Treasurer and Director
- ----------------------------- (Principal Financial ------------ , 1998
(Philip M. Mandel) and Accounting Officer)
/s/ ALICE A. PELLEGRINO Secretary and Director ____________ , 1998
- ------------------------------
(Alice A. Pellegrino)
C-10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
C-11
