<PAGE> 1
As filed with the Securities and Exchange Commission on October 13, 1994.
FILE NO. 2-62329
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. /X/
Post-Effective Amendment No. 20 / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 18 /X/
(Check appropriate box or boxes)
---------------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
(exact name of registrant as specified in charter)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
FUND ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, N.Y. 10166
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
/ /this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
CALCULATION OF REGISTRATION FEE
The Registrant has registered an indefinite number of Class A Shares and
Class B Shares of Intermediate Term Portfolio Common Stock, High Income
Portfolio Common Stock and High Quality Portfolio Common Stock. The notice
required by such rule for the Registrant's most recent fiscal year will be filed
on or about November 29, 1994.
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<PAGE> 2
MERRILL LYNCH CORPORATE BOND FUND, INC.
SUPPLEMENT TO PROSPECTUS DATED OCTOBER 21, 1994
FOR USE IN THE STATES OF WASHINGTON AND ARIZONA
The Fund's High Income Portfolio may invest primarily in lower rated bonds,
commonly known as "junk bonds." Investments of this type are subject to greater
risk of loss of principal and interest than are investments in higher rated
bonds. Purchasers should carefully assess the risks associated with an
investment in this Portfolio.
Code #10046-1094--WA, AZ
<PAGE> 3
MERRILL LYNCH CORPORATE BOND FUND, INC.
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM LOCATION
- ----- -----------------------------------------
<C> <S> <C>
PART A
1. Cover Page............................... Cover Page
2. Synopsis................................. Fee Table
3. Financial Highlights..................... Financial Highlights; Performance Data
4. General Description of Registrant........ Investment Objectives and Policies;
Investment Policies of the Portfolios;
Additional Information
5. Management of the Fund................... Fee Table; 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 PricingSM System; Additional
Information
8. Redemption or Repurchase................. Fee Table; Redemption of Shares; Merrill
Lynch Select PricingSM 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............................. *
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....... *
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..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
- ---------------
* Item inapplicable or answer negative.
<PAGE> 4
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company consisting of three separate
Portfolios. The primary objective of each Portfolio is to provide shareholders
with as high a level of current income as is consistent with the investment
policies of such Portfolio and with prudent investment management. As a
secondary objective, each Portfolio seeks capital appreciation when consistent
with its primary objective. Each Portfolio invests primarily in a diversified
portfolio of corporate fixed-income securities, such as corporate bonds and
notes, convertible securities and preferred stocks. There can be no assurance
that the objectives of any Portfolio will be realized. Each of the Portfolios
pursues its investment objective through the separate investment policies
described below:
High Income Portfolio invests principally in fixed-income securities which
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
Corporation), or in unrated securities of comparable quality. Such securities
generally involve greater volatility of price and risks to principal and income
than securities in the higher rating categories.
Investment Grade Portfolio invests primarily in long-term corporate bonds
rated A or better by either rating service. The Investment Grade Portfolio was
formerly known as the High Quality Portfolio. Except for the change in name, no
other changes to the Portfolio or in its investment objectives or policies
occurred.
Intermediate Term Portfolio invests primarily in bonds rated in the four
highest rating categories (Baa or higher by Moody's Investors Service, Inc. or
BBB or higher by Standard & Poor's Corporation) with a maximum remaining
maturity not to exceed ten years and, depending on market conditions, an average
remaining maturity of five to seven years is anticipated.
Each Portfolio is in effect a separate fund issuing its own shares.
Pursuant to the Merrill Lynch Select PricingSM System, each of the Fund's
Portfolios offers four classes of shares, each with a different combination of
sales charges, ongoing fees and other features. Class C shares of the
Intermediate Term Portfolio are available only through the Exchange Privilege.
The Merrill Lynch Select PricingSM 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 PricingSM
System" on page 5.
(continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES 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 a prospective investor should know before investing in the Fund. Investors
should read and retain this Prospectus for future reference. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated October 21, 1994, and
is available upon request and without charge, by calling or writing the Fund at
the address and telephone number set forth above. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 5
(continued from cover page)
Shares of the Fund's Portfolios may be purchased directly from the
Distributor, P.O. Box 9011, Princeton, New Jersey 08543-9011, (609) 282-2800, or
from other securities dealers which have entered into selected dealer agreements
with the Distributor. See "Purchase of Shares," below. Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions effected directly through the Fund's transfer agent
are not subject to the processing fee. See "Purchase of Shares" and "Redemption
of Shares".
The minimum initial purchase for shares of each Portfolio is $1,000 ($100
for retirement plans), and the minimum subsequent purchase is $50 ($1 for
retirement plans). A shareholder may have his shares redeemed at the net asset
value per share of the Portfolio represented by the redeemed shares.
2
<PAGE> 6
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO(A)
---------------------------------------------- ----------------------------------
CLASS A(C) CLASS B(D) CLASS C(E) CLASS D(E) CLASS A(C) CLASS B(D) CLASS C(E)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price)............ 4.00%(f) None None 4.00%(f) 4.00%(f) None None
Sales Charge Imposed on Dividend
Reinvestments.............................. None None None None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).............. None(h) 4.00%(m) 1.00%(n) None(h) None(h) 4.00%(m) 1.00%(n)
Exchange Fee................................. None None None None None None None
Annual Portfolio Operating Expenses(i):
Management Fees(j)........................... .42 .42 .42 .42 .37 .37 .37
12b-1 Fees(k):
Account Maintenance Fees................. None 0.25 .25 .25 None 0.25 0.25
Distribution Fees........................ None 0.50(p) .55 None None 0.50(p) 0.55
Other Expenses:
Custodial Fees........................... .01 .01 .01 .01 .01 .01 .01
Shareholder Servicing Costs(l)........... .07 .08 .08 .07 .10 .11 .11
Other Fees............................... .05 .05 .05 .05 .05 .05 .05
Total Other Expenses.................. .13 .14 .14 .13 .16 .17 .17
Total Portfolio Operating Expenses........... .55% 1.31% 1.36% .80% .53% 1.29% 1.34%
<CAPTION>
INVESTMENT
GRADE
PORTFOLIO(A) INTERMEDIATE TERM PORTFOLIO(B)
------------ -------------------------------------------------
CLASS D(E) CLASS A(C) CLASS B(D) CLASS C(E)(Q) CLASS D(E)
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price)............ 4.00%(f) 1.00%(g) None None 1.00%(g)
Sales Charge Imposed on Dividend
Reinvestments.............................. None None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).............. None(h) None(h) 1.00%(o) 1.00%(n) None(h)
Exchange Fee................................. None None None None None
Annual Portfolio Operating Expenses(i):
Management Fees(j)........................... .37 .36 .36 .36 .36
12b-1 Fees(k):
Account Maintenance Fees................. 0.25 None 0.25 0.25 0.10
Distribution Fees........................ None None 0.25(p) 0.25 None
Other Expenses:
Custodial Fees........................... .01 .01 .01 .01 .01
Shareholder Servicing Costs(l)........... .10 .09 .08 .08 .09
Other Fees............................... .05 .12 .12 .12 .12
Total Other Expenses.................. .16 .22 .21 .21 .22
Total Portfolio Operating Expenses........... .78% .58% 1.07% 1.07% .68%
</TABLE>
- ---------------
(a) As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
(b) Up to November 12, 1992, the Intermediate Term Portfolio consisted of one
class of shares of Common Stock.
(c) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 28.
(d) 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 31.
(e) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(f) Reduced for purchases of $25,000 and over. 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 28.
(g) Reduced for purchases of $100,000 and over. Class A or Class D purchases of
$1,000,000 or more are not subject to an initial sales charge. See "Purchase
of Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 28.
(h) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(i) Information for Class A and Class B shares is stated for the fiscal year
ended 9/30/93. Information under "Other Expenses" for Class C and Class D
shares is estimated for the fiscal year ending 9/30/95.
(j) See "Management of the Fund -- Management and Advisory Arrangements" -- page
24.
(k) See "Purchase of Shares -- Distribution Plans" -- page 35.
(l) See "Management of the Fund -- Transfer Agency Services" -- page 50.
(m) Decreasing 1% annually thereafter to 0.0% after the fourth year.
(n) For one year, decreasing to 0.0% after the first year.
(o) Decreasing 1.0% annually thereafter to 0.0% after the first year.
(p) Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
(q) Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege. See page -- 46.
3
<PAGE> 7
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 in the Portfolios (and Classes) listed below
would pay the following expenses on a $1,000 investment,
including for Class A shares of the High Income
Portfolio and Investment Grade Portfolio the maximum $40
front-end sales charge and for shares of the
Intermediate Term Portfolio the maximum $10 front-end
sales charge and assuming (i) the operating expense
ratio set forth opposite the Portfolio or Class thereof,
(ii) a 5% annual return throughout the periods indicated
and (iii) redemption at the end of the period:
High Income Portfolio
Class A.............................................. $45 $57 $70 $106
Class B.............................................. $53 $62 $72 $158
Class C.............................................. $24 $43 $74 $164
Class D.............................................. $48 $65 $83 $135
Investment Grade Portfolio*
Class A.............................................. $45 $56 $68 $104
Class B.............................................. $53 $61 $71 $156
Class C.............................................. $24 $42 $73 $161
Class D.............................................. $48 $64 $82 $133
Intermediate Term Portfolio
Class A.............................................. $16 $28 $42 $ 82
Class B.............................................. $21 $34 $59 $131
Class C**............................................ $21 $34 $59 $131
Class D.............................................. $17 $32 $47 $ 94
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
High Income Portfolio
Class A.............................................. $45 $57 $70 $106
Class B.............................................. $13 $42 $72 $158
Class C.............................................. $14 $43 $74 $164
Class D.............................................. $48 $65 $83 $135
Investment Grade Portfolio*
Class A.............................................. $45 $56 $68 $104
Class B.............................................. $13 $41 $71 $156
Class C.............................................. $14 $42 $73 $161
Class D.............................................. $48 $64 $82 $133
Intermediate Term Portfolio
Class A.............................................. $16 $28 $42 $ 82
Class B.............................................. $11 $34 $59 $131
Class C**............................................ $11 $34 $59 $131
Class D.............................................. $17 $32 $47 $ 94
</TABLE>
- ---------------
* As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
** Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege.
4
<PAGE> 8
The foregoing Fee Table is intended to assist investors in understanding
cost and expenses that a shareholder in a Portfolio (and classes) of 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 Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN OF ANY PORTFOLIO 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
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD"). In addition, the Example does not reflect the processing fee
(presently $4.85) Merrill Lynch may charge its customers for confirming
purchases and redemptions.
MERRILL LYNCH SELECT PRICINGSM SYSTEM
Each Portfolio of the Fund offers four classes of shares under the Merrill
Lynch Select PricingSM 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 (for the High Income and
Investment Grade Portfolios only) are sold to investors choosing the deferred
sales charge alternatives. Class C shares of the Intermediate Term Portfolio are
offered only through the Exchange Privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or certain other funds.
The Merrill Lynch Merrill Lynch Select PricingSM System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its
affiliate, Fund Asset Management, L.P. ("FAM" or the "Investment Adviser").
Funds advised by MLAM or FAM are referred to herein as "MLAM-advised mutual
funds".
Each Class A, Class B, Class C or Class D share of one of the Fund's
Portfolios represents an identical interest in the investment portfolio of that
Portfolio 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 and account maintenance fees
that are imposed on Class B and Class C shares of a Portfolio, as well as the
account maintenance fees that are imposed on the Class D shares of a Portfolio,
will be imposed directly against those classes and not against all assets of the
relevant Portfolio 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 a Portfolio 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".
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 deferred sales charges with respect to the Class B and Class C
shares in that the sales charges 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
5
<PAGE> 9
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 PricingSM 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 PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for periods of 4 years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during D shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</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. 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 for one year. See "Class A"
and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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 Portfolios 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
<PAGE> 10
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE1 FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for up to one year, at 0.25% 0.25% B shares convert to
a rate of 1.0% during the D shares automatically
first year, decreasing to after approximately
0.0% after the first year ten years4
- -------------------------------------------------------------------------------------------------
C(5) 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</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 $100,000 or more. 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 0.20% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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 Portfolios 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.
(5) Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege. See p. 46.
Class A: Class A shares of a Portfolio incur an initial sales charge when they
are purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A shares
in that account. Other eligible investors include certain retirement
plans and participants in certain investment programs. In addition,
Class A shares will be offered to directors and employees of Merrill
Lynch & Co., Inc. (the term "subsidiaries," when used herein with
respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain
other entities directly or indirectly wholly-owned and controlled by
Merrill Lynch & Co., Inc.) and its subsidiaries and to members of the
Boards of MLAM-advised mutual funds. The maximum initial sales charge
is 4.00% for the High Income and Investment Grade Portfolios and 1.00%
for the Intermediate Term Portfolio, and is reduced for purchases of
$25,000 and over for the High Income and Investment Grade Portfolios
or $100,000 for the Intermediate Term Portfolio. 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 will be subject
to a contingent deferred sales charge ("CDSC") of 1.0% for the High
Income and Investment Grade Portfolios or 0.20% for the Intermediate
Term Portfolio, if the shares are redeemed within one year after
purchase. Sales charges also are reduced under a
7
<PAGE> 11
right of accumulation which 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 a Portfolio 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 Portfolio's average net assets attributable to the
Class B shares, an ongoing distribution fee of 0.50% of average net
assets attributable to Class B shares for the High Income and
Investment Grade Portfolios, or 0.25% of average net assets
attributable to Class B shares for the Intermediate Term Portfolio and
a CDSC if they are redeemed within four years of purchase for the High
Income and Investment Grade Portfolios or within one year of purchase
for the Intermediate Term Portfolio. Approximately ten years after
issuance, Class B shares of a Portfolio will convert automatically
into Class D shares of that Portfolio, 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 a Portfolio 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 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 a Portfolio do not incur a sales charge when they
are purchased, but they are subject to an ongoing account maintenance
fee of 0.25% of average net assets and an ongoing distribution fee of
0.55% of average net assets for the High Income and Investment Grade
Portfolios or 0.25% of average net assets for the Intermediate Term
Portfolio. Class C shares are also subject to a CDSC if they are
redeemed within one year of purchase. Although Class C shares are
subject to a 1.0% CDSC for only one year (as compared to four years
for Class B shares of the High Income and Investment Grade Portfolios
and one year for the Intermediate Term Portfolio), Class C shares have
no conversion feature and, accordingly, an investor that 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 C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege.
Class D: Class D shares of a Portfolio incur an initial sales charge when they
are purchased and are subject to an ongoing account maintenance fee of
0.25% of average net assets for the High Income and Investment Grade
Portfolios and 0.10% of average net assets for the Intermediate Term
Portfolio. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. 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 will be subject to a CDSC of
1.0% for the High Income and Investment Grade Portfolios or 0.20% for
the Intermediate Term Portfolio, if the shares are redeemed within one
year of purchase. The schedule of initial sales charges and reductions
for Class D shares is the same as the schedule for Class A shares.
Class D shares also will be issued
8
<PAGE> 12
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
PricingSM System that the investor believes is most beneficial under his
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 that 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 a Portfolio will be converted into Class D shares of that
Portfolio 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".
9
<PAGE> 13
FINANCIAL HIGHLIGHTS
The financial information in the table below, other than the six month
period ended March 31, 1994 (unaudited), in connection with shares of the High
Income Portfolio, Investment Grade Portfolio (formerly the High Quality
Portfolio) and the Intermediate Term Portfolio has been audited in conjunction
with the audits of the financial statements of the Portfolios by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended
September 30, 1993, and the independent auditors' report thereon and the
unaudited financial statements for the six months ended March 31, 1994, are
included in the Statement of Additional Information. Financial information is
not presented for Class C or Class D shares, because no shares of those classes
were publicly issued as of the date of this Prospectus.
<TABLE>
HIGH INCOME PORTFOLIO
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND -----------------------------------------------------------------------------
RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS: SIX MONTHS
ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN 1994 ---------------------------------------------------------------
NET ASSET VALUE: (UNAUDITED) 1993 1992 1991 1990 1989 1988
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05
-------- -------- -------- -------- -------- -------- --------
Investment income--net............................ .38 .79 .87 .92 1.00 .95 .96
Realized and unrealized gain (loss) on
investments--net................................. (.05) .29 .82 .63 (1.13) (.37) (.15)
-------- -------- -------- -------- -------- -------- --------
Total from investment operations.................. .33 1.08 1.69 1.55 (.13) .58 .81
-------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net........................... (.38) (.79) (.87) (.92) (1.00) (.96) (.96)
-------- -------- -------- -------- -------- -------- --------
Total dividends................................... (.38) (.79) (.87) (.92) (1.00) (.96) (.96)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period.................... $ 8.08 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN: **
Based on net asset value per share................ 4.01%++ 14.35% 25.22% 26.46% (1.95%) 7.69% 10.82%
======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............. .52%* .55% .59% .66% .68% .66% .64%
======== ======== ======== ======== ======== ======== ========
Expenses.......................................... .52%* .55% .59% .66% .68% .66% .64%
======== ======== ======== ======== ======== ======== ========
Investment income--net............................ 8.98%* 9.78% 11.44% 14.13% 14.22% 12.30% 12.33%
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $919,807 $886,784 $683,801 $522,703 $486,426 $641,619 $759,403
======== ======== ======== ======== ======== ======== ========
Portfolio turnover................................ 17.76% 34.85% 40.52% 39.95% 47.60% 56.00% 38.99%
======== ======== ======== ======== ======== ======== ========
<CAPTION>
HIGH INCOME PORTFOLIO
CLASS A
THE FOLLOWING PER SHARE DATA AND -----------------------------------------
RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS:
FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN -----------------------------------------
NET ASSET VALUE: 1987 1986 1985 1984
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 8.28 $ 8.15 $ 7.67 $ 8.24
-------- -------- -------- --------
Investment income--net................................ .95 .99 1.02 1.02
Realized and unrealized gain (loss) on
investments--net..................................... (.23) .13 .48 (.57)
-------- -------- -------- --------
Total from investment operations...................... .72 1.12 1.50 .45
-------- -------- -------- --------
Less dividends:
Investment income--net............................... (.95) (.99) (1.02) (1.02)
-------- -------- -------- --------
Total dividends....................................... (.95) (.99) (1.02) (1.02)
-------- -------- -------- --------
Net asset value, end of period........................ $ 8.05 $ 8.28 $ 8.15 $ 7.67
========= ========= ========= =========
TOTAL INVESTMENT RETURN: **
Based on net asset value per share.................... 8.82% 14.30% 20.60% 5.88%
========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees................. .65% .71% .86% .84%
========= ========= ========= =========
Expenses.............................................. .65% .71% .86% .84%
========= ========= ========= =========
Investment income--net................................ 11.31% 11.68% 12.87% 12.97%
========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $811,558 $597,379 $299,145 $235,449
========= ========= ========= =========
Portfolio turnover.................................... 56.95% 32.97% 82.18% 94.26%
========= ========= ========= =========
<CAPTION>
CLASS B
THE FOLLOWING PER SHARE DATA AND ------------------------------------------------------------------------
RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE FOR THE
FINANCIAL STATEMENTS: SIX MONTHS PERIOD
ENDED OCT. 21,
MARCH 31, 1988+ TO
INCREASE (DECREASE) IN 1994 FOR THE YEAR ENDED SEPTEMBER 30, SEPT 30,
NET ASSET VALUE: (UNAUDITED) 1993 1992 1991 1990 1989
----------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92
---------- ---------- -------- -------- -------- --------
Investment income--net............................ .35 .72 .81 .87 .95 .86
Realized and unrealized gain (loss) on
investments--net................................. (.05) .28 .83 .62 (1.12) (.40)
---------- ---------- -------- -------- -------- --------
Total from investment operations.................. .30 1.00 1.64 1.49 (.17) .46
---------- ---------- -------- -------- -------- --------
Less dividends:
Investment income--net........................... (.35) (.72) (.81) (.87) (.95) (.86)
---------- ---------- -------- -------- -------- --------
Total dividends................................... (.35) (.72) (.81) (.87) (.95) (.86)
---------- ---------- -------- -------- -------- --------
Net asset value, end of period.................... $ 8.08 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
========== ========== ======== ======== ======== ========
TOTAL INVESTMENT RETURN: **
Based on net asset value per share................ 3.61%++ 13.35% 24.44% 25.32% (2.54%) 6.08%++
========== ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............. .53%* .56% .60% .67% .70% .70%*
========== ========== ======== ======== ======== ========
Expenses.......................................... 1.28%* 1.31% 1.35% 1.42% 1.45% 1.45%*
========== ========== ======== ======== ======== ========
Investment income--net............................ 8.21%* 8.94% 10.42% 13.24% 13.69% 11.75%*
========== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $2,263,879 $1,823,275 $847,354 $264,486 $157,979 $120,969
========== ========== ======== ======== ======== ========
Portfolio turnover................................ 17.76% 34.85% 40.52% 39.95% 47.60% 56.00%
========== ========== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
10
<PAGE> 14
FINANCIAL HIGHLIGHTS -- (CONTINUED)
INVESTMENT GRADE PORTFOLIO@
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND CLASS A
RATIOS HAVE BEEN DERIVED FROM ---------------------------------------------------------------------
INFORMATION PROVIDED IN THE SIX MONTHS
FINANCIAL STATEMENTS: ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN 1994 -------------------------------------------------------
NET ASSET VALUE: (UNAUDITED) 1993 1992 1991 1990
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
-------- --------- -------- -------- --------
Investment income--net............................ .39 .81 .88 .92 .95
Realized and unrealized gain (loss) on
investments--net................................. (.98) .67 .71 .76 (.38)
-------- --------- -------- -------- --------
Total from investment operations.................. (.59) 1.48 1.59 1.68 .57
-------- --------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................... (.39) (.81) (.88) (.92) (.95)
Realized gains on investments--net............... (.55) (.16) -- -- --
-------- --------- -------- -------- --------
Total dividends and distributions................. (.94) (.97) (.88) (.92) (.95)
-------- -------- --------- -------- --------
Net asset value, end of period.................... $ 11.28 $ 12.81 $ 12.30 $ 11.59 $ 10.83
========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN: **
Based on net asset value per share................ (4.89%)++ 12.78% 14.30% 16.18% 5.22%
========= ========== ========= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............. .51%* .53% .58% .61% .64%
========= ========== ========= ======== ========
Expenses.......................................... .51%* .53% .58% .61% .64%
========= ========== ========= ======== ========
Investment income--net............................ 6.35%* 6.94% 7.43% 8.26% 8.54%
========= ========= ========= ========= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $380,839 $407,625 $362,139 $324,818 $307,723
========= ========= ========== ========= =========
Portfolio turnover................................ 62.63% 121.34% 65.43% 126.32% 126.39%
========= ========= ========= ========= =========
<CAPTION>
THE FOLLOWING PER SHARE DATA AND CLASS A
RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED ------------------------------------------------------------------------------
IN THE FINANCIAL STATEMENTS:
FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN ------------------------------------------------------------------------------
NET ASSET VALUE: 1989 1988 1987 1986 1985 1984
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.04 $ 10.61 $ 11.69 $ 10.93 $ 9.98 $ 10.37
---------- ---------- ---------- ---------- ---------- ---------
Investment income--net............................ 1.00 .99 .99 1.11 1.20 1.21
Realized and unrealized gain (loss) on
investments--net................................. .17 .43 (1.08) .76 .95 (.39)
---------- ---------- ---------- ---------- ---------- ---------
Total from investment operations.................. 1.17 1.42 (.09) 1.87 2.15 .82
---------- ---------- ---------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net........................... (1.00) (.99) (.99) (1.11) (1.20) (1.21)
Realized gains on investments--net............... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------
Total dividends and distributions................. (1.00) (.99) (.99) (1.11) (1.20) (1.21)
---------- ---------- ---------- ---------- ---------- ---------
Net asset value, end of period.................... $ 11.21 $ 11.04 $ 10.61 $ 11.69 $ 10.93 $ 9.98
========== ========== ========== ========== ========== =========
TOTAL INVESTMENT RETURN: **
Based on net asset value per share................ 11.09% 13.75% (1.14%) 17.66% 22.50% 8.60%
========== ========== ========== ========== ========== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............. .66% .60% .59% .66% .85% .85%
========== ========== ========== ========== ========== =========
Expenses.......................................... .66% .60% .59% .66% .85% .85%
========== ========== ========== ========== ========== =========
Investment income--net............................ 9.04% 9.02% 8.52% 9.51% 11.41% 12.19%
========== ========== ========== ========== ========== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $289,804 $258,435 $238,637 $224,820 $135,910 $118,948
========== ========== ========== ========== ========== =========
Portfolio turnover................................ 212.85% 174.99% 126.19% 93.76% 141.40% 112.67%
========== ========== ========== ========== ========== =========
<CAPTION>
CLASS B
----------------------------------------------------------------------------
For the
THE FOLLOWING PER SHARE DATA AND Period
RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED SIX MONTHS Oct 21,
IN THE ENDED 1988+ to
FINANCIAL STATEMENTS: MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30, Sept. 30,
INCREASE (DECREASE) IN 1994 -------------------------------------------------- ---------
NET ASSET VALUE: (UNAUDITED) 1993 1992 1991 1990 1989
----------- ----- ----- ----- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08
--------- ---------- ---------- ---------- ---------- -------
Investment income--net............................ .35 .72 .79 .84 .86 .87
Realized and unrealized gain (loss) on
investments--net................................. (.98) .67 .71 .76 (.38) .13
--------- ---------- ---------- ---------- ---------- -------
Total from investment operations.................. (.63) 1.39 1.50 1.60 .48 1.00
--------- ---------- ---------- ---------- ---------- -------
Less dividends and distributions:
Investment income--net........................... (.35) (.72) (.79) (.84) (.86) (.87)
Realized gains on investments--net............... (.55) (.16) -- -- -- --
--------- ---------- ---------- ---------- ---------- -------
Total dividends and distributions................. (.90) (.88) (.79) (.84) (.86) (.87)
--------- ---------- ---------- ---------- ---------- -------
Net asset value, end of period.................... $ 11.28 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
========= ========== ========== ========== ========== =======
TOTAL INVESTMENT RETURN: **
Based on net asset value per share................ (5.26%)++ 11.92% 13.44% 15.30% 4.42% 9.44%++
========= ========== ========== ========== ========== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............. .52%* .54% .59% .62% .66% .70%*
========= ========== ========== ========== ========== =======
Expenses.......................................... 1.27%* 1.29% 1.34% 1.37% 1.41% 1.45%*
========= ========== ========== ========== ========== =======
Investment income--net............................ 5.59%* 5.80% 6.65% 7.50% 7.77% 8.17%*
========= ========== ========== ========== ========== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $506,658 $515,402 $325,706 $198,504 $174,914 $91,914
========= ========== ========== ========== ========== =======
Portfolio turnover................................ 62.63% 121.34% 65.43% 126.32% 126.39% 212.85%
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
@ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
11
<PAGE> 15
FINANCIAL HIGHLIGHTS -- (CONCLUDED)
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND --------------------------------------------------------------------
RATIOS HAVE BEEN DERIVED FROM SIX MONTHS
INFORMATION PROVIDED IN THE FINANCIAL ENDED
STATEMENTS: MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
1994 --------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: (UNAUDITED) 1993 1992 1991 1990 1989 1988
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70
--------- -------- -------- -------- -------- -------- --------
Investment income--net................... .38 .76 .88 .93 .97 .98 .96
Realized and unrealized gain (loss) on
investments--net........................ (.85) .55 .62 .53 (.17) .05 .31
--------- -------- -------- -------- -------- -------- --------
Total from investment operations......... (.47) 1.31 1.50 1.46 .80 1.03 1.27
--------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................. (.38) (.76) (.88) (.93) (.97) (.99) (.96)
Realized gains on investments--net...... (.28) (.14) -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total dividends and distributions........ (.66) (.90) (.88) (.93) (.97) (.99) (.96)
--------- -------- -------- -------- -------- -------- --------
Net asset value, end of period........... $ 11.31 $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01
========= ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....... (3.93%)++ 11.40% 13.71% 13.97% 7.55% 9.79% 12.25%
========= ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees.... .52%* .58% .62% .67% .71% .72% .62%
========= ======== ======== ======== ======== ======== ========
Expenses................................. .52%* .58% .62% .67% .71% .72% .62%
========= ======== ======== ======== ======== ======== ========
Investment income--net................... 6.19%* 6.42% 7.54% 8.35% 8.86% 8.97% 8.83%
========= ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $184,244 $193,505 $154,333 $103,170 $88,248 $87,001 $97,577
========= ======== ======== ======== ======== ======== ========
Portfolio turnover....................... 76.18% 180.52% 95.33% 132.56% 102.53% 148.75% 152.41%
========= ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS B
---------------------
FOR THE
THE FOLLOWING PER SHARE DATA AND SIX MONTHS PERIOD
INFORMATION PROVIDED IN THE FINANCIAL ENDED NOV. 13,
STATEMENTS: MARCH 31, 1992+ TO
1994 SEPT.
INCREASE (DECREASE) IN NET ASSET VALUE: 1987 1986 1985 1984 (UNAUDITED) 30, 1993
-------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 11.69 $ 10.86 $ 10.05 $ 10.43 $ 12.44 $ 11.68
-------- -------- -------- -------- --------- --------
Investment income--net................... .94 1.07 1.18 1.17 .35 .61
Realized and unrealized gain (loss) on
investments--net........................ (.99) .83 .81 (.38) (.85) .90
-------- -------- -------- -------- --------- --------
Total from investment operations......... (.05) 1.90 1.99 .79 (.50) 1.51
-------- -------- -------- -------- --------- --------
Less dividends and distributions:
Investment income--net.................. (.94) (1.07) (1.18) (1.17) (.35) (.61)
Realized gains on investments--net...... -- -- -- -- (.28) (.14)
-------- -------- -------- -------- --------- --------
Total dividends and distributions........ (.94) (1.07) (1.18) (1.17) (.63) (.75)
-------- -------- -------- -------- --------- --------
Net asset value, end of period........... $ 10.70 $ 11.69 $ 10.86 $ 10.05 $ 11.31 $ 12.44
======== ======== ======== ======== ========= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....... (0.72%) 18.09% 20.66% 8.20% (4.18%)++ 13.31%++
======== ======== ======== ======== ========= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees.... .61% .62% .50% .50% .53%* .57%*
======== ======== ======== ======== ========= ========
Expenses................................. .61% .62% .50% .50% 1.03%* 1.07%*
======== ======== ======== ======== ========= ========
Investment income--net................... 8.09% 9.12% 11.00% 11.70% 5.69%* 5.61%*
======== ======== ======== ======== ========= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $111,207 $105,919 $48,095 $27,333 $147,898 $134,122
======== ======== ======== ======== ========= ========
Portfolio turnover....................... 152.53% 67.12% 48.48% 69.60% 76.18% 180.52%
======== ======== ======== ======== ========= ========
</TABLE>
[/R]
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
Further information about the performance of each Portfolio is contained in
the Fund's Annual Report, which can be obtained, without charge, upon request.
The Fund, a Maryland corporation, is a diversified, open-end investment
company which is comprised of three separate portfolios: the Investment Grade
Portfolio, the Intermediate Term Portfolio and the High Income Portfolio. Each
Portfolio is in effect a separate fund issuing its own shares. A shareholder's
interest is limited to the assets of the Portfolio in which he holds shares, and
a shareholder is entitled to a pro rata share of all dividends and distributions
arising from the net income and capital gains on the investments of such
Portfolio. Each Portfolio bears the expenses directly attributable to it and a
portion of the Fund's general administrative expenses allocated on the basis of
asset size.
12
<PAGE> 16
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of each Portfolio of the Fund is to obtain
the highest level of current income as is consistent with the investment
policies of such Portfolio, as described herein, and with prudent investment
management. As a secondary objective, each Portfolio seeks capital appreciation
when consistent with its primary objective. Each Portfolio 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. The investment objectives of a Portfolio may be changed
without the approval of the holders of a majority of such Portfolio's
outstanding voting securities. There can be no assurance that the objective of
any Portfolio can be attained.
The securities in each Portfolio of the Fund 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 the assets of each
Portfolio 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 assets of each Portfolio will under normal
circumstances be invested in corporate bonds. The remaining assets of a
Portfolio 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 Portfolios of the Fund do not intend to invest in common
stocks, rights or other equity securities, but the High Income Portfolio will
acquire or hold such securities (if consistent with the objectives of the
Portfolio) 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.
Each Portfolio is permitted to enter into transactions in futures contracts
and options thereon solely for the purpose of hedging the Portfolio against
adverse movements in the market value of fixed-income securities held by the
Portfolio, or which the Portfolio intends to purchase, and not for the purpose
of speculation. Transactions in options on debt securities also may be entered
into for such hedging purposes, as well as for non-hedging purposes intended to
increase the Portfolios' returns. For a more complete description of futures
transactions, see "Interest Rate Futures and Options Thereon" below and "Options
on Debt Securities" below and the Statement of Additional Information.
INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objectives through the separate
investment policies described below:
High Income Portfolio seeks high current income by investing principally in
fixed-income securities which 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. 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
13
<PAGE> 17
Transactions in Junk Bonds". Because investment in such junk bonds entails
relatively greater risk of loss of income or principal, an investment in the
High Income Portfolio may not constitute a complete investment program and may
not be appropriate for all investors. Purchasers should carefully assess the
risks associated with an investment in this Portfolio.
Selection and supervision by the management of the High Income Portfolio of
portfolio investments involves continuous analysis of individual issuers,
general business conditions and other factors which 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 Portfolio may
invest, without limit, in unrated securities. As a result, the High Income
Portfolio's ability to achieve its investment objective may depend to a greater
extent on the Investment Adviser's own credit analysis than mutual funds which
invest in higher-rated securities. Although the High Income Portfolio 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
which 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.
The High Income Portfolio may also from time to time invest up to 10% of
its assets in securities which are the subject of bankruptcy proceedings or
otherwise in default or in significant risk of being in default ("Distressed
Securities"). Distressed Securities which 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 which 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 Portfolio 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 Portfolio will invest in
Distressed Securities at a price that represents a significant discount from the
principal amount due on maturity of the securities. The Portfolio 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 Portfolio
would receive in exchange for its Distressed Securities securities or assets
with terms and credit characteristics which offer the Portfolio significant
opportunities for capital appreciation and future high rates of current income.
See "Risk Factors in Transactions in Junk Bonds".
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<PAGE> 18
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the High
Income Portfolio 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 High Income Portfolio for temporary
defensive 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.
Investment Grade Portfolio invests primarily in securities rated in the top
three rating categories of either S&P or Moody's. The financial risk of the
Portfolio should be minimized by the quality of the bonds in which it will
invest, but the long maturities that typically provide the best yields will
subject the Portfolio to possible substantial price changes resulting from
market yield fluctuations. Portfolio management strategy will attempt to
mitigate adverse price changes and optimize favorable price changes through
active trading that shifts the maturity and/or quality structure of the
Portfolio within the overall investment guidelines. The Investment Grade
Portfolio may continue to hold securities which, after being purchased by the
Portfolio, were downgraded to a rating below the top three rating categories of
Moody's or S&P as well as any unrated securities which, in the Investment
Adviser's judgment, have suffered a similar decline in quality. Under unusual
market or economic conditions, the Portfolio for temporary defensive or other
purposes may invest up to 100% of its assets in obligations of 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
the objectives of the Portfolio, or the Portfolio may hold its assets in cash.
Intermediate Term Portfolio invests primarily in bonds rated in the four
highest categories of S&P or Moody's. Bonds rated in the lowest of these
categories are considered to have some speculative characteristics. The
Portfolio will invest in fixed-income securities with a maximum remaining
maturity of ten years and, under normal circumstances, the average maturity of
the Portfolio will be between five and seven years. The Portfolio will treat
bonds which the Portfolio has the option to demand repayment of within ten years
as having a remaining maturity of less than ten years, even if the period to the
stated maturity date of such bonds is greater than ten years. In addition, the
Portfolio may purchase bonds on a forward commitment basis, with a period of up
to 45 days between the date on which the Fund commits to purchase a bond and the
date on which it settles the purchase, even if the commitment is made in excess
of ten years prior to the maturity date of the bond, as long as the maturity
date of the bond at the date of settlement is no more than ten years. See
"Investment Restrictions -- Forward Commitments" in the Statement of Additional
Information for a further description of forward commitments. Because of the
shorter maturities of the securities in which this Portfolio invests, changes in
the general level of interest rates should result in less change in the net
asset value per share of the Portfolio than for the other two Portfolios. In
addition, this Portfolio will usually offer a lower yield.
Despite the inherently greater defensive characteristics of the shorter
maturities in the Intermediate Term Portfolio, during periods of unusually high
yields on money market instruments the prices of
15
<PAGE> 19
intermediate-term maturity securities may be adversely affected to a substantial
degree. Therefore, management will seek to mitigate the effect of any such
interest rate development by shortening the average maturity of securities held
by the Portfolio during such periods. Active management strategy within the
overall investment guidelines will thus seek to provide an attractive total
return. The Intermediate Term Portfolio may continue to hold securities which,
after being purchased by the Portfolio, are downgraded to a rating lower than
the four highest categories of S&P or Moody's. As in the other Portfolios, under
unusual market or economic conditions, the Portfolio for temporary defensive or
other purposes may invest up to 100% of its assets in obligations of 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 the objectives of the Portfolio, or the Portfolio may hold its
assets in cash.
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 Portfolio may invest do
not include securities which, 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 Portfolio purchases a particular security, in which
case the Portfolio 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 High Income Portfolio. If a call were
exercised by the issuer during a period of declining interest rates, the High
Income Portfolio likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the High Income
Portfolio 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 which 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 Portfolio receives
for its junk bonds
16
<PAGE> 20
to be reduced, or the Portfolio may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Portfolio'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 Portfolio's portfolio securities than in
the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the High Income
Portfolio's net asset value. In addition, the High Income Portfolio 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.
Investment in Distressed Securities involves significant risk. The High
Income Portfolio 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 Portfolio 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 Portfolio
will be subject to significant uncertainty as to whether or not the exchange
offer or plan of reorganization will be completed, and the Portfolio 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 Portfolio, there can
be no assurance that the securities or other assets received by the Portfolio 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 Portfolio upon completion of an
exchange offer or plan of reorganization may be restricted as to resale. In
addition, as a result of the Portfolio's participation in negotiations with
respect to any exchange offer or plan of reorganization with respect to an issue
of Distressed Securities, the Portfolio may be precluded from disposing of such
securities.
17
<PAGE> 21
The table below shows the average monthly dollar-weighted market value, by
S&P's rating category, of the bonds held by the Portfolio during the fiscal year
ended September 30, 1993.
<TABLE>
<CAPTION>
% MARKET VALUE
% NET CORPORATE
RATING ASSETS BONDS
- ----------- ----- --------------
<S> <C> <C>
AAA .25% .27%
AA .33 .36
A .65 .72
BBB 1.37 1.50
BB 17.51 19.05
B 50.94 55.56
CCC 3.61 3.94
CC .52 .57
C 1.46 1.60
D 1.12 1.22
NR 13.97 15.21
----- ------
91.73% 100.00%
===== ======
</TABLE>
INTEREST RATE FUTURES AND OPTIONS THEREON
Each Portfolio of the Fund may engage in hedging transactions in interest
rate futures contracts and options thereon. The Portfolios 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. However, under the investment restrictions of the Fund, the
Portfolios are permitted to trade in such additional types of interest rate
futures contracts and options thereon as the Fund's Board of Directors
determines is appropriate for trading by the Fund's Portfolios, subject to the
restrictions noted below. The Portfolios will engage in the trading of futures
contracts or options thereon for hedging purposes only. A Portfolio may enter
into a futures contract or option in order to protect against a decline in the
value of securities it owns, or to protect against an increase in the cost of
securities it intends to purchase. To the extent the hedge is successful, a loss
(or gain) on the securities will tend to be offset by a gain (or loss) on the
futures or options contracts. While the use of futures contracts and options
thereon is intended to reduce the overall level of market risk in the
Portfolios, there can be no assurance that this objective will be achieved. In
addition, while transactions in futures contracts and options thereon are
employed solely for hedging purposes, their use nevertheless involves certain
risks. See "Risk Factors in Transactions in Futures Contracts and Options
Thereon".
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and the
risks associated therewith. 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 Contracts. Each Portfolio may purchase and sell interest rate,
bond or bond index futures contracts ("futures contracts"), which are described
in the Appendix to the Statement of Additional Information, for the purpose of
hedging its portfolio of fixed-income securities against the adverse effects of
18
<PAGE> 22
anticipated movements in interest rates. A futures contract obligates the seller
of a contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument called for in the contract at a specified future
time for a specified price. Although the terms of a futures contract either call
for actual delivery of its underlying commodity, or the making of a cash payment
or settlement, in most cases the contracts are closed out before the delivery
date without delivery taking place. The Portfolios intend to close out their
futures contracts prior to the delivery date of such contracts.
A Portfolio may sell futures contracts in anticipation of an increase in
the general level of interest rates in the U.S. economy. Generally, as interest
rates rise, the market value of the fixed-income securities held by the
Portfolio will fall, thus reducing the net asset value of the Portfolio. This
interest rate risk can be reduced without employing futures as a hedge by
selling long-term securities and either reinvesting the proceeds in securities
with shorter maturities or by holding assets in cash. This strategy, however,
entails increased transaction costs in the form of dealer spreads and brokerage
commissions and would typically reduce the stated coupon rate or imputed yield
of securities held in the Portfolio as a result of the shortening of maturities.
The sale of futures contracts provides an alternative means of hedging
against rising interest rates. As rates increase, the value of the Portfolio's
short position in the futures contracts are expected to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's fixed-income investments which are being hedged. While the
Portfolios will incur commission and transaction expenses in selling and closing
out futures positions (which is done by taking an opposite position-in this case
purchasing a futures contract-which operates to terminate the position in the
initial futures contract), commissions and transaction costs for futures
transactions may be lower than transaction costs incurred in the purchase and
sale of an equivalent amount of fixed-income securities. In addition, the
ability of a Portfolio to trade in the standardized contracts available in the
futures market may offer a more effective hedging strategy than a program to
reduce the average maturity of portfolio securities, due to the unique and
varied credit and technical characteristics of the corporate debt instruments
available to a Portfolio seeking to restructure its portfolio of such
securities. Employing futures as a hedge may also permit a Portfolio to assume a
hedging posture without reducing the stated coupon or imputed yield on its
investments. As a result of such futures transactions, however, the Portfolios
may be forced to forego in whole or in part the benefit of any increase in the
value of the securities being hedged.
A Portfolio may also purchase futures contracts in anticipation of a
decline in interest rates when it is not fully invested in fixed-income
securities in order to gain rapid market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. As such
purchases are made, an equivalent amount of futures contracts will be closed
out. In a substantial majority of these transactions, the Portfolios will
purchase fixed-income securities upon termination of the futures contracts.
However, due to changing market conditions and interest rate forecasts, the
Portfolios may terminate a futures position without a corresponding purchase of
securities, although the Portfolios' ability to do so may be subject to certain
regulatory restrictions.
Options on Futures Contracts. The Portfolios may purchase and write (i.e.,
sell) call and put options on futures contracts which are traded on contract
markets and enter into closing transactions with respect to such options to
terminate an existing position.
19
<PAGE> 23
A Portfolio may use such options in connection with its hedging strategies.
Generally these strategies would be employed under the same market and market
sector conditions in which the Portfolio enters into futures contracts. The
Portfolio may purchase put options on futures contracts rather than selling the
underlying futures contract in anticipation of an increase in interest rates.
Similarly, the Portfolio may purchase call options on futures contracts as a
substitute for the purchase of such futures contracts to hedge against the
increased cost resulting from a decline in interest rates of fixed-income
securities which the Portfolio intends to purchase. The Portfolio also may write
a call option on a futures contract rather than selling the underlying futures
contract, or write a put option on a futures contract rather than purchasing the
underlying futures contracts. The writing of an option, however, will only
constitute a partial hedge, since the Portfolio could be required to enter into
a futures contract at an unfavorable price and will in any event be able to
benefit only to the extent of the premium received. In a substantial majority of
transactions in which a Portfolio purchases call options or writes put options,
it will purchase an equivalent amount of fixed-income securities on the
termination of the options positions but such positions may be terminated
without corresponding purchases when, in the judgment of the Fund, changing
market conditions warrant.
Restrictions on the Use of Transactions in Futures Contracts and Related
Options. Under regulations of the Commodity Futures Trading Commission
("CFTC"), neither the Fund nor any of the Portfolios will be considered
"commodity pools", as defined under such regulations, as a result of their
entering into the transactions in futures contracts and related options
described herein, provided, among other things, that: (1) such transactions are
entered into solely for bona fide hedging purposes, as defined under CFTC
regulations or, in the case of long futures positions, the total value of such
positions does not exceed an amount determined by reference to certain
segregated funds and securities and accrued profits on such position, and (2) no
Portfolio enters into transactions in futures contracts or related options for
which the aggregate initial margin and premiums exceeds 5% of its total assets.
When a Portfolio purchases a futures contract or a call option thereon or
writes a put option thereon, an amount of cash or cash equivalents will be
deposited in a segregated account with the Fund's Custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
Risk Factors in Transactions in Futures Contracts and Options Thereon. A
Portfolio's ability effectively to hedge all or a portion of its fixed income
securities through the use of futures and options thereon depends in part on the
degree to which price movements in the security underlying the futures contract
or option correlate with price movements of the fixed-income securities held by
the Portfolio. Changes in the general level of interest rates can be expected to
have a similar impact on the market value of both U.S. Government securities
that are the subject of the futures contracts and other fixed-income
investments. However, inasmuch as the Portfolios invest predominantly in the
debt obligations of corporate issuers, the correlation will probably not be
perfect. Changes in interest rates may have a differential impact on the value
of private sector debt instruments as compared with U.S. Government debt
obligations. In addition, disparities in the average maturity or the quality of
a Portfolio's investments as compared to the financial instrument underlying a
futures or option contract may also reduce the correlation in price movements.
General economic and political factors other than interest rate movements may
also have a disparate effect on the value of corporate obligations and U.S.
Government securities. The use of financial futures will therefore probably not
be an effective hedge against market risks other than a general interest rate
risk. Transactions in options on futures
20
<PAGE> 24
contracts involve similar risks, as well as the additional risk that movements
in the price of the option will not correlate with movements in the price of the
underlying futures contract.
Prior to exercise or expiration, a position in futures contracts or options
thereon may be terminated only by entering into a closing purchase or sale
transaction. This requires a liquid market on the relevant contract market. A
Portfolio will enter into an option or futures position only if there appears to
be a liquid market therefor, although there can be no assurance that such a
liquid market will exist for any particular option or futures contract at any
specific time. Thus, it may not be possible to close out an option or futures
position once it has been established. In the case of a futures position, or
options on futures contracts written by the Portfolio, the Portfolio would
continue to be required to make daily cash payments of variation margin, in the
event of adverse price movements. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds or make a cash
settlement in respect thereof. The inability to close options and futures
positions also could have an adverse impact on the Portfolio's ability
effectively to hedge its portfolio. There is also the risk of loss by the Fund
of margin deposits in the event of bankruptcy of a broker with whom the Fund has
an open position in a futures contract or related option, or the exchange or
clearing organization on which those contracts are traded.
The liquidity of a market in a futures contract and options thereon may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges or contract markets on which these futures and options are traded
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures or options positions at the price desired by the
Portfolio. Prices have in the past moved to the daily limit on a number of
occasions, including consecutive trading days.
In addition to the risks of imperfect correlation and lack of a liquid
market for such instruments, transactions in futures and options involve other
risks, including those related to leveraging and the potential for incorrect
forecasts of the direction and extent of interest rate movements within a given
time frame. Reference is made to the Statement of Additional Information and the
Appendix thereto concerning additional risk factors with respect to the Fund's
options and futures strategies.
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 U.S. Government securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or primary dealer or an
affiliate thereof in U.S. Government securities or an affiliate thereof. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the Fund may suffer time delays and incur costs or
possible losses in connection with such transactions.
21
<PAGE> 25
Forward Commitments. The Fund may purchase U.S. Government securities and
corporate debt obligations on a when-issued basis or forward commitment basis,
and it may purchase or sell such securities for delayed delivery. These
transactions occur when securities are purchased or 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 maintain a segregated account with its
custodian of cash or liquid high grade debt obligations in an aggregate amount
equal to the amount of its commitments in connection with such purchase
transactions.
Restricted Securities. From time to time a Portfolio of 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 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, a
Portfolio of the Fund may not be able to sell its restricted securities at a
time which, in the judgment of the Investment Adviser, would be most opportune.
Standby Commitment Agreements. The High Income Portfolio of the Fund may
from time to time enter into standby commitment agreements. Such agreements
commit the Portfolio, for a stated period of time, to purchase a stated amount
of a fixed income security which may be issued and sold to the Portfolio 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 Portfolio is
paid a commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately .5% of the aggregate purchase price of
the security which the Portfolio has committed to purchase. The Portfolio will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price which is considered advantageous
to the Portfolio. The Portfolio 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 10% of its assets taken at the
time of acquisition of such commitment or security. The Portfolio 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
Portfolio 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 Portfolio'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.
22
<PAGE> 26
Options on Debt Securities. The Portfolios 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 Portfolios. The Portfolios 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, a Portfolio 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 Portfolio may be required, however, to forego benefits which 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 Portfolio may receive less total return, and at other times
greater total return, than if it had not written options.
The Portfolios also may purchase put options on optionable U.S. Treasury
bills, notes and bonds held in a Portfolio and, under certain limited
circumstances described in the Statement of Additional Information, call options
on such instruments. Purchases of put options may enable the Portfolios 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, a Portfolio will be required to pay the premium,
which will reduce the benefits obtained from the transaction.
Although options written by a Portfolio 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 Portfolio may be
unable to terminate existing positions and may be subject to exercise of the
option under unfavorable circumstances. The Portfolios 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 each
Portfolio). Among such restrictions are prohibitions against the Fund's
investing more than 5% of the total assets of any Portfolio in the securities of
any one issuer, purchasing more than 10% (i) in principal amount of outstanding
securities of an issuer, or (ii) of outstanding voting securities of an issuer,
and investing more than 25% of the total assets of any Portfolio 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.
23
<PAGE> 27
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The investment
objectives and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change. The full text of the
proposed investment restrictions is set forth under "Proposed Uniform Investment
Restrictions" in the Statement of Additional Information.
INVESTMENT ADVISER
The investment adviser to the Fund is Fund Asset Management, L.P. The
address of FAM is P.O. Box 9011, Princeton, New Jersey 08543-9011. FAM or MLAM
acts as the investment adviser for over 100 other registered investment
companies. FAM or MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of August 31, 1994, FAM and MLAM
had a total of approximately $165.7 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
FAM.
Effective January 1, 1994, FAM was reorganized as a Delaware limited
partnership. FAM (the general partner of which is Princeton Services, Inc., a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. (a financial services
holding company and parent of Merrill Lynch)) is owned and controlled by Merrill
Lynch & Co., Inc. and has its principal place of business at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536. Prior to the reorganization, the Investment
Adviser was a Delaware corporation known as Fund Asset Management, Inc., which
was incorporated in 1976. The reorganization did not result in a change to the
Investment Adviser's management or personnel, nor did the reorganization cause
any adverse change to the Investment Adviser's financial condition.
FAM, subject to the general supervision of the Fund's Board of Directors,
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. For the six
months ended March 31, 1994, FAM received advisory fees from the Fund in the
amount of $8,702,905, of which $6,362,332 was received with respect to the High
Income Portfolio (representing .42% of its average net assets), $1,713,212 was
received with respect to the Investment Grade Portfolio (representing .38% of
its average net assets) and $627,361 was received with respect to the
Intermediate Term Portfolio (representing .38% of its average net assets). For
the year ended September 30, 1993, FAM received advisory fees from the Fund in
the amount of $12,680,843, of which $8,790,993 was received with respect to the
High Income Portfolio (representing .42% of its average net assets), $2,983,402
was received with respect to the Investment Grade Portfolio (representing .37%
of its average net assets) and $906,448 was received with respect to the
Intermediate Term Portfolio (representing .36% of its average net assets).
24
<PAGE> 28
The Investment Advisory Agreement obligates each Portfolio to pay certain
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. The Fund's total expenses for the six months ended March
31, 1994 were $21,552,053, of which $15,897,052 was attributable to the High
Income Portfolio (.52% and 1.28% of average net assets represented by Class A
and Class B shares, respectively), $4,382,226 was attributable to the Investment
Grade Portfolio (.51% and 1.27% of average net assets represented by Class A and
Class B shares, respectively), $1,272,775 was attributable to the Intermediate
Term Portfolio (.52% and 1.03% of average net assets represented by Class A and
Class B shares, respectively). The Fund's total expenses for the year ended
September 30, 1993 were $30,415,303, of which $21,246,342 was attributable to
the High Income Portfolio (.55% and 1.31% of average net assets represented by
Class A and Class B shares, respectively), $7,440,555 was attributable to the
Investment Grade Portfolio (.53% and 1.29% of average net assets represented by
Class A and Class B shares, respectively) and $1,728,406 was attributable to the
Intermediate Term Portfolio (.58% and 1.07% of average net assets represented by
Class A and Class B shares, respectively).
Vincent T. Lathbury III has served as Portfolio Manager of the High Income
Portfolio, and Jay C. Harbeck has served as Portfolio Manager of the Investment
Grade and Intermediate Term Portfolios. They are primarily responsible for the
day to day management of the Fund. Vincent T. Lathbury III has served as
Portfolio Manager of the Investment Adviser and MLAM, and Vice President of
MLAM, since 1982. Jay C. Harbeck has served as Vice President of MLAM since
1986, and as Portfolio Manager of MLAM since 1992.
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act of
1940. 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 of 1940. The
Board of Directors elects officers of the Fund annually.
The Directors of the Fund and their principal employment are as follows:
ARTHUR ZEIKEL* -- President and Chief Executive Officer of MLAM and FAM;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co."); Executive
Vice President of Merrill Lynch, and a Senior Vice President thereof; Director
of the Distributor, Inc.
RONALD W. FORBES -- Associate Professor of Finance, School of Business,
State University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor, Harvard Business School.
CHARLES C. REILLY -- Adjunct Professor, Columbia University Graduate School
of Business.
KEVIN A. RYAN -- Professor of Education at Boston University. Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST -- Professor of Finance at New York University School of
Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
25
<PAGE> 29
PURCHASE OF SHARES
Each Portfolio continuously offers its shares at a public offering price
based on its per share net asset value plus sales charges imposed either at the
time of purchase or on a deferred basis depending upon the class of shares
selected by the investor under the Merrill Lynch Select PricingSM System. Net
asset value is determined in the manner set forth under "Additional
Information -- Determination of Net Asset Value". Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), an affiliate of both the Investment
Adviser and Merrill Lynch, acts as the distributor of the shares. Shares may be
purchased directly 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 each Portfolio is $1,000. The
minimum subsequent purchase in each Portfolio is $50. For retirement plans, the
minimum initial purchase in each Portfolio is $100 and the minimum subsequent
purchases requirement is $1. Merrill Lynch charges its customers a processing
fee (currently $4.85) to confirm a sale of shares to such customers.
As to purchase orders received by securities dealers prior to the close of
the New York Stock Exchange 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 the close
of the New York Stock Exchange on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
p.m., New York City time, on that 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. Any order may be
rejected by the Distributor or the Fund.
Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select PricingSM 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.
Class C shares of the Intermediate Term Portfolio are available only through the
Exchange Privilege and may not be purchased except through exchange of Class C
shares of another Portfolio or another MLAM-advised mutual fund.
The alternative sales arrangements of the Fund permit investors in the
Portfolios to choose the method of purchasing shares that they believe is most
beneficial given the amount of their purchase, the length of time the investor
expects to hold his shares and other relevant circumstances. 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 one of the Portfolios with the investment
thereafter being subject to ongoing account maintenance and distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select PricingSM System is
set forth under "Merrill Lynch Select PricingSM System" on page 5.
Each Class A, Class B, Class C and Class D share of a Portfolio represents
identical interests in the Portfolio 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
26
<PAGE> 30
arrangements. The deferred sales charges 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 Portfolio 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 a
Portfolio 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 a Portfolio 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. 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 deferred sales charges with respect to Class B and Class C shares in that
the sales charges 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, which are eligible to sell shares.
The following tables set forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for periods of 4 years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during D shares automatically
the first year, decreasing after approximately
1.0% ten years(4)
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</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.
(footnotes continued on following page)
27
<PAGE> 31
(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. 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 for one year. See "Class A"
and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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 Portfolios 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.
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for up to one year, at 0.25% 0.25% B shares convert to
a rate of 1.0% during the D shares automatically
first year, decreasing to after approximately
0.0% after the first year ten years(4)
- -------------------------------------------------------------------------------------------------
C(5) 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</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 $100,000 or more. 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 0.20% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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 Portfolios 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.
(5) Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege. See p. 46.
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 Portfolios,
computed as indicated below, are reduced on larger purchases. The Distributor
may reallow as a discount all or a part of
28
<PAGE> 32
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 of 1933 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 Portfolios,
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:
<TABLE>
<CAPTION>
HIGH INCOME AND
INVESTMENT GRADE PORTFOLIOS+
-----------------------------------------------------------
SALES LOAD AS A DISCOUNT TO SELECT
SALES LOAD PERCENTAGE OF 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% 4.16% 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**............................ .00 .00 .00
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
-----------------------------------------------------------
SALES LOAD AS A DISCOUNT TO SELECT
SALES LOAD AS A PERCENTAGE OF DEALERS AS A
PERCENTAGE OF NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Less than $100,000............................... 1.00% 1.01% .95%
$100,000 but less than $250,000.................. .75 .76 .70
$250,000 but less than $500,000.................. .50 .50 .45
$500,000 but less than $1,000,000................ .30 .30 .27
$1,000,000 or more**............................. .00 .00 .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 made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% for the High Income
and Investment Grade Portfolios or 0.20% for the Intermediate Term Portfolio
if the shares are redeemed within one year after purchase. Class A purchases
of the High Income and Investment Grade Portfolios made prior to October 21,
1994 may be subject to a CDSC if the shares are redeemed within one year of
purchase at the following rates: 0.75% on purchases of $1,000,000 to
$2,500,000; 0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on
purchases of $3,500,001 to $5,000,000; and 0.20% on purchases of more than
$5,000,000 in lieu of paying an initial sales charge. Class A purchases of
the Intermediate Term Portfolio made prior to October 21, 1994 may be subject
to a CDSC of 0.50% on purchases of more than $1,000,000 if the shares are
redeemed within one year of purchase in lieu of paying an initial sales
charge. 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.
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
During the six months ended March 31, 1994, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 13,374,785,
4,365,146 and 2,665,393 Class A shares, respectively, for aggregate net proceeds
of $111,427,018, $52,787,468 and $32,018,245, respectively. The gross sales
charges for the sale of Class A shares of the High Income Portfolio, Investment
Grade Portfolio and Intermediate Portfolio were $1,641,718, $364,909 and
$237,551 respectively, of which $127,733, $28,664 and $19,560, respectively,
were received by the Distributor, and $1,513,985, $336,245 and $217,991,
respectively, were received by Merrill Lynch. For the six months ended March 31,
1994, the Distributor received CDSC's of
29
<PAGE> 33
$4,478, $0 and $500, respectively, for the High Income Portfolio, Investment
Grade Portfolio and Intermediate Term Portfolio.
During the fiscal year ended September 30, 1993, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 34,759,978,
7,448,640 and 5,149,248 Class A shares, respectively, for aggregate net proceeds
of $277,722,778, $91,703,707 and $61,875,256, respectively. The gross sales
charges for the sale of Class A shares of the High Income Portfolio, Investment
Grade Portfolio, and Intermediate Term Portfolio were $4,240,811, $761,179 and
$598,610, respectively, of which $331,771, $54,762, and $54,258, respectively,
were received by the Distributor, and $3,909,040, $706,417 and $544,352,
respectively, were received by Merrill Lynch. For the fiscal year ended
September 30, 1993, the Distributor received CDSC's of $11,355, $0 and $0,
respectively, for the High Income Portfolio, Investment Grade Portfolio and
Intermediate Term Portfolio, all of which were paid to Merrill Lynch.
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 in a
shareholder account, including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares 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(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services and
certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser
program. 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 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 shares of
the Fund if certain conditions set forth in the Statement of Additional
Information are met. 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. 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 such funds.
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".
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a 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(SM) Program.
30
<PAGE> 34
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 High Income and Investment
Grade Portfolios are subject to a four year CDSC and Class B shares of the
Intermediate Term Portfolio are subject to a one year CDSC, while Class C shares
are subject only to a one year 1.0% 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 Portfolio 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 each Portfolio are subject
to an account maintenance fee of 0.25% of net assets. Class B and Class C shares
of the High Income and Investment Grade Portfolios are subject to distribution
fees of 0.50% and 0.55%, respectively, of net assets. Both Class B and Class C
shares of the Intermediate Term Portfolio are subject to distribution fees of
0.25% of net assets. See "Distribution Plans". The proceeds from the account
maintenance fees are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
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. Class C shares of the Intermediate Term Portfolio are available
only through the Exchange Privilege.
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 a Portfolio
will convert automatically into Class D shares of that Portfolio, 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. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. 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
31
<PAGE> 35
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 which
are redeemed within four years of purchase for the High Income and Investment
Grade Portfolios, or within one year of purchase for the Intermediate Term
Portfolio, 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 contingent deferred sales
charge on Class B shares applicable for the period starting October 21, 1994:
HIGH INCOME OR INVESTMENT GRADE PORTFOLIO:*
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
---------------- --------------------
<S> <C>
0-1................................................................ 4.0%
1-2................................................................ 3.0%
2-3................................................................ 2.0%
3-4................................................................ 1.0%
4 and thereafter................................................... None
</TABLE>
INTERMEDIATE TERM PORTFOLIO:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
---------------- --------------------
<S> <C>
0-1................................................................ 1.0%
Thereafter......................................................... None
</TABLE>
- ---------------
* As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible applicable rate being charged. Therefore, with respect to
the High Income and Investment Grade Portfolios, 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. It will be assumed, with respect to the
Intermediate Term Portfolio, that the redemption is 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 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.
32
<PAGE> 36
To provide an example, assume an investor purchased 100 Class B shares of
the High Income Portfolio 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 charge 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
at a rate of 2.0% (the applicable rate in the third year after purchase).
The Class B contingent deferred sales charge is waived on redemptions of
shares 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 contingent
deferred sales charge also is waived on redemption of shares in connection with
certain group plans through the Merrill Lynch Blueprint(SM) Program. See
"Shareholder Services -- Merrill Lynch Blueprint(SM) Program". The contingent
deferred sales charge is waived on redemption of shares by certain eligible
401(a) and eligible 401(k) plans. The contingent deferred sales charge is also
waived for any Class B shares which are purchased by an eligible 401(k) or
eligible 401(a) plan and are rolled over into a Merrill Lynch, Pierce, Fenner &
Smith Incorporated or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption.
Additional information concerning the waiver of the Class B contingent deferred
sales charge is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
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 following table sets forth the rates of the contingent deferred sales
charge on Class C shares of the High Income, Investment Grade and Intermediate
Term Portfolios:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------------- --------------------
<S> <C>
0-1................................................................ 1.0%
Thereafter......................................................... None
</TABLE>
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.
33
<PAGE> 37
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 relevant Portfolio. Class D shares are subject to an
ongoing account maintenance fee of 0.25% of net assets for the High Income and
Investment Grade Portfolios and 0.10% of net assets for the Intermediate Term
Portfolio, 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.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised 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 which 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 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 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 a Portfolio 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 minimum value of Class B shares of a Portfolio held in a single account
that will be converted on any Conversion Date is $50; however, if at a
Conversion Date the conversion of Class B shares to Class D shares of a
Portfolio 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 that Portfolio
held in the account on the Conversion Date will be converted to Class D shares
of the Portfolio.
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.
34
<PAGE> 38
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 to the
shares of the relevant class of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% of average daily net assets of the relevant class and
Portfolio for Class B, Class C and Class D shares of the High Income and
Investment Grade Portfolios, and for Class B and Class C shares of the
Intermediate Term Portfolio, and 0.10% of average daily net assets attributable
to the relevant class and Portfolio for Class D shares of the Intermediate Term
Portfolio 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 and Portfolio for Class B and Class C shares of the High Income and
Investment Grade Portfolios, and 0.25% of average daily net assets attributable
to the relevant class and Portfolio for Class B and Class C shares of the
Intermediate Term Portfolio, in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing shareholder and 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 Portfolio. 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 deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the High Income Portfolio and Investment Grade Portfolio) and
0.50% (in the case of the Intermediate Term Portfolio) of the average daily net
assets for the Class B shares of the respective Portfolios (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are identical to
the aggregate fee rate payable and the services provided under the Distribution
Plan, the difference being that the account maintenance and distribution
services have been unbundled. For the six months ended March 31, 1994, the High
Income, Investment Grade and Intermediate Term Portfolios paid the Distributor
$7,898,418, $1,983,466 and $370,650, respectively, pursuant to the Distribution
Plan, all of which was paid to Merrill Lynch for providing shareholder and
distribution-related services. For the fiscal year ended September 30, 1993, the
High Income, Investment Grade and Intermediate Term Portfolios paid the
Distributor $9,639,303,
35
<PAGE> 39
$3,147,933 and $348,025, respectively, pursuant to the Distribution Plan, all of
which was paid to Merrill Lynch for providing shareholder and
distribution-related services.
The payments under the Distribution Plans, as was the case with the Prior
Plan, 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, the contingent deferred sales charges 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 the contingent deferred
sales charges and the expenses consist of financial consultation compensation.
At December 31, 1993, the last date at which fully allocated data is available,
the fully allocated accrual expenses incurred by the Distributor and Merrill
Lynch exceeded fully allocated accrual revenues for such period by approximately
$31,474,000 (1.53% of Class B net assets at that date) with respect to the High
Income Portfolio and approximately $5,594,000 (1.11% of Class B net assets at
that date) with respect to the Investment Grade Portfolio and approximately
$682,000 (.46% of Class B net assets at that date) with respect to the
Intermediate Term Portfolio. As of December 31, 1993, direct cash expenses for
the period since commencement of the offering of Class B shares exceeded direct
cash revenues by approximately $443,796 (.02% of Class B net assets at that
date) with respect to the High Income Portfolio and direct cash revenues
exceeded direct cash expenses by approximately $4,382,469 (.87% of Class B net
assets at that date) with respect to the Investment Grade Portfolio and direct
cash revenues exceeded direct cash expenses by approximately $140,742 (.10% of
Class B net assets at that date) with respect to the Intermediate Term
Portfolio. As of September 30, 1993, direct cash expenses for the period since
commencement of the offering of Class B shares exceeded direct cash revenues by
$1,489,198 (.08% of Class B net assets at that date) with respect to the High
Income Portfolio. As of September 30, 1993, direct cash revenues for the period
since commencement of the offering of Class B shares exceeded direct cash
expenses by $3,954,443 (.76% of Class B net assets at that date) with respect to
the Investment Grade Portfolio. As of September 30, 1993, direct cash revenues
for the period since commencement of the offering of Class B shares exceeded
direct cash expenses by $44,275 (.03% of Class B net assets at that date) with
respect to the Intermediate Term Portfolio.
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
36
<PAGE> 40
as set forth under "Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges, such as the Fund's
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 a Portfolio. As applicable to the Fund, the maximum
sales charge rule limits the aggregate of distribution fee payments and CDSCs
payable by a Portfolio to the sum of (1) 6.25% of eligible gross sales of Class
B shares and Class C shares of that Portfolio, 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 each Portfolio 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 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.
The following tables set forth comparative information as of March 31, 1994
and September 30, 1993 with respect to the Class B shares of the Fund indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and the Distributor's voluntary maximum for the period October 21,
1988 (commencement of Class B operations) to March 31, 1994 and September 30,
1993 for the High Income and Investment Grade Portfolios, and for the period
November 12, 1992 (commencement of Class B operations) to March 31, 1994 and
September 30, 1993 for the Intermediate Term Portfolio. Because
37
<PAGE> 41
Class C shares of the Fund had not been publicly issued prior to the date of
this Prospectus, information concerning Class C shares is not provided below.
DATA CALCULATED AS OF MARCH 31, 1994
HIGH INCOME PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............... $1,994,101 $124,631 $12,751 $137,382 $22,902 $114,480 $11,319
Under Distributor's
Voluntary Waiver...... $1,994,101 $124,631 $ 9,971 $134,602 $22,902 $111,700 $11,319
</TABLE>
INVESTMENT GRADE PORTFOLIO+
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............... $526,597 $32,912 $5,106 $38,018 $9,950 $28,068 $2,533
Under Distributor's
Voluntary Waiver...... $526,597 $32,912 $2,633 $35,545 $9,950 $25,595 $2,553
</TABLE>
INTERMEDIATE TERM PORTFOLIO+
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(5) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4)
-------------- ------------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............... $68,442 $4,278 $201,793 $4,479 $550,457 $3,929 $369,746
Under Distributor's
Voluntary Waiver...... $68,442 $4,278 $342,209 $4,620 $550,457 $4,069 $369,746
</TABLE>
38
<PAGE> 42
DATA CALCULATED AS OF SEPTEMBER 30, 1993
HIGH INCOME PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALLOWABLE AMOUNT
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE
-------------- ------------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,529,124 $95,570 $9,241 $104,811 $15,936 $88,875
Under Distributor's
Voluntary Waiver...... $1,529,124 $95,570 $7,646 $103,216 $15,936 $87,280
<CAPTION>
ANNUAL
DISTRIBUTION
FEE AT CURRENT
NET ASSET
LEVEL(4)
--------------
<S> <C>
Under NASD Rule as
Adopted................ $9,116
Under Distributor's
Voluntary Waiver...... $9,116
</TABLE>
INVESTMENT GRADE PORTFOLIO+
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALLOWABLE AMOUNTS
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE
-------------- ------------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............... $442,469 $27,654 $4,181 $31,835 $8,169 $23,666
Under Distributor's
Voluntary Waiver...... $442,469 $27,654 $2,213 $29,867 $8,169 $21,698
<CAPTION>
ANNUAL
DISTRIBUTION
FEE AT CURRENT
NET ASSET
LEVEL(4)
--------------
<S> <C>
Under NASD Rule as
Adopted............... $2,577
Under Distributor's
Voluntary Waiver...... $2,577
</TABLE>
INTERMEDIATE TERM PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALLOWABLE AMOUNTS
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID
GROSS SALES(5) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE
-------------- ------------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............... $44,590 $2,787 $82 $2,869 $237 $2,632
Under Distributor's
Voluntary Waiver...... $44,590 $2,787 $223 $3,010 $237 $2,773
<CAPTION>
ANNUAL
DISTRIBUTION
FEE AT CURRENT
NET ASSET
LEVEL(4)
--------------
<S> <C>
Under NASD Rule as
Adopted............... $334
Under Distributor's
Voluntary Waiver...... $334
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis based upon the
prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted
under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payment and accruals. Of these
distribution fee payments made prior to July 3, 1993 under the Prior Plan at
the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
(5) Purchase price of all eligible Class B shares sold since November 13, 1992
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.50% rate, 0.25% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
39
<PAGE> 43
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of each Portfolio 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 Class A or Class D shares of the Portfolios, 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
Class B or Class C Shares of the Portfolios. Except for any contingent deferred
sales load which may be applicable to Class B or Class C Shares of the three
Portfolios, 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, 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 each
Portfolio at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Att: TAMFO, P.O.
Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other
than by mail should be delivered to Financial Data Services, Inc., Transfer
Agency Mutual Funds Operations, 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 which 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 a Portfolio
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.
40
<PAGE> 44
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. As described in the Statement of
Additional Information, the repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities dealers may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. 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. Merrill
Lynch may charge its customers a processing fee (currently $4.85) to confirm a
repurchase of shares to such customers. Redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee.
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 three Portfolios who have
redeemed their shares have a one-time 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of the net
investment income of each Portfolio, if any. The net investment income of each
Portfolio is declared as dividends daily immediately prior to the determination
of the net asset value of each Portfolio on that day and reinvested monthly in
additional full and fractional shares of each Portfolio at net asset value
unless the shareholder elects to receive such dividends in cash. The net
investment income of each Portfolio 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
each Portfolio, 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 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent 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 the shareholders of the Portfolio or Portfolios to which such
gains are attributable annually after the close of the Fund's fiscal year.
41
<PAGE> 45
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 any
Portfolio. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of any
Portfolio or received in cash.
FEDERAL INCOME TAXES
The Fund has in the past elected the special tax treatment afforded
regulated investment companies under the Code. The Fund believes that it has
qualified for such treatment and intends to continue to qualify therefor. If it
so qualifies, the Fund (but not its shareholders) will be relieved of 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. Under the Code, each Portfolio of
the Fund is treated as a separate corporation for federal income tax purposes
and, thus, each Portfolio will be required to satisfy the qualification
requirements under the Code for regulated investment company treatment.
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 the Fund's net realized
short-term capital gains are taxable to shareholders as ordinary income.
Distributions made from net realized long-term capital gains are taxable to
shareholders as long-term capital gains. 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. The maximum tax rate
imposed on capital gains for individual taxpayers is 28 percent. Financial Data
Services, Inc., the Fund's transfer agent, will send each shareholder a monthly
dividend statement which will include the amount of dividends paid and identify
whether such dividends represent ordinary income or capital gains.
Upon sale or exchange of shares in 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.
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 which 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,
42
<PAGE> 46
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.
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.
For shares of a Portfolio of the Fund acquired after October 3, 1989, if a
shareholder exercises his exchange privilege within 90 days after the date such
shares were acquired to acquire shares in another Portfolio of the Fund or 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.
43
<PAGE> 47
PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Board of Directors, the Investment Adviser is primarily
responsible for the portfolio decisions of each Portfolio and the placing of its
portfolio transactions. In placing orders, it is the policy of each Portfolio 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of its Portfolios. 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 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 purchase and the reinvestment of ordinary income 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 which has
entered into a selected dealers 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 a
Portfolio, 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 a Portfolio, a shareholder must either redeem the
shares (paying any applicable CDSC) so that the cash
44
<PAGE> 48
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
An Automatic Investment Plan is available whereby the Transfer Agent is
authorized through preauthorized checks of $50 or more to charge the bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. Shareholders who initially invest a
minimum of $1,000 and whose positions in any Portfolio of the Fund are
maintained in a CMA(R) account may participate in the CMA(R) Automated
Investment Program, through which investments in any Portfolio of the Fund may
be made on a regularly scheduled basis ranging from weekly to semiannually in
amounts of $100 or more ($1 for retirement accounts).
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will
automatically be reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the respective Portfolio, and class,
without sales charge, as of the close of business on the payment date of the
dividend or distribution. Shareholders may elect in writing to receive either
their dividends or capital gain distributions, or both, in cash, in which event
payment will be mailed or directly deposited as soon as practicable after the
payable date. See "Dividends, Distributions and Taxes".
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 (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
As described in further detail in the Statement of Additional Information,
a shareholder of Class A or Class D shares may elect to make systematic
withdrawals from his Investment Account with respect to any Portfolio on either
a monthly, bimonthly, quarterly, semiannual or annual basis subject to certain
conditions.
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 which are available from Merrill Lynch.
45
<PAGE> 49
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of a Portfolio have an exchange
privilege with the other Portfolios and 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 PricingSM System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A shares
of the other Portfolio or second fund in his 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 other Portfolio or a second MLAM-advised mutual fund,
and the shareholder does not hold Class A shares of the other Portfolio 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 other Portfolio or second fund, the
shareholder will receive Class D shares of the other Portfolio or second fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of another Portfolio or 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 other Portfolio or 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 a Portfolio will be exchangeable
with shares of the same class of other MLAM-advised mutual funds. Class C shares
of the Intermediate Term Portfolio are available only through the Exchange
Privilege.
Shares of a Portfolio which 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 Portfolio. 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 a Portfolio 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 a Portfolio exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to that Portfolio if such
schedule is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of a Portfolio acquired through use of the exchange
privilege will be subject to the Portfolio'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.
46
<PAGE> 50
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
Each Portfolio's exchange privilege is modified with respect to purchases
of Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under the MFA
program. Then, any subsequent exchange under the MFA program of Class A or Class
D shares of a MLAM-advised mutual fund for Class A or Class D shares of a
Portfolio will be made solely on the basis of the relative net asset values of
the shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
MLAM-advised mutual fund and the sales charge payable on the shares of the
Portfolio being acquired in the exchange under the MFA program.
MERRILL LYNCH BLUEPRINTSM PROGRAM
Class D shares of any of the three Portfolios are offered to participants
in the Merrill Lynch BlueprintSM 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 Portfolios 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 three Portfolios 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 Portfolios 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 which, 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 BlueprintSM 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 a Portfolio 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 each Portfolio in accordance with formulas specified by
the Securities and Exchange Commission (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
47
<PAGE> 51
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 a Portfolio 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. Each Portfolio
of the Fund will include performance data for all classes of shares of that
Portfolio in any advertisement or information including performance data of the
Fund.
The Fund also may quote total return and aggregate total return performance
data of a Portfolio 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;
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".
A Portfolio'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 that Portfolio 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. The yield for the 30-day period ending
March 31, 1994 was 9.00% for Class A shares and 8.59% for Class B shares of the
High Income Portfolio, 6.09% for Class A shares and 5.56% for Class B shares of
the Investment Grade Portfolio, and 5.79% for Class A shares and 5.39% for Class
B shares of the Intermediate Term Portfolio.
Total return and yield figures are based on a Portfolio's historical
performance and are not intended to indicate future performance. A Portfolio's
total return and yield will vary depending on market conditions, the securities
held by that Portfolio, that Portfolio's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in a Portfolio 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 a Portfolio to that of
the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite
Index, the Dow Jones Industrial Average, or
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<PAGE> 52
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 representative 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 each Portfolio is
determined once daily by FAM immediately after the declaration of dividends as
of 4:15 p.m. (New York City time) on each day during which the New York Stock
Exchange 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 a Portfolio is computed by
dividing the sum of the value of the portfolio securities held by such Portfolio
plus any cash or other assets minus all liabilities by the total number of
shares of such Portfolio outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fee payable to FAM 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. For the fiscal year ended September 30, 1994, MLSPS received pricing
fees of $1,188 for the High Income Portfolio, $719 for the Investment Grade
Portfolio and $457 for the Intermediate Term Portfolio.
The per share net asset value of Class A shares of a Portfolio generally
will be higher than the per share net asset value of Class B, Class C and Class
D shares of that Portfolio, 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
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 a Portfolio eventually
will tend to converge immediately after the payment of dividends, which will
differ by approximately the amount of the expense accrual differentials between
the classes.
ORGANIZATION OF THE FUND
The Fund, a Maryland corporation, is a diversified, open-end management
company which was organized in August 1978 and which commenced operations on
November 10, 1978 as the Merrill Lynch High Income Fund, Inc. The Fund was
reorganized on September 8, 1980 to add the High Quality Portfolio and the
Intermediate Term Portfolio. Prior to the reorganization, the Fund consisted
solely of the High Income Portfolio. The Investment Grade Portfolio and the
Intermediate Term Portfolio commenced operations on October 31, 1980. The Fund
is authorized to issue two billion (2,000,000,000) shares of $.10 par value. The
shares are divided as follows: High Income Portfolio Series Common Stock which
is divided into four classes
49
<PAGE> 53
designated "Class A Common Stock", "Class B Common Stock", "Class C Common
Stock" and "Class D Common Stock", which consist of 200,000,000 shares,
500,000,000 shares, 200,000,000 shares and 500,000,000 shares, respectively,
High Quality Portfolio Series Common Stock (which does business under the name
"Investment Grade Portfolio") which is divided into four classes designated
"Class A Common Stock", "Class B Common Stock", "Class C Common Stock" and
"Class D Common Stock", each of which consist of 100,000,000 shares and the
Intermediate Term Portfolio Series Common Stock, which is divided into four
classes designated "Class A Common Stock", "Class B Common Stock", "Class C
Common Stock" and "Class D Common Stock", each of which consists of 50,000,000
shares. Each Class A, Class B, Class C and Class D share of Common Stock of each
Portfolio represents an interest in the same assets of such Portfolio 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. See "Purchase of
Shares". The Fund has received an order from the Securities and Exchange
Commission permitting the issuance and sale of multiple classes of Common Stock
of each of the Fund's Portfolios. 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 of 1940
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.
For further information concerning the organization of the Fund, see the
Statement of Additional Information.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, independent auditors, has been selected as the
independent auditors of the Fund.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, acts as
Custodian of the Fund's assets.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. ("FDS"), which is a wholly owned subsidiary
of Merrill Lynch & Co., Inc., 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, FDS is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, FDS receives an annual fee of $11.00 per shareholder
account for Class A and Class D shares of the Portfolios and $14.00 per
50
<PAGE> 54
shareholder account for Class B and Class C shares of the Portfolios and is
entitled to reimbursement for out-of-pocket expenses incurred by it under the
Transfer Agency Agreement.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Fund and passes upon
legal matters for the Fund in connection with the shares offered by 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:
FINANCIAL DATA SERVICES, INC.
ATTN: TAMFO
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 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 of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated October 21, 1994, 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.
51
<PAGE> 55
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF
MOODY'S INVESTORS SERVICE, INC.:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered 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 which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
52
<PAGE> 56
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.
DESCRIPTION OF CORPORATE BOND RATINGS OF
STANDARD & POOR'S RATINGS GROUP:
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.
53
<PAGE> 57
[This page is intentionally left blank.]
54
<PAGE> 58
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / High Income Portfolio Class A Shares
/ / High Income Portfolio Class B Shares
/ / High Income Portfolio Class C Shares
/ / High Income Portfolio Class D Shares
/ / Investment Grade Portfolio Class A Shares
/ / Investment Grade Portfolio Class B Shares
/ / Investment Grade Portfolio Class C Shares
/ / Investment Grade Portfolio Class D Shares
/ / Intermediate Term Portfolio Class A Shares
/ / Intermediate Term Portfolio Class B Shares
/ / Intermediate Term Portfolio Class D Shares
of Merrill Lynch Corporate Bond 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 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.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..........................................................
2. .......................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
</TABLE>
Name..................................................................
First Name Initial Last Name
Name of Co-Owner (if any).............................................
First Name Initial Last Name
<TABLE>
<S> <C>
Address......................................................
...................................................... Date.................................................
(Zip Code)
</TABLE>
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer................................................
............................................................................
............................................................................
................................................... ............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Corporate Bond Fund, Inc. Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name ......................................................................
Bank Number .................... Account Number.................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to 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.
55
<PAGE> 59
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
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.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (Available to holders of
Class A or Class D shares of the Intermediate Term Portfolio, the Investment
Grade Portfolio or the High Income Portfolio. See terms and conditions in the
Statement of Additional Information)
.........................., 19 . . . .
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase / / Class A or / /
Class D (choose one) shares of the / / High Income Portfolio / / Investment
Grade Portfolio / / Intermediate Term Portfolio (choose one) of Merrill Lynch
Corporate Bond 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:
High Income Portfolio or Investment Grade Portfolio:
/ / $100,000 / / $250,000 / / $500,000 / / $750,000 / / $1,000,000
Intermediate Term Portfolio: / / $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 Bond 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 Bond Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Corporate Bond Fund, Inc.
c/o Financial Data Services, Inc.
Att: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
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 made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................
Dealer Name and Address
By
...........................................................
Authorized Signature of Dealer
- --------- ------------
- --------- ------------ ....................
F/C Last Name
Branch-Code F/C No.
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
56
<PAGE> 60
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OF AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name................................................................................ ------------------------------------
First Name Initial Last Name Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares of the / / High Income Portfolio
n Investment Grade Portfolio / / Intermediate Term Portfolio (choose one) of
Merrill Lynch Corporate Bond 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 withdrawals on _____________ or as soon as
possible thereafter.
_______________________ (month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $____
or / / $___% of the current value of / / Class A or / / Class D shares (choose
one) 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 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.
57
<PAGE> 61
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
</TABLE>
of the / / High Income Portfolio / / Investment Grade Portfolio / / Intermediate
Term Portfolio (choose one) of Merrill Lynch Corporate Bond 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.
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 Bond 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 _________________ or as soon as thereafter as possible.
_____________ (month)
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, 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
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
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 Financial Data
Services, Inc., I agree that your rights in respect to 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
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
58
<PAGE> 62
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 DISTRIBUTORS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table........................................... 3
Merrill Lynch Select Pricing(SM) System............. 5
Financial Highlights................................ 10
Investment Objectives and Policies.................. 13
Investment Policies of the Portfolios............... 13
Risk Factors in Transactions in Junk Bonds......... 16
Interest Rate Futures and Options Thereon.......... 18
Other Portfolio Strategies......................... 21
Investment Restrictions............................ 23
Investment Adviser.................................. 24
Directors........................................... 25
Purchase of Shares.................................. 26
Initial Sales Charge Alternatives --
Class A and Class D Shares....................... 28
Deferred Sales Charge Alternatives --
Class B and Class C Shares....................... 31
Distribution Plans................................. 35
Limitations on the Payment of Deferred Sales
Charges.......................................... 37
Redemption of Shares................................ 40
Redemption......................................... 40
Repurchase......................................... 41
Reinstatement Privilege -- Class A and Class D
Shares........................................... 41
Dividends, Distributions and Taxes.................. 41
Dividends and Distributions........................ 41
Federal Income Taxes............................... 42
Portfolio Transactions.............................. 44
Shareholder Services................................ 44
Investment Account................................. 44
Automatic Investment Plan.......................... 45
Automatic Reinvestment of Dividends and Capital
Gain Distributions............................... 45
Systematic Withdrawal Plans........................ 45
Retirement Plans................................... 45
Exchange Privilege................................. 46
Merrill Lynch Blueprint(SM) Program................ 47
Performance Data.................................... 47
Additional Information.............................. 49
Determination of Net Asset Value................... 49
Organization of the Fund........................... 49
Independent Auditors............................... 50
Custodian.......................................... 50
Transfer Agency Services........................... 50
Legal Counsel...................................... 51
Reports to Shareholders............................ 51
Additional Information............................. 51
Appendix: Description of Corporate Bond Ratings..... 52
Authorization Form.................................. 55
Code # 10046-1094
</TABLE>
[LOGO]
MERRILL LYNCH
CORPORATE BOND
FUND, INC.
ART WORK
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 63
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 21, 1994
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company consisting of three separate
portfolios, the High Income Portfolio, the Investment Grade Portfolio (formerly
the High Quality Portfolio) and the Intermediate Term Portfolio. Pursuant to the
Merrill Lynch Select PricingSM System, each Portfolio of the Fund offers four
classes of shares of Common Stock, each with a different combination of sales
charges, ongoing fees and other features, except that Class C shares of the
Intermediate Term Portfolio are available only through the Exchange Privilege.
The Merrill Lynch Select PricingSM 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.
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This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated October 21, 1994, which has been filed with the Securities
and Exchange 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> 64
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of each Portfolio of the Fund is to obtain
the highest level of current income as is consistent with the investment
policies of such Portfolio and with prudent investment management. As a
secondary objective, each Portfolio seeks capital appreciation when consistent
with its primary objective. Each Portfolio 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 13 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, each Portfolio of 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 Portfolios
currently trade futures contracts on U.S. Treasury bills, notes and bonds and
GNMA mortgage-backed certificates. The Portfolios may also purchase and sell
exchange-traded call and put options on such futures contracts. The Fund is
subject to the tax requirement that less than 30% of its gross income be derived
from the sale or other disposition of stocks, securities and certain options,
futures or forward contracts held for less than three months. This requirement
may limit the Fund's ability to engage in the hedging transactions and
strategies described below. 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, a Portfolio will purchase a call option on a futures contract
to hedge against a market advance resulting from declining interest rates when
the Portfolio 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 Portfolios, if
the futures price at expiration is below the exercise price of the option. In
such event, the Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Portfolio'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 Portfolio 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. A Portfolio 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.
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The writing of a put option on a futures contract may constitute a partial
hedge against increasing prices of fixed-income securities which a Portfolio
intends to purchase, if the futures price at expiration is higher than the
exercise price. In such event, the Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any increase in the price
of fixed-income securities which the Portfolio 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 Portfolio would be required to
enter into the underlying futures contract at an unfavorable price.
OPTIONS ON DEBT SECURITIES
As described in the Prospectus, a Portfolio may purchase put options on
debt securities held by the Portfolio in connection with its hedging strategies
and may purchase call options on debt securities under the limited circumstances
described below. A Portfolio also may write covered call options and write
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.
A Portfolio may write call options which give the holder the right to buy
the underlying security covered by the option from the Portfolio at the stated
exercise price. A Portfolio also may write put options that give the holder the
right to sell the underlying security to the Portfolio at the stated exercise
price. A Portfolio will write only covered options, which means that so long as
the Portfolio 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 Portfolio 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.
A Portfolio will receive a premium from writing a put or call option, which
increases the Portfolio'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 Portfolio increases its return by retaining the premium without being
required to purchase or sell the underlying security. In the latter case, the
Portfolio 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 Portfolio 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 Portfolio's obligation as a writer continues.
By writing a put, the Portfolio 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 Portfolio 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 a Portfolio or increases in the value of
securities the Portfolio intends to acquire. The Portfolio 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
Portfolio will ordinarily only write options for which a liquid secondary market
appears to exist.
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A Portfolio may engage in closing transactions in order to terminate
outstanding options that it has written. To effect a closing transaction, the
Portfolio 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.
A Portfolio 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 Portfolio 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
Portfolio 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 Portfolio may desire not to enter into a closing transaction
in order to comply with certain provisions of the Internal Revenue Code. In such
circumstances, the Portfolio may purchase a call option in an opening
transaction with the same exercise price and expiration date as the option it
sold.
A Portfolio may purchase put options on securities held by the Portfolio in
connection with its hedging activities. By buying a put, the Portfolio has a
right to sell the underlying security at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the security until
the put expires. As a result of the hedge, the amount of any appreciation in the
value of the underlying security will be partially offset by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction and profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction costs.
The availability of a secondary market in options on debt securities may be
adversely affected by lack of trading interest, exchange trading limits or other
factors. In addition, the trading of options on debt securities is subject to
the risk of insolvency of a brokerage firm or exchange. The risk of purchasing
options on debt securities is limited to the amount of the premium plus
transaction costs.
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 which 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
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<PAGE> 67
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 Portfolios 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 Portfolios or decreases in the price of
securities the Portfolios intend 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.
"Trading Limits" may also be imposed on the maximum number of contracts
which 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 a Portfolio'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 which 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 Fund has obtained an order from the Securities and Exchange Commission
("SEC") exempting it from certain provisions of the Investment Company Act of
1940 in connection with its transactions in interest
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<PAGE> 68
rate futures contracts and related options. In applying for this exemptive
order, the Fund made a number of representations to the SEC regarding the manner
in which such trading will be conducted.
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities. These 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 each
Portfolio affected (which for this purpose and under the Investment Company Act
of 1940 means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares). The Fund may not:
1. (a) Invest more than 5% of the total assets of any Portfolio (taken
at market value at the time of each investment) in the securities (other
than United States Government or Government agency securities) of any one
issuer (including repurchase agreements with any one bank); and (b)
purchase more than either 10% (i) in principal amount of the outstanding
securities of an issuer, or (ii) of the outstanding voting securities of an
issuer, except that such restrictions shall not apply to United States
Government or Government agency securities, bank money instruments or bank
repurchase agreements.
2. Invest more than 25% of the total assets of any Portfolio (taken at
market value at the time of each investment) in the securities of issuers
primarily engaged in the same industry. Utilities will be divided according
to their services; for example, gas, gas transmission, electric and
telephone each will be considered a separate industry for purposes of this
restriction.
3. Make investments for the purpose of exercising control over, or
management of, any issuer.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved, and only if immediately
thereafter not more than 10% of the total assets of any Portfolio, taken at
market value, would be invested in such securities.
5. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, real estate, commodities, or commodity contracts
(provided that such restriction shall not apply to options on debt
securities or interest rate futures contracts and options thereon), except
that any Portfolio may purchase securities of issuers which invest or deal
in any of the above.
6. Purchase any securities on margin, except that any Portfolio may
(a) obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, (b) make margin payments in
connection with transactions in interest rate futures contracts, options
thereon and options on debt securities or (c) maintain a short position in
interest rate futures contracts and options thereon and may write, purchase
or sell puts, calls, straddles, spreads or combinations thereof with
respect to such contracts or options and with respect to options on debt
securities.
7. Make loans, except as provided in (8) below and except through the
purchase of obligations in private placements (the purchase of
publicly-traded obligations not being considered the making of a loan).
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<PAGE> 69
8. Lend portfolio securities of any Portfolio in excess of 20% of the
total assets of such Portfolio, taken at market value at the time of the
loan, and provided that such loans shall be made in accordance with the
guidelines set forth below.
9. Issue senior securities, or borrow amounts in any Portfolio in
excess of 5% of the total assets of such Portfolio, taken at market value
at the time of the borrowing, and then only from banks as a temporary
measure for extraordinary or emergency purposes.
10. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by any Portfolio
except as may be necessary in connection with borrowings mentioned in (9)
above, in which case such mortgaging, pledging or hypothecating may not
exceed 10% of such Portfolio's total assets, taken at market value, or as
may be necessary in connection with transactions in options on debt
securities, interest rate futures contracts and options thereon, as set
forth in (6) above. In order to comply with certain state statutes, each
Portfolio will not, as a matter of operating policy, mortgage, pledge or
hypothecate its portfolio securities to the extent that at any time the
percentage of the value of pledged securities plus the maximum sales charge
will exceed 10% of the value of the Portfolio's shares at the maximum
offering price.
11. Invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily
available market exists if, regarding all such securities held by a
Portfolio, more than 10% of the total assets of such Portfolio, taken at
market value, would be invested in such securities. If, through the
appreciation of restricted securities or the depreciation of unrestricted
securities held by a Portfolio, more than 10% of the assets of such
Portfolio should be invested in restricted securities, such Portfolio will
consider appropriate steps to assure maximum flexibility.
12. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
13. Write, purchase or sell puts, calls or combinations thereof
(provided that such restriction shall not apply to options on debt
securities or on interest rate futures contracts).
14. Invest in securities of foreign issuers if at the time of
acquisition more than 10% of the total assets of any Portfolio, taken at
market value at the time of the investment, would be invested in such
securities. However, up to 25% of the total assets of any Portfolio may be
invested in securities (i) issued, assumed or guaranteed by foreign
governments, or political subdivisions or instrumentalities thereof, (ii)
assumed or guaranteed by domestic issuers, including Eurodollar securities,
or (iii) issued, assumed or guaranteed by foreign issuers having a class of
securities listed for trading on the New York Stock Exchange.
15. Invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than
5% of the total assets of any Portfolio, taken at market value at the time
of investment, would be invested in such securities.
16. Participate on a joint (or a joint and several) basis in any
trading account in securities (but this does not include the "bunching" of
orders for the sale or purchase of portfolio securities with other funds or
individually managed accounts advised or sponsored by the Investment
Adviser or any of its affiliates to reduce brokerage commissions or
otherwise to achieve best overall execution).
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17. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, Merrill Lynch Investment
Management, Inc. or any subsidiary thereof each owning beneficially more
than 1/2 of 1% of the securities of such issuer owns in the aggregate more
than 5% of the securities of such issuer.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, 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 of 1940 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.
The Fund has undertaken to certain state securities administrators that as
a matter of operating policy it will not make short sales of securities or
invest in oil, gas or mineral leases or in real estate limited partnership
interests.
Lending of Portfolio Securities. Subject to investment restriction (8)
above, a Portfolio of 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
Portfolio making the loan. 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 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
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<PAGE> 71
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 10% of the
total assets of a Portfolio would be so invested.
Foreign Securities. Investments in foreign securities, particularly those
of nongovernmental issuers, involve considerations which 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. No Portfolio will concentrate its investments
in any particular foreign country. Each Portfolio 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 Portfolio making the
investment would be subject to the risk of changes in currency exchange rates.
PROPOSED UNIFORM INVESTMENT RESTRICTIONS
As discussed in the Prospectus under "Investment Policies of the
Portfolios -- Investment Restrictions", the Board of Directors of the Fund has
approved the replacement of the Fund's existing investment restrictions with the
fundamental and non-fundamental investment restrictions set forth below. These
uniform investment restrictions have been proposed for adoption by all of the
non-money market mutual funds advised by the Investment Adviser or its
affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The investment
objectives and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be
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replaced by the proposed restrictions, and the Fund's Prospectus and Statement
of Additional Information will be supplemented to reflect such change.
Under the proposed 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.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% 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 proposed non-fundamental investment restrictions, each Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
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<PAGE> 73
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 which cannot be readily resold because of
legal or contractual restrictions or which 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 which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). 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 (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free or
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 5% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, the
Fund will not borrow amounts in any Portfolio in excess of 5% of the total
assets of such Portfolio, taken at market value, and then only
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<PAGE> 74
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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and officers of the Fund, their 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 -- President and Director(1)(2) -- President since 1977 and
Chief Investment Officer since 1976 of Fund Asset Management, L.P. (referred to
below as the "Investment Adviser" (which term as used herein includes its
corporate predecessors) or "FAM") since 1977; President of Merrill Lynch
Investment Management L.P., doing business as Merrill Lynch Asset Management
L.P. ("MLAM"), (which term as used herein includes its corporate predecessors)
since 1977 and Director and Chief Investment Officer since 1976; Executive Vice
President of Merrill Lynch & Co., Inc. and of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") since 1990 and Senior Vice President of
Merrill Lynch from 1985 to 1990; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
RONALD W. FORBES -- Director(2) -- 1400 Washington Avenue, Albany, New York
12222. Associate Professor of Finance, School of Business, State University of
New York at Albany; Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund; Consultant, Public Finance Banking, Shearson Lehman
Brothers, Inc.
CYNTHIA A. MONTGOMERY -- Director(2) -- Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02613. Professor, Harvard Business School,
since 1989; Associate Professor, J.L. Kellog Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director of UNUM Corporation.
CHARLES C. REILLY -- Director(2) -- 9 Hampton Harbor Road, Hampton Bays,
New York 11946. Adjunct Professor, Columbia University Graduate School of
Business since 1990; Adjunct Professor, Wharton School, University of
Pennsylvania, 1990; President and Chief Investment Officer of Verus Capital,
Inc. from 1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder,
Inc. from 1973 to 1990.
KEVIN A. RYAN -- Director(2) -- 127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982,
Founder and current Director of the Boston University Center for Advancement of
Ethics and Character. Formerly taught on the faculties of the University of
Chicago, Stanford University and Ohio State University.
RICHARD R. WEST -- Director(2) -- 482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance and Dean at New York University Business School of
Administration from 1984 to 1993; Director of ReCapital Corp. (reinsurance
holding company), Vornado Realty Trust (real estate holding company), Bowne &
Co., Inc. (printer), Alexander's Inc. (department stores), and Smith Corona
Corporation (manufacturer of typewriters and word processors).
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<PAGE> 75
TERRY K. GLENN -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and MLAM since 1983 and Director since 1992;
President and Director of Merrill Lynch Funds Distributor, Inc. ("MLFD") since
1986; President of Princeton Administrators, Inc. and Director of Financial Data
Services, Inc. since 1985; Executive Vice President and Director of Princeton
Services since 1993.
N. JOHN HEWITT -- Senior Vice President(1)(2) -- Senior Vice President of
the Investment Adviser since 1981 .
DONALD C. BURKE -- Vice President(2) -- Vice President and Director of
Taxation of MLAM since 1990; employee at Deloitte & Touche LLP from 1982 to
1990.
VINCENT T. LATHBURY, III -- Vice President(1)(2) -- Vice President of MLAM
and Portfolio Manager of the Investment Adviser and MLAM since 1982.
JAY C. HARBECK -- Vice President(1)(2) -- Vice President of MLAM since
1986.
GERALD M. RICHARD -- Treasurer(1)(2) -- Senior Vice President and Treasurer
of MLAM and the Investment Adviser since 1984; Vice President of MLFD since 1981
and Treasurer since 1984; Senior Vice President and Treasurer of Princeton
Services since 1993.
MICHAEL J. HENNEWINKEL -- Secretary(1)(2) -- Vice President of MLAM since
1985 and attorney associated with the Investment Adviser and MLAM since 1982.
- ---------------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
(2) Mr. Zeikel and Mr. Glenn are directors or trustees and officers, Messrs.
Forbes, Reilly, Ryan and West and Ms. Montgomery are directors or trustees,
and 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").
On September 30, 1994, Messrs. Zeikel, Glenn, Hewitt, Lathbury, Harbeck,
Burke, Richard and Hennewinkel owned in the aggregate less than 1% of the
outstanding Common Stock of Merrill Lynch & Co., Inc. On September 30, 1994, the
officers and directors of the Fund owned less than one percent of the
outstanding shares of each Portfolio of the Fund.
The Fund has an Audit Committee and a Nominating Committee, each of which
consists of all of the directors of the Fund who are not interested persons 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 Merrill
Lynch & Co., Inc. or its subsidiaries. The Fund will pay each director who is
not an affiliated person of Merrill Lynch & Co., Inc. or its subsidiaries an
annual fee of $4,000 plus a fee of $800 per meeting of the Board of Directors
attended and a fee at the annual rate of $2,000 for serving on the Fund's Audit
Committee. In addition, the Fund pays all directors' actual out-of-pocket
expenses related to attendance at meetings. The Chairman of the Audit Committee
is paid an additional annual fee of $1,000. For the fiscal year ended September
30, 1993, fees and expenses paid to the unaffiliated directors of the Fund
aggregated $41,834.
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<PAGE> 76
INVESTMENT ADVISORY ARRANGEMENTS
The Investment Adviser, acts as the investment adviser for the Fund and
provides the Fund with management services. Effective January 1, 1994, FAM, the
Fund's Investment Adviser, was reorganized as a Delaware limited partnership.
FAM (the general partner of which is Princeton Services Inc., a wholly-owned
subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned affiliate of
Merrill Lynch & Co., Inc. and has its principal place of business at 800
Scudders Mill Road, Plainsboro, New Jersey 08536. Merrill Lynch & Co., Inc. has
its principal place of business at 250 Vesey Street, New York, New York 10281.
Prior to the reorganization, the Investment Adviser was a Delaware corporation
known as Fund Asset Management, Inc., which was incorporated in 1976. The
reorganization did not result in a change to the Investment Adviser's management
or personnel, nor did the reorganization cause any adverse change to the
Investment Adviser's financial condition.
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 each Portfolio and has responsibility
for making decisions to buy, sell or hold any particular security. The
Investment Adviser provides the portfolio managers for the Portfolios, who
consider information from various sources, make the necessary investment
decisions and effect 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 any Portfolio 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
any Portfolio 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.
The principal executive officers and directors of the Investment Adviser
are Arthur Zeikel, President, Chief Investment Officer and Director; Terry K.
Glenn, Executive Vice President and Director; Philip L. Kirstein, Senior Vice
President, Secretary, General Counsel, and Director; Gerald M. Richard, Senior
Vice President and Treasurer; Robert W. Crook; Bernard J. Durnin, Vincent R.
Giordano, Elizabeth Griffin, Norman R. Harvey, N. John Hewitt, Joseph T.
Monagle, Stephen M. M. Miller, Richard L. Rufener, Ronald L. Welburn, Anthony
Wiseman, Senior Vice Presidents, and Ronald M. Kloss, Senior Vice President and
Comptroller.
Advisory Fee. As compensation for its services to the Fund, the Investment
Adviser receives monthly compensation with respect to each Portfolio at the
rates set forth below, which are based on the average daily value of the Fund's
net assets. These rates are subject to reduction to the extent that the
aggregate of the average daily net assets of the Portfolio exceeds $250 million.
The reductions will be applicable to each Portfolio regardless of size on a
"uniform percentage" basis. Determination of the portion of the net assets of
14
<PAGE> 77
each Portfolio to which a reduced rate is applicable is made by multiplying the
net assets of that Portfolio by the "uniform percentage," which is derived by
dividing the amount of the portion of the aggregate assets of all Portfolios to
which such rate applies by the total amount of such aggregate assets.
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
-----------------------------------------
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO* PORTFOLIO
--------- ---------- ------------
<S> <C> <C> <C>
Not exceeding $250 million.................................. 0.55% 0.50% 0.50%
In excess of $250 million but not more than $500 million.... 0.50 0.45 0.45
In excess of $500 million but not more than $750 million.... 0.45 0.40 0.40
In excess of $750 million................................... 0.40 0.35 0.35
</TABLE>
- ---------------
* As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations applicable to the Fund require that the Investment Adviser reimburse
the Fund for advisory fees received by it from the Fund to the extent that the
Fund's aggregate ordinary operating expenses (excluding interest, taxes,
brokerage fees, distribution fees and commissions and extraordinary charges such
as litigation costs) exceed in any fiscal year 2.5% of the Fund's first
$30,000,000 of average daily net assets, 2.0% of average daily net assets in
excess of $30,000,000 but not exceeding $100,000,000 and 1.5% of average daily
net assets above $100,000,000 for such year. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the pro rata expense limitation at the time of such payment.
For the six months ended March 31, 1994, the advisory fees paid by the Fund
to the Investment Adviser totaled $8,702,905. For the fiscal years ended
September 30, 1991, 1992 and 1993, the advisory fees paid by the Fund to the
Investment Adviser totaled $5,458,881, $7,557,650 and $12,680,843, respectively.
The Investment Adviser did not reimburse any portion of its advisory fee for the
fiscal years ended September 30, 1991, 1992, and 1993.
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 Portfolios, as well as the fees of all directors of the Fund
who are affiliated persons of Merrill Lynch & Co., Inc. or any of its
subsidiaries. Each Portfolio pays all other expenses incurred in its operation
and a portion of the Fund's general administrative expenses allocated on the
basis of the asset size of the respective Portfolios. Expenses that will be
borne directly by the Portfolios 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 a particular
Portfolio. Expenses which will be allocated on the basis of size of the
respective Portfolios 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), Securities and Exchange
Commission fees, accounting costs and other expenses properly payable
15
<PAGE> 78
by the Fund and allocable on the basis of size of the respective Portfolios.
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. For the six months ended March 31, 1994, the amount of such
reimbursement was $131,358. For the fiscal year ended September 30, 1993, the
amount of such reimbursement was $245,880. Depending upon the nature of the
lawsuit, litigation costs may be directly applicable to a Portfolio or allocated
on the basis of the size of the respective Portfolios. 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 each Portfolio incurred in connection with the
offering of shares of each Portfolio, including the expenses of printing the
prospectuses and statements of additional information used in connection with
the continuous offering of shares by each Portfolio. See "Distributor".
Merrill Lynch & Co., Inc. and Princeton Services, Inc. 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 policies.
DURATION AND TERMINATION
Continuation of the Investment Advisory Agreement for the period March 1,
1994 to March 1, 1995 was approved by the Board of Directors, including a
majority of the disinterested directors, on December 8, 1993. Unless earlier
terminated as described below, the agreement will remain in effect until March
1, 1995 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 1940) 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
Financial Data Services, Inc. ("FDS"), which is a wholly owned subsidiary
of Merrill Lynch & Co., Inc., serves as transfer agent to the Fund pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). FDS receives a fee of $11.00 per
shareholder account for Class A or Class D shares of the Portfolios and a fee of
$14.00 per shareholder account for Class B or Class C shares of the Portfolios.
For the year ended September 30, 1993, the Fund paid FDS a fee of $2,707,499.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" on page 49 of the Prospectus. The net asset value of the shares of each
Portfolio is determined once daily by FAM immediately after the declaration of
dividends on days that the New York Stock Exchange 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 New York Stock
Exchange is not open for business on the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset
16
<PAGE> 79
value per share of a Portfolio is computed by dividing the sum of the value of
the securities held by such Portfolio plus any cash or other assets minus all
liabilities by the total number of shares of such Portfolio outstanding at such
time, rounded to the nearest cent. Expenses, including the investment advisory
fee payable to FAM and any account maintenance and/or distribution fees payable
to the Distributor, are accrued daily.
Portfolio securities which 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 market are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
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 over-the-counter 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. 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.
PORTFOLIO TRANSACTIONS
Under the Investment Company Act of 1940, persons affiliated with the Fund
are prohibited from dealing with the Fund as a principal in the purchase or sale
of the Fund's portfolio securities unless a permissive order allowing such
transactions is obtained from the SEC. Since over-the-counter transactions are
usually principal transactions, affiliated persons of the Fund, including
Merrill Lynch, may not serve as dealers in connection with such transactions
with the Fund. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis. Certain court
decisions have in the past raised questions as to whether investment companies
should seek to "recapture" brokerage commissions and underwriting and dealer
spreads by effecting their purchases and sale through affiliated entities. In
order to effect such an arrangement, the Fund would be required to seek an
exemption from the Investment Company Act so that it could engage in principal
transactions with affiliates. The directors have considered the possibilities of
seeking to recapture spreads for the benefit of the Fund and, after reviewing
all factors deemed relevant, have made a determination not to seek such
recapture at this time. The Board will reconsider this matter from time to time.
The Fund will take such steps as may be necessary to effect recapture, including
the filing of applications for exemption under the Investment Company Act, if
the directors should determine that recapture is in the best interests of the
Fund or otherwise required by developments in the law. The Investment Adviser
has arranged for the Fund's custodial bank to receive on behalf of the Fund any
tender offer solicitation fees payable with respect to portfolio securities of
the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any
17
<PAGE> 80
rules the Securities and Exchange Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
The securities in which each Portfolio invests are traded primarily in the
over-the-counter market. Where possible, each Portfolio 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 each Portfolio 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 each Portfolio, brokers
who provide supplemental investment research to the Investment Adviser may
receive orders for transactions by a Portfolio. 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, a Portfolio will be benefited by such supplemental research
services, the Investment Adviser is authorized to pay commissions to brokers
furnishing such services which are in excess of commissions which 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.
For the fiscal year ended September 30, 1991, the Fund paid total brokerage
commissions of $127,094, all of which was paid to Merrill Lynch. For the fiscal
year ended September 30, 1992, the Fund paid total brokerage commissions of
$54,411, $47,211 of which was paid to Merrill Lynch. For the fiscal year ended
September 30, 1993, the Fund paid total brokerage commissions of $45,972,
$10,896 of which was paid to Merrill Lynch.
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 the
annual turnover rate for each of the portfolios should not generally exceed
100%; however, during periods when interest rates fluctuate significantly, as
they have during the past few years, the portfolio turnover rates for each of
the portfolios may be substantially higher. In any particular year, however,
market conditions could result in portfolio activity of a Portfolio at a greater
or lesser rate than anticipated. For the fiscal years ended September 30, 1992
and September 30, 1993, the portfolio turnover rates of the High Income
Portfolio were 40.52% and 34.85%, respectively, of the Investment Grade
Portfolio were 65.43% and 121.34%, respectively, and of the Intermediate Term
Portfolio were 95.33% and 180.52%, respectively. 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
18
<PAGE> 81
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.
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 which 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
Each Portfolio issues four classes of shares under the Merrill Lynch
Merrill Lynch Select PricingSM 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 each Portfolio represents an
identical interest in the same portfolio of investments of such Portfolio 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 which the account maintenance and by distributions fees are paid.
Each has different exchange privileges. See "Shareholder Services -- Exchange
Privilege". Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the three Portfolios permit investors
to choose the method of purchasing shares that the investor believes is most
beneficial given the amount of their purchase, the length of time the investor
expects to hold his shares and other relevant circumstances. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge and not be subject to ongoing charges, as
discussed below, or to have the entire initial purchase price invested in one of
the Portfolios with the investment thereafter being subject to ongoing charges.
The Merrill Lynch Merrill Lynch Select PricingSM System is used by more
than 50 mutual funds advised by MLAM or its affiliate, the Investment Adviser.
Funds advised by MLAM or the Investment Adviser are referred to herein as
"MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the
continuous offering of each class of shares of the three Portfolios. 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.
19
<PAGE> 82
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A AND CLASS D SHARES
For the six months ended March 31, 1994, the Distributor received
$2,244,178 as sales charges on shares sold, of which $2,068,221 was paid to
Merrill Lynch. For the fiscal years ended September 30, 1991, 1992 and 1993, the
Distributor received $1,523,659, $3,920,517 and $5,600,601, respectively, as
sales charges on shares sold, of which $1,410,401, $3,605,119 and $5,159,809,
respectively, were paid to Merrill Lynch, the only selected dealer for the Fund
during such years. All of such sales charges were attributable to payments of
initial sales charges in connection with purchases of Class A shares of the
Portfolios; no Class B shares of the High Income Portfolio or the Investment
Grade Portfolio were sold prior to October 21, 1988. No Class B shares of the
Intermediate Term Portfolio were sold prior to November 12, 1992. For
information as to brokerage commissions received by Merrill Lynch, see
"Portfolio Transactions".
REDUCED INITIAL SALES CHARGES--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
High Income Portfolio or Investment Grade Portfolio in excess of $25,000 and
Class A or Class D shares of the Intermediate Term Portfolio in excess of
$100,000. 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 which
has not been in existence for at least six months or which 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 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 any of the three Portfolios 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
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<PAGE> 83
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 High Income Portfolio or the Investment Grade Portfolio and $100,000 or more
of Class A shares of the Intermediate Term Portfolio 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 any
of the three Portfolios 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 Portfolio 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 which
would be applicable to a single purchase equal to the total dollar value of the
Class A or Class D shares of the Portfolio 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 mutual fund into any Portfolio that creates a sales charge will
count toward completing a new or existing Letter of Intention in any Portfolio.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts, to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Merrill Lynch Blueprint(SM) Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint(SM)
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 groups such as benefit plans, credit unions
and trade associations. Investors placing orders to purchase Class A or Class D
shares of the Portfolios through Blueprint will acquire such Class A or Class D
shares at net asset value plus a sales
21
<PAGE> 84
charge calculated in accordance with the Blueprint sales charge schedule (i.e.,
up to $5,000 at 3.5% for the High Income and Investment Grade Portfolios and
.80% for the Intermediate Term Portfolios. Purchases of $5,000.01 or more will
be at the standard sales charge rate disclosed in the Prospectus). In addition,
Class D shares of the Portfolios are being offered at net asset value plus a
sales charge of 1/2 of 1% 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(SM) 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(SM) 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 investment companies, Merrill Lynch & Co.,
Inc. and its subsidiaries (the term "subsidiaries", when used herein with
respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other
entities directly or indirectly wholly-owned and controlled by Merrill Lynch &
Co., Inc.), 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 funds are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund
("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 in shares of the Fund. In order to
exercise this investment option, Merrill Lynch Senior Floating Rate Fund
shareholders must sell their Merrill Lynch Senior Floating Rate Fund shares to
the Merrill Lynch Senior Floating Rate Fund in connection with a tender offer
conducted by the Merrill Lynch Senior Floating Rate Fund 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 shares as to
which no Early Withdrawal Charge (as defined in the Merrill Lynch Senior
Floating Rate Fund prospectus) is applicable. Purchase orders from Merrill Lynch
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Merrill Lynch Senior
Floating Rate Fund tender offer terminates and will be effected at the net asset
value of the Fund at such day.
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 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
22
<PAGE> 85
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.
Class D shares of the Fund will be offered at the net asset value, without
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 they 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
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 Portfolios will be 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.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investors.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Portfolios 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 which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
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<PAGE> 86
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 which (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).
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES
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 and Class C 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. For the six months ended March 31, 1994, the High
Income, Investment Grade and Intermediate Term Portfolios incurred distribution
fees with respect to Class B shares of $7,898,418, $1,983,466 and $370,650,
respectively, all of which was paid to Merrill Lynch. For the fiscal year ended
September 30, 1993 the High Income, Investment Grade and Intermediate Term
Portfolios incurred distribution fees, with respect to Class B shares, of
$9,639,303, $3,147,933, and $348,025, respectively, all of which was paid to
Merrill Lynch. During the fiscal year ended September 30, 1992, the High Income
and Investment Grade Portfolios incurred distribution fees, with respect to
Class B shares, of $3,738,255 and $1,734,391, respectively, all of which was
paid to Merrill Lynch. For the fiscal year ended September 30, 1991, the High
Income and Investment Grade Portfolios incurred distribution fees, with respect
to Class B shares, of $1,384,324 and $1,372,089, respectively, all of which was
paid to Merrill Lynch. Merrill Lynch also received contingent deferred sales
charges as described below under "Redemption of Shares".
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act of
1940. 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 of the relevant Portfolio. 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 of 1940 (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 of the relevant
Portfolio. 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 any Portfolio. A Distribution Plan cannot be amended to increase
materially the amount to be spent by any Portfolio without the approval of the
related class of shareholders of that Portfolio, 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
24
<PAGE> 87
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.
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 New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange 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 any Portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
Portfolio. 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 each
Portfolio 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 New
York Stock Exchange on the day received and is received by the Fund from such
dealer not later than 4:30 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 4:30 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 any Portfolio,
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 such Portfolio 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 shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of
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<PAGE> 88
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 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 High Income Portfolio and the Investment
Grade Portfolio redeemed within four years of purchase and Class B shares of the
Intermediate Term Portfolio redeemed within one year of purchase are subject to
a contingent deferred sales charge under most circumstances, the charge is
waived on redemptions of Class B shares 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 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.
During the fiscal year ended September 30, 1991, Merrill Lynch received
contingent deferred sales charges of $761,962 with respect to Class B shares of
the High Income Portfolio and $810,226 with respect to Class B shares of the
Investment Grade Portfolio. During the fiscal year ended September 30, 1992,
Merrill Lynch received contingent deferred sales charges of $1,135,956 with
respect to Class B shares of the High Income Portfolio and $741,419 with respect
to Class B shares of the Investment Grade Portfolio. During the fiscal year
ended September 30, 1993, Merrill Lynch received contingent deferred sales
charges of $2,273,384 with respect to Class B shares of the High Income
Portfolio, $822,254 with respect to Class B shares of the Investment Grade
Portfolio and $63,434 with respect to Class B shares of the Intermediate Term
Portfolio. During the six months ended March 31, 1994, Merrill Lynch received
contingent deferred sales charges of $1,699,376 with respect to Class B shares
of the High Income Portfolio, $458,594 with respect to Class B shares of the
Investment Grade Portfolio and $127,686 with respect to Class B shares of the
Intermediate Term Portfolio.
Merrill Lynch Blueprint(SM) -- Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint(SM) -- 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 these 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(SM) -- Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
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<PAGE> 89
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends, Distributions and Taxes" on page 41 of the
Prospectus.
FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under
such provisions, the Fund will not be subject to federal income tax on such part
of its ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders. To qualify for treatment as
a regulated investment company, the Fund must, among other things, derive in
each taxable year at least 90% of its gross income from dividends, interest and
gains from the sale or other disposition of securities and derive less than 30%
of its gross income each taxable year from gains (without deduction for losses)
from the sale or other disposition of stocks, securities and certain options,
futures or forward contracts held for less than three months. If in any taxable
year the Fund does not qualify as a regulated investment company, all its
taxable income will be taxed to the Fund at corporate rates.
Dividends will be taxable to shareholders as ordinary income, except for
(a) such portion as may exceed a shareholder's ratable share of the Fund's
earnings and profits as determined for tax purposes (which may differ from net
income for book purposes), which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares and (b) amounts
representing distributions of realized net long-term capital gains, if any. If
the amount described in (a) above were to exceed the shareholder's tax basis for
his shares, the excess over basis would be treated as gain from the sale or
exchange of such shares. The excess of any net long-term capital gains over net
short-term capital losses realized by the Fund will, to the extent distributed
by the Fund, be taxable to shareholders as long-term capital gains regardless of
the length of time a particular shareholder may have held his shares in the
Fund. The maximum tax rate imposed on capital gains for individual taxpayers is
28 percent. Dividends and distributions are taxable as described, whether
received in cash or reinvested in additional shares of the Fund.
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.
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.
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<PAGE> 90
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 percent of the Fund's investment company
income, with certain adjustments, for such calendar year, plus 98 percent 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 which 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 each Portfolio 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.
At September 30, 1993, the Fund had aggregate a net capital loss
carry-forward in the High Income Portfolio of approximately $28,547,000, all of
which expires in 1999. Each Portfolio of the Fund is treated as a separate
corporation for federal income tax purposes. Therefore, only net capital loss
carry-forward realized by a particular Portfolio may be applied to offset any
net capital gains realized by that Portfolio.
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 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
Each Portfolio of 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 Portfolios may write or purchase
options which 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 percent thereof and short-term capital gain or loss to the extent of 40
percent 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 a Portfolio 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
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loss. The capital gains and losses of each Portfolio will be combined in each
fiscal year to determine the capital gains and losses of the Fund, as described
above.
In addition, the Portfolio'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 has obtained a private letter ruling from the Internal
Revenue Service providing the Fund with relief from certain provisions of the
Code which might otherwise affect its ability to engage in such transactions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder of any of the Portfolios may elect to
receive systematic withdrawal payments from an Investment Account in the form of
payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A or Class D
shares having a value, based upon the current net asset value, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A or
Class D shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
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 either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business on the New York Stock Exchange (currently 4:15 pm, New York
time) on the 24th day of each month or the 24th day of the last month of each
calendar quarter, whichever is applicable. If the Exchange is not open for
business on such date, the Class A or Class D 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 for 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 Class A or
Class D shares in the Investment Account are automatically reinvested in Class A
or Class D shares of the applicable Portfolio. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's 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 Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept
additions to an Investment Account in which an election has been made to receive
systematic withdrawals unless such addition 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.
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A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, 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 Systematic Redemption Program, eligible shareholders
should contact their 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
(except that the minimum initial purchase through the Merrill Lynch Blueprint
(SM) Program is $100).
Retirement Plan
Any Retirement Plan which 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 which 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 which 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.
Employer Sponsored Retirement and Savings Plan
Class A shares and Class D shares are offered at net asset value to
Employer Sponsored Retirement or Savings Plans, such as tax qualified retirement
plans within the meaning of Section 401(a) of the Internal
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Revenue Code of 1986, as amended (the "Code"), deferred compensation plans
within the meaning of Section 403(b) and 457 of the Code, other deferred
compensation arrangements. Voluntary Employee Benefits Association, ("VEBA")
plans, and non-qualified After Tax Savings and Investment programs, maintained
on the Merrill Lynch Group Employee Services system, herein referred to as
"Employer Sponsored Retirement or Savings Plans", provided the plan has
accumulated at least $5 million in MLAM-advised mutual funds for Class D shares
or at least $20 million in MLAM-advised mutual funds for Class A shares. Class D
shares may be offered at net asset value to new Employer Sponsored Retirement or
Savings Plans, provided the plan has $3 million initially invested in
MLAM-advised mutual funds. Assets of Employer Sponsored Retirement or Savings
Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares are also offered at net asset value, provided
the plan has between 500-999 employees eligible to participate in the plan for
Class D shares or at least 1,000 employees eligible to participate in the plan
for Class A shares. Employees eligible to participate in Employer Sponsored
Retirement or Savings Plans of the same sponsoring employer or its affiliates
may be aggregated. Tax qualified retirement plans within the meaning of Section
401(a) of the Code meeting any of the foregoing requirements and which are
provided specialized services (e.g., plans whose participants may direct on a
daily basis their plan allocations among a wide range of investments including
individual corporate equities and other securities in addition to mutual fund
shares) by the Merrill Lynch BlueprintSM Program, are offered Class A shares at
a price equal to net asset value per share plus a reduced sales charge of 0.50%.
Any Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares or Class D shares at net
asset value has the option of (i) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, or (ii)
purchasing Class D shares at the initial sales charge and possible CDSC schedule
disclosed in the Prospectus, if the Employer Sponsored Retirement or Savings
Plan meets the specified requirements, purchasing Class B shares with a waiver
of the CDSC upon redemption, or (iii) if the Employer Sponsored Retirement or
Savings Plan does not qualify to purchase Class B shares with a waiver of the
CDSC upon redemption, purchasing Class C shares at the CDSC schedule disclosed
in the Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored Retirement
or Savings Plan.
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 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.
Capital gains and income received in each of the plans referred to above
are exempt from federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of a Portfolio of the Fund have an
exchange privilege with other Portfolios of the Fund and with certain other
MLAM-advised mutual funds listed below. Under the Merrill Lynch Select PricingSM
System, Class A shareholders may exchange Class A shares of a Portfolio for
Class A shares of another Portfolio or a second MLAM-advised mutual fund if the
shareholder holds any Class A
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shares of the other Portfolio or second fund in his 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 other Portfolio or a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the other Portfolio or second fund in his account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the other Portfolio
or second fund, the shareholder will receive Class D shares of the other
Portfolio or the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of another Portfolio or 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
other Portfolio or second fund. Class B, Class C and Class D of a Portfolio
shares 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 Portfolio is "tacked" to the holding period of
the newly acquired shares of the other Portfolio or 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 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, of any of the other
MLAM-advised mutual fund ("new Class B or Class C shares") 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
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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
which 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 for Class B or
Class C shares of the 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 High Income Portfolio 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 High Income
Portfolio 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.
The funds into which exchanges may be made and their respective investment
objectives are as follows:
Funds Issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. ....... High current income, consistent with a policy
of limiting the degree
of fluctuation in net asset value by investing
primarily in a portfolio of adjustable rate
securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC................... A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
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MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL
BOND FUND ................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Arizona income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona
Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND ........ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND ......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH
FUND, INC................... High total investment return, consistent with
prudent risk, from investment in United States
and foreign equity, debt and money market
securities, the combination of which will be
varied both with respect to types of securities
and markets in response to changing market and
economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC................... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT, INC............. As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks and
other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH BASIC VALUE
FUND, INC................... Capital appreciation and, secondarily, income
by investing in securities, primarily equities,
that management of the fund believes are
undervalued and therefore represent basic
investment value.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and California income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of insured California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
MERRILL LYNCH CAPITAL
FUND, INC................... The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC... Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
MERRILL LYNCH DRAGON
FUND, INC.................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
MERRILL LYNCH EURO FUND........ Capital appreciation primarily through
investment in equity securities of corporations
domiciled in Europe.
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MERRILL LYNCH FEDERAL
SECURITIES TRUST............ High current return through investments in U.S.
government and governmental agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed government securities.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management while seeking to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal
property taxes through investment in a
portfolio primarily of intermediate-term
investment grade Florida Municipal Bonds.
MERRILL LYNCH FUND FOR
TOMORROW, INC............... Long-term growth through investment in a
portfolio of good quality securities, primarily
common stock, potentially positioned to benefit
from demographic and cultural changes as they
affect consumer markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC............. Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited above-average growth rate in
earnings.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC.......... High total return, consistent with prudent
risk, through a fully managed investment policy
utilizing United States and foreign equity,
debt, and money market securities, the
combination of which will be varied from time
to time, both with respect to types of
securities and markets in response to changing
market and economic trends.
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MERRILL LYNCH GLOBAL BOND
FUND FOR INVESTMENT AND
RETIREMENT.................. High total investment return from investment in
government and corporate bonds denominated in
various currencies and multi-national currency
units.
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC....... High total return from investment primarily in
an internationally diversified portfolio of
convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of debt
securities or preferred stock and warrants or
options.
MERRILL LYNCH GLOBAL
HOLDINGS, INC.
(RESIDENT OF ARIZONA MUST
MEET INVESTOR SUITABILITY
STANDARDS).................. The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL
RESOURCES TRUST............. Long-term growth and protection of capital from
investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC.......... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in the
United States.
MERRILL LYNCH GLOBAL
UTILITY FUND, INC............ Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by
domestic and foreign companies primarily
engaged in the ownership or operation of
facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT... Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the Fund
believes to be undervalued.
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MERRILL LYNCH HEALTHCARE
FUND, INC. (RESIDENTS OF
WISCONSIN MUST MEET INVESTOR
SUITABILITY STANDARDS) Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. Capital appreciation by investing primarily in
Latin American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from federal and Maryland income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
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high a level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC.................... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND....... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide a high level of income
exempt from Federal income taxes by investing
in investment grade obligations with the
maximum maturity not to exceed twelve years and
a dollar weighted average maturity of five to
ten years.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
New Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND......... Currently a portfolio of Merrill Lynch
Multi-State Municipal Series Trust, a series
fund, whose objective is to provide as high a
39
<PAGE> 102
level of income exempt from Federal, New York
State and New York City income taxes as is
consistent with prudent investment management.
MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal, New
York State and New York City income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade New York
Municipal Bonds.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC
FUND, INC.................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern or Western Pacific countries, including
Japan, Australia, Hong Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Pennsylvania
40
<PAGE> 103
income taxes as is consistent with prudent
investment management through investment in a
portfolio of intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PHOENIX
FUND, INC................... Long-term growth of capital by investing in
equity and fixed income securities, including
tax-exempt securities, of issuers in weak
financial condition or experiencing poor
operating results believed to be undervalued
relative to the current or prospective
condition of such issuer.
MERRILL LYNCH SHORT-TERM
GLOBAL INCOME FUND, INC..... Current income at as high a level as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE
FUND, INC.................... Long-term growth of capital from investments in
securities, primarily common stocks, or
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC
DIVIDEND FUND................ Long-term total return from investment in
dividend paying common stocks which yield more
than Standard & Poor's 500 Composite Stock
Price Index.
MERRILL LYNCH TECHNOLOGY
FUND, INC.................... Long-term capital appreciation through
worldwide investment in equity securities of
companies that derive or are expected to derive
a substantial portion of their sales from
products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND.................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
by investing primarily in a portfolio of
long-term, investment grade obligations issued
by the State of Texas, its political
subdivisions, agencies and instrumentalities.
MERRILL LYNCH UTILITY
INCOME FUND, INC............. High current income through investment in
equity and debt securities issued by companies
which are primarily engaged in the
41
<PAGE> 104
ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC................... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multi-national currencies.
Class A Shares
Money Market Funds:
MERRILL LYNCH READY ASSETS
TRUST........................ Preservation of capital, liquidity and the
highest possible current income consistent with
the foregoing objectives from the short-term
money market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only for
exchanges within certain
retirement plans)............ Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES.......... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND.................. Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
Class B, Class C and Class D
Share
Money Market Funds:
MERRILL LYNCH GOVERNMENT
FUND......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities issued
or guaranteed by the U.S. Government, its
agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL
FUND......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current income
42
<PAGE> 105
consistent with liquidity and the maintenance
of a high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH TREASURY FUND.... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obligations
of the U.S. Treasury and up to 10% of its total
assets in repurchase agreements secured by such
obligations.
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 Securities and Exchange
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 a Portfolio's 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 a Portfolio'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
each Portfolio in accordance with formulas specified by the Securities and
Exchange Commission and take into account the maximum 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.
43
<PAGE> 106
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.
Set forth below is total return information for the Class A and Class B
shares of the High Income Portfolio, the Investment Grade Portfolio and the
Intermediate Term Portfolio. Since Class C and Class D shares have not been
issued prior to the date of this Statement of Additional Information,
performance information concerning Class C and Class D shares is not yet
provided.
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF A HYPOTHETICAL
EXPRESSED AS A PERCENTAGE BASED $1,000 INVESTMENT AT THE END OF THE
ON A HYPOTHETICAL $1,000 INVESTMENT PERIOD
------------------------------------- ------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
- ------------------------------------ ---------- --------- ------------ ---------- ---------- ----------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
One Year Ended March 31, 1994
Class A........................... (2.08%) 5.44% 1.27% $ 979.20 $1,054.40 $1,012.70
Class B........................... (2.41%) 5.00% 0.84% $ 975.90 $1,050.00.. $1,008.40
Five Years Ended March 31, 1994
Class A........................... 9.39% 12.93% 9.84% $1,566.70 $ 1,836.40 $1,598.90
Class B........................... 9.46% 12.97% -- $1,571.40 $ 1,839.60 --
Ten Years Ended March 31, 1994...... 10.68% 12.55% 10.50% $2,758.50 $ 3,262.20 $2,713.70
Class B Shares 10/21/88-3/31/94... 8.83% 12.44% -- $1,585.00 $ 1,893.50 --
Class B Shares 11/13/92-3/31/94.... -- -- 6.15% -- -- $1,085.70
</TABLE>
44
<PAGE> 107
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF A HYPOTHETICAL
EXPRESSED AS A PERCENTAGE BASED $1,000 INVESTMENT AT THE END OF THE
ON A HYPOTHETICAL $1,000 INVESTMENT PERIOD
------------------------------------- ------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
------ ---------- --------- ------------ ---------- ---------- ----------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED MARCH 31, 1994
Class A....................... (4.89%) 4.01% (3.93%) $ 951.10 $ 1,040.10 $ 960.70
Class B....................... (5.26) 3.61 (4.18) 947.40 1,036.10 958.20
YEAR ENDED SEPTEMBER 30,
1993 (Class A).................. 12.78 14.35 11.40 1,127.80 1,143.50 1,114.00
(Class B)....................... 11.92 13.35 15.27* 1,119.20 1,133.50 1,133.10
1992 (Class A).................. 14.30 25.22 13.71 1,143.00 1,252.20 1,137.10
(Class B)....................... 13.44 24.44 -- 1,134.40 1,244.40 --
1991 (Class A).................. 16.18 26.46 13.97 1,161.80 1,264.60 1,139.70
(Class B)....................... 15.30 25.32 -- 1,153.00 1,253.20 --
1990 (Class A).................. 5.22 (1.95) 7.55 1,052.20 980.50 1,075.50
(Class B)....................... 4.42 (2.54) -- 1,044.20 974.60 --
1989 (Class A).................. 11.09 7.69 9.79 1,110.90 1,076.90 1,097.90
(Class B)....................... 10.04* 6.46* -- 1,094.40 1,060.80 --
1988............................ 13.75 10.82 12.25 1,137.50 1,108.20 1,122.50
1987............................ (1.14) 8.82 (0.72) 988.60 1,088.20 992.80
1986............................ 17.66 14.30 18.09 1,176.60 1,143.00 1,180.90
1985............................ 22.50 20.60 20.66 1,225.00 1,206.00 1,206.60
1984............................ 8.60 5.88 8.20 1,086.00 1,058.80 1,082.00
1983............................ 17.38 28.58 15.95 1,173.80 1,285.80 1,159.50
1982............................ 27.75 22.43 27.12 1,277.50 1,224.30 1,271.20
1981............................ 3.76* (3.00) 4.74* 1,034.40 970.00 1,043.30
1980............................ -- (1.04) -- -- 989.60 --
</TABLE>
- ---------------
* Annualized
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
45
<PAGE> 108
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
--------------------------------------- ------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
- ----------------------------- ---------- --------- ------------ ----------- ---------- -------------
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Commencement of operations**
to March 31, 1994
Class A.................... 336.39% 446.17% 328.37% $4,363.90 $ 5,461.70 $4,283.70
Class B.................... 58.50% 89.35% 8.57% $1,585.00 $ 1,893.00 $1,085.70
</TABLE>
- ---------------
** Commencement of operations for Investment Grade Portfolio Class A shares and
Intermediate Term Portfolio was October 31, 1980. Commencement of operations
for Class A shares of High Income Portfolio was November 10, 1978.
Commencement of operations for Class B shares of Investment Grade Portfolio
and High Income Portfolio was October 21, 1988. Commencement of operations
for Class B shares of Intermediate Term Portfolio was November 13, 1992.
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
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 Composite Stock Price 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. As with other performance data,
performance comparisons should not be considered representative 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 two billion
(2,000,000,000) shares of Common Stock, having a par value $0.10 per share. The
shares of Common Stock are divided as follows: High Income Portfolio Series
Common Stock which is divided into four classes designated "Class A Common
Stock", "Class B Common Stock", "Class C Common Stock" and "Class D Common
Stock" which consist of 200,000,000 shares, 500,000,000 shares, 200,000,000
shares and 500,000,000 shares, respectively, High Quality Portfolio Series
Common Stock (which does business under the name "Investment Grade Portfolio")
which is divided into four classes designated "Class A Common Stock", "Class B
Common Stock", "Class C Common Stock" and "Class D Common Stock" each of which
consists of 100,000,000 shares and the Intermediate Term Portfolio Series Common
Stock, which is divided into four classes designated "Class A Common Stock",
"Class B Common Stock", "Class C Common Stock" and "Class D Common Stock" each
of which consists of 50,000,000 shares. Each of the Fund's shares has equal
dividend, distribution, liquidation and voting rights, except that only shares
of the respective Portfolios are entitled to vote on matters concerning
46
<PAGE> 109
only that Portfolio and 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. Each issued and outstanding share is
entitled to one vote and to participate equally in dividends and distributions
declared by the respective Portfolio and class and in net assets of such
Portfolio upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each Portfolio, 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 any Portfolio
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 10,417 shares for $100,003. Such shares were acquired for investment
and can only be disposed of by redemption. The organizational expenses of the
Fund have been fully amortized.
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.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the High Income,
Investment Grade and Intermediate Term Portfolios, based on the value of each
Portfolio's net assets and number of shares outstanding as of March 31, 1994, is
calculated as set forth below. Information is not provided for Class C or Class
D shares since no Class C or Class D shares were publicly offered prior to the
date of this Statement of Additional Information.
HIGH INCOME PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ --------------
<S> <C> <C>
Net Assets..................................................... $919,806,773 $2,263,879,262
============ ==============
Number of Shares Outstanding................................... $113,855,959 $ 280,147,216
============ ==============
Net Asset Value Per Share (net assets divided by number of
shares outstanding).......................................... $8.08 $8.08
Sales Charge* (for Class A shares: 4.00% of offering price
(4.17% of net asset value)).................................. .34 **
------------ -------------
$8.42 $8.08
Offering Price................................................. ============ =============
</TABLE>
- ---------------
* 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.
47
<PAGE> 110
INVESTMENT GRADE PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
<S> <C> <C>
Net Assets....................................................... $380,838,894 $506,658,188
============ ============
Number of Shares Outstanding..................................... $ 33,773,498 $ 44,932,891
============ ============
Net Asset Value Per Share (net assets divided by number of shares
outstanding)* (for Class A shares: 4.00% of offering price
(4.17% of net asset value)).................................... $11.28 $11.28
Sales Charge..................................................... .47 **
------------ ------------
Offering Price................................................... $11.75 $11.28
------------ ------------
</TABLE>
- ---------------
* 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.
INTERMEDIATE TERM PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
<S> <C> <C>
Net Assets....................................................... $184,243,802 $147,898,423
============ ============
Number of Shares Outstanding..................................... $ 16,289,470 $ 13,075,723
============ ============
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $11.31 $11.31
Sales Charge* (for Class A shares: 1.00% of offering price (0.97%
of net asset value))........................................... .11 **
------------ -----------
Offering Price................................................... $11.42 $11.31
------------ -----------
</TABLE>
- ---------------
* 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 within one year of purchase. See
"Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and
Class C Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8500, Boston, Massachusetts
02266-8500, acts as the Custodian of the Fund's assets. 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.
48
<PAGE> 111
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 which 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
49
<PAGE> 112
"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 4.
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 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 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
Securities and Exchange Commission. The Options Clearing Corporation is
interposed between the clearing members which 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
50
<PAGE> 113
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.
51
<PAGE> 114
THE FOLLOWING SEMI-ANNUAL FINANCIAL
STATEMENTS FOR THE FUND FOR THE PERIOD
ENDED MARCH 31, 1994, ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal recurring
nature.
52
<PAGE> 115
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
[B
BONDS HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
AIRLINES--3.5% Delta Air Lines Inc.:
BB+ Baa3 $ 1,963,718 9.875% due 4/30/2008++++ $ 1,980,901 $ 2,026,137
BB+ Baa3 3,000,000 9.30% due 1/02/2010 2,963,100 2,950,701
BB+ Baa3 5,000,000 9.20% due 9/23/2014++++ 4,839,050 4,688,400
BB+ Baa3 28,000,000 10.50% due 4/30/2016 28,481,900 29,491,812
Piedmont Aviation, Inc.:
BB+ Ba2 200,000 Series C, 9.70% due 1/15/1999 201,676 194,415
BB+ Ba2 100,000 Series C, 10.25% due 1/15/2007 103,706 97,277
BB+ Ba2 500,000 Series E, 10.30% due 3/28/2007 520,395 467,500
BB+ Ba2 1,950,000 Series F, 10.35% due 3/28/2011 1,999,718 1,905,864
BB+ Ba2 50,000 Series G, 10.35% due 3/28/2011 51,424 48,868
BB+ Ba2 450,000 Series H, 9.85% due 5/08/2005 454,617 428,215
BB+ Ba2 1,500,000 Series H, 10.00% due 11/08/2012 1,493,250 1,422,645
BB+ Ba2 536,000 Series I, 10.00% due 11/08/2012 545,048 490,440
United Air Lines Inc.:
BB+ Baa1 7,100,000 9.35% due 4/07/2016 7,215,446 6,887,000
BB+ Baa1 10,500,000 9.21% due 1/21/2017 10,480,125 9,996,042
USAir Inc.:
B+ Ba3 28,000,000 9.625% due 2/01/2001 22,360,000 22,222,368
BB+ Ba2 1,432,000 Series A, 10.70% due 1/15/2007 1,525,137 1,444,395
BB+ Ba2 1,815,000 Series C, 10.70% due 1/15/2007 1,933,048 1,830,711
BB+ Ba2 1,107,000 Series E, 10.70% due 1/15/2007 1,159,472 1,115,811
BB+ Ba2 3,715,855 Series 89A1, 9.33% due 1/01/2006++++ 3,712,232 3,388,191
BB+ Ba2 5,000,000 Series 89A2, 9.82% due 1/01/2013++++ 4,837,500 4,600,000
BB+ Ba2 16,500,000 Series 93A3, 10.375% due 3/01/2013 16,530,000 15,732,849
------------ ------------
113,387,745 111,429,641
AUTOMOBILE BB- B2 13,000,000 Exide Corp., 10.75% due 12/15/2002 13,558,125 13,845,000
PARTS--0.4%
BROADCASTING & B B2 10,550,000 Century Communications Corp., 11.875%
PUBLISHING--4.1% due 10/15/2003 10,550,000 11,420,375
BB- Ba2 15,000,000 Continental Cablevision Inc., 9.50%
due 8/01/2013 15,000,000 14,625,000
BB- Ba3 13,150,000 Heritage Media Services Corporation, 11.00%
due 6/15/2002 13,158,750 13,610,250
B B1 9,200,000 K-III Communications Corp.,
10.625% due 5/01/2002 9,192,500 9,683,000
B B3 10,000,000 The Katz Corp., 12.75% due 11/15/2002 10,125,000 10,750,000
CCC+ B3 10,000,000 SCI Television Inc., 11.00% due 6/30/2005 10,350,000 10,000,000
B+ B3 12,500,000 Sinclair Broadcasting Group Inc.,
10.00% due 12/15/2003 12,530,000 12,562,500
B B1 5,000,000 Storer Communications, Inc., 10.00%
due 5/15/2003 3,556,250 5,000,000
B- B3 9,000,000 Summit Communications Group Inc.,
10.50% due 4/15/2005 9,000,000 9,135,000
BB+ Ba3 10,000,000 Videotron Groupe L'TEE, 10.25%
due 10/15/2002 10,097,500 10,350,000
BB- B1 22,750,000 World Color Press, Inc., 9.125% due 3/15/2003 22,769,375 22,522,500
------------ ------------
126,329,375 129,658,625
</TABLE>
53
<PAGE> 116
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
BUILDING B+ B1 $ 4,885,000 National Gypsum Co., 10.00% due 7/01/2003 $ 4,890,000 $ 4,958,275
MATERIALS--2.5% CCC Caa 20,000,000 Nortek Inc., 9.875% due 3/01/2004 19,834,240 18,500,000
B+ B3 21,455,000 Pacific Lumber Co., 10.50% due 3/01/2003 21,514,913 21,133,175
US Gypsum Corp.:
B+ B2 7,000,000 10.25% due 12/15/2002 6,993,750 7,070,000
B- B3 29,084,000 8.75% due 3/01/2017 25,890,006 28,066,060
------------ ------------
79,122,909 79,727,510
BUILDING American Standard Inc.:
PRODUCTS--1.3% B Ba3 6,750,000 9.875% due 6/01/2001 6,750,000 6,615,000
B+ Ba3 10,150,000 9.25% due 12/01/2016 10,203,625 10,302,250
CCC- Caa 9,300,000 Amstar Corp., 11.375% due 2/15/1997 6,566,250 9,253,500
B Ba3 16,000,000 Inter-City Products Corp., 9.75%
due 3/01/2000 15,888,750 15,120,000
------------ ------------
39,408,625 41,290,750
CAPITAL B+ B1 21,450,000 Essex Group Inc., 10.00% due 5/01/2003 21,546,500 21,450,000
GOODS--1.3% Sequa Corp.:
B+ B3 2,696,000 10.50% due 5/01/1998 2,783,620 2,786,990
B+ B3 16,935,000 9.375% due 12/15/2003 17,066,800 16,342,275
------------ ------------
41,396,920 40,579,265
CELLULAR B- B3 13,000,000 Dial Page Inc., 12.25% due 2/15/2000 13,080,500 13,585,000
TELEPHONES--2.3% CCC+ Caa 20,235,000 Horizon Cellular Telephone Co.,
11.375% due 10/01/2000 (a) 13,421,258 14,063,325
CCC+ B3 17,000,000 Mobilemedia Communication, Inc., 10.50%
due 12/01/2003 (a) 10,368,905 10,115,000
NR NR 10,267,000 Page Mart Inc., 12.25% due 11/01/2003 (a) (b) (g) 5,929,679 6,147,366
B B3 15,000,000 Paging Network, Inc., 11.75% due 5/15/2002 15,000,000 16,200,000
BB- Ba3 13,150,000 Rogers Communication Inc., 10.875%
due 4/15/2004 13,366,250 13,610,250
------------ ------------
71,166,592 73,720,941
CHEMICALS--2.9% B B2 17,000,000 Agriculture Minerals & Chemicals Company,
L.P., 10.75% due 9/30/2003 17,060,000 17,595,000
B+ Ba3 42,540,000 G-I Holdings, Inc., 11.38% due 10/01/1998 (a) 25,873,174 26,162,100
Harris Chemical North America Inc.:
B+ B2 18,750,000 10.25% due 7/15/2001 (a) 15,214,142 15,562,500
B B3 12,000,000 10.75% due 10/15/2003 12,000,000 12,240,000
B- B3 20,000,000 UCC Investors Holding, Inc., 11.00%
due 5/01/2003 20,550,000 20,700,000
------------ ------------
90,697,316 92,259,600
COMMUNICATIONS--1.5% CCC- B3 40,000,000 Nextel Communications Inc., 9.75% due
8/15/2004 (a) 25,000,762 23,800,000
Panamsat L.P.:
B+ Ba3 4,750,000 9.75% due 8/01/2000 4,750,000 4,797,500
B- B3 28,710,000 11.38% due 8/01/2003 (a) 17,454,871 17,656,650
------------ ------------
47,205,633 46,254,150
CONGLOMERATES--5.8% NR NR 9,083,000 Astrum International Corp., 11.50% due
6/08/2003 9,137,780 9,593,919
Collins & Aikman Group Inc.:
CCC+ Caa 4,300,000 11.375% due 5/01/1997 4,209,385 4,321,500
B Caa 9,900,000 14.39% due 1/31/2005 (a) 7,989,091 9,615,375
Colt Industries, Inc.:
B+ B1 20,000,000 10.25% due 4/01/2002 20,350,000 20,800,000
BB Ba2 3,237,000 11.25% due 12/01/2015 3,447,997 3,471,682
</TABLE>
54
<PAGE> 117
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
CONGLOMERATES B+ B1 $ 18,500,000 Foamex Capital Corp., 11.25% due 10/01/2002 $ 18,495,000 $ 19,702,500
(CONCLUDED) NR NR 13,000,000 Gillette Holdings, Inc., 12.25% due 6/30/2002 13,346,250 14,235,000
B- B3 23,250,000 The Interlake Corp., 12.125% due 3/01/2002 23,483,750 23,133,750
B+ B3 25,000,000 Jordan Industries Inc., 10.375% due 8/01/2003 24,961,000 25,125,000
NR NR 8,500,000 MacAndrews & Forbes Group, Inc., 12.25%
due 7/01/1996 8,276,775 8,755,000
NR NR 9,100,000 MacAndrews & Forbes Holdings, Inc.,
13.00% due 3/01/1999 8,568,400 9,168,250
BB- Ba3 11,250,000 Reeves Industries, Inc., 11.00% due 7/15/2002 11,266,913 11,531,250
BB- Ba3 25,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 24,979,063 24,562,500
------------ ------------
178,511,404 184,015,726
CONSUMER B NR 7,200,000 Coleman Holdings, 11.49% due 5/27/1998 (a) 7,093,070 7,112,000
PRODUCTS--3.0% Formica Corporation:
NR NR 23,500,000 13.06% due 10/01/2001++++ (a) 21,171,269 22,795,000
NR NR 9,000,000 13.928% due 9/15/2005 9,000,000 9,180,000
Liggett Group Inc.:
NR NR 13,000,000 11.50% due 2/01/1999 12,261,015 9,555,000
NR NR 4,300,000 16.50% due 2/01/1999 (g) 3,910,000 4,063,500
NR B3 5,500,000 Revlon Consumer Products Corp., 10.50%
due 2/15/2003 5,624,375 4,950,000
B- B3 40,350,000 Revlon Worldwide Corp., 12.00% due
3/15/1998 (a) 24,932,725 18,561,000
B+ B1 19,850,000 Sealy Corp., 9.50% due 5/01/2003 19,951,800 19,750,750
------------ ------------
103,944,254 95,967,250
CONTAINERS--3.8% B B2 20,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008 20,000,000 20,050,000
Ivex Packaging Corp.:
B+ B3 13,250,000 12.50% due 12/15/2002 13,157,117 13,846,250
B- Caa 21,500,000 13.25% due 3/15/2005 (a) 9,492,907 10,293,125
BB Ba3 19,000,000 Owens-Illinois, Inc., 11.00% due 12/01/2003 19,380,000 20,852,500
B+ Ba3 10,000,000 Plastic Container Corp., 10.75% due 4/01/2001 10,022,500 9,950,000
B- B3 32,628,000 Silgan Holdings Inc., 13.25% due 12/15/2002 (a) 25,019,888 24,960,420
B+ Ba3 20,000,000 Sweetheart Cup Co., 9.625% due 9/01/2000 20,000,000 20,100,000
------------ ------------
117,072,412 120,052,295
CONVERTIBLE B B2 8,352,000 Builders Transport, Inc., 8.00%
BONDS*--1.1% due 8/15/2005 (4) 4,886,880 8,289,360
B+ Ba3 10,362,000 Lomas Financial Corp., 9.00%
due 10/31/2003 (2) 9,653,775 9,442,372
B- B3 6,941,000 MEDIQ, Inc., 7.25% due 6/01/2006 (3) 4,539,685 5,413,980
B B2 6,000,000 Ohm Corp., 8.00% due 10/01/2006 (5) 4,160,000 5,880,000
B+ B2 5,909,000 UNC, Inc., 7.50% due 3/31/2006 (1) 3,442,530 5,716,957
------------ ------------
26,682,870 34,742,669
ENERGY--8.9% B+ B1 49,500,000 Clark R&M Holdings Inc., 11.00% due
2/15/2000 (a) 26,406,700 26,482,500
NR NR 36,000,000 Consolidated Hydro Inc., 12.00% due
7/15/2003 (a) 20,802,853 22,500,000
CC Caa 2,037,000 Empire Gas Corp., 12.00% due 3/31/2002 1,606,510 2,031,907
CC Caa 5,900,000 Empire, Inc., 9.00% due 12/31/2007 3,290,116 5,383,750
B- B2 16,000,000 Falcon Drilling Company, Inc., 9.75% due
1/15/2001 (g) 16,000,000 15,440,000
B B2 18,450,000 Ferrell Gas Companies, Inc., 11.625% due
12/15/2003 18,612,865 19,464,750
B+ B1 20,000,000 Global Marine Inc., 12.75% due 12/15/1999 20,047,500 21,450,000
Gulf Canada Resources Ltd.:
BB B1 12,750,000 9.00% due 8/15/1999 11,735,937 12,651,965
B+ B2 8,700,000 9.25% due 1/15/2004 8,488,355 8,047,500
</TABLE>
55
<PAGE> 118
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
ENERGY BB B1 $ 12,300,000 Maxus Energy Corp., 11.50% due 11/15/2015 $ 11,988,138 $ 12,853,500
(CONCLUDED) Mesa Capital Corp.:
CCC B3 1,363,000 12.75% due 6/30/1996 (a) 961,266 1,148,328
CCC+ B3 4,341,000 12.75% due 6/30/1998 (a) 3,295,754 3,874,343
B- Caa 7,610,000 National Propane Corp., 13.125% due 3/01/1999 5,405,665 7,648,050
BB- Ba3 8,750,000 Noble Drilling Corp., 9.25% due 10/01/2003 8,925,000 8,618,750
BBB- Ba2 18,000,000 Oryx Energy Co., 10.375% due 9/15/2018 17,823,010 19,396,098
B- B3 3,750,000 Presidio Oil Co., 11.50% due 9/15/2000 3,750,000 3,759,375
BB Ba2 15,000,000 Rowan Companies, Inc., 11.875% due 12/01/2001 15,085,000 15,675,000
BB- Ba3 25,000,000 Seagull Energy Corp., 8.625% due 8/01/2005 24,990,000 24,125,000
CCC+ Caa 8,650,000 Tesoro Petroleum Corp., 12.75% due 3/15/2001 7,483,899 8,650,000
BB- B1 23,000,000 Trans Texas Gas Corp., 10.50% due 9/01/2000 23,000,000 23,287,500
B+ B1 31,525,000 Triton Energy Corp., 12.816%
due 11/01/1997 (a) 21,724,514 22,067,500
------------ ------------
271,423,082 284,555,816
ENTERTAINMENT--3.0% B B2 11,750,000 AMC Entertainment, Inc., 12.625% due
8/01/2002 11,696,095 12,983,750
B+ B1 9,000,000 Cinemark USA Inc., 12.00% due 6/01/2002 9,058,750 9,787,500
B B3 50,000,000 Marvel Holdings Inc., 11.475% due 4/15/1998 (a) 31,940,889 31,125,000
SPI Holding Inc.:
B+ B2 33,250,000 11.50% due 10/01/2001 (a) 24,301,207 24,438,750
B- B3 20,000,000 11.65% due 12/01/2002++ 19,900,000 18,500,000
------------ ------------
96,896,941 96,835,000
FINANCIAL American Annuity Group Inc.:
SERVICES--2.2% B+ Ba3 11,000,000 9.50% due 8/15/2001 11,000,000 10,890,000
B- B2 12,000,000 11.125% due 2/01/2003 12,000,000 12,480,000
BB Ba1 21,000,000 Lomas Mortgage USA, Inc., 10.25% due
10/01/2002 21,140,625 21,315,000
BB+ NR 3,000,000 Reliance Financial Services Corp., 10.36%
due 12/01/2000 2,380,000 2,992,500
BB- B1 25,000,000 Reliance Group Holdings, Inc., 9.75%
due 11/15/2003 24,962,500 23,625,000
------------ ------------
71,483,125 71,302,500
FOOD & Chiquita Brands International Inc.:
BEVERAGE--7.2% B+ B3 5,745,000 11.50% due 6/01/2001 6,139,969 6,003,525
BB- B1 13,000,000 9.125% due 3/01/2004 12,990,000 12,155,000
NR NR 15,000,000 Cumberland Farms, 10.50% due 10/01/2003+++ 14,681,250 14,418,750
BB- Ba3 25,000,000 Del Monte Corp., 10.00% due 5/01/2003 (g) 25,012,500 23,625,000
NR B2 24,963,000 Envirodyne Industries, Inc., 10.25% due
12/01/2001 24,298,891 24,713,370
B- B3 10,520,000 Farm Fresh, Inc., 7.50% due 3/01/2010 5,488,575 7,574,400
B+ B2 29,500,000 Grand Union Corp., 12.25% due 7/15/2002 29,475,625 29,426,250
B- B2 5,000,000 Kash-n-Karry Inc., 12.375% due 2/01/1999 4,975,000 4,512,500
BB- Ba3 7,000,000 P & C Food Markets, Inc., 11.50% due 10/15/2001 7,100,000 7,560,000
B B2 25,000,000 Penn Traffic Co., 9.625% due 4/15/2005 24,781,750 24,750,000
B- B2 9,575,000 Pueblo Xtra International Inc., 9.50% due
8/01/2003 9,280,250 9,000,500
B+ B1 19,250,000 Royal Crown Corp., 9.75% due 8/01/2000 19,275,000 18,961,250
B- Caa 11,800,000 Seven-Up/RC Bottling Co. of Southern
California, Inc., 11.50% due 8/01/1999 11,967,500 11,741,000
Specialty Foods Corp.:
B B2 15,000,000 10.25% due 8/15/2001 15,000,000 15,225,000
B- B3 2,250,000 11.25% due 8/15/2003 2,261,250 2,283,750
B B3 20,000,000 Texas Bottling Group, Inc., 9.00% due
11/15/2003 20,002,500 18,900,000
------------ ------------
232,730,060 230,850,295
</TABLE>
56
<PAGE> 119
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
HEALTH BB- Ba2 $ 5,000,000 American Medical International Inc., 11.25%
SERVICES--1.9% due 6/01/2015 $ 5,097,500 $ 5,325,000
B+ B1 11,500,000 Continental Medical Systems, Inc., 10.875%
due 8/15/2002 11,523,750 11,298,750
B+ B1 10,000,000 Continental Medsystems, Inc.,
10.375% due 4/01/2003 9,991,250 9,650,000
NR NR 9,764,706 Epic Properties, Inc., 11.50% due 7/15/2001++++ 9,703,188 11,961,765
B+ B1 10,000,000 HealthTrust Co. (The Hospital), 8.75%
due 3/15/2005 9,850,000 9,500,000
B+ B1 11,500,000 MEDIQ/PRN Life Support Services, Inc.,
11.125% due 7/01/1999 11,455,000 11,816,250
------------ ------------
57,620,688 59,551,765
HIGH CCC+ B3 4,000,000 Anacomp, Inc., 15.00% due 11/01/2000 3,562,500 4,520,000
TECHNOLOGY--0.7% ComputerVision Corp.:
B- B3 10,000,000 11.375% due 8/15/1999 9,706,250 9,050,000
B- B3 12,500,000 8.00% due 12/01/2009 6,802,472 8,125,000
------------ ------------
20,071,222 21,695,000
HOME BUILDERS--3.0% B- B2 20,000,000 Baldwin Company, 10.375% due 8/01/2003 19,879,500 19,000,000
Del E. Webb Corporation:
BB- Ba2 7,000,000 10.875% due 3/31/2000 7,002,795 7,262,500
B B2 7,500,000 9.75% due 3/01/2003 7,440,975 7,537,500
B B2 5,000,000 9.00% due 2/15/2006 4,993,750 4,650,000
B B3 14,000,000 Greystone Homes Inc., 10.75% due 3/01/2004+++ 14,000,000 13,860,000
B B1 10,250,000 K Hovnanian Enterprises, 11.25% due 4/15/2002 10,204,062 10,660,000
BB Ba2 12,000,000 Standard Pacific Corp., 10.50% due 3/01/2000 11,995,000 12,120,000
B+ Ba3 20,000,000 U.S. Home Corp., 9.75% due 6/15/2003 20,000,000 20,000,000
------------ ------------
95,516,082 95,090,000
HOTELS & B B2 22,325,000 Aztar Corp., 11.00% due 10/01/2002 22,557,250 21,990,125
CASINOS--7.4% BB B1 25,000,000 Bally's Park Place, Inc., 9.25% due 3/15/2004 24,267,700 23,187,500
NR NR 12,000,000 Capital Gaming International, Inc., 11.50%
due 2/01/2001 (c)(g) 13,600,200 14,400,000
B+ B2 25,000,000 GB Property Funding Corp., 10.875% due
1/15/2004 24,837,500 23,000,000
B+ B2 24,750,000 GNS Finance Corp., 9.25% due 3/15/2003 24,610,371 25,616,250
NR NR 7,682,000 Goldriver Hotel & Casino Corporation,
11.375% due 8/31/1999 (a) 8,609,882 7,182,670
BB- B 17,000,000 Host Marriott Corp., 10.375% due 6/15/2011 17,439,375 17,255,000
B+ B1 15,000,000 MGM Grand Hotel Finance Corp., 12.00%
due 5/01//2002 15,230,500 16,800,000
CCC+ B2 10,000,000 Pioneer Finance Corp., 13.50% due 12/01/1998 10,542,500 10,400,000
BB- Ba3 25,000,000 Showboat, Inc., 9.25% due 5/01/2008 24,920,000 23,625,000
Trump Castle Funding Inc.:
NR Caa 8,585,250 11.75% due 11/15/2003 6,887,807 7,855,504
NR Ca 1,774,285 7.00% due 11/15/2005++ (a) 1,272,626 1,554,762
B B3 31,250,000 Trump Plaza Funding, Inc., 10.875% due
6/15/2001 31,037,645 29,375,000
NR Caa 15,979,095 Trump Taj Mahal Funding, Inc., 11.35% due
11/15/1999++ 11,688,477 14,370,879
------------ ------------
237,501,833 236,612,690
</TABLE>
57
<PAGE> 120
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
INDUSTRIAL BB- B2 $25,000,000 ADT Operations Inc., 9.25% due 8/01/2003 $ 25,097,437 $ 24,000,000
SERVICES--2.1% B- B3 10,000,000 Bell & Howell Co., 10.75% due 10/01/2002 10,040,000 10,450,000
B+ B1 10,000,000 Repap Wisconsin Inc., 9.25% due 2/01/2002 10,000,000 9,600,000
B- Caa 7,720,000 Southeastern Public Service Co., 11.875%
due 2/01/1998 5,699,947 7,835,800
Thermadyne Industries, Inc.:
NR NR 5,706,000 10.25% due 5/01/2002 5,711,468 5,734,530
NR NR 7,913,000 10.75% due 11/01/2003 7,915,156 7,952,565
------------ ------------
64,464,008 65,572,895
METALS Kaiser Aluminum & Chemical Corp.:
& MINING--1.8% B+ B1 3,750,000 9.875% due 2/15/2002 3,724,650 3,487,500
B- B2 23,000,000 12.75% due 2/01/2003 22,845,000 23,460,000
Maxxam Group, Inc.:
B- B3 5,000,000 11.25% due 8/01/2003 4,918,750 5,012,500
B- B3 41,155,000 12.25% due 8/01/2003 (a) 23,561,256 25,516,100
------------ ------------
55,049,656 57,476,100
PAPER--5.0% B+ B2 15,420,000 Container Corporation of America, 9.75% due
4/01/2003 15,433,400 15,265,800
BB- Ba3 15,000,000 Doman Industries Ltd., 8.75% due 3/15/2004 15,000,000 13,800,000
Fort Howard Corp.:
B+ B1 11,000,000 9.25% due 3/15/2001 11,000,000 10,725,000
B B2 11,000,000 10.00% due 3/15/2003 11,000,000 10,725,000
B B2 14,000,000 9.00% due 2/01/2006 13,915,000 12,670,000
B B3 25,000,000 Gaylord Container Corp., 11.50% due 5/15/2001 25,001,250 25,375,000
B B1 23,000,000 Riverwood International Corp.,
11.25% due 6/15/2002 23,680,000 24,610,000
B+ B1 11,500,000 Stone-Consolidated Corp., 10.25% due
12/15/2000 11,520,000 10,925,000
Stone Container Corp.:
B- B2 10,000,000 10.75% due 6/15/1997 9,426,125 9,850,000
B B1 3,000,000 12.625% due 7/15/1998 3,000,000 3,225,000
B B1 12,000,000 11.875% due 12/01/1998 11,921,975 12,360,000
B- B2 6,500,000 11.50% due 9/01/1999 6,264,563 6,353,750
B B1 5,000,000 9.875% due 2/01/2001 5,000,000 4,575,000
------------ ------------
162,162,313 160,459,550
RAILROADS--0.6% B+ Ba3 17,750,000 Southern Pacific Rail Co., 9.375% due
8/15/2005 17,750,000 17,705,625
RESTAURANTS/ Family Restaurants Inc.:
FOOD SERVICES--2.8% B B1 13,000,000 9.75% due 2/01/2002 13,000,000 12,090,000
B- B3 13,500,000 10.875% due 2/01/2004 (a) 9,871,168 9,112,500
B- B2 30,000,000 Flagstar Corp., 11.375% due 9/15/2003 30,092,500 29,550,000
Foodmaker, Inc:
B- B2 16,000,000 9.75% due 6/01/2002 15,455,000 15,280,000
B- B2 23,000,000 Series 1993A, 9.75% due 11/01/2003 (g) 22,641,200 22,568,750
------------ ------------
91,059,868 88,601,250
RETAIL B- B3 10,000,000 Pamida Holdings, Inc., 11.75% due 3/15/2003 9,997,500 9,850,000
SPECIALTY--1.1% Specialty Retailers Group, Inc.:
B+ B1 21,000,000 10.00% due 8/15/2000 21,000,000 21,105,000
B- B3 3,670,000 11.00% due 8/15/2003 3,673,350 3,706,700
------------ ------------
34,670,850 34,661,700
</TABLE>
58
<PAGE> 121
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS (CONCLUDED) HIGH INCOME PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
STEEL--2.1% B B2 $21,000,000 A.K. Steel Corp., 10.75% due 4/01/2004 $ 21,000,000 $ 21,105,000
B B2 15,000,000 Republic Engineered Steel,
9.875% due 12/15/2001 15,000,000 14,775,000
B+ B1 17,500,000 WCI Steel, Inc., 10.50% due 3/01/2002 (g) 17,500,000 18,462,500
BB- B1 12,000,000 Wheeling-Pittsburg Corp.,
9.375% due 11/15/2003 11,650,000 11,340,000
------------ ------------
65,150,000 65,682,500
TELECOMMUNI- CCC+ B3 11,500,000 USA Mobile Communications Holdings, Inc.,
CATIONS--0.3% 9.50% due 2/01/2004 11,456,250 10,752,500
TEXTILES--0.9% B+ B3 30,000,000 Westpoint Stevens, 9.375% due 12/15/2005 30,100,000 28,425,000
TRANSPORTATION B+ B1 5,095,000 ACF Industries, Inc., 11.60% due 5/15/2000 4,865,725 5,120,475
SERVICES--2.0% BB Ba2 9,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 9,000,000 8,775,000
BB- B1 11,000,000 International Shipholding Corp., 9.00% due
7/01/2003 10,998,750 10,615,000
NR NR 36,106,000 Transtar Holdings, L.P., 13.375% due
12/15/2003 (a)(g) 18,177,966 19,677,770
B+ Ba3 19,000,000 Viking Star Shipping, Inc., 9.625%
due 7/15/2003 19,077,500 18,869,375
------------ ------------
62,119,941 63,057,620
UTILITIES--4.4% Beaver Valley Funding:
B+ Ba3 5,299,000 8.625% due 6/01/2007 5,047,297 4,753,479
B+ Ba3 25,000,000 9.00% due 6/01/2017 23,494,000 22,306,875
BB+ Ba1 19,500,000 CTC Mansfield Funding, 11.125% due 9/30/2016 21,013,750 20,719,023
Midland Cogeneration Venture
Limited Partnership:
BB- Ba2 4,610,891 10.33% due 7/23/2002++++ 4,760,745 4,591,779
BB- Ba2 11,250,000 11.75% due 7/23/2005 11,310,000 11,768,985
BB- B2 5,500,000 13.25% due 7/23/2006 6,002,565 6,204,863
NR NR 14,517,815 Sunflower Electric Power Corp., 8.00%
due 12/31/2016+++++++ 9,306,139 11,940,903
Texas-New Mexico Power Corp.:
BB Ba3 5,000,000 9.25% due 9/15/2000 5,000,000 5,282,665
B+ B1 18,000,000 10.75% due 9/15/2003 18,060,000 19,339,740
B Ba3 5,000,000 Transco Energy Co., 9.875% due 6/15/2020 4,687,500 5,212,500
Tucson Electric & Power Co.:
NR NR 12,323,081 Series B, 10.21% due 1/01/2009+++ 11,547,774 11,799,350
NR NR 17,426,207 Series C, 10.73239% due 1/01/2013+++ 16,252,461 16,946,987
------------ ------------
136,482,231 140,867,149
TOTAL INVESTMENTS IN BONDS--90.9% 2,862,192,330 2,893,298,377
<CAPTION>
SHARES
HELD
PREFERRED STOCKS
<S> <C> <S> <C> <C>
BROADCASTING & 471,000 K-III Communications Corp. 11,812,750 12,834,750
PUBLISHING--0.7% 108,401 K-III Communications Corp.++ 11,047,046 10,867,209
------------ ------------
22,859,796 23,701,959
ENERGY--0.2% 10,000 Consolidated Hydro, Inc. 4,743,077 5,160,000
STEEL--0.5% 600,000 USX Capital LLC 15,000,000 14,400,000
TOTAL INVESTMENTS IN PREFERRED STOCKS--1.4% 42,602,873 43,261,959
</TABLE>
59
<PAGE> 122
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
SHARES VALUE
INDUSTRIES HELD ISSUE COST (NOTE 1a)
COMMON STOCKS HIGH INCOME PORTFOLIO
<S> <C> <S> <C> <C>
BANKING--0.2% 168,000 Chase Manhattan Corp. $ 7,000,000 $ 5,439,000
CONGLOMERATES--0.1% 200,369 Astrum International Corp. 4,085,240 4,934,087
ENERGY--0.1% 57,237 Mesa Inc. 325,690 329,113
122,500 Petrolane Inc. 1,424,063 1,424,063
------------ ------------
1,749,753 1,753,176
FINANCIAL SERVICES--0.0% 132,527 Lomas Financial Corporation 1,689,719 1,060,216
FOOD & 120,194 Abco Markets Inc.+++ (f) 4,054,875 1,584,759
BEVERAGE--0.2% 139,068 Doskocil Companies, Inc. 5,678,900 1,816,576
313,879 RJR Nabisco Holdings Corp. 3,060,320 1,804,804
------------ ------------
12,794,095 5,206,139
HOSPITAL SUPPLIES--0.3% 467,103 Ply-Gem Industries 8,878,758 9,633,999
HOTELS & 66,824 Buckhead Corporation of America+++ (f) 167,060 167,060
CASINOS--0.00% 75,500 Goldriver Hotel & Casino Corporation
(Class B)(d)(f) 540,045 316,156
23,000 Trump Taj Mahal Holding Corp. (Class A) 11,500 523,250
------------ ------------
718,605 1,006,466
INDUSTRIAL SERVICES--0.0% 11,400 Thermadyne Industries 165,300 153,900
STEEL--0.0% 47,242 LTV Corp. 5,521,163 708,630
TOTAL INVESTMENTS IN COMMON STOCKS--0.9% 42,602,633 29,895,613
TRUSTS & WARRANTS
ENERGY--0.0% 18,000 Consolidated Hydro (Warrants)(e) 390,123 432,000
20,833 UGI (Warrants)(e) 91,057 33,854
------------ ------------
481,180 465,854
FINANCIAL SERVICES--0.0% 7,194 Reliance Group Holdings (Warrants)(e) 0 0
HIGH TECHNOLOGY--0.0% 394,563 Anacomp, Inc. (Warrants)(e)(g) 495,400 937,087
HOTELS & 30,000 Capital Gaming (Warrants)(e) 52,500 75,000
CASINOS--0.0% 7,550 Goldriver Hotel & Casino Corp.
Liquidating Trust+++ 192,320 137,028
------------ ------------
244,820 212,028
PAPER--0.1% 813,584 Gaylord Container Corp. (Warrants)(e) 1,707,305 2,745,846
TELECOMMUNICATIONS--0.0% 302,500 ALC Communications Corp. (Warrants)(e) 831,875 0
TOTAL INVESTMENTS IN TRUSTS &
WARRANTS--0.1% 3,760,580 4,360,815
</TABLE>
60
<PAGE> 123
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1a)
SHORT-TERM SECURITIES HIGH INCOME PORTFOLIO
<S> <C> <S> <C> <C>
COMMERCIAL $102,408,000 General Electric Capital Corp., 3.53%
PAPER**--6.2% due 4/04/1994 $ 102,408,000 $ 102,408,000
Oryx Inc.:
30,000,000 3.95% due 4/20/1994 29,947,333 29,947,333
20,000,000 3.98% due 4/21/1994 19,962,411 19,962,411
Vons Companies, Inc.:
15,000,000 3.80% due 4/11/1994 14,988,917 14,988,917
10,000,000 3.80% due 4/14/1994 9,989,444 9,989,444
10,000,000 3.83% due 4/18/1994 9,985,106 9,985,106
10,000,000 3.83% due 4/19/1994 9,984,042 9,984,042
-------------- --------------
197,265,253 197,265,253
US GOVERNMENT 14,857,000 US Treasury Bill, 3.14% due 4/07/1994 14,853,112 14,853,112
DISCOUNT NOTES**--0.5%
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES-6.7% 212,118,365 212,118,365
TOTAL INVESTMENTS--100.0% $3,163,276,781 3,182,935,129
==============
OTHER ASSETS LESS LIABILITIES--0.0% 750,906
--------------
NET ASSETS--100.0% $3,183,686,035
==============
<FN>
++Represents a pay-in-kind security which may
pay interest/dividend in additional face/shares.
++++Subject to principal paydowns.
*Industry classification for convertible bonds are:
(1)Conglomerates; (2)Financial Services;
(3)Health Services; (4)Transportation Services;
(5)Waste Management.
**Commercial Paper and US Government
Discount Notes are traded on a discount basis;
the interest rates shown are the discount rates
paid at the time of purchase by the Portfolio.
(a)Represents the effective yield at time of purchase.
(b)Represents units. Each unit consists of 10 Senior
Discount Notes and 46 Warrants.
(c)Represents units. Each unit consists of one
11.5% Note due 2001, 20.25 Warrants and 26.67
shares of Common Stock.
(d)Each share of Series B Stock contains a right
which entitles the Portfolio to purchase a
predetermined number of shares of preferred
stock. The purchase price and number of shares
are subject to adjustment.
(e)Warrants entitle the portfolio to purchase a
predetermined number of shares of common
stock/face amount of bonds. The purchase price
and number of shares/face amount are subject
to adjustment under certain conditions until the
expiration date.
(f)Non-income producing securities.
(g)Restricted security pursuant to Rule 144A.
See Notes to Financial Statements.
</TABLE>
<TABLE>
+++Restricted securities as to resale. The value of the Portfolio's investments in restricted
securities was approximately $97,713,000, representing 3.07% of the Portfolio's net assets.
<CAPTION>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1a)
<S> <C> <C> <C>
Abco Markets Inc. 11/19/1992 $ 4,054,875 $ 1,584,759
Buckhead Corporation of America 12/29/1992 167,060 167,060
Cumberland Farms, 10.50% due
10/01/2003 2/18/1994 14,681,250 14,418,750
Formica Corporation, 13.06% due
10/01/2001 6/03/1993 21,171,269 22,795,000
Goldriver Hotel & Casino Corp.
Liquidating Trust 8/31/1992 192,320 137,028
Greystone Homes Inc., 10.75% due
3/01/2004 9/24/1993 14,000,000 13,860,000
Liggett Group Inc., 16.50% due 2/01/1999 1/26/1994-1/31/1994 3,910,000 4,063,500
Sunflower Electric Power Corp.,
8.00% due 12/31/2016 11/29/1991-9/15/1992 9,306,139 11,940,903
Tucson Electric & Power Co. (Series B),
10.21% due 1/01/2009 6/04/1993-7/28/1993 11,547,774 11,799,350
Tucson Electric & Power Co. (Series C),
10.73239% due 1/01/2013 3/01/1993-7/16/1993 16,252,461 16,946,987
----------- -----------
$95,283,148 $97,713,337
=========== ===========
</TABLE>
61
<PAGE> 124
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES INVESTMENT GRADE PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
US GOVERNMENT United States Treasury Notes & Bonds:
OBLIGATIONS--8.0% NR Aaa $18,000,000 8.25% due 7/15/1998 $ 20,015,625 $ 19,428,750
NR Aaa 3,000,000 8.75% due 8/15/2000 3,569,453 3,351,561
NR Aaa 18,500,000 6.375% due 8/15/2002 19,784,844 18,089,541
NR Aaa 21,000,000 5.875% due 2/15/2004 20,942,047 19,694,073
NR Aaa 10,000,000 7.50% due 11/15/2016 11,087,231 10,271,870
------------ ------------
75,399,200 70,835,795
BANKING--7.7% First Interstate Bancorp.:
A- A3 3,000,000 11.00% due 3/05/1998 3,603,060 3,456,789
A- A3 3,000,000 9.90% due 11/15/2001 3,642,840 3,437,550
First Union Corp.:
A- A3 1,000,000 8.125% due 6/24/2002 1,109,750 1,034,063
A- A3 8,300,000 8.00% due 11/15/2002 8,810,850 8,507,127
Golden West Financial Corp.:
A- A3 5,000,000 9.15% due 5/23/1998 5,678,700 5,470,710
A- A3 5,000,000 8.375% due 4/15/2002 5,035,950 5,275,825
A- A3 8,000,000 Huntington Bancshares, Inc., 7.625%
due 1/15/2003 8,405,600 8,035,936
BBB+ A3 7,000,000 Meridian Bancorp, 6.625% due 3/15/2003 6,887,370 6,550,327
Norwest Corp.:
A A2 3,500,000 6.625% due 3/15/2003 3,553,235 3,307,567
A A2 13,500,000 6.65% due 10/15/2023 13,116,260 11,392,609
A- A1 3,500,000 Society National Bank, 7.85% due 11/01/2002 3,870,125 3,589,113
A A2 7,000,000 World Savings and Loan Association,
9.90% due 7/01/2000 7,430,130 7,883,414
------------ ------------
71,143,870 67,941,030
FEDERAL NR Aaa 1,500,000 Federal Home Loan Mortgage Corp.,
AGENCIES--2.7% 6.55% due 4/02/2003 1,526,265 1,440,033
Federal National Mortgage Association:
NR Aaa 10,500,000 6.90% due 3/01/2004 10,486,875 10,197,705
NR Aaa 7,000,000 6.85% due 4/05/2004 6,992,344 6,924,190
AAA Aaa 5,000,000 Private Export Funding,
8.35% due 1/31/2001 5,786,950 5,517,580
------------ ------------
24,792,434 24,079,508
FINANCIAL SERVICES-- Chrysler Financial Corp.:
CAPTIVE--1.4% BBB Baa2 2,000,000 9.50% due 12/15/1999 2,263,120 2,217,564
BBB Baa2 8,000,000 10.95% due 8/01/2017 9,701,900 9,317,232
A A2 1,000,000 Ford Motor Credit Corp., 7.75%
due 11/15/2002 1,040,130 1,006,763
------------ ------------
13,005,150 12,541,559
FINANCIAL SERVICES-- American General Finance Corp.:
CONSUMER--7.5% A+ A1 2,500,000 8.50% due 8/15/1998 2,848,650 2,672,095
A+ A1 9,000,000 7.45% due 7/01/2002 9,131,640 8,978,913
Associates Corp. of North America:
AA- A1 2,000,000 8.80% due 8/01/1998 2,253,820 2,166,322
AA- A1 1,550,000 6.75% due 10/15/1999 1,612,945 1,535,901
A A2 16,000,000 Beneficial Corp., 4.76% due 3/15/1999 (a)(b) 16,000,000 15,989,920
A+ A1 16,500,000 CIT Group Holdings, Inc., 4.83%
due 3/29/1999 (a)(b) 16,500,000 16,510,395
</TABLE>
62
<PAGE> 125
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONTINUED) INVESTMENT GRADE PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
FINANCIAL SERVICES-- A A2 $ 6,000,000 Commercial Credit Co., 6.70% due
CONSUMER 8/01/1999 $ 6,001,800 $ 5,943,126
(CONCLUDED) Transamerica Finance Corp.:
A+ A2 6,000,000 6.80% due 3/15/1999 5,998,380 6,000,000
A+ A2 7,000,000 7.50% due 3/15/2004 7,000,000 7,000,000
------------ ------------
67,347,235 66,796,672
FINANCIAL SERVICES-- Bear Stearns Cos. Inc.:
OTHER--8.6% A A2 3,000,000 6.75% due 4/15/2003 3,125,580 2,801,826
A A2 6,000,000 6.70% due 8/01/2003 5,970,660 5,573,010
Dean Witter & Discover:
A A3 5,000,000 6.50% due 11/01/2005 4,942,250 4,583,445
A A3 6,000,000 6.75% due 10/15/2013 5,880,540 5,207,496
AAA Aaa 4,500,000 General Electric Capital Corp., 8.70%
due 2/15/2003 5,449,725 4,920,170
A A3 12,000,000 Lehman Brothers Holding Corp., 4.43%
due 1/12/1999(a)(b) 12,062,760 11,977,440
Morgan Stanley Group Inc.:
A+ A1 10,000,000 8.875% due 10/15/2001 11,482,400 10,834,760
A+ A1 12,000,000 7.00% due 10/01/2013 12,021,310 10,801,572
PaineWebber Group Inc.:
BBB+ A3 3,000,000 6.25% due 6/15/1998 3,078,060 2,921,133
BBB+ A3 7,000,000 9.25% due 12/15/2001 8,185,100 7,577,409
A+ A3 8,000,000 Torchmark Corp., 9.625% due 5/01/1998 7,941,440 8,815,400
------------ ------------
80,139,825 76,013,661
FOREIGN*--9.9% A A1 9,000,000 Australian New Zealand Bank,
6.25% due 2/01/2004 (1) 8,973,450 8,268,021
CRA Finance Ltd. (2):
A+ A2 4,000,000 6.50% due 12/01/2003 4,005,890 3,717,096
A+ A2 3,500,000 7.125% due 12/01/2013 3,479,700 3,206,770
A+ A1 10,000,000 Hydro-Quebec, 8.00% due 2/01/2013 (3) 11,212,600 10,018,200
AAA Aaa 2,000,000 Japan Finance Corp. for Municipal
Enterprises, 8.70% due 7/30/2001 (4) 2,237,380 2,191,486
A+ A1 6,500,000 Korea Development Bank,
7.90% due 2/01/2002 (5) 7,110,740 6,642,863
A+ A3 5,000,000 Korea Electric Power Corp., 7.75% due
4/01/2013 (6) 5,117,200 4,734,755
Metropolis of Tokyo (Japan) (7):
AAA Aaa 3,550,000 9.25% due 10/11/1998 4,134,756 3,924,770
AAA Aaa 3,000,000 8.70% due 10/05/1999 3,469,410 3,299,286
AAA Aaa 4,000,000 9.25% due 11/08/2000 4,219,660 4,533,176
BBB Baa1 3,000,000 Petro Canada, 8.60% due 10/15/2001 (8) 3,292,470 3,233,334
AA+ Aa1 5,000,000 Province of British Columbia (Canada),
7.00% due 1/15/2003 (9) 4,982,870 4,956,550
A+ A1 2,500,000 Province of Manitoba (Canada), 8.80% due
1/15/2020 (9) 2,959,500 2,729,825
Province of Ontario (Canada) (9):
AA Aa2 7,000,000 8.00% due 10/17/2001 7,564,970 7,318,990
AA Aa2 5,000,000 7.75% due 6/04/2002 5,398,150 5,144,600
A+ A1 3,000,000 Province of Quebec (Canada), 13.00% due
10/01/2013 (9) 3,918,120 3,827,610
AA A1 6,000,000 Republic of Italy, 6.875% due 9/27/2023 (10) 5,774,220 5,197,608
A A2 5,000,000 Western Mining Corporation Holdings, Ltd.,
7.25% due 11/15/2013 (2) 5,036,900 4,540,005
------------ ------------
92,887,986 87,484,945
</TABLE>
63
<PAGE> 126
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONTINUED) INVESTMENT GRADE PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
INDUSTRIAL-- AA- A1 $ 3,000,000 Anheuser-Busch Cos., Inc., 8.75% due
CONSUMER--11.2% 12/01/1999 $ 3,367,590 $ 3,266,193
Bass America, Inc.:
A+ A1 3,000,000 6.75% due 8/01/1999 3,027,270 2,971,011
A+ A1 7,000,000 8.125% due 3/31/2002 7,162,320 7,328,083
Dilliard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,254,860 4,077,332
A+ A2 5,000,000 9.125% due 8/01/2011 6,054,000 5,565,015
A+ A2 8,000,000 7.85% due 10/01/2012 7,926,890 7,994,760
Grand Metropolitan Investment Corp.:
A+ A2 4,000,000 6.50% due 9/15/1999 4,000,000 3,932,224
A+ A2 9,000,000 8.625% due 8/15/2001 9,412,690 9,653,958
A+ A2 6,000,000 7.125% due 9/15/2004 6,499,940 5,882,256
A+ A2 4,000,000 9.00% due 8/15/2011 4,764,410 4,414,968
Philip Morris Cos., Inc.:
A A2 2,000,000 9.00% due 1/01/2001 2,061,930 2,178,074
A A2 5,000,000 7.25% due 1/15/2003 5,113,110 4,861,375
Sears Roebuck & Co.:
BBB+ Baa1 5,000,000 9.25% due 4/15/1998 5,712,125 5,434,335
BBB+ Baa1 8,785,000 8.45% due 11/01/1998 9,709,797 9,302,867
AA Aa1 16,810,000 Wal-Mart Stores, Inc., 8.625% due 4/01/2001 18,401,637 18,117,667
AA Aa3 5,000,000 Warner-Lambert Co., 6.625% due 9/15/2002 4,910,350 4,781,720
------------ ------------
102,378,919 99,761,838
INDUSTRIAL-- A+ A1 5,000,000 Atlantic Richfield Company (ARCO), 10.375%
ENERGY--4.5% due 7/15/1995 5,266,660 5,305,730
AA- A1 9,000,000 BP America Inc. (Guaranteed by the British
Petroleum Co., PLC), 7.875% due 5/15/2002 9,519,510 9,285,840
Burlington Resources, Inc.:
A- A3 8,500,000 9.625% due 6/15/2000 9,720,390 9,560,783
A- A3 1,000,000 8.50% due 10/01/2001 1,165,780 1,060,066
Texaco Capital Inc.:
A+ A1 5,500,000 9.00% due 12/15/1999 6,215,190 6,013,156
A+ A1 1,000,000 8.50% due 2/15/2003 1,089,360 1,063,567
A+ A1 2,000,000 8.875% due 9/01/2021 2,440,280 2,200,208
A+ A1 5,000,000 8.00% due 8/01/2032 4,848,650 5,001,980
------------ ------------
40,265,820 39,491,330
INDUSTRIAL-- A+ A1 4,000,000 Air Products & Chemicals, Inc., 6.25%
OTHER--12.3% due 6/15/2003 3,965,400 3,701,492
AA- Aa2 10,000,000 Archer-Daniels-Midland Co., 6.25% due
5/15/2003 9,950,460 9,345,650
A+ A1 4,000,000 Capital Cities/ABC, Inc., 8.875% due
12/15/2000 4,305,360 4,415,656
A- Baa1 8,000,000 Carnival Cruise Lines, Inc., 6.15%
due 10/01/2003 7,995,600 7,241,608
A A2 6,000,000 Communications Satellite Corp., 8.125%
due 4/01/2004 6,376,270 6,291,732
Ford Capital B.V.:
A A2 2,500,000 9.375% due 5/15/2001 2,762,725 2,773,025
A A2 4,000,000 9.50% due 7/01/2001 4,527,920 4,464,864
A A2 9,000,000 9.875% due 5/15/2002 9,080,850 10,266,867
</TABLE>
64
<PAGE> 127
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONTINUED) INVESTMENT GRADE PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
INDUSTRIAL-- BBB- Baa3 $ 5,000,000 Georgia Pacific Corp., 9.95% due 6/15/2002 $ 5,772,150 $ 5,697,955
OTHER A- A3 7,710,000 International Paper Co., 9.70% due 3/15/2000 9,293,944 8,664,136
(CONCLUDED) AA Aa2 8,740,000 Kaiser Foundation Hospital, 9.00% due
11/01/2001 9,835,623 9,630,492
AAA Aaa 8,500,000 Stanford University, 6.875% due 2/01/2024 8,435,400 7,759,437
Telecommunications, Inc.:
BBB- Baa3 2,500,000 9.25% due 4/15/2002 2,968,375 2,681,350
BBB- Baa3 10,000,000 9.25% due 1/15/2023 11,433,450 10,361,640
BBB- Baa3 5,000,000 Time Warner Entertainment Co.,
8.375% due 3/15/2023 5,281,450 4,775,000
AAA Aaa 3,000,000 United Parcel Service of America Inc., 8.375%
due 4/01/2020 2,859,590 3,272,469
A A2 5,000,000 Weyerhaeuser Corp., 7.25% due 7/01/2013 5,234,850 4,772,590
A A3 3,000,000 Witco Corp., 6.60% due 4/01/2003 2,999,130 2,828,316
------------ ------------
113,078,547 108,944,279
SUPRANATIONAL--5.9% Asian Development Bank:
AAA Aaa 3,000,000 10.75% due 6/01/1997 3,302,730 3,414,690
AAA Aaa 9,000,000 9.125% due 6/01/2000 9,455,080 10,156,032
AAA Aaa 4,000,000 6.50% due 9/21/2002 3,875,000 3,908,596
European Investment Bank:
AAA Aaa 2,000,000 8.875% due 3/01/2001 2,380,320 2,226,946
AAA Aaa 4,000,000 9.125% due 6/01/2002 4,890,870 4,528,368
Inter-American Development Bank:
AAA Aaa 8,000,000 8.875% due 6/01/2009 10,115,250 9,200,544
AAA Aaa 5,000,000 8.50% due 3/15/2011 5,955,170 5,537,345
AAA Aaa 10,000,000 International Bank for Reconstruction &
Development, 12.375% due 10/15/2002 12,247,510 13,306,150
------------ ------------
52,221,930 52,278,671
TRANSPORTATION--0.8% Southwest Airlines, Inc.:
A- Baa1 4,000,000 9.40% due 7/01/2001 4,814,240 4,443,136
A- Baa1 3,000,000 7.875% due 9/01/2007 2,983,950 3,011,970
------------ ------------
7,798,190 7,455,106
UTILITIES-- BBB+ A3 4,000,000 GTE Corp., 9.10% due 6/01/2003 4,242,720 4,404,544
COMMUNICATIONS-- A+ A1 5,000,000 General Telephone of California, Inc.,
4.7% 6.75% due 3/15/2004 4,864,250 4,812,770
AA- Aa2 2,000,000 New England Telephone & Telegraph Co.,
8.625% due 8/01/2001 2,233,620 2,167,138
Pacific Bell, Inc.:
AA- Aa3 4,000,000 8.70% due 6/15/2001 3,958,040 4,390,052
AA- Aa3 6,000,000 7.25% due 7/01/2002 5,970,840 5,962,194
AA- Aa3 4,500,000 7.375% due 6/15/2025 4,602,510 4,136,845
A+ A1 2,000,000 Southwestern Bell Telecommunications Co.,
6.125% due 3/01/2000 2,011,250 1,926,440
AA- Aa3 14,000,000 US West Communications, Inc.,
4.65% due 3/25/1999 (a)(b) 14,000,000 14,008,680
------------ ------------
41,883,230 41,808,663
</TABLE>
65
<PAGE> 128
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONCLUDED) INVESTMENT GRADE PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
UTILITIES-- Central Power & Light Co.:
ELECTRIC--7.2% A A2 $ 5,000,000 6.00% due 10/01/1997 $ 4,973,400 $ 4,936,925
A A2 5,000,000 7.50% due 4/01/2023 5,118,750 4,687,405
A- A3 2,000,000 Georgia Power Co., 6.125% due 9/01/1999 1,961,420 1,933,172
Pacific Gas & Electric Co.:
A A1 12,000,000 7.875% due 3/01/2002 12,232,160 12,384,036
A A1 9,000,000 6.25% due 8/01/2003 8,990,280 8,302,923
A A1 5,000,000 7.25% due 8/01/2026 5,056,400 4,566,275
Pennsylvania Power & Light Co.:
A A2 8,000,000 7.75% due 5/01/2002 8,388,270 8,180,288
A A2 7,500,000 6.875% due 2/01/2003 7,607,625 7,195,605
AA- Aa3 5,000,000 TECO Energy, Inc., 9.27% due 6/12/2000 (a) 5,000,000 5,577,950
Virginia Electric & Power Co.:
A A2 3,000,000 6.625% due 4/01/2003 2,996,700 2,841,756
A A2 4,000,000 7.00% due 1/01/2024 3,889,400 3,575,000
------------ ------------
66,214,405 64,181,335
UTILITIES-- Consolidated Natural Gas Co.:
GAS--1.6% AA- A1 1,000,000 9.375% due 2/01/1997 1,031,440 1,085,863
AA- A1 7,500,000 8.75% due 6/01/1999 7,450,660 8,158,035
AA- A1 2,000,000 5.75% due 8/01/2003 1,970,080 1,783,788
BBB Baa2 3,000,000 Union Oil of California, Inc., 9.25% due
2/01/2003 3,422,340 3,338,433
------------ ------------
13,874,520 14,366,119
TOTAL INVESTMENTS IN
BONDS & NOTES--94.0% 862,431,261 833,980,511
SHORT-TERM
SECURITIES
REPURCHASE 39,714,000 Carroll McEntee & McGinley, Inc.,
AGREEMENTS**--4.5% purchased on 3/31/1994 to yield 3.55%
to 4/04/1994 39,714,000 39,714,000
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--4.5% 39,714,000 39,714,000
TOTAL INVESTMENTS--98.5% $902,145,261 873,694,511
============
OTHER ASSETS LESS LIABILITIES--1.5% 13,802,571
------------
NET ASSETS--100.0% $887,497,082
============
<FN>
(a)Medium-Term Note.
(b)The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rate shown is the rate
in effect at March 31, 1994.
*Corresponding industry groups for foreign securities, which are
denominated in US dollars:
(1)Financial Institution; Guaranteed by the Government.
(2)Industrial Mining.
(3)Electric Utility; Owned & Guaranteed by the Province.
(4)Financial Institution; Government-Owned & Guaranteed.
(5)Financial Institution; Government-Owned & Guaranteed by Korea.
(6)Electric Utility; Majority-Owned, not Guaranteed by Korea.
(7)Government Entity; Guaranteed by Japan.
(8)Energy Company not Guaranteed by Canada.
(9)Government Entity; Guaranteed by the Province.
(10)Government Entity; Guaranteed by Italy.
**Repurchase Agreements are fully collateralized by US Government
Obligations.
See Notes to Financial Statements.
</TABLE>
66
<PAGE> 129
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES INTERMEDIATE TERM PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
US GOVERNMENT United States Treasury Notes:
OBLIGATIONS--3.6% NR Aaa $ 3,000,000 8.25% due 7/15/1998 $ 3,374,531 $ 3,238,125
NR Aaa 6,000,000 4.75% due 8/31/1998 5,918,760 5,681,250
NR Aaa 2,000,000 6.375% due 8/15/2002 2,090,625 1,955,626
NR Aaa 1,000,000 5.875% due 2/15/2004 1,013,770 937,813
------------ ------------
12,397,686 11,812,814
BANKS & THRIFTS-- First Interstate Bancorp.:
10.8% A- A3 4,500,000 11.00% due 3/05/1998 5,404,590 5,185,184
A- A3 7,000,000 9.90% due 11/15/2001 8,552,250 8,020,950
First Union Corp.:
A- A3 5,000,000 8.00% due 11/15/2002 5,002,240 5,124,775
A- A3 3,000,000 7.25% due 2/15/2003 2,990,730 2,924,256
Golden West Financial Corp.:
A- A3 4,000,000 9.15% due 5/23/1998 4,542,960 4,376,568
A- A3 1,000,000 8.375% due 4/15/2002 987,040 1,055,165
BBB+ A3 4,500,000 Meridian Bancorp, 6.625% due 3/15/2003 4,364,145 4,210,924
A A2 3,000,000 Norwest Corp., 6.625% due 3/15/2003 3,002,870 2,835,057
A A2 2,000,000 World Savings and Loan Association,
9.90% due 7/01/2000 2,072,740 2,252,404
------------ ------------
36,919,565 35,985,283
FEDERAL NR Aaa 1,000,000 Federal Home Loan Mortgage Corp.,
AGENCIES-1.2% 6.55% due 4/02/2003 1,017,510 960,022
NR Aaa 3,000,000 Federal National Mortgage Association,
6.90% due 3/01/2004 2,996,250 2,913,630
------------ ------------
4,013,760 3,873,652
FINANCIAL SERVICES-- BBB Baa2 8,000,000 Chrysler Financial Corp., 9.50% due 12/15/1999 9,275,380 8,870,256
CAPTIVE--4.2% Ford Motor Credit Co.:
A A2 2,000,000 8.00% due 1/15/1999 2,197,100 2,087,848
A A2 1,000,000 7.75% due 11/15/2002 1,040,130 1,006,763
A A2 2,000,000 7.50% due 1/15/2003 2,040,640 1,993,560
------------ ------------
14,553,250 13,958,427
FINANCIAL SERVICES-- American General Finance Corp.:
CONSUMER--8.6% A+ A1 1,500,000 8.50% due 8/15/1998 1,680,255 1,603,257
A+ A1 1,000,000 7.45% due 7/01/2002 997,800 997,657
A+ A1 3,500,000 6.375% due 3/01/2003 3,457,190 3,254,352
Associates Corp. of North America:
AA- A1 3,000,000 8.80% due 8/01/1998 3,380,730 3,249,483
AA- A1 1,500,000 7.50% due 5/15/1999 1,645,950 1,546,913
A A2 5,000,000 Beneficial Corp., 4.76% due 3/15/1999 (a)(b) 5,000,000 4,996,850
A+ A1 9,000,000 CIT Group Holdings, Inc.,
4.83% due 3/29/1999 (a)(b) 9,000,000 9,005,670
A A2 2,000,000 Commercial Credit Co.,
6.70% due 8/01/1999 2,001,200 1,981,042
A2 A+ 2,000,000 Transamerica Finance Corp.,
6.80% due 3/15/1999 1,999,460 2,000,000
------------ ------------
29,162,585 28,635,224
</TABLE>
67
<PAGE> 130
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONTINUED) INTERMEDIATE TERM PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
FINANCIAL SERVICES-- Bear Stearns Cos. Inc.:
OTHER--10.3% A A2 $ 6,500,000 6.75% due 4/15/2003 $ 6,577,675 $ 6,070,623
A A2 2,000,000 6.70% due 8/01/2003 2,072,560 1,857,670
A A3 5,000,000 Dean Witter & Discover, 6.875% due 3/01/2003 5,017,470 4,772,945
A A3 5,000,000 Lehman Brothers Holding Corp.,
4.43% due 1/12/1999 (a)(b) 5,026,150 4,990,600
Morgan Stanley Group Inc.:
A+ A1 2,500,000 9.375% due 6/15/2001 2,952,975 2,773,265
A+ A1 3,000,000 8.875% due 10/15/2001 3,482,840 3,250,428
PaineWebber Group Inc.:
BBB+ A3 2,000,000 6.25% due 6/15/1998 2,052,040 1,947,422
BBB+ A3 7,000,000 9.25% due 12/15/2001 8,174,550 7,577,409
A+ A3 1,000,000 Torchmark Corp., 9.625% due 5/01/1998 1,139,040 1,101,925
------------ ------------
36,495,300 34,342,287
FOREIGN*--7.8% A A1 2,000,000 Australian New Zealand Bank,
6.25% due 2/01/2004 (1) 1,994,100 1,837,338
A+ A2 4,000,000 CRA Finance Ltd., 6.50% due 12/01/2003 (2) 4,006,020 3,717,096
Korea Development Bank (3):
A+ A1 1,500,000 6.25% due 5/01/2000 1,508,040 1,422,429
A+ A1 2,500,000 7.90% due 2/01/2002 2,734,900 2,554,947
A+ A1 3,000,000 Korea Electric Power, Corp.
6.375% due 12/01/2003 (4) 2,955,810 2,715,399
AAA Aaa 2,000,000 Metropolis of Tokyo (Japan),
8.70% due 10/05/1999 (5) 2,312,940 2,199,524
BBB Baa1 5,000,000 Petro Canada, 8.60% due 10/15/2001 (6) 5,194,980 5,388,890
AA+ Aa1 2,000,000 Province of British Columbia (Canada),
7.00% due 1/15/2003 (7) 1,998,500 1,982,620
AA+ Aa1 1,000,000 Province of Ontario (Canada),
8.00% due 10/17/2001 (7) 1,080,710 1,045,570
A+ A1 3,000,000 Province of Quebec (Canada),
7.50% due 7/15/2002 (7) 3,228,060 3,015,810
------------ ------------
27,014,060 25,879,623
INDUSTRIAL-- AA- A1 5,481,000 Anheuser-Busch Cos., Inc.,
CONSUMER--11.9% 8.75% due 12/01/1999 6,189,910 5,967,335
Bass America, Inc.:
A+ A1 1,000,000 6.75% due 8/01/1999 1,009,090 990,337
A+ A1 2,000,000 8.125% due 3/31/2002 2,065,740 2,093,738
Dillard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,191,980 4,077,332
A+ A2 1,000,000 7.15% due 9/01/2002 1,046,710 975,788
Grand Metropolitan Investment Corp.:
A+ A2 3,000,000 6.50% due 9/15/1999 3,040,120 2,949,168
A+ A2 3,000,000 8.625% due 8/15/2001 3,069,700 3,217,986
A A1 4,000,000 PepsiCo., Inc., 6.125% due 1/15/1998 3,972,240 3,971,268
A A2 2,000,000 Phillip Morris Cos., Inc., 9.00% due 1/01/2001 1,983,340 2,178,074
Sears, Roebuck & Co.:
BBB+ Baa1 2,500,000 9.25% due 4/15/1998 2,837,275 2,717,168
BBB+ Baa1 7,000,000 8.45% due 11/01/1998 7,762,380 7,412,643
AA Aa1 2,000,000 Wal-Mart Stores, Inc., 8.625% due 4/01/2001 2,101,960 2,155,582
AA Aa3 1,000,000 Warner-Lambert Co., 6.625% due 9/15/2002 1,024,270 956,344
------------ ------------
40,294,715 39,662,763
</TABLE>
68
<PAGE> 131
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONTINUED) INTERMEDIATE TERM PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
INDUSTRIAL-- A+ A1 $ 2,000,000 Atlantic Richfield Company (ARCO), 10.375%
ENERGY--4.6% due 7/15/1995 $ 2,176,960 $ 2,122,292
AA- A1 1,000,000 BP America Inc. (Guaranteed by the
British Petroleum Co., PLC),
7.875% due 5/15/2002 1,055,380 1,031,760
Burlington Resources, Inc.:
A- A3 3,500,000 9.625% due 6/15/2000 4,186,510 3,936,793
A- A3 1,000,000 8.50% due 10/01/2001 1,165,780 1,060,066
BBB+ Baa2 3,000,000 Louisiana Land & Exploration Company,
8.25% due 6/15/2002 3,000,000 3,080,985
Texaco Capital Inc.:
A+ A1 2,000,000 6.875% due 7/15/1999 1,996,120 2,000,754
A+ A1 2,000,000 9.00% due 12/15/1999 2,342,460 2,186,602
------------ ------------
15,923,210 15,419,252
INDUSTRIAL-- A+ A1 4,000,000 Air Products & Chemicals, Inc.,
OTHER--13.0% 6.25% due 6/15/2003 3,965,400 3,701,492
AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 6.25% due
5/15/2003 1,989,000 1,869,130
A+ A1 3,000,000 Capital Cities/ABC, Inc., 8.875% due
12/15/2000 3,514,560 3,311,742
A- Baa1 3,000,000 Carnival Cruise Lines, Inc., 6.15% due
10/01/2003 2,998,350 2,715,603
A A3 2,000,000 First Data Corp., 6.625% due 4/01/2003 1,989,620 1,882,880
AA Aa2 3,500,000 Kaiser Foundation Hospital, 9.00% due
11/01/2001 3,881,070 3,856,604
BBB- Ba1 3,000,000 News America Holdings Inc., 7.50% due
3/01/2000 3,152,370 2,980,011
Telecommunications, Inc.:
BBB- Baa3 9,000,000 9.25% due 4/15/2002 10,732,560 9,652,860
BBB- Baa3 5,000,000 8.25% due 1/15/2003 5,271,050 5,044,185
BBB- Baa2 6,000,000 Tenneco, Inc., 8.00% due 11/15/1999 6,371,100 6,197,130
A A3 2,000,000 Witco Corp., 6.60% due 4/01/2003 1,999,420 1,885,544
------------ ------------
45,864,500 43,097,181
SUPRANATIONAL--3.0% Asian Development Bank:
AAA Aaa 2,000,000 9.125% due 6/01/2000 2,234,280 2,256,896
AAA Aaa 2,500,000 6.50% due 9/21/2002 2,421,875 2,442,872
AAA Aaa 4,800,000 European Investment Bank, 9.125% due
6/01/2002 5,819,666 5,434,042
------------ ------------
10,475,821 10,133,810
TRANSPORTATION-- A- Baa1 5,000,000 Southwest Airlines, Inc., 9.40% due 7/01/2001 5,949,310 5,553,920
1.7%
UTILITIES-- A+ A1 6,000,000 General Telephone of California, Inc.,
COMMUNICATIONS-- 6.75% due 3/15/2004 5,837,100 5,775,324
3.0% Pacific Bell, Inc.:
AA- Aa3 1,000,000 8.70% due 6/15/2001 1,113,620 1,097,513
AA- Aa3 1,000,000 7.25% due 7/01/2002 995,140 993,699
AA- Aa3 2,000,000 US West Communications, Inc., 4.65%
due 3/25/1999 (a) (b) 2,000,000 2,001,240
------------ ------------
9,945,860 9,867,776
</TABLE>
69
<PAGE> 132
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
BONDS & NOTES (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
<S> <S> <S> <C> <S> <C> <C>
UTILITIES-- A A1 $ 3,000,000 Pacific Gas & Electric Co., 7.875% due
ELECTRIC--2.4% 3/01/2002 $ 3,058,040 $ 3,096,009
Pennsylvania Power & Light Co.:
A A2 4,000,000 5.50% due 4/01/1998 3,991,280 3,855,628
A A2 1,000,000 7.75% due 5/01/2002 1,043,980 1,022,536
------------ ------------
8,093,300 7,974,173
UTILITIES-- Consolidated Natural Gas Co.:
GAS--5.5% AA- A1 4,000,000 9.375% due 2/01/1997 4,125,760 4,343,452
AA- A1 5,000,000 5.75% due 8/01/2003 4,996,030 4,459,470
BBB Baa2 8,250,000 Union Oil of California, Inc.,
9.75% due 12/01/2000 9,919,305 9,381,793
------------ ------------
19,041,095 18,184,715
TOTAL INVESTMENTS IN
BONDS & NOTES--91.6% 316,144,017 304,380,900
SHORT-TERM
SECURITIES
COMMERCIAL 6,000,000 General Electric Capital Corp.,
PAPER**--1.8% 3.53% due 4/01/1994 6,000,000 6,000,000
REPURCHASE 16,266,000 Carroll McEntee & McGinley, Inc.,
AGREEMENTS***--4.9% purchased on 3/31/1994 to yield 3.55%
to 4/04/1994 16,266,000 16,266,000
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--6.7% 22,266,000 22,266,000
TOTAL INVESTMENTS--98.3% $338,410,017 326,646,900
============
OTHER ASSETS LESS LIABILITIES--1.7% 5,495,325
------------
NET ASSETS--100.0% $332,142,225
============
<FN>
(a)Medium-Term Note.
(b)The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rate shown is the rate
in effect at March 31, 1994.
*Corresponding industry groups for foreign securities, which are
denominated in US dollars:
(1)Financial Institution; Guaranteed by the Government.
(2)Industrial Mining.
(3)Financial Institution; Government-Owned and Guaranteed by Korea.
(4)Electric Utility; Majority-Owned, not Guaranteed by Korea.
(5)Government Entity; Guaranteed by Japan.
(6)Energy Company; not Guaranteed by Canada.
(7)Government Entity; Guaranteed by the Province.
**Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Portfolio.
***Repurchase Agreements are fully collateralized by US Government
Obligations.
See Notes to Financial Statements.
</TABLE>
70
<PAGE> 133
FINANCIAL INFORMATION
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES AS OF MARCH 31, 1994
<CAPTION>
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <S> <C> <C> <C>
ASSETS: Investments, at value* (Note 1a) $3,182,935,129 $873,694,511 $326,646,900
Cash 793 466 766
Receivables:
Interest 69,238,348 18,224,841 6,484,727
Securities sold 24,605,970 29,940,519 7,736,915
Capital shares sold 15,234,649 3,998,195 1,995,263
Dividends 102,000 -- --
Prepaid registration fees and other assets (Note 1d) 902,399 119,135 63,700
-------------- ------------ ------------
Total assets 3,293,019,288 925,977,667 342,928,271
-------------- ------------ ------------
LIABILITIES: Payables:
Securities purchased 70,927,074 30,852,585 7,866,246
Capital shares redeemed 22,687,107 4,832,868 1,894,245
Investment adviser (Note 2) 1,258,574 308,466 114,807
Dividends to shareholders (Note 1e) 12,420,212 1,963,448 728,186
Distributor (Note 2) 1,603,302 360,792 69,281
Accrued expenses and other liabilities 436,984 162,426 113,281
-------------- ------------ ------------
Total liabilities 109,333,253 38,480,585 10,786,046
-------------- ------------ ------------
NET ASSETS: Net assets $3,183,686,035 $887,497,082 $332,142,225
============== ============ ============
NET ASSETS Class A Common Stock, $0.10 par value++ $ 11,385,596 $ 3,377,350 $ 1,628,947
CONSIST OF: Class B Common Stock, $0.10 par value++++ 28,014,722 4,493,289 1,307,572
Paid-in capital in excess of par 3,137,414,832 908,908,145 340,884,168
Undistributed (accumulated) realized capital gains
(losses)--net (12,787,463) (830,952) 84,655
Unrealized appreciation/depreciation on investments--
net 19,658,348 (28,450,750) (11,763,117)
-------------- ------------ ------------
Net assets $3,183,686,035 $887,497,082 $332,142,225
============== ============ ============
NET ASSET VALUE: Class A:
Net assets $ 919,806,773 $380,838,894 $184,243,802
============== ============ ============
Shares outstanding 113,855,959 33,773,498 16,289,470
============== ============ ============
Net asset value and redemption price per share $ 8.08 $ 11.28 $ 11.31
============== ============ ============
Class B:
Net assets $2,263,879,262 $506,658,188 $147,898,423
============== ============ ============
Shares outstanding 280,147,216 44,932,891 13,075,723
============== ============ ============
Net asset value and redemption price per share $ 8.08 $ 11.28 $ 11.31
============== ============ ============
<FN>
*Identified cost $3,163,276,781 $902,145,261 $338,410,017
============== ============ ============
++Authorized shares--Class A 200,000,000 100,000,000 50,000,000
============== ============ ============
++++Authorized shares--Class B 500,000,000 100,000,000 50,000,000
============== ============ ============
See Notes to Financial Statements.
</TABLE>
71
<PAGE> 134
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1994
<CAPTION>
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <S> <C> <C> <C>
INVESTMENT Interest and discount earned $142,548,746 $ 31,871,570 $ 11,407,036
INCOME Dividends 1,494,019 -- --
(NOTE 1c): Other 577,326 108,146 61,505
------------ ------------ ------------
Total income 144,620,091 31,979,716 11,468,541
------------ ------------ ------------
EXPENSES: Distribution fees--Class B (Note 2) 7,898,418 1,983,466 370,650
Investment advisory fees (Note 2) 6,362,332 1,713,212 627,361
Transfer agent fees--Class B (Note 2) 792,489 282,737 67,065
Transfer agent fees--Class A (Note 2) 312,298 191,757 78,402
Registration fees (Note 1d) 203,732 61,800 53,057
Printing and shareholder reports 97,030 38,964 13,393
Accounting services (Note 2) 71,698 35,458 24,202
Custodian fees 62,793 29,413 21,910
Professional fees 53,121 21,534 8,072
Pricing fees 15,353 17,556 6,705
Directors' fees and expenses 13,357 3,681 1,553
Amortization of organization expenses (Note 1d) 614 217 --
Other 13,817 2,431 405
------------ ------------ ------------
Total expenses 15,897,052 4,382,226 1,272,775
------------ ------------ ------------
Investment income--net 128,723,039 27,597,490 10,195,766
------------ ------------ ------------
REALIZED & Realized gain on investments--net 12,758,750 4,807,228 1,084,377
UNREALIZED GAIN Change in unrealized appreciation/depreciation on
(LOSS) ON investments--net (46,050,583) (80,947,157) (25,351,651)
INVESTMENTS--NET ------------ ------------ ------------
(NOTES 1c & 3): NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 95,431,206 $(48,542,439) $(14,071,508)
============ ============ ============
See Notes to Financial Statements.
</TABLE>
72
<PAGE> 135
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS HIGH INCOME PORTFOLIO
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
INCREASE (DECREASE) IN NET ASSETS: MARCH 31, 1994 SEPT. 30, 1993
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 128,723,039 $ 191,944,836
Realized gain on investments--net 12,758,750 39,490,168
Change in unrealized appreciation/depreciation on investments--net (46,050,583) 30,800,724
-------------- --------------
Net increase in net assets resulting from operations 95,431,206 262,235,728
-------------- --------------
DIVIDENDS TO Investment income--net:
SHAREHOLDERS Class A (42,257,980) (77,067,944)
(NOTE 1e): Class B (86,465,059) (114,876,892)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (128,723,039) (191,944,836)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share transactions 506,919,068 1,108,612,505
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase in net assets 473,627,235 1,178,903,397
Beginning of period 2,710,058,800 1,531,155,403
-------------- --------------
End of period $3,183,686,035 $2,710,058,800
============== ==============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) INVESTMENT GRADE PORTFOLIO
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
INCREASE (DECREASE) IN NET ASSETS: MARCH 31, 1994 SEPT. 30, 1993
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 27,597,490 $ 49,188,032
Realized gain on investments--net 4,807,228 35,442,646
Change in unrealized appreciation/depreciation on investments--net (80,947,157) 12,048,232
-------------- --------------
Net increase (decrease) in net assets resulting from operations (48,542,439) 96,678,910
-------------- --------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Class A (12,803,580) (24,831,019)
SHAREHOLDERS Class B (14,793,910) (24,357,013)
(NOTE 1e): Realized gain on investments--net:
Class A (17,369,101) (4,865,108)
Class B (23,017,849) (5,004,106)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (67,984,440) (59,057,246)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share transactions 80,997,435 197,559,404
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase (decrease) in net assets (35,529,444) 235,181,068
Beginning of period 923,026,526 687,845,458
-------------- --------------
End of period $ 887,497,082 $ 923,026,526
============== ==============
See Notes to Financial Statements.
</TABLE>
73
<PAGE> 136
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
INCREASE (DECREASE) IN NET ASSETS: MARCH 31, 1994 SEPT. 30, 1993
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 10,195,766 $ 14,760,592
Realized gain on investments--net 1,084,377 7,219,619
Change in unrealized appreciation/depreciation on investments--net (25,351,651) 6,890,072
-------------- --------------
Net increase (decrease) in net assets resulting from operations (14,071,508) 28,870,283
-------------- --------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Class A (5,976,831) (10,854,121)
SHAREHOLDERS Class B (4,218,935) (3,906,471)
(NOTE 1e): Realized gain on investments--net:
Class A (4,476,067) (1,857,266)
Class B (3,477,851) (293,192)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (18,149,684) (16,911,050)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share transactions 36,736,712 161,334,292
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase in net assets 4,515,520 173,293,525
Beginning of period 327,626,705 154,333,180
-------------- --------------
End of period $ 332,142,225 $ 327,626,705
============== ==============
See Notes to Financial Statements.
</TABLE>
74
<PAGE> 137
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
FINANCIAL HIGHLIGHTS HIGH INCOME PORTFOLIO
<CAPTION>
CLASS A
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52
OPERATING ---------- ---------- ---------- ---------- ----------
PERFORMANCE: Investment income--net .38 .79 .87 .92 1.00
Realized and unrealized gain (loss) on
investments--net (.05) .29 .82 .63 (1.13)
---------- ---------- ---------- ---------- ----------
Total from investment operations .33 1.08 1.69 1.55 (.13)
---------- ---------- ---------- ---------- ----------
Less dividends:
Investment income--net (.38) (.79) (.87) (.92) (1.00)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 8.08 $ 8.13 $ 7.84 $ 7.02 $ 6.39
========== ========== ========== ========== ==========
TOTAL INVESTMENT Based on net asset value per share 4.01%++ 14.35% 25.22% 26.46% (1.95%)
RETURN:** ========== ========== ========== ========== ==========
RATIOS TO AVERAGE Expenses .52%* .55% .59% .66% .68%
NET ASSETS: ========== ========== ========== ========== ==========
Investment income--net 8.98%* 9.78% 11.44% 14.13% 14.22%
========== ========== ========== ========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $ 919,807 $ 886,784 $ 683,801 $ 522,703 $ 486,426
DATA: ========== ========== ========== ========== ==========
Portfolio turnover 17.76% 34.85% 40.52% 39.95% 47.60%
========== ========== ========== ========== ==========
<CAPTION>
CLASS B
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
OPERATING ---------- ---------- ---------- ---------- ----------
PERFORMANCE: Investment income--net .35 .72 .81 .87 .95
Realized and unrealized gain (loss) on
investments--net (.05) .28 .83 .62 (1.12)
---------- ---------- ---------- ---------- ----------
Total from investment operations .30 1.00 1.64 1.49 (.17)
---------- ---------- ---------- ---------- ----------
Less dividends:
Investment income--net (.35) (.72) (.81) (.87) (.95)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 8.08 $ 8.13 $ 7.85 $ 7.02 $ 6.40
========== ========== ========== ========== ==========
TOTAL INVESTMENT Based on net asset value per share 3.61%++ 13.35% 24.44% 25.32% (2.54%)
RETURN:** ========== ========== ========== ========== ==========
RATIOS TO AVERAGE Expenses, excluding distribution fees .53%* .56% .60% .67% .70%
NET ASSETS: ========== ========== ========== ========== ==========
Expenses 1.28%* 1.31% 1.35% 1.42% 1.45%
========== ========== ========== ========== ==========
Investment income--net 8.21%* 8.94% 10.42% 13.24% 13.69%
========== ========== ========== ========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $2,263,879 $1,823,275 $ 847,354 $ 264,486 $ 157,979
DATA: ========== ========== ========== ========== ==========
Portfolio turnover 17.76% 34.85% 40.52% 39.95% 47.60%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
75
<PAGE> 138
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
FINANCIAL HIGHLIGHTS (CONTINUED) INVESTMENT GRADE PORTFOLIO
<CAPTION>
CLASS A
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
OPERATING ---------- ---------- ---------- ---------- ----------
PERFORMANCE: Investment income--net .39 .81 .88 .92 .95
Realized and unrealized gain (loss) on
investments--net (.98) .67 .71 .76 (.38)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.59) 1.48 1.59 1.68 .57
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.39) (.81) (.88) (.92) (.95)
Realized gain on investments--net (.55) (.16) -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.94) (.97) (.88) (.92) (.95)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 11.28 $ 12.81 $ 12.30 $ 11.59 $ 10.83
========== ========== ========== ========== ==========
TOTAL INVESTMENT Based on net asset value per share (4.89%)++ 12.78% 14.30% 16.18% 5.22%
RETURN:** ========== ========== ========== ========== ==========
RATIOS TO AVERAGE Expenses .51%* .56% .58% .61% .64%
NET ASSETS: ========== ========== ========== ========== ==========
Investment income--net 6.35%* 6.94% 7.43% 8.26% 8.54%
========== ========== ========== ========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $ 380,839 $ 407,625 $ 362,139 $ 324,818 $ 307,723
DATA: ========== ========== ========== ========== ==========
Portfolio turnover 62.63% 121.34% 65.43% 126.32% 126.39%
========== ========== ========== ========== ==========
<CAPTION>
CLASS B
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
OPERATING ---------- ---------- ---------- ---------- ----------
PERFORMANCE: Investment income (loss)--net .35 .72 .79 .84 .86
Realized and unrealized gain (loss) on
investments--net (.98) .67 .71 .76 (.38)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.63) 1.39 1.50 1.60 .48
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.35) (.72) (.79) (.84) (.86)
Realized gain on investments--net (.55) (.16) -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.90) (.88) (.79) (.84) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 11.28 $ 12.81 $ 12.30 $ 11.59 $ 10.83
========== ========== ========== ========== ==========
TOTAL INVESTMENT Based on net asset value per share (5.26%)++ 11.92% 13.44% 15.30% 4.42%
RETURN:** ========== ========== ========== ========== ==========
RATIOS TO AVERAGE Expenses, excluding distribution fees .52%* .54% .59% .62% .66%
NET ASSETS: ========== ========== ========== ========== ==========
Expenses 1.27%* 1.29% 1.34% 1.37% 1.41%
========== ========== ========== ========== ==========
Investment income--net 5.59%* 5.80% 6.65% 7.50% 7.77%
========== ========== ========== ========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $ 506,658 $ 515,402 $ 325,706 $ 198,504 $ 174,914
DATA: ========== ========== ========== ========== ==========
Portfolio turnover 62.63% 121.34% 65.43% 126.32% 126.39%
========== ========== ========== ========== ==========
<FN>
++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
76
<PAGE> 139
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
FINANCIAL HIGHLIGHTS (CONTINUED) INTERMEDIATE TERM PORTFOLIO
<CAPTION>
CLASS A
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05
OPERATING ---------- ---------- ---------- ---------- ----------
PERFORMANCE: Investment income--net .38 .76 .88 .93 .97
Realized and unrealized gain (loss) on
investments--net (.85) .55 .62 .53 (.17)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.47) 1.31 1.50 1.46 .80
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.38) (.76) (.88) (.93) (.97)
Realized gain on investments--net (.28) (.14) -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.66) (.90) (.88) (.93) (.97)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 11.31 $ 12.44 $ 12.03 $ 11.41 $ 10.88
========== ========== ========== ========== ==========
TOTAL INVESTMENT Based on net asset value per share (3.93%)++ 11.40% 13.71% 13.97% 7.55%
RETURN:** ========== ========== ========== ========== ==========
RATIOS TO AVERAGE Expenses .52%* .58% .62% .67% .71%
NET ASSETS: ========== ========== ========== ========== ==========
Investment income--net 6.19%* 6.42% 7.54% 8.35% 8.86%
========== ========== ========== ========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $ 184,244 $ 193,505 $ 154,333 $ 103,170 $ 88,248
DATA: ========== ========== ========== ========== ==========
Portfolio turnover 76.18% 180.52% 95.33% 132.56% 102.53%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
77
<PAGE> 140
FINANCIAL INFORMATION (CONCLUDED)
<TABLE>
FINANCIAL HIGHLIGHTS (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
<CAPTION> CLASS B
FOR THE
FOR THE SIX PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS NOV. 13,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED 1992++ TO
MARCH 31, SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993
<S> <S> <C> <C>
PER SHARE Net asset value, beginning of period $ 12.44 $ 11.68
OPERATING ---------- ----------
PERFORMANCE: Investment income--net .35 .61
Realized and unrealized gain (loss) on investments--net (.85) .90
---------- ----------
Total from investment operations (.50) 1.51
---------- ----------
Less dividends and distributions:
Investment income--net (.35) (.61)
Realized gain on investments--net (.28) (.14)
---------- ----------
Total dividends and distributions (.63) (.75)
---------- ----------
Net asset value, end of period $ 11.31 $ 12.44
========== ==========
TOTAL INVESTMENT Based on net asset value per share (4.18%)+++ 13.31%+++
RETURN:** ========== ==========
RATIOS TO AVERAGE Expenses, excluding distribution fees .53%* .57%**
NET ASSETS: ========== ==========
Expenses 1.03%* 1.07%**
========== ==========
Investment income--net 5.69%* 5.61%**
========== ==========
SUPPLEMENTAL Net assets, end of period (in thousands) $ 147,898 $ 134,122
DATA: ========== ==========
Portfolio turnover 76.18% 180.52%
========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
78
<PAGE> 141
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Corporate Bond Fund, Inc. (the
"Fund") is registered under the Investment Company
Act of 1940 as a diversified, open-end investment
management company consisting of three separate
portfolios: the High Income Portfolio, the Investment
Grade Portfolio (formerly known as the High
Quality Portfolio), and the Intermediate Term
Portfolio. The Fund's Portfolios offer Class A and
Class B Shares. Class A Shares are sold with a front-
end sales charge. Class B Shares may be subject to
a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions,
except that Class B Shares bear certain expenses
related to the distribution of such shares and have
exclusive voting rights with respect to matters relating
to such distribution expenditures. The following
is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities
which 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
market are valued at the mean between the bid and
asked prices or yield equivalent as obtained from
one or more dealers that make markets in the
securities. Portfolio securities which are traded
both in the over-the-counter 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
over-the-counter market. Short-term securities
are valued at amortized cost which approximates
market.
Options on debt securities, which are traded on
exchanges, are valued at the last asked price for
options written and 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.
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. Written and purchased options are
non-income producing investments.
(b) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and
to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income
tax provision is required.
(c) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Dividend
income is recorded on the ex-dividend dates.
Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains
and losses on security transactions are determined
on the identified cost basis.
(d) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are
charged to expense on a straight-line basis over a
five-year period. Costs related to the organization of
the second class of shares are charged to expense
over a period not exceeding five years. Prepaid registration
fees are charged to expense as the related
shares are issued.
(e) Dividends and distributions--Dividends from net
investment income are declared daily and paid
monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory
Agreement with Merrill Lynch Asset Management,
L.P. ("MLAM"). Effective January 1, 1994, the investment
advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control
of MLAM was vested with Merrill Lynch & Co.,
Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are
ML & Co. and Merrill Lynch Investment Management,
Inc. ("MLIM"), which is also an indirect
79
<PAGE> 142
wholly-owned subsidiary of ML & Co. The Fund has
also entered into a Distribution Agreement and a
Distribution Plan with Merrill Lynch Funds distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of MLIM.
FAM is responsible for the management of the Fund's
Portfolios and provides the necessary personnel,
facilities, equipment and certain other services
necessary to the operations of the Fund. For such
services, FAM receives at the end of each month
a fee with respect to each Portfolio at the annual
rates set forth below which are based upon the
average daily value of the Fund's net assets.
RATE OF ADVISORY FEE
AGGREGATE OF AVERAGE
DAILY NET ASSETS OF HIGH INVESTMENT INTERMEDIATE
THE THREE COMBINED INCOME GRADE TERM
PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
Not exceeding $250 million 0.55% 0.50% 0.50%
In excess of $250 million but
not more than $500 million 0.50 0.45 0.45
In excess of $500 million but
not more than $750 million 0.45 0.40 0.40
In excess of $750 million 0.40 0.35 0.35
The Investment Advisory Agreement obligates FAM
to reimburse the Fund to the extent the Fund's
expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the Fund's
next $70 million of average daily net assets, and
1.5% of the average daily net assets in excess thereof.
No fee payment will be made to the Investment
Adviser during any fiscal year which will cause such
expenses to exceed the pro rata expense limitation
at the time of such payment.
Pursuant to a distribution plan (the "Distribution
Plan") adopted by the Fund in accordance with
Rule 12b-1 under the Investment Company Act of
1940, the Fund pays the Distributor ongoing distribution
fee, accrued daily and paid monthly at the
annual rate of 0.50% (in the case of the High Income
Portfolio and the Investment Grade Portfolio) or
0.25% (in the case of the Intermediate Term Portfolio)
and an account maintenance fee at the annual
rate of 0.25% (for each of the Portfolios) of the
average daily net assets of the Class B Shares of such
Portfolio. Pursuant to a sub-agreement with the
Distributor, Merrill Lynch also provides account
maintenance and distribution services to the Fund.
As authorized by the Plan, the Distributor has
entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate
of MLAM, which provides for the compensation
of MLPF&S for providing distribution-related services
to the Fund.
During the six months ended March 31, 1994, MLFD
earned underwriting discounts and MLPF&S earned
dealer concessions on sales of the Fund's Class A
Shares as follows:
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO PORTFOLIO
MLFD $ 127,733 $ 28,664 $ 19,560
MLPF&S $1,513,985 $336,245 $217,991
MLPF&S received contingent deferred sales charges
of $2,285,656 relating to transactions in Class B
Shares, amounting to $1,699,376, $458,594 and
$127,686 in the High Income, Investment Grade, and
Intermediate Term Portfolios, respectively, and
$3,750 in commissions on the execution of security
transactions for the High Income Portfolio during
the period.
Financial Data Services, Inc. ("FDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer
agent.
Accounting services are provided to the Fund by
FAM at cost.
Certain officers and/or directors of the Fund are
officers and/or directors of FAM, MLIM, MLFD, FDS,
MLPF&S, ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-
term securities, for the six months ended March 31,
1994 were as follows:
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO PORTFOLIO
Purchases $994,573,867 $584,546,457 $261,036,551
============ ============ ============
Sales $493,350,228 $539,678,858 $238,509,848
============ ============ ============
80
<PAGE> 143
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Net realized and unrealized gains (losses) as of
March 31, 1994 were as follows:
REALIZED UNREALIZED
HIGH INCOME PORTFOLIO GAINS GAINS
Long-term investments $ 12,758,750 $ 19,658,348
-------------- --------------
Total $ 12,758,750 $ 19,658,348
============== ==============
REALIZED UNREALIZED
INVESTMENT GRADE PORTFOLIO GAINS LOSSES
Long-term investments $ 4,807,228 $ (28,450,750)
-------------- --------------
Total $ 4,807,228 $ (28,450,750)
============== ==============
REALIZED UNREALIZED
INTERMEDIATE GRADE PORTFOLIO GAINS LOSSES
Long-term investments $ 1,084,377 $ (11,763,117)
-------------- --------------
Total $ 1,084,377 $ (11,763,117)
============== ==============
As of March 31, 1994, net unrealized appreciation
depreciation for Federal income tax purposes was
as follows:
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO PORTFOLIO
Gross unrealized
appreciation $ 92,450,794 $ 8,422,895 $ 1,381,217
Gross unrealized
depreciation (72,792,446) (36,873,645) (13,144,334)
------------ ------------ ------------
Net unrealized appre-
ciation/depreciation $ 19,658,348 $(28,450,750) $(11,763,117)
============ ============ ============
The aggregate cost of investments at March 31, 1994
for Federal income tax purposes was $3,163,276,781
for the High Income Portfolio, $902,145,261 for the
Investment Grade Portfolio, and $338,410,017 for
the Intermediate Term Portfolio.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions for the six months ended March 31,
1994 was $506,919,068 for the High Income Portfolio,
$80,997,435 for the Investment Grade Portfolio
and $36,736,712 for the Intermediate Term Portfolio.
Net increase in net assets derived from capital share
transactions for the year ended September 30, 1993
was $1,108,612,505 for the High Income Portfolio,
$197,559,404 for the Investment Grade Portfolio and
$161,334,292 for the Intermediate Term Portfolio.
Transactions in capital shares were as follows:
HIGH INCOME PORTFOLIO
CLASS A SHARES FOR THE SIX DOLLAR
MONTHS ENDED MARCH 31, 1994 SHARES AMOUNT
Shares sold 13,374,785 $ 111,427,018
Shares issued to shareholders in
reinvestment of dividends 2,697,287 22,359,741
------------- --------------
Total issued 16,072,072 133,786,759
Shares redeemed (11,306,818) (93,901,285)
------------- --------------
Net increase 4,765,254 $ 39,885,474
============= ==============
HIGH INCOME PORTFOLIO
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 34,759,978 $ 277,722,778
Shares issued to shareholders in
reinvestment of dividends 4,969,045 39,803,859
------------- --------------
Total issued 39,729,023 317,526,637
Shares redeemed (17,827,332) (142,464,560)
------------- --------------
Net increase 21,901,691 $ 175,062,077
============= ==============
HIGH INCOME PORTFOLIO
CLASS B SHARES FOR THE SIX DOLLAR
MONTHS ENDED MARCH 31, 1994 SHARES AMOUNT
Shares sold 77,205,318 $ 643,700,232
Shares issued to shareholders in
reinvestment of dividends 5,079,402 42,111,254
------------- --------------
Total issued 82,284,720 685,811,486
Shares redeemed (26,367,259) (218,777,892)
------------- --------------
Net increase 55,917,461 $ 467,033,594
============= ==============
HIGH INCOME PORTFOLIO
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 142,333,233 $ 1,141,712,615
Shares issued to shareholders
reinvestment of dividends 7,016,905 56,387,833
------------- ----------------
Total issued 149,350,138 1,198,100,448
Shares redeemed (33,122,536) (264,550,020)
------------- ----------------
Net increase 116,227,602 $ 933,550,428
============= ================
INVESTMENT GRADE PORTFOLIO
CLASS A SHARES FOR THE SIX DOLLAR
MONTHS ENDED MARCH 31, 1994 SHARES AMOUNT
Shares sold 4,365,146 $ 52,787,468
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,759,212 21,121,180
------------- --------------
Total issued 6,124,358 73,908,648
Shares redeemed (4,159,670) (50,653,683)
------------- --------------
Net increase 1,964,688 $ 23,254,965
============= ==============
81
<PAGE> 144
INVESTMENT GRADE PORTFOLIO
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 7,448,640 $ 91,703,707
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,704,681 20,844,343
------------- --------------
Total issued 9,153,321 112,548,050
Shares redeemed (6,795,967) (83,737,710)
------------- --------------
Net increase 2,357,354 $ 28,810,340
============= ==============
INVESTMENT GRADE PORTFOLIO
CLASS B SHARES FOR THE SIX DOLLAR
MONTHS ENDED MARCH 31, 1994 SHARES AMOUNT
Shares sold 9,227,825 $ 112,666,530
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,993,420 23,905,173
------------- --------------
Total issued 11,221,245 136,571,703
Shares redeemed (6,509,014) (78,829,233)
------------- --------------
Net increase 4,712,231 $ 57,742,470
============= ==============
INVESTMENT GRADE PORTFOLIO
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 20,946,711 $ 257,900,677
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,496,071 18,304,113
------------- --------------
Total issued 22,442,782 276,204,790
Shares redeemed (8,711,514) (107,455,726)
------------- --------------
Net increase 13,731,268 $ 168,749,064
============= ==============
INTERMEDIATE TERM PORTFOLIO
CLASS A SHARES FOR THE SIX DOLLAR
MONTHS ENDED MARCH 31, 1994 SHARES AMOUNT
Shares sold 2,665,393 $ 32,018,245
Shares issued to shareholders in
reinvestment of dividends and
distributions 592,150 7,057,162
------------- --------------
Total issued 3,257,543 39,075,407
Shares redeemed (2,519,804) (30,248,786)
------------- --------------
Net increase 737,739 $ 8,826,621
============= ==============
INTERMEDIATE TERM PORTFOLIO
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 5,149,248 $ 61,875,256
Shares issued to shareholders in
reinvestment of dividends and
distributions 707,534 8,452,204
------------- --------------
Total issued 5,856,782 70,327,460
Shares redeemed (3,139,330) (37,802,328)
------------- --------------
Net increase 2,717,452 $ 32,525,132
============= ==============
INTERMEDIATE TERM PORTFOLIO
CLASS B SHARES FOR THE
SIX MONTHS ENDED DOLLAR
MARCH 31, 1994 SHARES AMOUNT
Shares sold 4,009,132 $ 48,262,973
Shares issued to shareholders in
reinvestment of dividends and
distributions 381,160 4,539,333
------------- --------------
Total issued 4,390,292 52,802,306
Shares redeemed (2,093,298) (24,892,215)
------------- --------------
Net increase 2,296,994 $ 27,910,091
============= ==============
INTERMEDIATE TERM PORTFOLIO
CLASS B SHARES FOR THE PERIOD
NOVEMBER 13, 1992++ TO DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 11,673,732 $ 139,623,863
Shares issued to shareholders in
reinvestment of dividends and
distributions 175,119 2,128,550
------------- --------------
Total issued 11,848,851 141,752,413
Shares redeemed (1,070,122) (12,943,253)
------------- --------------
Net increase 10,778,729 $ 128,809,160
============= ==============
[FN]
++Commencement of Operations.
5. LOANED SECURITIES:
At March 31, 1994, the Investment Grade Portfolio
held US Treasury Bonds/Notes having an aggregate
value of approximately $20,336,000 as collateral for
Portfolio securities loaned, having a market value of
approximately $19,694,000. The Intermediate Term
Portfolio held US Treasury Bonds/Notes having an
aggregate value of approximately $967,000 as collateral
for Portfolio securities loaned, having a market
value of approximately $938,000.
6. CAPITAL LOSS CARRYFORWARD:
At September 30, 1993, the Fund had a capital loss
carryforward of approximately $28,547,000 in the
High Income Portfolio, all of which expires in 1999.
This will be available to offset like amounts of any
future taxable gains.
In accordance with generally accepted accounting
principles, expired capital loss carryforwards in the
amount of $16,670,558 for the High Income Portfolio
and $588,874 for the Intermediate Term Portfolio
have been reclassified from undistributed (accumulated)
realized capital gains (losses) net to paid-in
capital in excess of par.
82
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH CORPORATE BOND FUND, INC.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the High Income, High Quality and Intermediate
Term Portfolios of Merrill Lynch Corporate Bond Fund, Inc. as of September 30,
1993, the related statements of operations for the year then ended, and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion of these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the High Income,
High Quality and Intermediate Term Portfolios of Merrill Lynch Corporate Bond
Fund, Inc. as of September 30, 1993 the results of their operations, the changes
in their net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 29, 1993
83
<PAGE> 146
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS HIGH INCOME PORTFOLIO
AIRLINES--2.9% Delta Air Lines Inc.:
BB+ Baa3 $ 1,987,705 9.875% due 4/30/2008++++ $ 2,005,097 $ 2,164,444
BB+ Baa3 3,000,000 9.30% due 1/02/2010 2,963,100 3,080,460
BB+ Baa3 5,000,000 9.20% due 9/23/2014 4,839,050 4,963,000
BB+ Baa3 28,000,000 10.50% due 4/30/2016++++ 28,481,900 30,442,104
Piedmont Aviation:
BB+ Ba2 200,000 Series C, 9.70% due 1/15/1999 201,676 198,169
BB+ Ba2 100,000 Series C, 10.25% due 1/15/2007 103,706 100,689
BB+ Ba2 500,000 Series E, 10.30% due 3/28/2007 520,395 505,000
BB+ Ba2 1,950,000 Series F, 10.35% due 3/28/2011 1,999,719 2,012,271
BB+ Ba2 50,000 Series G, 10.35% due 3/28/2011 51,424 51,597
BB+ Ba2 450,000 Series H, 9.85% due 5/08/2005 454,617 450,538
BB+ Ba2 1,500,000 Series H, 10.00% due 11/08/2012 1,493,250 1,502,276
BB+ Ba2 536,000 Series I, 10.00% due 11/08/2012 545,048 533,320
United Air Lines Inc.:
BB+ Baa1 7,100,000 9.35% due 4/07/2016 7,215,446 7,632,500
BB+ Baa1 10,500,000 9.21% due 1/21/2017 10,480,125 11,126,482
USAir Inc:
B+ Ba3 8,000,000 10.00% due 7/01/2003 8,000,000 7,960,000
BB+ Ba2 1,107,000 Series E, 10.70% due 1/15/2007 1,159,472 1,136,671
BB+ Ba2 3,756,465 Series 89A1, 9.33% due 1/01/2006++++ 3,752,802 3,782,685
BB+ Ba2 500,000 Series 89A2, 9.82% due 1/01/2013++++ 506,250 502,500
-------------- --------------
74,773,077 78,144,706
AUTOMOBILE B B2 13,000,000 Exide Corp., 10.75% due 12/15/2002 13,558,125 13,975,000
PARTS--0.5%
BROADCASTING & B B2 8,000,000 Adelphia Communications Corp., 9.875%
PUBLISHING--5.6% due 3/01/2005 7,863,200 7,450,000
B NR 10,000,000 CableVision Corp., 14.00% due 11/15/2003 10,800,000 10,625,000
B B2 10,550,000 Century Communications Corp., 11.875%
due 10/15/2003 10,550,000 11,947,875
Comcast Corp.:
B B1 1,775,000 11.875% due 3/01/2004 1,788,312 1,899,250
B B1 6,000,000 10.625% due 7/15/2012 6,136,250 6,727,500
BB- Ba2 15,000,000 Continental Cablevision, 9.50% due 8/01/2013 15,000,000 15,225,000
BB- Ba3 15,000,000 Heritage Media, 11.00% due 6/15/2002 15,008,750 16,387,500
BB Ba2 9,200,000 K-III Communications Corp., 10.625%
due 5/01/2002 9,192,500 9,982,000
CCC+ B3 10,000,000 SCI Television, 11.00% due 6/30/2005 10,350,000 10,350,000
B B1 5,000,000 Storer Communications, Inc., 10.00%
due 5/15/2003 3,556,250 5,050,000
B- B3 9,000,000 Summit Communications Group, Inc., 10.50%
due 4/15/2005 9,000,000 9,450,000
B B3 10,000,000 The Katz Corporation, 12.75% due 11/15/2002 10,125,000 10,700,000
BB+ Ba3 11,000,000 Videotron L'TEE, 10.25% due 10/15/2002 11,097,500 11,990,000
BB- B1 22,750,000 World Color Press, 9.125% due 3/15/2003 22,769,375 22,863,750
-------------- --------------
143,237,137 150,647,875
</TABLE>
84
<PAGE> 147
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
BUILDING & B- B2 $17,000,000 Baldwin Homes Co., 10.375% due 8/01/2003+++ $ 16,864,500 $ 16,490,000
CONSTRUCTION-- Del E. Webb Corporation:
2.9% BB- Ba2 7,000,000 10.875% due 3/31/2000 7,002,795 7,455,000
B B2 7,500,000 9.75% due 3/01/2003 7,440,975 7,706,250
B B1 10,250,000 Hovnanian K Enterprises, 11.25% due 4/15/2002 10,204,063 11,018,750
BB Ba2 12,000,000 Standard Pacific Corp., 10.50% due 3/01/2000 11,995,000 12,165,000
B B2 24,000,000 US Home Corp., 9.75% due 6/15/2003 24,000,000 24,300,000
-------------- --------------
77,507,333 79,135,000
BUILDING CCC- Caa 9,300,000 Amstar Corp., 11.375% due 2/15/1997 6,566,250 9,439,500
MATERIALS--1.1% B+ B3 20,000,000 Pacific Lumber Co., 10.50% due 3/01/2003 20,049,000 20,200,000
-------------- --------------
26,615,250 29,639,500
BUILDING American Standard Inc.:
PRODUCTS--2.6% B Ba3 6,750,000 9.875% due 6/01/2001 6,750,000 6,631,875
B+ Ba3 10,150,000 9.25% due 12/01/2016 10,203,625 9,972,375
B Ba3 16,000,000 Inter-City Products Corp., 9.75% due 3/01/2000 15,888,750 15,480,000
B+ B1 9,750,000 National Gypsum Industry, 10.00% due 7/01/2003 9,755,000 9,835,312
USG Corp:
B+ B2 7,000,000 10.25% due 12/15/2002 6,993,750 7,157,500
B- B3 24,084,000 8.75% due 3/01/2017 21,202,506 22,337,910
-------------- --------------
70,793,631 71,414,972
CAPITAL GOODS-- B+ B1 20,450,000 Essex Group Inc., 10.00% due 5/01/2003 20,542,750 20,654,500
1.6% B+ Ba3 5,000,000 Rexnord Corp., 10.75% due 7/01/2002 5,000,000 5,431,250
B+ B3 17,500,000 Sequa Corp., 10.50% due 5/01/1998 17,763,250 18,178,125
-------------- --------------
43,306,000 44,263,875
CELLULAR Comcast Cellular: (a)
TELEPHONES--2.9% B B2 13,140,000 Series A, 10.84% due 3/05/2000 7,220,362 7,769,025
B B2 18,500,000 Series B, 10.84% due 3/05/2000 10,449,001 10,938,125
B- B3 13,000,000 Dial Page Inc., 12.25% due 2/15/2000 13,080,500 14,283,750
CCC+ Caa 20,235,000 Horizon Cellular Telephone Co., 11.375%
due 10/01/2000+++(a) 12,999,166 13,064,222
B- B3 15,000,000 Paging Network, Inc., 11.75% due 5/15/2002 15,000,000 16,875,000
BB- Ba3 13,150,000 Rogers Communications, Inc., 10.875%
due 4/15/2004 13,366,250 14,432,125
-------------- --------------
72,115,279 77,362,247
CHEMICALS--2.5% G-I Holdings, Inc.:
B+ Ba3 42,540,000 11.38% due 10/01/1998+++(a) 24,495,808 24,726,375
B+ B1 22,333,000 12.875% due 3/15/2005++ 22,169,860 22,373,410
B- B3 20,000,000 UCC Investors Holding, Inc., 11.00%
due 5/01/2003 20,550,000 21,100,000
-------------- --------------
67,215,668 68,199,785
</TABLE>
85
<PAGE> 148
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
COMMUNICATIONS-- Panamsat L.P.:
0.8% B+ Ba3 $ 8,000,000 9.75% due 8/01/2000 $ 8,000,000 $ 8,180,000
B- B3 23,710,000 11.38% due 8/01/2003 (a) 13,768,211 14,403,825
-------------- --------------
21,768,211 22,583,825
CONGLOMERATES-- NR NR 9,083,000 Astrum International, 11.50% due 6/08/2003 9,137,780 9,559,857
7.1% Collins & Aikman Group:
CCC+ Caa 4,750,000 15.00% due 5/01/1995 4,936,875 4,791,562
CCC+ Caa 4,300,000 11.375% due 5/01/1997 4,197,875 4,181,750
B Caa 9,900,000 14.39% due 1/31/2005(a) 7,971,736 8,984,250
Colt Industries, Inc.:
B+ Ba2 5,000,000 9.75% due 4/01/2000 5,300,000 5,275,000
B+ B1 15,000,000 10.25% due 4/01/2002 15,000,000 15,825,000
BB Ba2 4,753,000 11.25% due 12/01/2015 5,066,327 5,109,475
B+ B1 18,500,000 Foamex Capital Corp., 11.25% due 10/01/2002 18,495,000 19,818,125
NR NR 15,000,000 Gillette Holdings, 12.25% due 6/30/2002 15,396,250 16,425,000
B+ B3 25,000,000 Jordan Industries, 10.375% due 8/01/2003 24,961,000 24,375,000
NR NR 8,500,000 MacAndrews & Forbes Group, Inc., 12.25%
due 7/01/1996 8,276,775 8,765,625
NR NR 9,100,000 MacAndrews & Forbes Holdings, Inc., 13.00%
due 3/01/1999 8,568,400 9,156,875
BB- Ba3 11,250,000 Reeves Industries, Inc., 11.00% due 7/15/2002 11,266,913 12,065,625
BB- Ba3 24,750,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 24,728,125 24,657,187
B- B3 19,750,000 The Interlake Corporation, 12.125%
due 3/01/2002 19,915,000 20,441,250
B- B2 2,933,000 Valhi, Inc., 12.50% due 2/15/1998 2,969,663 3,035,655
-------------- --------------
186,187,719 192,467,236
CONSUMER Formica Corporation:
PRODUCTS--3.5% NR NR 23,500,000 13.06% due 10/01/2001(a)+++ 21,049,587 21,649,375
NR NR 9,000,000 13.125% due 9/15/2005+++ 9,000,000 9,045,000
B- B2 10,000,000 Harman International Corp., 12.00% due 8/01/2 9,927,700 10,850,000
NR NR 15,000,000 Liggett Group Inc., 11.50% due 2/01/1999 14,237,597 10,050,000
NR B3 5,500,000 Revlon Consumer Products Corp., 10.50%
due 2/15/2003 5,624,375 5,307,500
NR NR 34,350,000 Revlon Worldwide Corp., 12.00% due 3/15/1998 (a) 20,375,053 18,463,125
B+ B1 19,850,000 Sealy Corp., 9.50% due 5/01/2003 19,951,800 20,147,750
-------------- --------------
100,166,112 95,512,750
CONTAINERS--3.8% Ivex Packaging Corp.:
B- B3 13,250,000 12.50% due 12/15/2002 13,157,117 14,144,375
B- Caa 21,130,000 13.25% due 3/15/2005 (a) 8,954,404 9,402,850
BB Ba3 19,000,000 Owens-Illinois, Inc., 11.00% due 12/01/2003 19,380,000 21,660,000
B+ Ba3 11,000,000 Plastic Container Corp., 10.75% due 4/01/2001 11,022,500 11,495,000
B- B3 25,840,000 Silgan Holdings, 13.25% due 12/15/2002 (a) 18,326,638 18,992,400
B+ Ba3 20,000,000 Sweetheart Cup, 9.625% due 9/01/2000 20,000,000 20,400,000
B- B3 5,000,000 United States Can Co., 13.50% due 1/15/2002 5,087,500 5,775,000
-------------- --------------
95,928,159 101,869,625
</TABLE>
86
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<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
CONVERTIBLE B B2 $ 8,352,000 Builders Transport, Inc., 8.00%
BONDS*--1.9% due 8/15/2005 (7) $ 4,886,880 $ 8,080,560
B- B3 10,520,000 Farm Fresh, Inc., 7.50% due 3/01/2010 (4) 5,488,575 7,101,000
B+ Ba3 9,362,000 Lomas Financial Corp., 9.00%
due 10/31/2003 (3) 8,681,275 9,057,735
B- B3 6,941,000 MEDIQ, Inc., 7.25% due 6/01/2006 (5) 4,539,685 6,177,490
CCC+ B3 223,000 Mesa Capital Corp., 12.75%
due 6/30/1998 (2)(a) 325,690 408,926
B B2 6,000,000 Ohm Corp., 8.00% due 10/01/2006 (8) 4,160,000 5,700,000
B B2 8,482,000 Ply-Gem Industries, Inc., 10.00%
due 10/01/2008 (6) 8,490,000 9,245,380
B+ B2 5,909,000 UNC, Inc., 7.50% due 3/31/2006 (1) 3,442,530 5,399,349
-------------- --------------
40,014,635 51,170,440
DRUG STORES--0.1% B- B2 1,969,000 Eckerd (Jack) Corp., 13.00% due 5/01/2006 1,969,000 1,993,613
ENERGY--9.7% B+ B- 42,500,000 Clark Oil, 11.00% due 2/15/2000 (a) 21,474,392 21,250,000
NR NR 34,500,000 Consolidated Hydro Inc., 12.00%
due 7/15/2003+++ (a) 19,257,805 19,147,500
CC Caa 2,100,000 Empire Gas Corp., 12.00% due 3/31/2002 1,656,910 2,110,500
CC Caa 5,900,000 Empire, Inc., 9.00% due 12/31/2007 3,290,116 4,867,500
B B2 15,000,000 Ferrell Gas Companies, Inc., 11.625%
due 12/15/2003 14,887,240 16,162,500
B+ B1 20,000,000 Global Marine Inc., 12.75% due 12/15/1999 20,047,500 22,300,000
BB B1 12,750,000 Gulf Canada Resources Ltd, 9.00% due 8/15/1999 11,735,938 12,896,931
BB Ba3 12,300,000 Maxus Energy Corp., 11.50% due 11/15/2015 11,988,138 13,191,750
Mesa Capital Corp. (a):
CCC B3 1,363,000 12.75% due 6/30/1996 911,952 1,047,806
CCC B3 4,341,000 12.75% due 6/30/1998 3,225,776 3,527,063
C Caa 8,697,000 National Propane Corp., 13.125% due 3/01/1999 6,263,027 8,729,614
BB- Ba3 3,750,000 Noble Drilling, 9.25% due 10/01/2003 3,750,000 3,791,016
BBB- Ba2 18,000,000 Oryx Energy Co., 10.375% due 9/15/2018 17,823,010 19,407,654
Presidio Oil Co.:
NR NR 3,750,000 11.50% due 9/15/2000+++ 3,750,000 3,881,250
CCC Caa 5,000,000 13.25% due 7/15/2002 5,093,750 5,175,000
BB Ba2 15,000,000 Rowan Companies, Inc., 11.875% due 12/01/2001 15,085,000 16,725,000
BB- Ba3 21,500,000 Seagull Energy, 8.625% due 8/01/2005 21,481,250 21,338,750
CCC+ Caa 8,650,000 Tesoro Petroleum Corp., 12.75% due 3/15/2001 7,483,899 8,725,687
BB- B1 23,000,000 Trans Texas Gas Corp., 10.50% due 9/01/2000 23,000,000 23,747,500
B+ B1 31,525,000 Triton Energy Corp., 12.816% due
11/01/1997 (a) 20,646,426 20,885,312
B+ B1 13,000,000 Western Company of North America, 12.875%
due 12/01/2002 12,850,100 14,852,500
-------------- --------------
245,702,229 263,760,833
ENTERTAINMENT-- B- B3 11,750,000 AMC Entertainment, 12.625% due 8/01/2002 11,696,095 12,925,000
3.6% B+ B1 9,000,000 Cinemark USA Inc., 12.00% due 6/01/2002 9,058,750 10,035,000
CCC+ B3 13,150,000 Fair Lanes, Inc., 11.875% due 8/15/1997 13,293,970 10,454,250
B B3 44,650,000 Marvel Holdings, 11.475% due 4/15/1998 (a) 26,912,084 26,566,750
NR Caa 13,000,000 New World Pictures, 12.25% due 9/15/1998 12,636,000 13,065,000
B+ B2 33,250,000 SPI Holdings, 11.50% due 10/01/2001 (a) 23,803,675 24,189,375
-------------- --------------
97,400,574 97,235,375
</TABLE>
87
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<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
FINANCIAL American Annuity Group, Inc.:
SERVICES--3.9% B+ Ba3 $11,000,000 9.50% due 8/15/2001 $ 11,000,000 $ 11,000,000
B B2 12,000,000 11.125% due 2/01/2003 12,000,000 12,540,000
NA NA 29,000,000 Great American Reserve Insurance Co., 14.00%
due 6/27/1998+++ 29,050,000 29,108,750
B- B3 2,786,000 I.C.H. Corp., 16.50% due 12/31/1994 2,755,750 2,869,580
BB Ba1 19,375,000 Lomas Mortgage USA, 10.25% due 10/01/2002 19,442,500 20,489,063
Reliance Financial Services Corp.:
BB+ NR 3,000,000 10.36% due 12/01/2000 2,380,000 3,015,000
BB+ NR 3,500,000 11.375% due 6/01/2008 3,270,000 3,517,500
Reliance Group Holdings, Inc.:
BB- NR 3,250,000 11.50% due 12/01/1997 2,988,183 3,274,375
B B2 18,650,000 11.50% due 11/15/2001 16,273,627 19,279,438
-------------- --------------
99,160,060 105,093,706
FOOD & BB- Ba3 22,000,000 Del Monte Corp., 10.00% due 5/01/2003+++ 22,080,000 21,505,000
BEVERAGE--5.6% C Caa 15,000,000 Envirodyne Industries, Inc., 21.59%
due 8/01/1997 (a) 12,264,636 12,525,000
B+ B2 25,000,000 Grand Union Corp., 12.25% due 7/15/2002 25,020,625 25,812,500
B- B2 5,000,000 Kash-n-Karry Inc., 12.375% due 2/01/1999 4,975,000 5,243,750
BB- Ba3 7,000,000 P & C Food Markets, Inc., 11.50% due 10/15/2001 7,100,000 7,822,500
B B2 25,000,000 Penn Traffic Co., 9.625% due 4/15/2005 24,781,750 25,718,750
B- B2 4,250,000 Pueblo Xtra International, 9.50% due 8/01/2003 4,265,937 4,281,875
B+ B1 19,250,000 Royal Crown Corp., 9.75% due 8/01/2000 19,275,000 19,586,875
B- Caa 11,800,000 Seven-Up/RC Bottling Company of Southern
California, Inc., 11.50% due 8/01/1999 11,967,500 12,154,000
Specialty Foods+++:
B B2 15,000,000 10.75% due 8/15/2001 15,000,000 14,981,250
B- B3 2,250,000 11.75% due 8/15/2003 2,261,250 2,264,062
-------------- --------------
148,991,698 151,895,562
HEALTH American Medical International, Inc.:
SERVICES--4.0% B B1 3,000,000 13.50% due 8/15/2001 3,000,000 3,495,000
B B1 7,000,000 19.352% due 11/25/2005++(a) 8,594,620 9,188,057
BB- Ba2 5,000,000 11.25% due 6/01/2015 5,097,500 5,387,500
B+ B1 11,500,000 Continental Medical, 10.875% due 8/15/2002 11,523,750 11,643,750
B+ B1 10,000,000 Continental Medsystems, Inc., 10.375%
due 4/01/2003 9,991,250 9,975,000
NR NR 9,823,529 Epic Properties, Inc., 11.50% due 7/15/2001++++ 9,761,641 11,051,470
Healthtrust Co. (The Hospital):
B+ B1 15,000,000 10.75% due 5/01/2002 15,087,500 16,650,000
B+ B1 10,000,000 8.75% due 3/15/2005 9,850,000 10,150,000
B+ Ba2 7,000,000 Hospital Corporation of America, 11.25%
due 12/01/2015 6,821,930 7,520,625
B+ B1 11,500,000 MEDIQ/PRN, Life Support Services, Inc.,
11.125% due 7/01/1999 11,455,000 12,103,750
B- B3 9,562,000 The Multicare Companies Inc., 12.50%
due 7/01/2002 9,507,188 10,709,440
-------------- --------------
100,690,379 107,874,592
HIGH TECHNOLOGY-- CCC+ B3 13,000,000 Anacomp, Inc., 15.00% due 11/01/2000 11,852,100 15,080,000
1.1% ComputerVision Corp.:
B- B3 10,000,000 11.375% due 8/15/1999 9,706,250 8,200,000
B- NR 12,500,000 8.00% due 12/01/2009 6,802,473 7,312,500
-------------- --------------
28,360,823 30,592,500
</TABLE>
88
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<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <C> <C> <C>
BONDS (CONTINUED) HIGH INCOME PORTFOLIO
HOTELS & CASINOS B B2 $10,000,000 Aztar Corp., 11.00% due 10/01/2002 $ 10,000,000 $ 10,150,000
- --5.7% BB- B1 17,065,000 Bally's Park Place Funding, Inc., 11.875%
due 8/15/1999 16,647,400 18,387,537
B+ B2 24,000,000 GNS Finance Corp., 9.25% due 3/15/2003 23,864,121 24,030,000
NR NR 7,682,000 Goldriver Hotel & Casino Corporation, 11.375%
due 8/31/1999 (a) 8,609,882 6,260,830
B+ B1 15,000,000 MGM Grand Hotel, 12.00% due 5/01/2002 15,230,500 17,212,500
CCC+ B2 10,000,000 Pioneer Finance Corp., 13.50% due 12/01/1998 10,542,500 10,750,000
BB- Ba3 25,000,000 Showboat, Inc., 9.25% due 5/01/2008 24,920,000 25,062,500
B B2 3,000,000 Station Casinos, Inc., 9.625% due 6/01/2003 3,000,000 2,943,750
NR Caa 11,447,278 Trump Castle Funding, Inc., 9.50%
due 8/15/1998++ 8,044,463 9,047,549
B B3 15,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 14,815,770 14,775,000
NR Caa 15,979,095 Trump Taj Mahal Funding, Inc., 11.35%
due 11/15/1999++ 11,484,894 15,134,265
-------------- --------------
147,159,530 153,753,931
INDUSTRIAL BB- B2 20,000,000 ADT Operations, 9.25% due 8/01/2003 20,091,938 20,300,000
SERVICES--2.9% Bell & Howell Co:
B+ B1 2,000,000 9.25% due 7/15/2000 2,000,000 2,020,000
B- B3 10,000,000 10.75% due 10/01/2002 10,040,000 10,350,000
B- B3 24,250,000 11.50% due 3/01/2005(a) 11,590,231 12,125,000
B+ B2 6,900,000 Blount, Inc., 9.00% due 6/15/2003 6,900,000 6,969,000
B- B3 9,000,000 Neodata Services, Inc., 12.00% due 5/01/2003+++ 6,442,549 6,603,750
C Caa 9,007,000 Southeastern Public Service Co., 11.875%
due 2/01/1998 6,662,417 9,097,070
NR Caa 12,734,180 Thermadyne Industries, Inc., 16.59%
due 5/01/1999(a)++ 12,703,321 11,581,875
-------------- --------------
76,430,456 79,046,695
METALS & MINING-- B- B3 30,000,000 Maxxam Group, Inc., 12.725% due 8/01/2003 16,725,167 16,350,000
0.6%
PAPER--4.2% Container Corporation of America:
B B3 7,500,000 14.00% due 12/01/2001 7,444,375 8,409,375
B+ B2 15,420,000 9.75% due 4/01/2003 15,433,400 15,150,150
Fort Howard Corp.:
B+ B1 11,000,000 9.25% due 3/15/2001 11,000,000 10,958,750
B B2 11,000,000 10.00% due 3/15/2003 11,000,000 10,917,500
B B3 25,000,000 Gaylord Container Corp., 11.50% due 5/15/2001 25,001,250 24,687,500
B B1 15,000,000 Riverwood International Corp., 11.25% due
6/15/2002 15,000,000 16,200,000
Stone Container Group:
B+ B2 10,000,000 10.75% due 6/15/1997 9,426,125 7,650,000
B B1 3,000,000 12.625% due 7/15/1998+++ 3,000,000 2,921,250
B B1 12,000,000 11.875% due 12/01/1998 11,921,975 11,190,000
B B2 6,500,000 11.50% due 9/01/1999 6,264,563 5,037,500
-------------- --------------
115,491,688 113,122,025
POLLUTION B B1 10,000,000 International Technology Corp., 9.375%
CONTROL--0.4% due 7/01/1996 8,910,000 9,937,500
</TABLE>
89
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<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS (CONCLUDED) HIGH INCOME PORTFOLIO
RAILROADS--0.6% B+ Ba3 $17,750,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005 $ 17,750,000 $ 17,439,375
RESTAURANTS/FOOD B B2 10,000,000 Chi Chi's Inc., 9.00% due 10/15/2009 8,800,000 8,450,000
SERVICES--1.9% B- B2 28,000,000 Flagstar Corp., 11.375% due 9/15/2003 28,000,000 28,210,000
B B2 16,000,000 Foodmaker, Inc., 9.75% due 6/01/2002 15,455,000 16,160,000
-------------- --------------
52,255,000 52,820,000
RETAIL B- B3 10,000,000 Pamida Holdings Inc., 11.75% due 3/15/2003 9,997,500 9,750,000
SPECIALTY--1.2% Specialty Retailers+++:
B+ B1 20,000,000 10.00% due 8/15/2000 20,000,000 19,575,000
B- B3 3,000,000 11.00% due 8/15/2003 3,000,000 2,960,625
-------------- --------------
32,997,500 32,285,625
STEEL--0.7% BB- Ba3 17,000,000 WCI Steel, Inc., 12.625% due 3/01/2002 17,000,000 18,551,250
TRANSPORTATION B+ B1 5,095,000 ACF Industries, Inc., 11.60% due 5/15/2000 4,865,725 5,069,525
SERVICES--1.3% BB- B1 11,000,000 International Shipping, 9.00% due 7/01/2003 10,998,750 11,000,000
B+ Ba3 19,000,000 Viking Star Shipping, 9.625% due 7/15/2003+++ 19,077,500 19,095,000
-------------- --------------
34,941,975 35,164,525
UTILITIES--4.2% BB+ Ba1 19,500,000 CTC Mansfield Funding, 11.125% due 9/30/2016 21,013,750 21,961,290
Midland Cogeneration Venture Limited
Partnership:
BB Ba2 4,643,461 10.33% due 7/23/2002++++ 4,794,374 4,860,018
B B1 11,250,000 11.75% due 7/23/2005 11,310,000 12,240,518
B B1 5,500,000 13.25% due 7/23/2006 6,002,565 6,713,372
NR NR 14,632,316 Sunflower Electric Power Corp., 8.00%
due 12/31/2016++++ +++ 9,379,536 10,425,525
Texas-New Mexico Power Co.:
BB Ba3 5,000,000 9.25% due 9/15/2000 5,000,000 5,104,125
B+ B2 18,000,000 10.75% due 9/15/2003 18,060,000 18,270,954
B Ba3 5,000,000 Transco Energy Co., 9.625% due 6/15/2020 4,687,500 5,725,000
Tucson Electric & Power+++:
NR NR 12,323,081 Series B, 10.21% due 1/01/2009 11,547,774 11,799,350
NR NR 17,426,207 Series C, 10.73239% due 1/01/2013 16,252,461 16,903,421
-------------- --------------
108,047,960 114,003,573
TOTAL INVESTMENTS IN BONDS--91.4% 2,383,170,375 2,477,307,516
PREFERRED STOCKS
BROADCASTING & 471,000 K--III Communications Corp. 11,812,750 12,893,625
PUBLISHING--0.9% 102,365 K--III Communications Corp.++ 10,447,240 10,377,271
-------------- --------------
22,259,990 23,270,896
ENERGY--0.2% 1,000 Consolidated Hydro, Inc. 5,133,200 5,237,500
FINANCIAL 13,935 Southmark Corp. (Series A) (b) 4,979,760 488
SERVICES--0.0%
TOTAL INVESTMENTS IN PREFERRED STOCKS--1.1% 32,372,950 28,508,884
</TABLE>
90
<PAGE> 153
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
SHARES VALUE
INDUSTRIES HELD ISSUE COST (NOTE 1a)
<S> <C> <S> <C> <C>
COMMON STOCKS HIGH INCOME PORTFOLIO
BANKING--0.2% 168,000 Chase Manhattan Corp. $ 7,000,000 $ 6,237,000
CONGLOMERATES--0.1% 200,369 Astrum International 4,085,240 4,019,903
DEFENSE--0.0% 1,560 Empire of Carolina, Inc.+++ (b) 234,000 9,360
ENERGY--0.1% 157,500 Petrolane Inc. (b) 1,830,938 1,624,219
FINANCIAL 132,527 Lomas Financial Corporation 1,689,719 1,192,743
SERVICES--0.0% 273,986 Southmark Corp. (b) 8,159,240 0
-------------- --------------
9,848,959 1,192,743
FOOD & BEVERAGE 120,194 Abco Markets Inc. (b) 4,054,875 1,584,759
- --0.3% 139,068 Doskocil Companies, Inc. 5,678,900 1,547,132
313,879 RJR Nabisco Holdings Corp. 3,060,320 1,412,455
-------------- --------------
12,794,095 4,544,346
HOTELS & CASINOS--0.0% 66,824 Buckhead Corporation of America+++ (b) 167,060 167,060
75,500 Goldriver Hotel & Casino Corporation
(Class B) (b) (c) 540,045 235,938
23,000 Trump Taj Mahal Holding Corp. (Class A) 11,500 158,125
-------------- --------------
718,605 561,123
PAPER--0.0% 153,176 Gaylord Container Corp. (Class A) 406,524 335,073
STEEL--0.0% 47,242 LTV Corp. 5,521,163 507,851
TOTAL INVESTMENTS IN COMMON STOCKS--0.7% 42,439,524 19,031,618
TRUSTS, WARRANTS & RIGHTS
ENERGY--0.0% 35,000 Amerigas Inc. (Put Right) (d) 393,750 422,188
20,833 UGI (Warrants) (e) 91,057 46,874
-------------- --------------
484,807 469,062
FINANCIAL SERVICES--0.0% 7,194 Reliance Group Holdings (Warrants) (e) 0 0
HIGH TECHNOLOGY--0.0% 394,563 Anacomp, Inc. (Warrants) (e)+++ 495,400 641,165
HOTELS & CASINOS--0.0% 7,550 Goldriver Hotel & Casino Corporation
Liquidating Trust+++ (b) 192,320 137,028
INDUSTRIAL--0.0% 3,465 Thermadyne Industries, Inc. (Warrants) (e) 34,650 20,790
PAPER--0.0% 813,584 Gaylord Container Corp. (Warrants) (e) 1,707,305 1,322,074
TELECOMMUNICATIONS--0.0% 302,500 ALC Communications Corp. (Warrants) (e) 831,875 0
TOTAL INVESTMENTS IN TRUSTS, WARRANTS &
RIGHTS--0.0% 3,746,357 2,590,119
</TABLE>
91
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<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1a)
<S> <C> <S> <C> <C>
SHORT-TERM SECURITIES HIGH INCOME PORTFOLIO
COMMERCIAL PAPER**--4.9% $70,104,000 General Electric Capital Corp., 3.45%
due 10/01/1993 $ 70,104,000 $ 70,104,000
21,000,000 Oryx Inc., 3.45% due 10/28/1993 20,945,663 20,945,663
Vons Companies, Inc.:
18,000,000 3.40% due 10/12/1993 17,981,300 17,981,300
13,000,000 3.42% due 10/18/1993 12,979,005 12,979,005
10,000,000 3.42% due 10/28/1993 9,974,350 9,974,350
-------------- --------------
131,984,318 131,984,318
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--4.9% 131,984,318 131,984,318
TOTAL INVESTMENTS--98.1% $2,593,713,524 2,659,422,455
==============
OTHER ASSETS LESS LIABILITIES--1.9% 50,636,345
--------------
NET ASSETS--100.0% $2,710,058,800
==============
<FN>
++Represents a pay-in-kind security which may pay interest/dividend in additional face/shares.
++++Subject to principal paydowns.
++++++Subject to principal payups.
*Industry classifications for convertible bonds are:
(1) Conglomerates; (2) Energy; (3) Financial Services; (4) Food & Beverage; (5) Health Services;
(6) High Technology; (7) Transportation Services; (8) Waste Management.
**Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates
paid at the time of purchase by the Portfolio.
(a)Represents the effective yield at time of purchase.
(b)Non-income producing security.
(c)Each share of Series B Stock contains a right which entitles the Portfolio to purchase a
predetermined number of shares of preferred stock. The purchase price and number of shares
are subject to adjustment.
(d)Each put right may be exercised to sell Petrolane Common Stock at the put purchase price.
(e)Warrants entitle the Portfolio to purchase a predetermined number of shares of common
stock/face amount of bonds. The purchase price and number of shares/face amount are subject
to adjustment under certain conditions until the expiration date.
Ratings of issues shown have not been audited by Deloitte & Touche.
++Restricted securities as to resale. The value of the Portfolio's investments in restricted
securities was approximately $267,101,000, representing 9.8% of the Portfolio's net assets.
<CAPTION>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1a)
<S> <C> <C> <C>
Anacomp, Inc. (Warrants) 10/23/90 to 3/14/91 $ 495,400 $ 641,165
Baldwin Homes Co., 10.375%
due 8/01/2003 7/15/93 16,864,500 16,490,000
Buckhead Corporation of America 12/29/92 167,060 167,060
Consolidated Hydro Inc., 12.00%
due 7/15/2003 6/15/93 19,257,805 19,147,500
Del Monte Corp., 10.00%
due 5/01/2003 4/22/93 22,080,000 21,505,000
Empire of Carolina, Inc.
(common stock) 12/30/88 234,000 9,360
Formica Corporation, 13.06%
due 10/01/2001 6/03/93 21,049,587 21,649,375
Formica Corporation, 13.125%
due 9/15/2005 9/17/93 9,000,000 9,045,000
G-I Holdings, Inc., 11.38%
due 10/01/1998 9/28/93 24,495,808 24,726,375
Goldriver Hotel & Casino
Corporation Liquidating Trust 8/31/92 192,320 137,028
Great American Reserve Ins. Co.,
14.00% due 6/27/1998 7/28/93 29,050,000 29,108,750
Horizon Cellular Telephone Co.,
11.375% due 10/01/2000 9/24/93 12,999,166 13,064,222
Neodata Services Co., 12.00% due
5/01/2003 4/28/93 6,442,549 6,603,750
Presidio Oil Co., 11.50% due
9/15/2000 8/03/93 3,750,000 3,881,250
Specialty Foods, 10.75% due
8/15/2001 8/10/93 15,000,000 14,981,250
Specialty Foods, 11.75% due
8/15/2003 9/08/93 2,261,250 2,264,062
Specialty Retailers, 10.00% due
8/15/2000 7/22/93 20,000,000 19,575,000
Specialty Retailers, 11.00% due
8/15/2003 7/22/93 3,000,000 2,960,625
Stone Container Group, 12.625%
due 7/15/1998 6/24/93 3,000,000 2,921,250
Sunflower Electric Power Corp.,
8.00% due 12/31/2016 11/29/91 to 9/15/92 9,379,536 10,425,525
Tucson Electric & Power
(Series B), 10.21% due 1/01/2009 6/04/93 11,547,774 11,799,350
Tucson Electric & Power (Series
C), 10.73239% due 1/01/2013 3/01/93 16,252,461 16,903,421
Viking Star Shipping, 9.625% due
7/15/2003 7/08/93 19,077,500 19,095,000
------------ ------------
$265,596,716 $267,101,318
============ ============
See Notes to Financial Statements.
</TABLE>
92
<PAGE> 155
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES HIGH QUALITY PORTFOLIO
US GOVERNMENT United States Treasury Notes & Bonds:
OBLIGATIONS-- NR Aaa $ 9,500,000 4.75% due 9/30/1998 $ 9,483,311 $ 9,485,085
10.5% NR Aaa 6,000,000 5.50% due 4/15/2000 6,000,937 6,168,720
NR Aaa 13,000,000 8.75% due 8/15/2000 15,333,906 15,746,120
NR Aaa 4,000,000 6.375% due 8/15/2002 4,298,750 4,274,960
NR Aaa 18,000,000 5.75% due 8/15/2003 18,434,962 18,478,080
NR Aaa 10,000,000 7.875% due 2/15/2021 10,075,038 12,059,300
NR Aaa 27,000,000 7.125% due 2/15/2023 30,480,469 30,282,120
-------------- --------------
94,107,373 96,494,385
BANKS & THRIFTS A- A3 5,000,000 Boatmen's Bancshares Inc., 6.75% due 3/15/2003 5,028,900 5,219,835
- --10.7% BBB Baa1 7,000,000 First Interstate, 9.90% due 11/15/2001 (a) 8,381,310 8,643,320
First Union Corp.:
A- A3 1,000,000 8.125% due 6/24/2002 1,109,750 1,126,731
A- A3 8,300,000 8.00% due 11/15/2002 8,810,850 9,334,537
Golden West Financial Corp.:
A- A3 2,000,000 7.00% due 1/15/2000 1,976,250 2,126,940
A- A3 5,000,000 7.875% due 1/15/2002 5,025,600 5,546,155
A- A3 5,000,000 8.375% due 4/15/2002 5,035,950 5,716,150
A- A3 8,000,000 Huntington National Bank, 7.625% due 1/15/2003 8,405,600 8,812,784
BBB+ A3 7,000,000 Meridian Bancorp, 6.625% due 3/15/2003 6,887,370 7,205,198
NationsBank Corp.:
A- A3 7,000,000 6.50% due 8/15/2003 7,000,000 7,157,500
A- A3 1,000,000 9.375% due 9/15/2009 1,226,450 1,284,060
A A2 16,500,000 Norwest Corp., 6.625% due 3/15/2003 16,623,970 17,259,776
A- A3 3,500,000 Society National Bank, 6.75% due 6/15/2003 3,546,375 3,659,187
A- Baa1 6,500,000 US Bancorp, 7.00% due 3/15/2003 6,483,750 6,872,443
A A2 7,000,000 World Savings and Loan Association, 9.90% due
7/01/2000 7,430,130 8,346,576
-------------- --------------
92,972,255 98,311,192
FEDERAL NR Aaa 7,000,000 Federal National Mortgage Association, 6.80%
AGENCIES--1.4% due 1/10/2003 6,990,156 7,603,953
AAA Aaa 5,000,000 Private Export Funding, 8.35% due 1/31/2001 5,786,950 5,929,045
-------------- --------------
12,777,106 13,532,998
FINANCIAL Ford Motor Credit Corp.:
SERVICES-- A A2 1,000,000 7.75% due 11/15/2002 1,040,130 1,110,361
CAPTIVE--2.2% A A2 3,000,000 6.625% due 6/30/2003 3,022,080 3,094,089
A A2 7,000,000 6.75% due 8/15/2008 6,959,050 7,252,588
General Motors Acceptance Corp.:
BBB+ Baa1 2,500,000 7.75% due 4/15/1997 2,496,625 2,686,943
BBB+ Baa1 5,000,000 9.375% due 4/01/2000 5,677,600 5,859,465
-------------- --------------
19,195,485 20,003,446
FINANCIAL A+ A1 9,000,000 American General Finance Corp., 7.45%
SERVICES-- due 7/01/2002 9,131,640 9,903,105
CONSUMER--4.7% Associates Corp. of North America:
AA- A1 2,000,000 6.00% due 3/15/2000 1,963,900 2,042,796
AA- A1 1,500,000 6.875% due 2/01/2003 1,523,385 1,593,720
Beneficial Corp.:
A A2 2,500,000 9.125% due 2/15/1998 2,856,700 2,857,270
A A2 1,000,000 12.75% due 10/01/2013 983,750 1,082,893
Commercial Credit Co.:
A A2 6,000,000 6.70% due 8/01/1999 6,001,800 6,342,456
A A2 5,000,000 6.125% due 3/01/2000 4,964,840 5,134,225
A A3 6,000,000 Household Finance Corp., 7.625% due 1/15/2003 6,143,280 6,609,588
A+ A2 7,000,000 Transamerica Finance, 7.94% due 12/02/2002 7,672,700 7,893,760
-------------- --------------
41,241,995 43,459,813
</TABLE>
93
<PAGE> 156
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES (CONTINUED) HIGH QUALITY PORTFOLIO
FINANCIAL Bear Stearns Companies Inc.:
SERVICES-- A A2 $ 3,000,000 6.75% due 4/15/2003 $ 3,125,580 $ 3,115,203
OTHER--5.7% A A2 6,000,000 6.70% due 8/01/2003 5,970,660 6,173,298
A A3 7,000,000 Dean Witter Discover, 6.875% due 3/01/2003 7,067,820 7,399,301
Morgan Stanley Group Inc.:
A+ A1 8,000,000 8.875% due 10/15/2001 9,163,120 9,483,688
A+ A1 4,000,000 6.75% due 3/04/2003 3,970,200 4,187,008
A+ A1 5,000,000 7.00% due 10/01/2013 4,970,150 4,950,000
BBB+ A3 7,000,000 PaineWebber Group Inc., 9.25% due 12/15/2001 8,185,100 8,267,161
A+ A3 8,000,000 Torchmark Corp., 9.625% due 5/01/1998 7,941,440 9,299,888
-------------- --------------
50,394,070 52,875,547
FOREIGN*--8.5% Hydro Quebec (1):
A+ A1 10,000,000 8.00% due 2/01/2013 11,212,600 11,082,770
A+ A1 6,000,000 8.40% due 1/15/2022 6,709,620 6,928,320
AAA Aaa 2,000,000 Japan Finance Corp. for Municipal Enterprises,
8.70% due 7/30/2001 (2) 2,237,380 2,398,404
AAA Aaa 5,000,000 KFW International Finance Inc., 7.00%
due 3/01/2013 (3) 4,944,350 5,244,675
Korea Development Bank (4):
A+ A1 3,500,000 6.25% due 5/01/2000 3,521,980 3,588,655
A+ A1 6,500,000 7.90% due 2/01/2002 7,110,740 7,217,671
Metropolis of Tokyo (Japan) (5):
AAA Aaa 3,550,000 9.25% due 10/11/1998 4,134,756 4,168,556
AAA Aaa 4,000,000 9.25% due 11/08/2000 4,219,660 4,859,680
BBB Baa1 3,000,000 Petro Canada, 8.60% due 10/15/2001 (6) 3,292,470 3,468,117
AA+ Aa1 5,000,000 Province of British Columbia (Canada), 7.00%
due 1/15/2003 (7) 4,982,870 5,413,850
Province of Manitoba (Canada) (7):
A+ A1 3,000,000 6.75% due 3/01/2003 3,000,000 3,148,650
A+ A1 2,500,000 8.80% due 1/15/2020 2,959,500 3,026,500
Province of Ontario (Canada) (7):
AA Aa2 7,000,000 8.00% due 10/17/2001 7,564,970 7,886,200
AA Aa2 5,000,000 7.75% due 6/04/2002 5,398,150 5,565,750
A+ A1 3,000,000 Province of Quebec (Canada), 13.00%
due 10/01/2013 (7) 3,918,120 4,081,020
-------------- --------------
75,207,166 78,078,818
INDUSTRIAL-- AA- A1 3,000,000 Anheuser-Busch Companies, Inc., 8.75%
CONSUMER--10.9% due 12/01/1999 3,367,590 3,490,266
Bass America, Inc.:
A+ A1 3,000,000 6.75% due 8/01/1999 3,027,270 3,180,153
A+ A1 12,000,000 8.125% due 3/31/2002 12,156,070 13,730,256
A+ A1 3,000,000 6.625% due 3/01/2003 2,999,250 3,153,060
Dilliard Department Stores, Inc.:
A+ A2 3,000,000 7.375% due 6/15/1999 3,173,880 3,285,858
A+ A2 8,000,000 7.85% due 10/01/2012 7,926,890 8,962,096
Grand Metropolitan Investment Corp.:
A+ A2 4,000,000 6.50% due 9/15/1999 4,000,000 4,192,492
A+ A2 9,000,000 8.625% due 8/15/2001 9,412,690 10,433,880
A+ A2 6,000,000 7.125% due 9/15/2004 6,499,940 6,451,278
A+ A2 1,000,000 9.00% due 8/15/2011 1,029,470 1,237,450
A A2 6,000,000 K mart Corp., 7.77% due 7/02/2002 (a) 6,000,000 6,701,520
Philip Morris Companies, Inc.:
A A2 2,000,000 9.00% due 1/01/2001 2,061,930 2,366,438
A A2 5,000,000 7.25% due 1/15/2003 5,113,110 5,409,995
A A2 2,000,000 Seagram Co., Ltd., 6.50% due 4/01/2003 1,973,180 2,070,166
</TABLE>
94
<PAGE> 157
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES (CONTINUED) HIGH QUALITY PORTFOLIO
INDUSTRIAL-- Wal-Mart Stores, Inc.:
CONSUMER AA Aa1 $10,000,000 8.625% due 4/01/2001 $ 10,509,800 $ 11,872,970
(CONCLUDED) AA Aa1 8,000,000 6.50% due 6/01/2003 7,982,480 8,439,504
AA Aa3 5,000,000 Warner-Lambert Co., Inc., 6.625% due 9/15/2002 4,910,350 5,331,630
-------------- --------------
92,143,900 100,309,012
INDUSTRIAL-- A+ A1 5,000,000 Atlantic Richfield, 10.375% due 7/15/1995 5,266,660 5,505,925
ENERGY--4.5% AA- A1 9,000,000 BP America Inc. (Guaranteed by the British
Petroleum Co., PLC), 7.875% due 5/15/2002 9,519,510 10,154,754
A- A3 8,500,000 Burlington Resources, 9.625% due 6/15/2000 9,720,390 10,273,789
Texaco Capital Inc.:
A+ A1 5,500,000 9.00% due 12/15/1999 6,215,190 6,487,453
A+ A1 1,000,000 8.50% due 2/15/2003 1,089,360 1,182,693
A+ A1 2,000,000 8.875% due 9/01/2021 2,440,280 2,497,904
A+ A1 5,000,000 8.00% due 8/01/2032 4,848,650 5,693,960
-------------- --------------
39,100,040 41,796,478
INDUSTRIAL-- A+ A1 4,000,000 Air Products & Chemicals, 6.25% due 6/15/2003 3,965,400 4,158,856
OTHER--13.3% Archer-Daniels-Midland Co.:
AA- Aa2 10,000,000 6.25% due 5/15/2003 9,950,460 10,387,310
AA- Aa2 5,000,000 7.125% due 3/01/2013 4,986,800 5,312,990
Baxter International Inc.:
A- A3 8,000,000 8.125% due 11/15/2001 8,399,300 9,157,280
A- A3 4,000,000 7.625% due 11/15/2002 3,997,200 4,433,456
A+ A1 4,000,000 Capital Cities/ABC, Inc., 8.875%
due 12/15/2000 4,305,360 4,744,184
A A2 6,000,000 Communications Satellite Corp., 8.125%
due 4/01/2004 6,376,270 6,881,844
A- A1 2,000,000 Dresser Industries, 6.25% due 6/01/2000 2,015,000 2,080,354
A- A3 4,000,000 Equifax Inc., 6.50% due 6/15/2003 4,019,040 4,124,320
Ford Capital B.V.:
A A2 2,500,000 9.375% due 5/15/2001 2,762,725 3,011,652
A A2 4,000,000 9.50% due 7/01/2001 4,527,920 4,862,716
A A2 9,000,000 9.875% due 5/15/2002 9,080,850 11,227,041
AA- Aa3 6,000,000 Gannett Co. Inc., 5.25% due 3/01/1998 5,980,920 6,053,832
AA- A1 8,000,000 Illinois Tool Works Inc., 5.875% due 3/01/2000 7,979,520 8,220,888
AA Aa2 8,740,000 Kaiser Foundation Hospital, 9.00%
due 11/01/2001 9,835,624 10,593,501
AA- Aa3 5,000,000 R.R. Donnelly & Sons Co., 7.00% due 1/01/2003 5,447,100 5,405,765
AAA Aaa 3,000,000 United Parcel Service, 8.375% due 4/01/2020 2,859,590 3,640,512
Weyerhaeuser Corp.:
A A2 5,000,000 7.50% due 3/01/2013 5,000,000 5,436,295
A A2 10,000,000 7.125% due 7/15/2023 9,808,100 10,204,710
A A3 3,000,000 Witco Corp., 6.60% due 4/01/2003 2,999,130 3,106,968
-------------- --------------
114,296,309 123,044,474
SUPRANATIONAL-- Asian Development Bank:
5.8% AAA Aaa 3,000,000 10.75% due 6/01/1997 3,302,730 3,575,262
AAA Aaa 9,000,000 9.125% due 6/01/2000 9,455,080 10,946,637
AAA Aaa 4,000,000 6.50% due 9/21/2002 3,875,000 4,227,624
AAA Aaa 4,000,000 European Investment Bank, 9.125% due 6/01/2002 4,890,870 4,918,684
Inter-American Development Bank:
AAA Aaa 8,000,000 8.875% due 6/01/2009 10,115,250 10,247,472
AAA Aaa 4,000,000 8.50% due 3/15/2011 4,695,120 4,982,480
AAA Aaa 10,000,000 International Bank for Reconstruction &
Development, 12.375% due 10/15/2002 12,247,510 14,569,040
-------------- --------------
48,581,560 53,467,199
TRANSPORTATION-- A- Baa1 3,000,000 Southwest Airlines, Inc., 7.875% due 9/01/2007 2,983,950 3,356,238
0.4%
</TABLE>
95
<PAGE> 158
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES (CONCLUDED) HIGH QUALITY PORTFOLIO
UTILITIES-- AAA Aaa $ 2,000,000 BellSouth Telecommunications, 7.00% due
COMMUNICATIONS-- 2/01/2005 $ 1,996,300 $ 2,184,966
5.8% GTE Corp.:
BBB+ A3 10,000,000 9.375% due 12/01/2000 10,973,710 12,149,940
BBB+ A3 4,000,000 9.10% due 6/01/2003 4,242,720 4,879,424
BBB+ Baa1 10,000,000 MCI Communications, 7.50% due 8/20/2004 10,467,400 11,109,530
AA- Aa2 2,000,000 New England Telephone & Telegraph Co., 8.625%
due 8/01/2001 2,233,620 2,343,252
Pacific Bell, Inc.:
AA- Aa3 4,000,000 8.70% due 6/15/2001 3,958,040 4,771,112
AA- Aa3 6,000,000 7.25% due 7/01/2002 5,970,840 6,589,824
AA- Aa3 4,500,000 7.125% due 3/15/2026 4,598,370 4,666,162
A+ A1 5,000,000 Southwestern Bell Telecommunications, 6.125%
due 3/01/2000 5,028,125 5,194,190
-------------- --------------
49,469,125 53,888,400
UTILITIES-- A+ A1 2,000,000 Baltimore Gas & Electric Co., 8.375% due 8/15/2001 2,040,240 2,310,734
ELECTRIC-- A A2 5,000,000 Central Power & Light Co., 6.00% due 10/01/1997 4,973,400 5,170,205
8.1% BBB+ A3 4,000,000 Detroit Edison, 6.76% due 3/17/2003 (a) 4,000,000 4,211,040
A- A3 2,000,000 Georgia Power Co., 6.125% due 9/01/1999 1,961,420 2,051,162
Pacific Gas & Electric Co.:
A A1 12,000,000 7.875% due 3/01/2002 12,232,160 13,477,848
A A1 9,000,000 6.25% due 8/01/2003 8,990,280 9,177,831
A A1 5,000,000 7.25% due 8/01/2026 5,056,400 5,172,400
Pennsylvania Power & Light Co.:
A A2 8,000,000 7.75% due 5/01/2002 8,388,270 8,968,056
A A2 11,000,000 6.875% due 2/01/2003 11,098,750 11,735,889
Public Service Electric & Gas Co.:
A A2 1,000,000 6.125% due 8/01/2002 1,010,500 1,021,435
A A2 2,000,000 8.875% due 6/01/2003 2,085,800 2,416,358
AA- Aa3 5,000,000 TECO Energy, Inc., 9.27% due 6/12/2000 (a) 5,000,000 5,964,400
A A2 3,000,000 Virginia Electric & Power Co., 6.625% due 4/01/2003 2,996,700 3,156,489
-------------- --------------
69,833,920 74,833,847
UTILITIES-- Consolidated Natural Gas Co.:
GAS--1.3% AA- A1 1,000,000 9.375% due 2/01/1997 1,031,440 1,129,506
AA- A1 7,500,000 8.75% due 6/01/1999 7,450,660 8,676,487
AA- A1 2,000,000 5.75% due 8/01/2003 1,970,080 1,995,000
-------------- --------------
10,452,180 11,800,993
TOTAL INVESTMENTS IN BONDS & NOTES--93.8% 812,756,434 865,252,840
SHORT-TERM SECURITIES
REPURCHASE 34,472,000 Carroll McEntee & McGinley, Inc., purchased
AGREEMENTS**-- on 9/30/1993 to yield 3.35% to 10/01/1993 34,472,000 34,472,000
3.7%
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--3.7% 34,472,000 34,472,000
TOTAL INVESTMENTS--97.5% $ 847,228,434 899,724,840
==============
OTHER ASSETS LESS LIABILITIES--2.5% 23,301,686
--------------
NET ASSETS--100.0% $ 923,026,526
==============
<FN>
*Corresponding industry groups for foreign securities, which are
denominated in US dollars:
(1) Electric Utility; Owned & Guaranteed by the Province.
(2) Financial Institution; Government-Owned & Guaranteed.
(3) Financial Institution; Government-Owned & Supported, not Guaranteed.
(4) Financial Institution; Government-Owned & Guaranteed by Korea.
(5) Government Entity; Guaranteed by Japan.
(6) Energy Company not Guaranteed by Canada.
(7) Government Entity; Guaranteed by the Province.
**Repurchase Agreements are fully collateralized by US Government Obligations.
(a) Medium-term note.
Ratings of issues have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
</TABLE>
96
<PAGE> 159
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES INTERMEDIATE TERM PORTFOLIO
US GOVERNMENT United States Treasury Notes:
OBLIGATIONS-- UR Aaa $11,000,000 4.75% due 8/31/1998 $ 10,851,060 $ 10,986,140
12.8% UR Aaa 10,000,000 4.75% due 9/30/1998 9,984,765 9,984,300
UR Aaa 8,000,000 5.50% due 4/15/2000 8,003,438 8,224,960
UR Aaa 12,500,000 5.75% due 8/15/2003 12,940,156 12,832,000
-------------- --------------
41,779,419 42,027,400
BANKS & THRIFTS A- A3 6,000,000 Boatmen's Bancshares, Inc., 6.75%
- --13.3% due 3/15/2003 6,022,720 6,263,802
BBB Baa 7,000,000 First Interstate Bancorp., 9.90%
due 11/15/2001 8,402,030 8,643,320
First Union Corp.:
A- A3 5,000,000 8.00% due 11/15/2002 5,002,240 5,623,215
A- A3 3,000,000 7.25% due 2/15/2003 2,990,730 3,225,540
Golden West Financial Corp.:
A- A3 1,000,000 7.875% due 1/15/2002 1,089,750 1,109,231
A- A3 3,000,000 8.375% due 4/15/2002 2,961,120 3,429,690
BBB+ A3 4,500,000 Meridian Bancorp, 6.625% due 3/15/2003 4,364,145 4,631,913
A A2 3,000,000 Norwest Corp., 6.625% due 3/15/2003 3,002,870 3,138,141
A- Baa1 5,000,000 US Bancorp, 7.00% due 3/15/2003 5,052,660 5,286,495
A A2 2,000,000 World Savings and Loan Association, 9.90% due
7/01/2000 2,072,740 2,384,736
-------------- --------------
40,961,005 43,736,083
FINANCIAL SERVICES-- American General Finance Corp.:
16.4% A+ A1 1,000,000 7.45% due 7/01/2002 997,800 1,100,345
A+ A1 5,000,000 6.375% due 3/01/2003 4,957,190 5,154,880
Associates Corp. of North America:
AA- A1 3,000,000 6.00% due 3/15/2000 2,945,850 3,064,194
AA- A1 1,500,000 6.875% due 2/01/2003 1,523,385 1,593,720
A A2 6,500,000 Bear Stearns Co. Inc., 6.75% due 4/15/2003 6,577,675 6,749,606
BB+ Baa3 7,500,000 Chrysler Financial Corp., 6.625% due 8/15/2000 7,670,350 7,637,783
Commercial Credit Co.:
A A2 2,000,000 6.70% due 8/01/1999 2,001,200 2,114,152
A A2 1,000,000 6.125% due 3/01/2000 997,200 1,026,845
A A3 5,000,000 Dean Witter Discover, 6.875% due 3/01/2003 5,017,470 5,285,215
Ford Motor Credit Corp.:
A A2 1,000,000 7.75% due 11/15/2002 1,040,130 1,110,361
A A2 2,000,000 7.50% due 1/15/2003 2,040,640 2,188,682
A A2 2,000,000 6.625% due 6/30/2003 2,014,720 2,062,726
BBB+ Baa1 3,000,000 General Motors Acceptance Corp., 9.625% due
12/15/2001 3,556,470 3,598,113
A A3 1,000,000 Household Finance Corp., 7.625% due 1/15/2003 1,023,880 1,101,598
Morgan Stanley Group Inc.:
A+ A1 2,500,000 9.375% due 6/15/2001 2,952,975 3,033,212
A+ A1 2,000,000 8.875% due 10/15/2001 2,323,200 2,370,922
A+ A1 1,000,000 6.75% due 3/04/2003 992,550 1,046,752
BBB+ A3 2,000,000 PaineWebber Group Inc., 9.25% due 12/15/2001 2,338,600 2,362,046
A+ A3 1,000,000 Torchmark Corp., 9.625% due 5/01/1998 1,139,040 1,162,486
-------------- --------------
52,110,325 53,763,638
FOREIGN*--6.1% Korea Development Bank (4):
A+ A1 1,500,000 6.25% due 5/01/2000 1,508,040 1,537,995
A+ A1 2,500,000 7.90% due 2/01/2002 2,734,900 2,776,027
BBB Baa1 5,000,000 Petro Canada, 8.60% due 10/15/2001 (2) 5,194,980 5,780,195
AA+ Aa1 2,000,000 Province of British Columbia (Canada), 7.00%
due 1/15/2003 (3) 1,998,500 2,165,540
</TABLE>
97
<PAGE> 160
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES (CONTINUED) INTERMEDIATE TERM PORTFOLIO
FOREIGN* A+ A1 $ 2,000,000 Province of Manitoba (Canada), 6.75%
(CONCLUDED) due 3/01/2003 (1) $ 2,000,000 $ 2,099,100
Province of Ontario (Canada) (3):
AA Aa2 1,000,000 8.00% due 10/17/2001 1,080,710 1,126,600
AA Aa2 4,000,000 7.375% due 1/27/2003 3,987,720 4,345,720
-------------- --------------
18,504,850 19,831,177
INDUSTRIALS-- A+ A1 4,000,000 Air Products & Chemicals, 6.25% due 6/15/2003 3,965,400 4,158,856
27.9% AA- A1 3,350,000 Anheuser-Busch Companies, Inc., 8.75% due 12/01/1999 3,703,559 3,897,464
AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 6.25% due 5/15/2003 1,989,000 2,077,462
A+ A1 2,000,000 Atlantic Richfield, 10.375% due 7/15/1995 2,176,960 2,202,370
Bass America, Inc.:
A+ A1 1,000,000 6.75% due 8/01/1999 1,009,090 1,060,051
A+ A1 2,000,000 8.125% due 3/31/2002 2,065,740 2,288,376
A+ A1 2,000,000 6.625% due 3/01/2003 1,999,500 2,102,040
A- A3 1,000,000 Baxter International, Inc., 8.125% due 11/15/2001 1,083,080 1,144,660
AA- A1 1,000,000 BP America Inc. (Guaranteed by the British
Petroleum Co., PLC), 7.875% due 5/15/2002 1,055,380 1,128,306
A- A3 1,500,000 Burlington Resources Inc., 9.625% due
6/15/2000 1,782,690 1,813,022
Dillard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,191,980 4,381,144
A+ A2 1,000,000 7.15% due 9/01/2002 1,046,710 1,089,282
A- A1 2,000,000 Dresser Industries, 6.25% due 6/01/2000 2,015,000 2,080,354
A- A3 4,000,000 Equifax Inc., 6.50% due 6/15/2003 4,019,040 4,124,320
A A3 2,000,000 First Data Corp., 6.625% due 4/01/2003 1,989,620 2,074,878
AA- Aa3 2,000,000 Gannett Co., Inc., 5.25% due 3/01/1998 1,993,640 2,017,944
Grand Metropolitan Investment Corp.:
A+ A2 1,000,000 6.50% due 9/15/1999 958,240 1,048,123
A+ A2 3,000,000 8.625% due 8/15/2001 3,069,700 3,477,960
AA- A1 4,000,000 Illinois Tool Works, Inc., 5.875%
due 3/01/2000 3,989,760 4,110,444
AA Aa2 3,500,000 Kaiser Foundation Hospital, 9.00%
due 11/01/2001 3,881,070 4,242,249
BBB+ Baa2 3,000,000 Louisiana Land & Exploration, 8.25%
due 6/15/2002 3,000,000 3,395,667
A A1 4,000,000 PepsiCo., Inc., 6.125% due 1/15/1998 3,972,240 4,169,956
A A2 2,000,000 Philip Morris Companies, Inc., 9.00%
due 1/01/2001 1,983,340 2,366,438
A A2 2,000,000 Seagram Co., Ltd., 6.50% due 4/01/2003 1,973,180 2,070,166
BBB- Baa3 5,000,000 Telecommunications, Inc., 8.25% due 1/15/2003 5,271,050 5,474,520
BBB- Baa2 6,000,000 Tenneco Inc., 8.00% due 11/15/1999 6,371,100 6,558,762
Texaco Capital Inc.:
A+ A1 2,000,000 6.875% due 7/15/1999 1,996,120 2,134,602
A+ A1 2,000,000 9.00% due 12/15/1999 2,342,460 2,359,074
Wal-Mart Stores, Inc.:
AA Aa1 4,000,000 9.10% due 7/15/2000 4,661,520 4,811,424
AA Aa1 2,000,000 8.625% due 4/01/2001 2,101,960 2,374,594
AA Aa1 2,000,000 6.375% due 3/01/2003 1,994,860 2,089,820
AA Aa3 1,000,000 Warner-Lambert Co., 6.625% due 9/15/2002 1,024,270 1,066,326
A A3 2,000,000 Witco Corp., 6.60% due 4/01/2003 1,999,420 2,071,312
-------------- --------------
86,676,679 91,461,966
SUPRANATIONAL-- Asian Development Bank:
3.3% AAA Aaa 2,000,000 9.125% due 6/01/2000 2,234,280 2,432,586
AAA Aaa 2,500,000 6.50% due 9/21/2002 2,421,875 2,642,265
AAA Aaa 4,800,000 European Investment Bank, 9.125% due 6/01/2002 5,819,666 5,902,421
-------------- --------------
10,475,821 10,977,272
</TABLE>
98
<PAGE> 161
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRIES RATING RATING AMOUNT ISSUE COST (NOTE 1a)
<S> <S> <C> <C> <S> <C> <C>
BONDS & NOTES (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
TRANSPORTATION-- A- Baa1 $ 1,000,000 Southwest Airlines, 9.40% due 7/01/2001 $ 1,135,070 $ 1,209,548
0.4%
UTILITIES-- AAA Aaa 3,000,000 BellSouth Telecommunication, 6.25% due
COMMUNICATIONS-- 5/15/2003 2,986,710 3,116,193
2.8% BBB+ A3 3,000,000 GTE Corp., 9.375% due 12/01/2000 3,276,230 3,644,982
Pacific Bell, Inc.:
AA- Aa3 1,000,000 8.70% due 6/15/2001 1,113,620 1,192,778
AA- Aa3 1,000,000 7.25% due 7/01/2002 995,140 1,098,304
-------------- --------------
8,371,700 9,052,257
UTILITIES-- BBB+ A3 3,000,000 Detroit Edison, 6.76% due 3/17/2003 (a) 3,000,000 3,158,280
ELECTRIC-- BBB Baa2 3,500,000 Long Island Lighting Co., 8.75% due 2/15/1997 3,838,330 3,877,457
8.4% BBB Baa2 4,000,000 Ohio Edison, 6.875% due 9/15/1999 4,000,000 4,242,780
A A1 3,000,000 Pacific Gas & Electric Co., 7.875% due 3/01/2002 3,058,040 3,369,462
Pennsylvania Power & Light Co.:
A A2 4,000,000 5.50% due 4/01/1998 3,991,280 4,042,824
A A2 1,000,000 7.75% due 5/01/2002 1,043,980 1,121,007
A A2 1,000,000 6.875% due 2/01/2003 994,650 1,066,899
Public Service Electric & Gas Co.:
A A2 5,000,000 7.875% due 11/01/2001 5,481,050 5,644,565
A A2 1,000,000 6.125% due 8/01/2002 1,010,500 1,021,435
-------------- --------------
26,417,830 27,544,709
UTILITIES-- Consolidated Natural Gas Co.:
GAS--2.0% AA- A1 4,000,000 9.375% due 2/01/1997 4,125,760 4,518,024
AA- A1 2,000,000 5.75% due 8/01/2003 1,970,080 1,995,000
-------------- --------------
6,095,840 6,513,024
TOTAL INVESTMENTS IN BONDS & NOTES--93.4% 292,528,539 306,117,074
SHORT-TERM SECURITIES
REPURCHASE 16,506,000 Carroll McEntee & McGinley Inc., purchased
AGREEMENTS**--5.1% on 9/30/1993 to yield 3.35% to 10/01/1993 16,506,000 16,506,000
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--5.1% 16,506,000 16,506,000
TOTAL INVESTMENTS--98.5% $ 309,034,539 322,623,074
==============
OTHER ASSETS LESS LIABILITIES--1.5% 5,003,631
--------------
NET ASSETS--100.0% $ 327,626,705
==============
<FN>
*Corresponding industry groups for foreign securities, which are denominated in US dollars:
(1) Electric Utility; Owned & Guaranteed by the Province.
(2) Independent energy company.
(3) Government entity.
(4) Financial institution, government-backed.
**Repurchase Agreements are fully collateralized by US Government Obligations.
(a) Medium-Term Note.
Ratings of issues shown have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
</TABLE>
99
<PAGE> 162
<TABLE>
FINANCIAL INFORMATION
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES AS OF SEPTEMBER 30, 1993
INTERMEDIATE
HIGH INCOME HIGH QUALITY TERM
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <S> <C> <C> <C>
ASSETS: Investments, at value* (Note 1a) $2,659,422,455 $899,724,840 $322,623,074
Cash 230,830 616 883
Receivables:
Interest 62,677,302 15,774,163 5,060,792
Securities sold 60,920,097 36,047,577 10,031,692
Capital shares sold 16,484,485 3,967,851 1,478,920
Deferred organization expenses (Note 1d) 1,348 494 --
Prepaid registration fees and other assets (Note 1d) 808,248 61,749 71,731
-------------- ------------ ------------
Total assets 2,800,544,765 955,577,290 339,267,092
-------------- ------------ ------------
LIABILITIES: Payables:
Securities purchased 72,074,955 27,919,274 9,986,071
Dividends to shareholders (Note 1e) 10,072,650 1,463,361 549,350
Capital shares redeemed 5,699,486 2,364,216 822,555
Investment adviser (Note 2) 922,428 277,771 97,313
Distributor (Note 2) 1,103,432 312,393 53,379
Accrued expenses and other liabilities 613,014 213,749 131,719
-------------- ------------ ------------
Total liabilities 90,485,965 32,550,764 11,640,387
-------------- ------------ ------------
NET ASSETS: Net assets $2,710,058,800 $923,026,526 $327,626,705
============== ============ ============
NET ASSETS Class A Common Stock, $0.10 par value++ $ 10,909,071 $ 3,180,881 $ 1,555,173
CONSIST OF: Class B Common Stock, $0.10 par value++++ 22,422,975 4,022,066 1,077,873
Paid-in capital in excess of par 2,636,564,036 828,578,402 304,450,929
Undistributed (accumulated) realized capital gains
(losses)--net (Note 6) (25,546,213) 34,748,771 6,954,195
Unrealized appreciation on investments--net 65,708,931 52,496,406 13,588,535
-------------- ------------ ------------
Net assets $2,710,058,800 $923,026,526 $327,626,705
============== ============ ============
NET ASSET VALUE: Class A:
Net assets $ 886,784,032 $407,624,397 $193,505,033
============== ============ ============
Shares outstanding 109,090,705 31,808,810 15,551,731
============== ============ ============
Net asset value and redemption price per share $ 8.13 $ 12.81 $ 12.44
============== ============ ============
Class B:
Net assets $1,823,274,768 $515,402,129 $134,121,672
============== ============ ============
Shares outstanding 224,229,755 40,220,660 10,778,729
============== ============ ============
Net asset value and redemption price per share $ 8.13 $ 12.81 $ 12.44
============== ============ ============
<FN>
*Identified cost $2,593,713,524 $847,228,434 $309,034,539
============== ============ ============
++Authorized shares--Class A 200,000,000 100,000,000 50,000,000
============== ============ ============
++++Authorized shares--Class B 250,000,000 100,000,000 50,000,000
============== ============ ============
See Notes to Financial Statements.
</TABLE>
100
<PAGE> 163
<TABLE>
FINANCIAL INFORMATION (CONTINUED)
<CAPTION>
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1993
INTERMEDIATE
HIGH INCOME HIGH QUALITY TERM
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <S> <C> <C> <C>
INVESTMENT Interest and discount earned $ 207,665,291 $ 56,274,683 $ 16,310,031
INCOME (NOTE 1c): Dividends 5,372,384 -- --
Other 153,503 353,904 178,967
-------------- ------------ ------------
Total income 213,191,178 56,628,587 16,488,998
-------------- ------------ ------------
EXPENSES: Investment advisory fees (Note 2) 8,790,993 2,983,402 906,448
Distribution fees--Class B (Note 2) 9,639,303 3,147,933 348,025
Transfer agent fees--Class A (Note 2) 559,012 387,690 151,123
Transfer agent fees--Class B (Note 2) 1,057,559 484,999 67,116
Printing and shareholder reports 104,740 54,682 21,889
Accounting services (Note 2) 133,112 64,024 48,744
Pricing fees 50,056 75,253 25,464
Registration fees (Note 1d) 520,965 111,640 103,604
Custodian fees 108,050 60,689 34,410
Professional fees 100,156 45,491 15,699
Directors' fees and expenses 27,006 11,974 2,854
Amortization of organization expenses (Note 1d) 16,296 5,923 --
Other 139,094 6,855 3,030
-------------- ------------ ------------
Total expenses 21,246,342 7,440,555 1,728,406
-------------- ------------ ------------
Investment income--net 191,944,836 49,188,032 14,760,592
-------------- ------------ ------------
REALIZED & Realized gain on investments--net 39,490,168 35,442,646 7,219,619
UNREALIZED GAIN ON Change in unrealized appreciation on investments--net 30,800,724 12,048,232 6,890,072
INVESTMENTS--NET -------------- ------------ ------------
(NOTES 1c & 3): NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 262,235,728 $ 96,678,910 $ 28,870,283
============== ============ ============
See Notes to Financial Statements.
</TABLE>
101
<PAGE> 164
<TABLE>
FINANCIAL INFORMATION (CONTINUED)
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS HIGH INCOME PORTFOLIO
FOR THE YEAR ENDED
SEPTEMBER 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 191,944,836 $ 120,598,802
Realized gain on investments--net 39,490,168 26,744,135
Change in unrealized appreciation on investments--net 30,800,724 82,988,557
-------------- --------------
Net increase in net assets resulting from operations 262,235,728 230,331,494
-------------- --------------
DIVIDENDS TO Investment income--net:
SHAREHOLDERS Class A (77,067,944) (68,531,628)
(NOTE 1e): Class B (114,876,892) (52,067,174)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (191,944,836) (120,598,802)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share
TRANSACTIONS transactions 1,108,612,505 634,233,984
(NOTE 4): -------------- --------------
NET ASSETS: Total increase in net assets 1,178,903,397 743,966,676
Beginning of year 1,531,155,403 787,188,727
-------------- --------------
End of year $2,710,058,800 $1,531,155,403
============== ==============
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) HIGH QUALITY PORTFOLIO
FOR THE YEAR ENDED
SEPTEMBER 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 49,188,032 $ 40,605,670
Realized gain on investments--net 35,442,646 13,222,256
Change in unrealized appreciation on investments--net 12,048,232 21,828,732
-------------- --------------
Net increase in net assets resulting from operations 96,678,910 75,656,658
-------------- --------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Class A (24,831,019) (25,177,439)
SHAREHOLDERS Class B (24,357,013) (15,428,231)
(NOTE 1e): Realized gain on investments--net:
Class A (4,865,108) --
Class B (5,004,106) --
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (59,057,246) (40,605,670)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share transactions 197,559,404 129,471,822
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase in net assets 235,181,068 164,522,810
Beginning of year 687,845,458 523,322,648
-------------- --------------
End of year $ 923,026,526 $ 687,845,458
============== ==============
See Notes to Financial Statements.
</TABLE>
102
<PAGE> 165
<TABLE>
FINANCIAL INFORMATION (CONTINUED)
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
FOR THE YEAR ENDED
SEPTEMBER 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
OPERATIONS: Investment income--net $ 14,760,592 $ 9,332,209
Realized gain on investments--net 7,219,619 3,063,649
Change in unrealized appreciation on investments--net 6,890,072 3,975,757
-------------- --------------
Net increase in net assets resulting from operations 28,870,283 16,371,615
-------------- --------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Class A (10,854,121) (9,332,209)
SHAREHOLDERS Class B (3,906,471) --
(NOTE 1e): Realized gain on investments--net:
Class A (1,857,266) --
Class B (293,192) --
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (16,911,050) (9,332,209)
-------------- --------------
CAPITAL SHARE Net increase in net assets derived from capital share transactions 161,334,292 44,123,539
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase in net assets 173,293,525 51,162,945
Beginning of year 154,333,180 103,170,235
-------------- --------------
End of year $ 327,626,705 $ 154,333,180
============== ==============
<CAPTION>
FINANCIAL HIGHLIGHTS HIGH INCOME PORTFOLIO
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS A
FOR THE YEAR ENDED SEPTEMBER 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value beginning of year $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90
OPERATING -------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .79 .87 .92 1.00 .95
Realized and unrealized gain (loss) on
investments--net .29 .82 .63 (1.13) (.37)
-------- -------- -------- -------- --------
Total from investment operations 1.08 1.69 1.55 (.13) .58
-------- -------- -------- -------- --------
Less dividends:
Investment income--net (.79) (.87) (.92) (1.00) (.96)
-------- -------- -------- -------- --------
Total dividends (.79) (.87) (.92) (1.00) (.96)
-------- -------- -------- -------- --------
Net asset value, end of year $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52
======== ======== ======== ======== ========
TOTAL INVESTMENT Based on net asset value per share 14.35% 25.22% 26.46% (1.95%) 7.69%
RETURN*: ======== ======== ======== ======== ========
RATIOS TO AVERAGE Expenses .55% .59% .66% .68% .66%
NET ASSETS: ======== ======== ======== ======== ========
Investment income--net 9.78% 11.44% 14.13% 14.22% 12.30%
======== ======== ======== ======== ========
SUPPLEMENTAL DATA: Net assets, end of year (in thousands) $886,784 $683,801 $522,703 $486,426 $641,619
======== ======== ======== ======== ========
Portfolio turnover 34.85% 40.52% 39.95% 47.60% 56.00%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
103
<PAGE> 166
<TABLE>
FINANCIAL INFORMATION (CONTINUED)
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED) HIGH INCOME PORTFOLIO
FOR THE
PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM OCT. 21,
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS B 1988++ TO
FOR THE YEAR ENDED SEPTEMBER 30, SEPT. 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value beginning of period $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92
OPERATING ---------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .72 .81 .87 .95 .86
Realized and unrealized gain (loss) on
investments--net .28 .83 .62 (1.12) (.40)
---------- -------- -------- -------- --------
Total from investment operations 1.00 1.64 1.49 (.17) .46
---------- -------- -------- -------- --------
Less dividends:
Investment income--net (.72) (.81) (.87) (.95) (.86)
---------- -------- -------- -------- --------
Total dividends (.72) (.81) (.87) (.95) (.86)
---------- -------- -------- -------- --------
Net asset value, end of period $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
========== ======== ======== ======== ========
TOTAL INVESTMENT Based on net asset value per share 13.35% 24.44% 25.32% (2.54%) 6.08%+++
RETURN**: ========== ======== ======== ======== ========
RATIOS TO AVERAGE Expenses, excluding distribution fees .56% .60% .67% .70% .70%*
NET ASSETS: ========== ======== ======== ======== ========
Expenses 1.31% 1.35% 1.42% 1.45% 1.45%*
========== ======== ======== ======== ========
Investment income--net 8.94% 10.42% 13.24% 13.69% 11.75%*
========== ======== ======== ======== ========
SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $1,823,275 $847,354 $264,486 $157,979 $120,969
========== ======== ======== ======== ========
Portfolio turnover 34.85% 40.52% 39.95% 47.60% 56.00%
========== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
104
<PAGE> 167
<TABLE>
FINANCIAL INFORMATION (CONTINUED)
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED) HIGH QUALITY PORTFOLIO
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS A
FOR THE YEAR ENDED SEPTEMBER 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value beginning of year $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04
OPERATING -------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .81 .88 .92 .95 1.00
Realized and unrealized gain (loss) on
investments--net .67 .71 .76 (.38) .17
-------- -------- -------- -------- --------
Total from investment operations 1.48 1.59 1.68 .57 1.17
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.81) (.88) (.92) (.95) (1.00)
Realized gain on investments--net (.16) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.97) (.88) (.92) (.95) (1.00)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
======== ======== ======== ======== ========
TOTAL INVESTMENT Based on net asset value per share 12.78% 14.30% 16.18% 5.22% 11.09%
RETURN**: ======== ======== ======== ======== ========
RATIOS TO AVERAGE Expenses .56% .58% .61% .64% .66%
NET ASSETS: ======== ======== ======== ======== ========
Investment income--net 6.94% 7.43% 8.26% 8.54% 9.04%
======== ======== ======== ======== ========
SUPPLEMENTAL DATA: Net assets, end of year (in thousands) $407,625 $362,139 $324,818 $307,723 $289,804
======== ======== ======== ======== ========
Portfolio turnover 121.34% 65.43% 126.32% 126.39% 212.85%
======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM OCT. 21,
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS B 1988++ TO
FOR THE YEAR ENDED SEPTEMBER 30, SEPT. 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
PER SHARE Net asset value beginning of period $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08
OPERATING -------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .72 .79 .84 .86 .87
Realized and unrealized gain (loss) on
investments--net .67 .71 .76 (.38) .13
-------- -------- -------- -------- --------
Total from investment operations 1.39 1.50 1.60 .48 1.00
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.72) (.79) (.84) (.86) (.87)
Realized gain on investments--net (.16) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.88) (.79) (.84) (.86) (.87)
-------- -------- -------- -------- --------
Net asset value, end of period $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
======== ======== ======== ======== ========
TOTAL INVESTMENT Based on net asset value per share 11.92% 13.44% 15.30% 4.42% 9.44%+++
RETURN**: ======== ======== ======== ======== ========
RATIOS TO AVERAGE Expenses, excluding distribution fees .54% .59% .62% .66% .70%*
NET ASSETS: ======== ======== ======== ======== ========
Expenses 1.29% 1.34% 1.37% 1.41% 1.45%*
======== ======== ======== ======== ========
Investment income--net 5.80% 6.65% 7.50% 7.77% 8.17%*
======== ======== ======== ======== ========
SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $515,402 $325,706 $198,504 $174,914 $ 91,914
======== ======== ======== ======== ========
Portfolio turnover 121.34% 65.43% 126.32% 126.39% 212.85%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
105
<PAGE> 168
<TABLE>
FINANCIAL INFORMATION (CONCLUDED)
<CAPTION>
FINANCIAL HIGHLIGHTS (CONCLUDED) INTERMEDIATE TERM PORTFOLIO
CLASS B
FOR THE
PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM NOV. 13,
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS A 1992++ TO
FOR THE YEAR ENDED SEPTEMBER 30, SEPT. 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989 1993
<S> <S> <C> <C> <C> <C> <C> <C>
PER SHARE Net asset value beginning of period $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 11.68
OPERATING -------- -------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .76 .88 .93 .97 .98 .61
Realized and unrealized gain (loss)
on investments--net .55 .62 .53 (.17) .05 .90
-------- -------- -------- -------- -------- --------
Total from investment operations 1.31 1.50 1.46 .80 1.03 1.51
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.76) (.88) (.93) (.97) (.99) (.61)
Realized gain on investments--net (.14) -- -- -- -- (.14)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.90) (.88) (.93) (.97) (.99) (.75)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 12.44
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT Based on net asset value per share 11.40% 13.71% 13.97% 7.55% 9.79% 13.31%+++
RETURN*: ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE Expenses, excluding distribution fees .58% .62% .67% .71% .72% .57%**
NET ASSETS: ======== ======== ======== ======== ======== ========
Expenses .58% .62% .67% .71% .72% 1.07%**
======== ======== ======== ======== ======== ========
Investment income--net 6.42% 7.54% 8.35% 8.86% 8.97% 5.61%**
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $193,505 $154,333 $103,170 $ 88,248 $ 87,001 $134,122
======== ======== ======== ======== ======== ========
Portfolio turnover 180.52% 95.33% 132.56% 102.53% 148.75% 180.52%
======== ======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
**Annualized.
++Commencement of Operations.
++++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
106
<PAGE> 169
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end investment management company consisting of
three separate portfolios: the High Income Portfolio, the High
Quality Portfolio, and the Intermediate Term Portfolio. The
Fund's Portfolios offer Class A and Class B Shares. Class A
Shares are sold with a front-end sales charge. Class B Shares may
be subject to a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B
Shares bear certain expenses related to the distribution of such
shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. The Intermediate Term
Portfolio issued its Class B Shares on November 13, 1992. The
following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities which 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 market are
valued at the mean between the bid and asked prices or yield
equivalent as obtained from one or more dealers that make markets
in the securities. Portfolio securities which are traded both in
the over-the-counter 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
over-the-counter market. Short-term securities are valued at
amortized cost which approximates market.
Options on debt securities, which are traded on ex-
changes, are valued at the last asked price for options
written and 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. 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. Written and purchased options are non-
income producing investments.
(b) Income taxes--It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applic-
able to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(c) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Dividend
income is recorded on the ex-dividend dates. Interest
income (including amortization of discount) is recog-
nized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified
cost basis.
(d) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Costs related to
the organization of the second class of shares are charged to
expense over a period not exceeding five years. Prepaid
registration fees are charged to expense as the related shares
are issued.
(e) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of
capital gains are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, Inc. ("FAMI"), a wholly-owned subsidiary
of Merrill Lynch Investment Management, Inc. ("MLIM"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. and
a Distribution Agreement and a Distribution Plan with Merrill
Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
FAMI is responsible for the management of the Fund's
Portfolios and provides the necessary personnel, facilities,
equipment and certain other services necessary to
the operations of the Fund. For such services, FAMI
receives at the end of each month a fee with respect to
each Portfolio at the annual rates set forth below which
are based upon the average daily value of the Fund's
net assets.
RATE OF ADVISORY FEE
AGGREGATE OF -------------------------------------
AVERAGE DAILY NET HIGH HIGH INTERMEDIATE
ASSETS OF THE THREE INCOME QUALITY TERM
COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
Not exceeding $250 million 0.55% 0.50% 0.50%
In excess of $250 million but
not more than $500 million 0.50 0.45 0.45
In excess of $500 million but
not more than $750 million 0.45 0.40 0.40
In excess of $750 million 0.40 0.35 0.35
107
<PAGE> 170
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Investment Advisory Agreement obligates FAMI to reimburse the
Fund to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily
net assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
No fee payment will be made to the Investment Adviser during any
fiscal year which will cause such expenses to exceed the pro rata
expense limitation at the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940
pursuant to which MLFD receives a fee from the Fund for the sale
of Class B Shares of the Portfolios at the end of each month at
the annual rate of 0.75% (in the case of the High Income
Portfolio and the High Quality Portfolio) or 0.50% (in the case
of the Intermediate Term Portfolio) of the average daily net
assets of the Class B Shares of the respective Portfolios. This
fee is to compensate the Distributor for services provided and
the expenses borne by it under the Plan. As authorized by the
Plan, the Distributor has entered into an agreement with Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of
MLAM, which provides for the compensation of MLPF&S for providing
distribution-related services to the Fund.
During the year ended September 30, 1993, MLFD earned
underwriting discounts, and MLPF&S earned dealer concessions on
sales of the Fund's Class A Shares as follows:
HIGH HIGH INTERMEDIATE
INCOME QUALITY TERM
PORTFOLIO PORTFOLIO PORTFOLIO
MLFD $ 331,771 $ 54,762 $ 54,334
MLPF&S $3,909,040 $706,417 $544,352
MLPF&S received contingent deferred sales charges of $3,159,072
relating to transactions in Class B Shares amounting to
$2,273,384, $822,254 and $63,434 in the High Income, High
Quality, and Intermediate Term Portfolios, respectively, and
$10,896 in commissions on the execution of security transactions
for the High Income Portfolio during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAMI at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAMI, MLIM, MLFD, FDS, MLPF&S, and/or Merrill Lynch &
Co., Inc.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term
securities, for the year ended September 30, 1993 were as
follows:
HIGH HIGH INTERMEDIATE
INCOME QUALITY TERM
PORTFOLIO PORTFOLIO PORTFOLIO
PURCHASES
Corporate Bonds $1,699,660,432 $1,097,739,068 $557,256,536
Equities & Warrants 15,570,235 -- --
-------------- -------------- ------------
$1,715,230,667 $1,097,739,068 $557,256,536
============== ============== ============
SALES
Corporate Bonds $ 621,472,818 $ 908,273,612 $408,922,937
Equities & Warrants 44,426,835 -- --
-------------- -------------- ------------
$ 665,899,653 $ 908,273,612 $408,922,937
============== ============== ============
Net realized and unrealized gains (losses) as of September 30,
1993 were as follows:
REALIZED
GAINS UNREALIZED
HIGH INCOME PORTFOLIO (LOSSES) GAINS
Long-term investments $39,491,418 $65,708,931
Short-term investments (1,250) --
----------- -----------
Total $39,490,168 $65,708,931
=========== ===========
REALIZED UNREALIZED
HIGH QUALITY PORTFOLIO GAINS GAINS
Long-term investments $35,442,646 $52,496,406
----------- -----------
Total $35,442,646 $52,496,406
=========== ===========
REALIZED UNREALIZED
INTERMEDIATE TERM PORTFOLIO GAINS GAINS
Long-term investments $ 7,219,619 $13,588,535
----------- -----------
Total $ 7,219,619 $13,588,535
=========== ===========
As of September 30, 1993, net unrealized appreciation
(depreciation) for Federal income tax purposes was as
follows:
HIGH HIGH INTERMEDIATE
INCOME QUALITY TERM
PORTFOLIO PORTFOLIO PORTFOLIO
Gross unrealized
appreciation $120,004,355 $52,919,664 $ 13,729,724
Gross unrealized
depreciation (54,650,836) (472,493) (158,845)
------------ ----------- -----------
Net unrealized appre-
ciation $ 65,353,519 $52,447,171 $ 13,570,879
============ =========== ============
108
<PAGE> 171
The aggregate cost of investments at September 30,
1993 for Federal income tax purposes was $2,594,068,936
for the High Income Portfolio, $847,277,669 for the High
Quality Portfolio, and $309,052,195 for the Intermediate Term
Portfolio.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions for the year ended September 30, 1993 was
$1,108,612,505 for the High Income Portfolio, $197,559,404 for
the High Quality Portfolio and $161,334,292 for the Intermediate
Term Portfolio. Net increase in net assets derived from capital
share transactions for the year ended September 30, 1992 was
$634,233,984 for the High Income Portfolio, $129,471,822 for the
High Quality Portfolio and $44,123,539 for the Intermediate Term
Portfolio.
Transactions in capital shares were as follows:
HIGH INCOME PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 34,759,978 $277,722,778
Shares issued to shareholders
in reinvestment of dividends 4,969,045 39,803,859
----------- ------------
Total issued 39,729,023 317,526,637
Shares redeemed (17,827,332) (142,464,560)
----------- ------------
Net increase 21,901,691 $175,062,077
=========== ============
HIGH INCOME PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1992 SHARES AMOUNT
Shares sold 19,147,540 $145,679,458
Shares issued to shareholders
in reinvestment of dividends 4,473,303 33,827,620
----------- ------------
Total issued 23,620,843 179,507,078
Shares redeemed (10,872,857) (82,050,890)
----------- ------------
Net increase 12,747,986 $ 97,456,188
=========== ============
HIGH INCOME PORTFOLIO
CLASS B SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 142,333,233 $1,141,712,615
Shares issued to shareholders
in reinvestment of dividends 7,016,905 56,387,833
----------- --------------
Total issued 149,350,138 1,198,100,448
Shares redeemed (33,122,536) (264,550,020)
----------- --------------
Net increase 116,227,602 $ 933,550,428
=========== ==============
HIGH INCOME PORTFOLIO
CLASS B SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1992 SHARES AMOUNT
Shares sold 80,289,676 $612,024,581
Shares issued to shareholders in
reinvestment of dividends 3,116,444 23,758,848
----------- ------------
Total issued 83,406,120 635,783,429
Shares redeemed (13,058,393) (99,005,633)
----------- ------------
Net increase 70,347,727 $536,777,796
=========== ============
HIGH QUALITY PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 7,448,640 $ 91,703,707
Shares issued to shareholders
in reinvestment of dividends and
distributions 1,704,681 20,844,343
----------- ------------
Total issued 9,153,321 112,548,050
Shares redeemed (6,795,967) (83,737,710)
----------- ------------
Net increase 2,357,354 $ 28,810,340
=========== ============
HIGH QUALITY PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1992 SHARES AMOUNT
Shares sold 5,601,006 $ 66,198,422
Shares issued to shareholders in
reinvestment of dividends 1,460,190 17,281,014
----------- ------------
Total issued 7,061,196 83,479,436
Shares redeemed (5,639,392) (66,510,662)
----------- ------------
Net increase 1,421,804 $ 16,968,774
=========== ============
HIGH QUALITY PORTFOLIO
CLASS B SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 20,946,711 $257,900,677
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,496,071 18,304,113
----------- ------------
Total issued 22,442,782 276,204,790
Shares redeemed (8,711,514) (107,455,726)
----------- ------------
Net increase 13,731,268 $168,749,064
=========== ============
HIGH QUALITY PORTFOLIO
CLASS B SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1992 SHARES AMOUNT
Shares sold 14,525,276 $173,438,007
Shares issued to shareholders in
reinvestment of dividends 794,911 9,419,183
----------- ------------
Total issued 15,320,187 182,857,190
Shares redeemed (5,961,196) (70,354,142)
----------- ------------
Net increase 9,358,991 $112,503,048
=========== ============
109
<PAGE> 172
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
INTERMEDIATE TERM PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 5,149,248 $ 61,875,256
Shares issued to shareholders
in reinvestment of dividends and
distributions 707,534 8,452,204
----------- ------------
Total issued 5,856,782 70,327,460
Shares redeemed (3,139,330) (37,802,328)
----------- ------------
Net increase 2,717,452 $ 32,525,132
=========== ============
INTERMEDIATE TERM PORTFOLIO
CLASS A SHARES
FOR THE YEAR ENDED DOLLAR
SEPTEMBER 30, 1992 SHARES AMOUNT
Shares sold 5,033,333 $ 58,521,870
Shares issued to shareholders
in reinvestment of dividends 546,748 6,344,303
----------- ------------
Total issued 5,580,081 64,866,173
Shares redeemed (1,787,579) (20,742,634)
----------- ------------
Net increase 3,792,502 $ 44,123,539
=========== ============
INTERMEDIATE TERM PORTFOLIO
CLASS B FOR THE PERIOD
NOVEMBER 13, 1992++ TO DOLLAR
SEPTEMBER 30, 1993 SHARES AMOUNT
Shares sold 11,673,732 $139,623,863
Shares issued to shareholders
in reinvestment of dividends and
distributions 175,119 2,128,550
----------- ------------
Total issued 11,848,851 141,752,413
Shares redeemed (1,070,122) (12,943,253)
----------- ------------
Net increase 10,778,729 $128,809,160
=========== ============
[FN]
++Commencement of Operations.
5. LOANED SECURITIES:
At September 30, 1993, the High Quality Portfolio held US Treasury
Bonds/Notes having an aggregate value of approximately $25,824,000
as collateral for Portfolio securities loaned, having a market value
of approximately $24,647,000. The Intermediate Term Portfolio held
US Treasury Bonds/Notes having an aggregate value of approximately
$22,045,000 as collateral for Portfolio securities loaned, having
a market value of approximately $21,057,000.
6. CAPITAL LOSS CARRYFORWARD:
At September 30, 1993, the Fund had a capital loss carryforward
of approximately $28,547,000 in the High Income Portfolio, all of
which expires in 1999. This will be available to offset like
amounts of any future taxable gains.
In accordance with generally accepted accounting principles,
expired capital loss carryforwards in the amount of $16,670,558
for the High Income Portfolio and $588,874 for the Intermediate
Term Portfolio have been reclassified from undistributed (accumulated)
realized capital gains (losses) net to paid-in capital in excess of par.
110
<PAGE> 173
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies.... 2
Transactions in Futures and Options
Thereon........................... 2
Options on Debt Securities.......... 3
Risk Factors in Transactions in
Futures and Options Thereon....... 4
Current Investment Restrictions....... 6
Proposed Uniform Investment
Restrictions...................... 9
Management of the Fund................ 12
Directors and Officers.............. 12
Investment Advisory Arrangements.... 14
Duration and Termination............ 16
Transfer Agency Services
Arrangements...................... 16
Determination of Net Asset Value...... 16
Portfolio Transactions................ 17
Portfolio Turnover.................. 18
Purchase of Shares.................... 19
Alternative Sales Arrangements...... 19
Initial Sales Charge
Alternative -- Class A and Class D
Shares............................ 19
Reduced Initial Sales
Charges -- Class A and Class D
Shares............................ 20
Deferred Sales Charge Alternative --
Class B Shares.................... 24
Redemption of Shares.................. 24
Repurchase............................ 25
Reinstatement Privilege............... 25
Deferred Sales Charge -- Class B
Shares.............................. 26
Dividends, Distributions and Taxes.... 27
Dividends and Distributions......... 27
Federal Income Taxes................ 27
Tax Treatment of Transactions in
Options on Debt Securities,
Futures Contracts and Options
Thereon........................... 28
Systematic Withdrawal Plans........... 29
Retirement Plans...................... 30
Exchange Privilege.................... 31
Performance Data...................... 43
Additional Information................ 46
Organization of the Fund............ 46
Computation of Offering Price per
Share............................. 47
Appendix............................ 49
Interest Rate Futures, Options
Thereon and Options on Debt
Securities........................ 49
Unaudited Financial Statements for the
Six Months Ended March 31, 1994..... 52
Independent Auditors' Report.......... 83
Audited Financial Statements for the
Fiscal Year Ended September 30,
1993................................ 84
Code #10210-1094
</TABLE>
[LOGO]
MERRILL LYNCH
CORPORATE BOND
FUND, INC.
ART WORK
STATEMENT OF
ADDITIONAL
INFORMATION
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 174
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair and
accurate narrative descriptions of graphic and image material omitted from this
EDGAR Submission File due to ASCII-incompatibility and cross-references this
material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 175
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A (to be filed by Amendment).
FINANCIAL HIGHLIGHTS:
High Income Portfolio for the six months ended March 31, 1994
(unaudited) and for each of the years in the ten-year period ended
September 30, 1993 (audited), Investment Grade Portfolio for the six months
ended March 31, 1994 (unaudited) and for each of the years in the ten-year
period ended September 30, 1993 (audited). Intermediate Term Portfolio for
the six months ended March 31, 1994 (unaudited) and for each of the years
in the ten-year period ended September 30, 1993 (audited).
Contained in Part B (to be filed by Amendment):
Schedules of Investments as of March 31, 1994 (unaudited) and
September 30, 1993 (audited). Statements of Assets and Liabilities as of
March 31, 1994 (unaudited) and September 30, 1993 (audited). Statements of
Operations for the six months ended March 31, 1994 (unaudited) and for the
year ended September 30, 1993 (audited). Statements of Changes in Net
Assets for the six months ended March 31, 1994 (unaudited) and for the
years ended September 30, 1993 and 1992 (audited).
FINANCIAL HIGHLIGHTS:
High Income Portfolio for the six months ended March 31, 1994
(unaudited) and for each of the years in the five-year period ended
September 30, 1993 (audited). Investment Grade Portfolio for the six months
ended March 31, 1994 (unaudited) and for each of the years in the five-year
period ended September 30, 1993 (audited). Intermediate Term Portfolio for
the six months ended March 31, 1994 (unaudited) and for each of the years
in the five-year period ended September 30, 1993 (audited).
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation (incorporated by reference to Exhibit 1 to Post-Effective
Amendment No. 5 to Registrant's Registration Statement on Form N-1) ("Post-Effective
Amendment No. 5").
(b) -- Articles of Amendment (incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement on Form N-1) ("Post-Effective
Amendment No. 13").
(c) -- Articles Supplementary reclassifying shares of Intermediate Term Portfolio Series
Common Stock (incorporated by reference to Exhibit 1(c) to Post-Effective Amendment
No. 16).
2 -- By-Laws (incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A) ("Post-Effective Amendment No.
12").
3 -- Inapplicable.
4 (a) -- Specimen certificates for Class A shares of High Quality Portfolio Series and High
Income Portfolio Series Common Stock of Registrant (incorporated by reference to
Exhibit 4(a) filed with Post-Effective Amendment No. 13).
(b) -- Specimen certificates for Class B shares of High Quality Portfolio Series and High
Income Portfolio Series Common Stock of Registrant (incorporated by reference to
Exhibit 4(b) filed with Post-Effective Amendment No. 13).
5 -- Form of Investment Advisory Agreement between Registrant and Fund Asset Management,
Inc. (incorporated by reference to Exhibit 5 filed with Post-Effective Amendment No.
5).
6 (a) -- Form of Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (filed herewith).
</TABLE>
C-1
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
<S> <C> <C>
(b) -- Form of Selected Dealers Agreement between Registrant and selected dealers (filed
herewith).
(c) -- Form of Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including form of Selected Dealer Agreement) (incorporated by
reference to Exhibit 6(c) filed with Post-Effective Amendment No. 13).
(d) -- Form of Amended Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including form of Selected Dealer Agreement) (incorporated
by reference to Exhibit 6(d) filed with Post-Effective Amendment No. 18).
(e) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including form of Selected Dealer Agreement) (filed herewith).
(f) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including form of Selected Dealer Agreement) (filed herewith).
7 -- Inapplicable.
8 -- Form of Custodian Agreement between Registrant and State Street Bank and Trust
Company (incorporated by reference to Exhibit A.8 filed with Amendment No. 2 to
Registrant's Registration Statement on Form S-5) ("Post-Effective Amendment No. 2").
9 (a) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc. (incorporated by
reference to Exhibit 9(a) to Post-Effective Amendment No. 12).
(b) -- Form of Agreement relating to the use of the "Merrill Lynch" name (incorporated by
reference to Exhibit A.9(c) filed with Amendment No. 2).
10 -- Inapplicable (filed with Rule 24f-2 Notice).
11 -- Consent of Deloitte & Touche LLP, independent accountants for the Registrant (to be
filed by amendment).
12 -- Inapplicable.
13 (a) -- Investment Letter -- High Income Portfolio -- Class C and Class D shares (filed
herewith).
(b) -- Investment Letter -- Investment Grade Portfolio Class C and Class D shares (filed
herewith).
(c) -- Investment Letter -- Intermediate Term Portfolio Class C and Class D shares (filed
herewith).
14 (a) -- Prototype Individual Retirement Account Plan and Keogh Plan available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 14
to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1 (File No.
2-74584) of Merrill Lynch Retirement Series Trust, filed on January 26, 1982).
(b) -- Prototype Merrill Lynch Basic Retirement Plan available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to Exhibit 14 to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A (File No.
2-74584) of Merrill Lynch Retirement Series Trust, filed on December 29, 1983).
15 (a) -- Class B Distribution Plan of Registrant (incorporated by reference to Exhibit 15
filed with Post-Effective Amendment No. 13).
(b) -- Class B Amended Distribution Plan of Registrant (including Distribution Plan
Sub-Agreement) (incorporated by reference to Exhibit 15(b) filed with Post-Effective
Amendment No. 18).
(c) -- Form of Class C Distribution Plan of Registrant (including Class C Distribution Plan
Sub-Agreement) (filed herewith).
(d) -- Form of Class D Distribution Plan of Registrant (including Class D Distribution Plan
Sub-Agreement) (filed herewith).
16 -- Schedule for computation of each performance quotation provided in the Registration
Statement in response to Item 22 (incorporated by reference to Exhibit 15 filed with
Post-Effective Amendment No. 13).
17 (a) -- Financial Data Schedule -- Class A shares (filed herewith).
(b) -- Financial Data Schedule -- Class B shares (filed herewith).
18 -- Power of attorney for Cynthia A. Montgomery (filed herewith).
</TABLE>
C-2
<PAGE> 177
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
ITEM 26. NUMBER OF RECORD HOLDERS
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AS OF SEPTEMBER 30, 1994
-------------- ------------------------
<S> <C>
High Income Portfolio Class A common stock, par value $0.10 per share... 7,144
High Income Portfolio Class B common stock, par value $0.10 per share... 2,825
High Income Portfolio Class C common stock, par value $0.10 per share... 0
High Income Portfolio Class D common stock, par value $0.10 per share... 0
Investment Grade Portfolio Class A common stock, par value $0.10 per
share.................................................................. 1,765
Investment Grade Portfolio Class B common stock, par value $0.10 per
share................................................................. 576
Investment Grade Portfolio Class C common stock, par value $0.10 per
share................................................................. 0
Investment Grade Portfolio Class D common stock, par value $0.10 per
share................................................................. 0
Intermediate Term Portfolio Class A common stock, par value $0.10 per
share................................................................. 586
Intermediate Term Portfolio Class B common stock, par value $0.10 per
share................................................................. 130
Intermediate Term Portfolio Class C common stock, par value $0.10 per
share................................................................. 0
Intermediate Term Portfolio Class D common stock, par value $0.10 per
share................................................................. 0
</TABLE>
ITEM 27. INDEMNIFICATION
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceeding against a present or former director, officer, agent, or
employee of the Registrant (a "corporate representative"), except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by the corporate representative in connection with the proceeding, if:
(i) he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant; and (ii) with respect to
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a suit
or action by or in the right of the Registrant. Under the Distribution
Agreements, the Registrant has agreed to indemnify the Distributor against any
loss, liability, claim, damage or expense arising out of any untrue statement of
a material fact, or an omission to state a material fact, in any registration
statement, prospectus or report to shareholders of the Registrant. Reference is
made to Article VI of 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.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Fund Asset Management, L.P. (the "Investment Adviser") acts as the
investment adviser for the following investment companies: Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond 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., MuniAssets Fund, Inc., MuniBond Income
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 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 New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., MuniInsured Fund, Inc.,
MuniYield Insured Fund II, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Income
Opportunities
C-3
<PAGE> 178
Fund 1999, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Tax-Exempt Fund, Financial Institutions Series Trust, The Corporate Fund
Accumulation Program, Inc., The Municipal Fund Accumulation Program, Inc.,
Corporate High Yield Fund, Inc., CMA Multi-State Municipal Series Trust,
MuniEnhanced Fund, Inc., CMA Treasury Fund, MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., Apex Municipal Fund Inc.,
Merrill Lynch World Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Taurus MuniNew York Holdings, Inc. and WorldWide DollarVest, Inc, Merrill Lynch
Asset Management, acts as investment adviser for the following registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Convertible Holdings, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fund for
Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Small Cap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Growth
Fund for Investment and Retirement, Merrill Lynch Institutional Intermediate
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Global Holdings,
Inc., Merrill Lynch Latin America Fund, Inc., Merrill Lynch Senior Floating Rate
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Global Resources
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Global
Bond Fund for Investment and Retirement, Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin must meet suitability requirements). 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 and
Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2665. The address of the Investment Adviser
and of Merrill Lynch Funds Distributor, Inc. (the "Distributor"), and their
parent corporation, Merrill Lynch Asset Management ("MLAM"), is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. is
Merrill Lynch World Headquarters, North Tower, 250 Vesey Street, New York, New
York 10281. The address of Financial Data Services is 4800 Deer Lake Drive, East
Jacksonville, Florida 32246-6484.
Set forth below is a list of each officer and director of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since December 1,
1989 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Glenn and Richard hold the same positions
with substantially all of the investment companies described in the preceding
paragraph. Messrs. Durnin, Giordano, Harvey, Hewitt and Monagle are directors or
officers of one or more of such companies. Mr. Zeikel is president and a
director, and Mr. Richard is treasurer of the Investment Adviser and MLAM as
well as all or substantially all of the investment companies advised by the
Investment Adviser or MLAM.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Arthur Zeikel.................. President and Director President and Director of MLAM;
Executive Vice President of
Merrill Lynch & Co. and Merrill
Lynch; Director of MLFD.
</TABLE>
C-4
<PAGE> 179
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Terry K. Glenn................. Executive Vice President Executive Vice President of MLAM;
and Director President and Director of MLFD;
Director of Financial Data
Services, Inc.
Robert W. Crook................ Senior Vice President Senior Vice President of MLFD since
1990; Vice President of MLFD from
1978 to 1990 and Vice President
of Investment Adviser from 1981
to 1990.
Bernard J. Durnin.............. Senior Vice President Senior Vice President of MLAM.
Vincent R. Giordano............ Senior Vice President Senior Vice President of MLAM.
Elizabeth Griffin.............. Senior Vice President Senior Vice President of MLAM since
1990; Vice President of MLAM from
1978 to 1990.
Norman R. Harvey............... Senior Vice President Senior Vice President of MLAM.
N. John Hewitt................. Senior Vice President Senior Vice President of MLAM.
Philip L. Kirstein............. Senior Vice President, Senior Vice President, General
General Counsel, Counsel, Director and Secretary of
Director and Secretary MLAM.
Ronald M. Kloss................ Senior Vice President Senior Vice President; Comptroller
of MLAM.
Stephen M. M. Miller........... Senior Vice President Executive Vice President of
Princeton Administrators, Inc.
since 1989; Vice President and
Secretary of Merrill Lynch from
1982 to 1989; Secretary of
Merrill Lynch & Co. from 1982 to
1989.
Joseph T. Monagle.............. Senior Vice President Senior Vice President of MLAM since
1990; Vice President of MLAM from
1978-1990.
Gerald M. Richard.............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Vice President of MLFD
since 1981 and Treasurer since
1984.
Richard L. Rufener............. Senior Vice President Senior Vice President of MLAM since
1986; Vice President of MLFD.
Ronald L. Welburn.............. Senior Vice President Senior Vice President of MLAM since
1988; Investment Fund Manager
Glickenhaus & Co. from 1983 to
1988.
Anthony Wiseman................ Senior Vice President Senior Vice President of MLAM since
1991; Vice President from 1990 to
1991.
</TABLE>
C-5
<PAGE> 180
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Merrill Lynch Funds Distributor, Inc. ("MLFD") acts as the principal
underwriter for the Registrant, for each of the investment companies referred to
in Item 28 (except MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund,
MuniYield Arizona Fund II, Inc., Apex Municipal Fund Inc., CMA Money Fund, CMA
Government Securities Fund, CMA Tax-Exempt Fund, CMA Treasury Fund, CBA Money
Fund, The Corporate Fund Accumulation Program, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., CMA Multi-State Municipal
Series Trust, Taurus MuniNew York Holdings, Inc., Taurus MuniCalifornia
Holdings, Inc., Convertible Holdings, Inc., MuniYield California Fund, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
New Jersey Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., MuniYield Quality
Fund, II, Inc. and Worldwide DollarVest, Inc.).
(b) Set forth below is information concerning each director and officer of
the MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Fatseas, Graczyk, Maguire and Wasel and Ms. Schena is One
Financial Center, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn............................. President Executive Vice
President
Arthur Zeikel.............................. Director President, Director
Philip Kirstein............................ Director None
Robert W. Crook............................ Senior Vice President None
William E. Aldrich......................... Senior Vice President None
Gerald M. Richard.......................... Vice President and Treasurer
Treasurer
Michael J. Brady........................... Vice President None
Richard L. Rufener......................... Vice President None
Michelle T. Lau............................ Vice President None
Salvatore Venezia.......................... Vice President None
Sharon Creveling........................... Vice President and None
Assistant Treasurer
William M. Breen........................... Vice President None
Mark A. DeSario............................ Vice President None
James T. Fatseas........................... Vice President None
Stanley Graczyk............................ Vice President None
William Wasel.............................. Vice President None
Debra W. Landsman-Yaros.................... Vice President None
Kevin P. Boman............................. Vice President None
Robert Harris.............................. Secretary None
</TABLE>
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 and the Rules thereunder are
maintained at the offices of the Registrant and Financial Data Service Inc.
C-6
<PAGE> 181
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request, and without charge.
C-7
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its 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 13th day of October 1994.
MERRILL LYNCH CORPORATE BOND
FUND, INC. (Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE(S)
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director (Principal October 13, 1994
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and October 13, 1994
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
* Director
- -----------------------------------
(Ronald W. Forbes)
* Director
- -----------------------------------
(Cynthia A. Montgomery)
* Director
- -----------------------------------
(Charles C. Reilly)
* Director
- -----------------------------------
(Kevin A. Ryan)
* Director
- -----------------------------------
(Richard R. West)
*By: /s/ ARTHUR ZEIKEL October 13, 1994
------------------------------
(Arthur Zeikel,
Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 183
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<C> <S> <C>
6(a) -- Form of Class A Amended Distribution Agreement*.......................
6(b) -- Form of Selected Dealers Agreement*...................................
6(e) -- Form of Class C Distribution Agreement (including form of Selected
Dealer Agreement)*....................................................
6(f) -- Form of Class D Distribution Agreement (including form of Selected
Dealer Agreement)*....................................................
11 -- Consent of Deloitte & Touche LLP, independent accountants for the
Registrant*...........................................................
13(a) -- Investment Letter-High Income Portfolio Class C and Class D shares*...
13(b) -- Investment Letter-Investment Grade Portfolio Class C and Class D
shares*...............................................................
13(c) -- Investment Letter-Intermediate Term Portfolio Class C and Class D
shares*...............................................................
15(c) -- Form of Class C Distribution Plan of Registrant (including Class C
Distribution Plan Sub-Agreement)*.....................................
15(d) -- Form of Class D Distribution Plan of Registrant (including Class D
Distribution Plan Sub-Agreement)*.....................................
17(a) -- Financial Data Schedule -- Class A shares*
17(b) -- Financial Data Schedule -- Class B shares*
18 -- Power of attorney for Cynthia A. Montgomery*..........................
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
CLASS A SHARES
AMENDED DISTRIBUTION AGREEMENT
AGREEMENT made this 8th day of September, 1980 and amended this
21st day of October, 1994, between MERRILL LYNCH CORPORATE BOND FUND, INC., a
corporation organized under the laws of Maryland (the "Fund"), and Merrill
Lynch Funds Distributor, Inc., a Delaware corporation (the "Distributor");
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended to date (the "Investment Company Act"), as a diversified
open-end investment company and it is affirmatively in the interest of the
Fund to offer its shares for sale continuously pursuant to a currently
effective prospectus (the "Prospectus") under the Securities Act of 1933 (the
"Securities Act"); and
WHEREAS the Fund is comprised of three separate Portfolios, each of
which pursues its investment objective through separate investment policies;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering of shares of
the Class A Common Stock, par value $.10 per share, of the Fund's three
Portfolios (the "shares"), in order to
1
<PAGE> 2
promote the growth of the Fund and facilitate the distribution of its shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and distributor of the
Fund to sell its shares to the public and the Distributor hereby accepts such
appointment. The Fund during the term of this Agreement shall sell its shares
to the Distributor upon the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties. The Distributor shall be
the exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time, designate other principal underwriters and distributors of
its shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell shares in the areas so designated shall terminate, but this
Agreement shall remain otherwise in full effect until terminated in accordance
with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to
purchase shares from the Fund shall not apply to shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares
2
<PAGE> 3
of any such company by the Fund.
(c) Such exclusive rights shall also not apply to shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive rights shall also not apply to shares
issued by the Fund pursuant to the reinvestment privilege afforded redeeming
shareholders.
Section 3. Purchase of Shares from the Fund.
(a) The Fund will offer its Class A shares and thereafter
the Distributor shall have the right to buy from the Fund the Class A shares
needed, but not more than the shares needed (except for clerical errors in
transmission) to fill unconditional orders for shares of the Fund placed with
the Distributor by investors or securities dealers. The price which the
Distributor shall pay for the shares of each Portfolio so purchased from the
Fund shall be the net asset value per share of such Portfolio, determined as
set forth in Section 3 (d) hereof, used in determining the public offering
price on which such orders were based.
(b) The shares are to be resold by the Distributor to
investors at the public offering price, as set forth in Section 3 (d) hereof,
or to securities dealers having agreements with the Distributor upon the terms
and conditions set forth in Section 7 hereof.
(c) The public offering price(s) of the shares, i.e., the
price per share at which the Distributor or Selected
3
<PAGE> 4
Dealers (as hereinafter defined) may sell shares to the public, shall be the
public offering price as set forth in the Prospectus relating to such shares,
but not to exceed the net asset value at which the Distributor is to purchase
the shares, plus sales charges not to exceed 4%, 4% and 2% of the public
offering price of shares of the High Income Portfolio, High Quality Portfolio
and Intermediate Term Portfolio, respectively, subject to reductions in each
case for volume purchases. Initially it is contemplated that the maximum
sales charges will be 4%, 4% and 2% of the public offering price of shares of
the High Income Portfolio, High Quality Portfolio and Intermediate Term
Portfolio, respectively. Shares may be sold to employees of Merrill Lynch &
Co., Inc. and its subsidiaries without a sales charge upon terms and
conditions set forth in the Prospectus. If the public offering price of
shares of a Portfolio does not equal an even cent, the public offering price
of such shares may be adjusted to the nearest cent. All payments to the Fund
hereunder shall be made in the manner set forth in Section 3(f).
(d) The net asset value of shares of each Portfolio of the
Fund shall be determined by the Fund or any agent of the Fund, as of the close
of the New York Stock Exchange on each business day on which said Exchange is
open, in accordance with the method set forth in the Prospectus of the Fund
and guidelines established by the Board of Directors of the Fund. The Fund
may also cause the net asset value of shares of each Portfolio of the Fund to
be determined in substantially the same manner or estimated
4
<PAGE> 5
in such manner and as of such other hour or hours as may from time to time be
agreed upon in writing by the Fund and the Distributor.
(e) The Fund shall have the right to suspend the sale of
shares of any of its Portfolios at times when redemption of any such shares is
suspended pursuant to the conditions set forth in Section 4(b) hereof. The
Fund shall also have the right to suspend the sale of shares of any or all of
its Portfolios if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by Federal or New
York authorities, or if there shall have been some other extraordinary event,
which, in the judgment of the Fund, makes it impracticable to sell any such
shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase orders for
shares of each Portfolio received by the Distributor. Any order may be
rejected by the Fund; provided, however, that the Fund will not arbitrarily or
without reasonable cause refuse to accept or confirm orders for the purchase
of shares. The Fund (or its agent) will confirm orders upon their receipt,
will make appropriate book entries and upon receipt by the Fund (or its agent)
of payment therefor, will deliver deposit receipts or certificates for such
shares pursuant to the instructions of the Distributor. Payment shall be made
to the Fund in New York Clearing House funds. The Distributor agrees to cause
such payment and such instructions to be delivered promptly to the Fund (or
its agent).
5
<PAGE> 6
Section 4. Repurchase or Redemption of Shares by the Fund.
(a) Any of the outstanding shares of each Portfolio may be
tendered for redemption at any time, and the Fund agrees to repurchase or
redeem any such shares so tendered in accordance with its obligations as set
forth in Article VII of its Articles of Incorporation, as amended from time to
time, and in accordance with the applicable provisions set forth in the
Prospectus of the Fund. The price to be paid to redeem or repurchase shares
of any Portfolio shall be equal to the net asset value per share of such
Portfolio calculated in accordance with the provisions of Section 3(e) hereof,
less the redemption fee or other charge, if any, set forth in the Prospectus
of the Fund. All payments by the Fund hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Fund of any of the
shares purchased by or through the Distributor will not affect the sales
charge secured by the Distributor or any Selected Dealer in the course of the
original sale, except that if any shares are tendered for redemption or
repurchase within seven business days after the date of the confirmation of
the original purchase, the right to the sales charge shall be forfeited by the
Distributor and the Selected Dealer which sold such shares.
The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
in New York Clearing House funds on or before the seventh business day
subsequent to its having
6
<PAGE> 7
received the notice of redemption in proper form.
(b) Redemption of shares of any Portfolio or payment may be
suspended at times when the New York Stock Exchange is closed, when trading on
said Exchange is closed, when trading on said Exchange is restricted, when an
emergency exists as a result of which disposal by the Fund of securities owned
by it for such Portfolio is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of the net assets of
such Portfolio, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of shares of
the Fund, and this shall include one certified copy, upon request by the
Distributor, of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor such
number of copies of its Prospectus as the Distributor shall reasonably
request.
(b) The Fund shall take, from time to time, but subject to
the necessary approval of its shareholders, all necessary action to fix the
number of its authorized shares and to register shares under the Securities
Act, to the end that there will be available for sale such number of shares as
investors may reasonably be expected to purchase.
7
<PAGE> 8
(c) The Fund shall use its best efforts to qualify and
maintain the qualifications of an appropriate number of shares of each of its
Portfolios for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may be withheld,
terminated or withdrawn by the Fund at any time in its discretion. As
provided in Section 8(c) hereof, the expense of qualification and maintenance
of qualification of shares of a Portfolio shall be borne by such Portfolio.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of shares of the Fund, but shall not be obligated to sell any
specific number of shares. The services of the Distributor hereunder are not
to be deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into distribution arrangements with other investment
companies so long as the performance of its obligations hereunder is not
impaired thereby.
(b) In selling the shares of the Fund, the Distributor
shall use its best efforts in all respects duly to conform with the
requirements of all federal and state laws and
8
<PAGE> 9
regulations and the regulations of the National Association of Securities
Dealers, Inc. (the "NASD"), relating to the sale of such securities. Neither
the Distributor nor any Selected Dealer nor any other person is authorized by
the Fund to give any information or to make any representations, other than
those contained in the registration statement or related Prospectus and any
sales literature specifically approved by the Fund.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice ("Selected
Dealers") for the sale of shares and fix therein the portion of the sales
charge which may be allocated to the Selected Dealers; provided that the Fund
shall approve the forms of agreements with dealers and the dealer compensation
set forth therein and shall evidence such approval by filing said forms and
amendments thereto as exhibits to its currently effective registration
statement on Form N-1 filed under the Securities Act. Shares sold to Selected
Dealers shall be for resale by such dealers only at the public offering
price(s) set forth in the Prospectus. The form of agreement with Selected
Dealers to be used during the subscription period described in Section 3(a) is
attached hereto as Exhibit A and the initial form of agreement with Selected
Dealers to be used in the continuous offering of the shares described in
Section 3(b) is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer
and sell shares only to such Selected Dealers as are
9
<PAGE> 10
members in good standing of the NASD.
(c) The Distributor shall adopt and follow procedures, as
approved by the Fund, for the confirmation of sales of shares to investors and
Selected Dealers, the collection of amounts payable by investors and Selected
Dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the NASD, as such requirements
may from time to time exist.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in connection
with the preparation and filing of any required registration statements and
prospectuses under the Investment Company Act, the Securities Act, and all
amendments and supplements thereto, and the expense of preparing, printing,
mailing and otherwise distributing prospectuses, annual or interim reports to
shareholders and proxy materials.
(b) After the prospectuses and annual and interim reports
have been prepared, set in type and mailed to shareholders, the Distributor
shall bear the costs and expenses of printing and distributing any copies
thereof which are used in connection with the offering of shares to Selected
Dealers or investors. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any supplementary sales literature used
by the Distributor or furnished by it for use by Selected Dealers in
connection with the offering of the shares for
10
<PAGE> 11
sale. Any expenses of advertising incurred in connection with such offering
will also be the obligation of the Distributor.
(c) Each Portfolio shall bear the costs and expenses of
qualification of shares of such Portfolio for sale, and, if necessary or
advisable in connection therewith, the Fund shall bear the cost and expense of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5(c) hereof and the cost and expenses payable to each such
state for continuing qualification therein until the Fund decides to
discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the
Distributor and each person, if any, who controls the Distributor against any
loss, liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith) arising
by reason of any person acquiring any shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus, as from time to time amended
and supplemented, or the annual or interim reports to shareholders of the
Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
11
<PAGE> 12
statements therein not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Fund in
connection therewith by or on behalf of the Distributor; provided, however,
that in no case (i) is the indemnity of the Fund in favor of the Distributor
and any such controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the Fund or its
security holders to which the Distributor or any such controlling persons
would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under this Agreement; or (ii) is the
Fund to be liable under its indemnity agreement contained in this paragraph
with respect to any claim made against the Distributor or any such controlling
persons, unless the Distributor or such controlling persons, as the case may
be, shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons,
(or after the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to notify the
Fund of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund will
be entitled to participate at its own expense in the defense, or, if it so
12
<PAGE> 13
elects, to assume the defense of any suit brought to enforce any such
liability, but if the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the Distributor or such
controlling person or persons, defendant or defendants in the suit. In the
event the Fund elects to assume the defense of any such suit and retain such
counsel, the Distributor or such controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Fund does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issuance or sale of the shares.
(b) The Distributor shall indemnify and hold harmless the Fund
and each of its directors and officers and each person, if any, who controls
the Fund against any loss, liability, claim, damage, or expense described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Fund in writing by or on behalf
of the Distributor for use in connection with the registration statement or
related prospectus, as from time to time amended, or the annual or interim
reports to shareholders. In case any action
13
<PAGE> 14
shall be brought against the Fund or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Fund, and the Fund and each person so
indemnified shall have the
rights and duties given to the Distributor by the provisions of subsection (a)
of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection wit the Merrill Lynch Mutual Fund Adviser Program, the Distributor
and its affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are
authorized to offer and sell shares of the Fund, as agent for the Fund, to
participants in such program. The terms of this Agreement shall apply to such
sales, including terms as to the offering price of shares, the proceeds to be
paid to the Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of the Fund and the Distributor.
Section 11. Duration and Termination of This Agreement. This
Agreement shall become effective as of the date first above written and shall
remain in force until October 21, 1996 and thereafter as to any Portfolio, but
only so long as such continuance is specifically approved at least annually by
(i) the Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of that Portfolio, cast in person or by proxy,
and (ii) a majority of those directors who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting called for
the purpose of voting upon such approval.
14
<PAGE> 15
This Agreement may be terminated at any time as to any Portfolio,
without the payment of any penalty, by the Board of Directors of the Fund or
by vote of a majority of the outstanding voting securities of that Portfolio,
or by the Adviser, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting
securities," "assignment," "affiliated person" and "interested person," a
when used in this Agreement, shall have the respective meaning specified in
the Investment Company Act.
Section 12. Amendments of This Agreement. This Agreement may be
amended by the parties as to any Portfolio only if such amendment is
specifically approved by (i) the Board of Directors of the Fund, or by the
vote of a majority of the outstanding voting securities of that Portfolio, and
(ii) a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
Section 13. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of New York and the applicable
provisions of the Investment Company Act. To the extent the applicable law of
the State of New York, or any of the provisions herein, conflict with
applicable provisions of the Investment Company Act, the latter shall control.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of ___________, 1994 in New York, New York.
MERRILL LYNCH CORPORATE BOND
FUND, INC.
By
-------------------------------------
President
MERRILL LYNCH FUNDS DISTRIBUTOR,
INC.
By
------------------------------------
President
16
<PAGE> 1
MERRILL LYNCH CORPORATE BOND FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Corporate Bond Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of
shares of Class A High Income Portfolio Series Common Stock, Class A High
Quality Portfolio Series Common Stock and Class A Intermediate Term Portfolio
Series Common Stock, par value $0.10 per share, of the Fund, and as such has
the right to distribute shares of the Fund for resale. The Fund is a
diversified open-end investment company registered under the Investment Company
Act of 1940, as amended, and its shares being offered to the public are
registered under the Securities Act of 1933, as amended. You have received a
copy of the Distribution Agreement between ourself and the Fund and reference
is made herein to certain provisions of such Distribution Agreement. The term
Prospectus as used herein refers to the prospectus on file with the Securities
and Exchange Commission which is part of the most recent effective registration
statement pursuant to the Securities Act of 1933, as amended. As principal, we
offer to sell to you, as a member of the Selected Dealers Group, shares of the
Fund upon the following terms and conditions:
1. In all sales of these shares to the public
you shall act as dealer for your own account, and in no transaction shall you
have any authority to act as agent for the Fund, for us
<PAGE> 2
or for any other member of the Selected Dealers Group, except in connection
with the Merrill Lynch Mutual Fund Adviser program and such other special
programs as we from time to time agree, in which case you shall have authority
to offer and sell shares, as agent for the Fund, to participants in such
program.
2. Orders received from you will be accepted through us
only as the public offering price applicable to each order, as set forth in the
current Prospectus of the Fund. The procedure relating to the handling of
orders shall be subject to Section 5 hereof and instructions which we or the
Fund shall forward from time to time to you. All orders are subject to
acceptance or rejection by the Distributor or the Fund in the sole discretion
of either. The minimum initial purchase is $1,000. The minimum subsequent
purchase is $100.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
Class A Shares of the
High Income and High Quality Portfolios
<TABLE>
<CAPTION>
Discounted
Sales Charge Selected
Sales Charge as Percentage1 Dealers as
Amount as Percentage of the Net Percentage
of of the Amount of the
Purchase Offering Price Invested Offering Price
-------- -------------- -------- --------------
<S> <C> <C> <C>
Less than $25,000 4 .00% 4.16% 3.75%
$25,000 but less
than $50,000 3 .75 3.90 3.50
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
$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** .00 .00 .00
</TABLE>
Class A Shares of the Intermediate Term Portfolio
<TABLE>
<S> <C> <C> <C>
Less than $100,000 1 . 00% 1.01% .95%
$100,000 but less
than $250,000 .75 .76 .70
$250,000 but less
than $500,000 .50 .50 .45
$500,000 but less
than $1,000,000 .30 .30 .27
$1,000,000 or more** .00 .00 .00
</TABLE>
- --------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information. Such
purchases may be subject to a contingent deferred sales charge as set forth in
the current Prospectus and Statement of Additional Information.
The term "purchase" 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 although more than one beneficiary is
involved. The term "purchase" also includes
<PAGE> 4
purchases by any "company" as that term is defined in the Investment Company
Act of 1940, as amended, but does not include purchases by any such company
which has not been in existence for at least six months or which 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 reduced sales charges are applicable through a right of
accumulation under which investors are permitted to purchase shares of the Fund
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 the shares of the Fund and of any other investment company with a
sales charge for which the Distributor acts as the distributor. For any such
right of accumulation to be made available, the Distributor must be provided
at the time of purchase, by the purchaser or you, with sufficient information
to permit confirmation of qualification, and acceptance of the purchase order
is subject to such confirmation.
The reduced sales charges are applicable to purchases of
shares through you aggregating $25,000 or more for the High Income and
Investment Grade Portfolios or $100,000 or more for the
<PAGE> 5
Intermediate Term Portfolio, made within a thirteen-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in
the Prospectus. 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. If the intended amount of shares is not purchased within
the thirteen-month period, an appropriate price adjustment will be made
pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts
of any sales made by you to the public qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of intention is set forth in the Prospectus.
4. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the shares except
under circumstances that will result in compliance with the applicable Federal
and state securities laws and that in connection with sales and offers to sell
shares you will furnish to each person to whom any such sale or offer is made a
copy of the Prospectus (as then
<PAGE> 6
amended or supplemented) and will not furnish to any person any information
relating to the shares of the Fund, which is inconsistent in any respect with
the information contained in the Prospectus (as then amended or supplemented)
or cause any advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and
subject to the compensation provisions of Section 3 hereof, and (ii) to tender
shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: e.g., by a
change in the "net asset value" from that used in determining the offering
price to your customers.
7. If any shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
shares.
8. No person is authorized to make any representations
concerning shares of the issuer except those contained in the current
Prospectus of the Fund and in such printed information subsequently issued by
us or the Fund as information supplemental
<PAGE> 7
to such Prospectus. In purchasing shares through us you shall rely solely on
the representations contained in the Prospectus and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, periodic reports and proxy solicitation material are our
sole responsibility and not the responsibility of the Fund, and you agree that
the Fund shall have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus at or prior to the
time of offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials of
the Fund. You further agree to endeavor to obtain proxies from such
purchasers. Additional copies of the Prospectus, annual or interim reports and
proxy solicitation materials of the Fund will be supplied to you in reasonable
quantities upon request.
10. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of shares entirely. Each party
hereto has the right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of good faith
and for obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate
<PAGE> 8
as, and the provisions of this paragraph shall not in any way whatsoever
constitute, a waiver by you of compliance with any provision of the Securities
Act of 1933, as amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales in the
United States, we both hereby agree to abide by the Rules of Fair Practice of
such Association.
13. Upon application to us, we will inform you as to the
states in which we believe the shares have been qualified for sale under, or
are exempt from the requirements of, the respective securities laws of such
states, but we assume no responsibility or obligation as to your right to sell
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the shares, if necessary.
14. All communications to us should be sent to the address
set forth below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
<PAGE> 9
15. Your first order placed pursuant to this Agreement for
the purchase of shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By:
---------------------------------------
Authorized Signature
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
One Liberty Plaza
165 Broadway
New York, N.Y. 10006
Accepted:
Firm Name:
--------------------------------------------
By:
---------------------------------------------------
Address:
----------------------------------------------
------------------------------------------------------
Date:
-------------------------------------------------
<PAGE> 1
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994, between Merrill
Lynch Corporate Bond Fund, Inc., a Maryland corporation, (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its
shares for sale continuously; and
WHEREAS, the Fund is comprised of three separate portfolios, namely,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio (the "Portfolios"), each of which pursues its own investment
objective through separate investment policies; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering
<PAGE> 2
of the shares of the Class C High Income Portfolio Series Common Stock, the
Class C Investment Grade Portfolio Series Common Stock and the Class C
Intermediate Term Portfolio Series Common Stock of the Fund (collectively, the
"Class C shares") in order to promote the growth of the Fund and facilitate the
distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to
sell Class C shares of common stock in the Fund (sometimes herein referred to
as "Class C shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class C shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class C
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall
2
<PAGE> 3
terminate, but this Agreement shall remain otherwise in full effect until
terminated in accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
(c) Such exclusive right also shall not apply to Class C shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right also shall not apply to Class C shares
issued by the Fund pursuant to any conversion, exchange or reinstatement
privilege afforded redeeming shareholders or to any other Class C shares as
shall be agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class C Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class C shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class C shares of each Portfolio needed, but not more than the
Class C shares of each Portfolio needed (except for clerical errors in
transmission) to fill unconditional orders for Class C shares of
3
<PAGE> 4
the relevant Portfolio placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class C shares of a
Portfolio shall be those persons so identified in the currently effective
prospectus and statement of additional information of the Fund (the
"prospectus" and "statement of additional information", respectively) under the
Securities Act of 1933, as amended (the "Securities Act"), relating to such
Class C shares. The price which the Distributor shall pay for the Class C
shares of a Portfolio so purchased from the Fund shall be the net asset value
for that Portfolio, determined as set forth in Section 3(c) hereof.
(b) The Class C shares of a Portfolio are to be resold by the
Distributor to investors at net asset value for that Portfolio, as set forth in
Section 3(c) hereof, or to securities dealers having agreements with the
Distributor upon the terms and conditions set forth in Section 7 hereof.
(c) The net asset value of Class C shares of a Portfolio shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the prospectus and statement of additional information and
guidelines established by the Board of Directors of the Fund.
(d) The Fund shall have the right to suspend the sale of Class C
shares of any Portfolio at times when redemption is suspended pursuant to the
conditions set forth in Section 4(b) hereof. The Fund shall also have the
right to suspend the sale
4
<PAGE> 5
of Class C shares of any Portfolio if trading on the New York Stock Exchange
shall have been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the Class C shares.
(e) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class C shares pursuant to
the instructions of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund.
(a) Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its
5
<PAGE> 6
obligations as set forth in Article VII of its Articles of Incorporation, as
amended from time to time, and in accordance with the applicable provisions set
forth in the prospectus and statement of additional information of the Fund.
The price to be paid to redeem or repurchase the Class C shares of a Portfolio
shall be equal to the net asset value for that Portfolio calculated in
accordance with the provisions of Section 3(c) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner set forth below.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class C shares of any Portfolio or payment may be
suspended at times when the New York Stock Exchange is closed, when trading on
said Exchange is suspended,
6
<PAGE> 7
when trading on said Exchange is restricted, when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class C
shares of the Fund, and this shall include, upon request by the Distributor,
one certified copy of all financial statements prepared for the Fund by
independent public accountants. The Fund shall make available to the
Distributor such number of copies of its prospectus and statement of additional
information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the shareholders, all necessary action to fix the number
of authorized shares and such steps as may be necessary to register the same
under the Securities Act to the end that there will be available for sale such
number of Class C shares of each Portfolio as the Distributor reasonably may be
expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class C
7
<PAGE> 8
shares of each Portfolio for sale under the securities laws of such states as
the Distributor and the Fund may approve. Any such qualification may be
withheld, terminated or withdrawn by the Fund at any time in its discretion.
As provided in Section 8(c) hereof, the expense of qualification and
maintenance of qualification shall be borne by the Fund. The Distributor shall
furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither
the Distributor nor any se-
8
<PAGE> 9
lected dealer, as defined in Section 7 hereof, nor any other person is
authorized by the Fund to give any information or to make any representations,
other than those contained in the registration statement or related prospectus
and statement of additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into selected
dealer agreements with securities dealers of its choice ("selected dealers")
for the sale of Class C shares; provided, that the Fund shall approve the forms
of agreements with dealers. Class C shares sold to selected dealers shall be
for resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers to be used
during the continuous offering of the shares is attached hereto as Exhibit A.
9
<PAGE> 10
(b) Within the United States, the Distributor shall offer and sell
Class C shares only to such selected dealers that are members in good standing
of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and interim reports and proxy materials to
Class C shareholders (including but not limited to the expense of setting in
type any such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the
costs and expenses of printing and distributing any copies thereof which are to
be used in connection with the offering of Class C shares to selected dealers
or investors pursuant to this Agreement. The Distributor shall bear the costs
and expenses of
10
<PAGE> 11
preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Class C shares for sale to the public and any expenses of
advertising incurred by the Distributor in connection with such offering. It
is understood and agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect,
any expenses incurred by the Distributor hereunder may be paid from amounts
recovered by it from the Fund under such Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Fund decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel
11
<PAGE> 12
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class C shares, which may be based upon the Securities
Act, or on any other statute or at common law, on the ground that the
registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to Class C shareholders of the Fund, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Distributor; provided, however, that in no case (i) is the
indemnity of the Fund in favor of the Distributor and any such controlling
persons to be deemed to protect such Distributor or any such controlling
persons thereof against any liability to the Fund or its security holders to
which the Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be,
12
<PAGE> 13
shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons
(or after the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which it may have to
the person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the Fund elects to
assume the defense of any such suit and retain such counsel, the Distributor or
such controlling person or persons, defendant or defendants in the suit shall
bear the fees and expenses, as incurred, of any additional counsel retained by
them, but in case the Fund does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses, as
incurred, of any counsel retained by them. The Fund shall promptly notify the
Distributor of the commence-
13
<PAGE> 14
ment of any litigation or proceedings against it or any of its officers or
Directors in connection with the issuance or sale of any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense, as incurred,
described in the foregoing indemnity contained in subsection (a) of this
Section, but only with respect to statements or omissions made in reliance
upon, and in conformity with, information furnished to the Fund in writing by
or on behalf of the Distributor for use in connection with the registration
statement or related prospectus and statement of additional information, as
from time to time amended, or the annual or interim reports to shareholders.
In case any action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against the
Distributor, the Distributor shall have the rights and duties given to the
Fund, and the Fund and each person so indemnified shall have the rights and
duties given to the Distributor by the provisions of subsection (a) of this
Section 9.
Section 10. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October 21, 1996 and thereafter as to
any Portfolio, but only for so long as such continuance is specifically
approved at least annually by (i) the
14
<PAGE> 15
Board of Directors of the Fund or by the vote of a majority of the outstanding
voting securities of that Portfolio and (ii) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be
amended as to any Portfolio by the parties only if such amendment is
specifically approved by (i) the Board of Directors of the Fund or by the vote
of a majority of outstanding voting securities of that Portfolio and (ii) by
the vote of a majority of those Directors of the Fund who are not parties to
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
15
<PAGE> 16
Section 12. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH CORPORATE BOND FUND, INC.
By
------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
Title:
16
<PAGE> 17
EXHIBIT A
MERRILL LYNCH CORPORATE BOND FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Corporate Bond Fund, Inc., a Maryland corporation,
(the "Fund"), pursuant to which it acts as the distributor for the sale of
shares of Class C High Income Portfolio Series Common Stock, Class C
Intermediate Term Portfolio Series Common Stock and Class C High Quality
Portfolio Series Common Stock, par value $0.10 per share, of the Fund
(collectively, the "Class C shares"), and as such has the right to distribute
Class C shares of the Fund for resale. The Fund is an open-end investment
company registered under the Investment Company Act of 1940, as amended, and
its Class C shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of the Class C
Shares Distribution Agreement (the "Distribution Agreement") between ourself
and the Fund and reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of Additional
Information" as used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement pursuant to
the Securities Act of 1933, as amended. We offer to sell to you, as a member
of the Selected Dealers Group, Class C shares of the Fund upon the following
terms and conditions:
1. In all sales of these Class C shares to the public, you shall act
as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
1
<PAGE> 18
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
3. You shall not place orders for any of the Class C shares of a
Portfolio unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or sell
any of the Class C shares except under circumstances that will result in
compliance with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will furnish to
each person to whom any such sale or offer is made a copy of the Prospectus
and, if requested, the Statement of Additional Information (as then amended or
supplemented) and will not furnish to any person any information relating to
the Class C shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Additional Information
(as then amended or supplemented) or cause any advertisement to be published in
any newspaper or posted in any public place without our consent and the consent
of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class C shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and (ii)
to tender Class C shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
5. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning
Class C shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
2
<PAGE> 19
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you
agree thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class C shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association.
11. Upon application to us, we will inform you as to the states in which
we believe the Class C shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.
3
<PAGE> 20
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:
-------------------------------------------------
Address: 800 Scudders Mill Road
--------------------------------------------
Plainsboro, New Jersey 08536
-----------------------------------------------------
Date: , 1994
-----------------------------------------------
4
<PAGE> 1
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between Merrill
Lynch Corporate Bond Fund, Inc., a Maryland corporation, (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its
shares for sale continuously; and
WHEREAS, the Fund is comprised of three separate portfolios, namely,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio (the "Portfolios"), each of which pursues its own investment
objective through separate investment policies; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
<PAGE> 2
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of shares of the Class
D High Income Portfolio Series Common Stock, the Class D Investment Grade
Portfolio Series Common Stock and the Class D Intermediate Term Portfolio
Series Common Stock of the Fund (collectively, the "Class D shares") in order
to promote the growth of the Fund and facilitate the distribution of its Class
D shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to
sell Class D shares of common stock in the Fund (sometimes herein referred to
as "Class D shares") to the public and hereby agrees during the term of this
Agreement to sell Class D shares of the Fund to the Distributor upon the terms
and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class D
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall
2
<PAGE> 3
terminate, but this Agreement shall remain otherwise in full effect until
terminated in accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
D shares from the Fund shall not apply to Class D shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding shares of any such
company by the Fund.
(c) Such exclusive right also shall not apply to Class D shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right also shall not apply to Class D shares
issued by the Fund pursuant to any conversion, exchange or reinstatement
privilege afforded redeeming shareholders or to any other Class D shares as
shall be agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class D shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class D shares of each Portfolio needed, but not more than the
Class D shares of each Portfolio needed (except for clerical errors in
transmission) to fill unconditional orders for Class D shares of the relevant
Portfolio placed with the Distributor by eligible
3
<PAGE> 4
investors or securities dealers. Investors eligible to purchase Class D shares
of a Portfolio shall be those persons so identified in the currently effective
prospectus and statement of additional information of the Fund (the
"prospectus" and "statement of additional information", respectively) under the
Securities Act of 1933, as amended (the "Securities Act"), relating to such
Class D shares. The price which the Distributor shall pay for the Class D
shares of a Portfolio so purchased from the Fund shall be the net asset value
for that Portfolio, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were based.
(b) The Class D shares of a Portfolio are to be resold by the
Distributor to investors at the public offering price for that Portfolio, as
set forth in Section 3(c) hereof, or to securities dealers having agreements
with the Distributor upon the terms and conditions set forth in Section 7
hereof.
(c) The public offering price(s) of Class D shares of a Portfolio,
i.e., the price per share at which the Distributor or selected dealers may sell
Class D shares to the public, shall be the public offering price as set forth
in the prospectus and statement of additional information relating to such
Class D shares, but not to exceed the net asset value at which the Distributor
is to purchase the Class D shares, plus a sales charge not to exceed 4.00% of
the public offering price (4.16% of the net amount invested) for Class D shares
of the Fund's High
4
<PAGE> 5
Income and Investment Grade Portfolios, or 1.00% of the public offering price
(1.01% of the net amount invested for Class D shares of the Fund's Intermediate
Term Portfolio), in each case subject to reductions for volume purchases. If
the public offering price does not equal an even cent, the public offering
price may be adjusted to the nearest cent. All payments to the Fund hereunder
shall be made in the manner set forth in Section 3(f).
(d) The net asset value of Class D shares of a Portfolio shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the prospectus and statement of additional information of the Fund
and guidelines established by the Board of Directors of the Fund.
(e) The Fund shall have the right to suspend the sale of Class D
shares of any Portfolio at times when redemption is suspended pursuant to the
conditions set forth in Section 4(b) hereof. The Fund shall also have the
right to suspend the sale of Class D shares of any Portfolio if trading on the
New York Stock Exchange shall have been suspended, if a banking moratorium
shall have been declared by Federal or New York authorities, or if there shall
have been some other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class D shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order
5
<PAGE> 6
may be rejected by the Fund; provided, however, that the Fund will not
arbitrarily or without reasonable cause refuse to accept or confirm orders for
the purchase of Class D shares. The Fund (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon receipt by the
Fund (or its agent) of payment therefor, will deliver deposit receipts or
certificates for such Class D shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class D Shares by the Fund.
(a) Any of the outstanding Class D shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class D
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class D shares of a Portfolio shall be equal to the net asset
value for that Portfolio calculated in accordance with the provisions of
Section 3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the prospectus and
statement of additional information of the Fund. All payments by
6
<PAGE> 7
the Fund hereunder shall be made in the manner set forth below. The redemption
or repurchase by the Fund of any of the Class D shares of a Portfolio purchased
by or through the Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original sale, except
that if any Class D shares of a Portfolio are tendered for redemption or
repurchase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class D shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor in New
York Clearing House funds on or before the seventh business day subsequent to
its having received the notice of redemption in proper form. The proceeds of
any redemption of shares shall be paid by the Fund as follows: (i) any
applicable CDSC shall be paid to the Distributor, and (ii) the balance shall be
paid to or for the account of the shareholder, in each case in accordance with
the applicable provisions of the prospectus and statement of additional
information.
(b) Redemption of Class D shares of any Portfolio or payment may be
suspended at times when the New York Stock Exchange is closed, when trading on
said Exchange is suspended, when trading on said Exchange is restricted, when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably
7
<PAGE> 8
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class D
shares of the Fund, and this shall include, upon request by the Distributor,
one certified copy of all financial statements prepared for the Fund by
independent public accountants. The Fund shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class D shareholders, all necessary action to fix the
number of authorized Class D shares of each Portfolio and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class D shares of each Portfolio as
the Distributor may reasonably be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares of each Portfolio
for sale under the securities laws of such states as the Distributor and the
Fund may approve. Any such qualification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section
8
<PAGE> 9
8(c) hereof, the expense of qualification and maintenance of qualification
shall be borne by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be required by the
Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither
the Distributor nor any selected dealer, as defined in Section 7 hereof, nor
any other person is authorized by the Fund to give any information or to make
any representations, other than those contained in the registration statement
or related prospectus and statement of
9
<PAGE> 10
additional information and any sales literature specifically approved by the
Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into selected
dealers agreements with securities dealers of its choice ("selected dealers")
for the sale of Class D shares and fix therein the portion of the sales charge
which may be allocated to the selected dealers; provided that the Fund shall
approve the forms of agreements with dealers and the dealer compensation set
forth therein. Class D shares sold to selected dealers shall be for resale by
such dealers only at the public offering price(s) set forth in the prospectus
and statement of additional information. The form of agreement with selected
dealers to be used during the continuous offering of the Class D shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class D shares only to such selected dealers as are members in good standing of
the NASD.
10
<PAGE> 11
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and interim reports and proxy materials to
Class D shareholders (including but not limited to the expense of setting in
type any such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the
costs and expenses of printing and distributing any copies thereof which are to
be used in connection with the offering of Class D shares to selected dealers
or investors pursuant to this Agreement. The Distributor shall bear the costs
and expenses of preparing, printing and distributing any other literature used
by the Distributor or furnished by it for use by selected dealers in connection
with the offering of the Class D shares for sale to the public and any expenses
of advertising incurred by the
11
<PAGE> 12
Distributor in connection with such offering. It is understood and agreed that
so long as the Fund's Class D Shares Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act remains in effect, any expenses incurred by
the Distributor hereunder in connection with account maintenance activities may
be paid from amounts recovered by it from the Fund under such plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Fund decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class D shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related
12
<PAGE> 13
prospectus and statement of additional information, as from time to time
amended and supplemented, or an annual or interim report to shareholders of the
Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Fund in
connection therewith by or on behalf of the Distributor; provided, however,
that in no case (i) is the indemnity of the Fund in favor of the Distributor
and any such controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the Fund or its
security holders to which the Distributor or any such controlling persons would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement; or (ii) is the
Fund to be liable under its indemnity agreement contained in this paragraph
with respect to any claim made against the Distributor or any such controlling
persons, unless the Distributor or such controlling persons, as the case may
be, shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons
(or after the Distributor or such controlling persons shall have received
notice of such
13
<PAGE> 14
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the Fund elects to
assume the defense of any such suit and retain such counsel, the Distributor or
such controlling person or persons, defendant or defendants in the suit shall
bear the fees and expenses of any additional counsel retained by them, but in
case the Fund does not elect to assume the defense of any such suit, it will
reimburse the Distributor or such controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Fund shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Class D
shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim,
14
<PAGE> 15
damage or expense described in the foregoing indemnity contained in subsection
(a) of this Section, but only with respect to statements or omissions made in
reliance upon, and in conformity with, information furnished to the Fund in
writing by or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of additional
information, as from time to time amended, or the annual or interim reports to
Class D shareholders. In case any action shall be brought against the Fund or
any person so indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties given to the
Fund, and the Fund and each person so indemnified shall have the rights and
duties given to the Distributor by the provisions of subsection (a) of this
Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized
to offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This
Agreement shall become effective as of the date first above
15
<PAGE> 16
written and shall remain in force until October 21, 1996 and thereafter as to
any Portfolio, but only for so long as such continuance is specifically
approved at least annually by (i) the Directors or by the vote of a majority of
the outstanding voting securities of that Portfolio and (ii) by the vote of a
majority of those Directors who are not parties to this Agreement or interested
persons of any such party cast in person at a meeting called for the purpose of
voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in
the event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be
amended as to any Portfolio by the parties only if such amendment is
specifically approved by (i) the Directors or by the vote of a majority of
outstanding voting securities of that Portfolio and (ii) by the vote of a
majority of those Directors of the Fund who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
16
<PAGE> 17
Section 13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH CORPORATE BOND FUND, INC.
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
17
<PAGE> 18
EXHIBIT A
MERRILL LYNCH CORPORATE BOND FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Corporate Bond Fund, Inc., a Maryland corporation, (the
"Fund"), pursuant to which it acts as the distributor for the sale of shares of
Class D High Income Portfolio Series Common Stock, Class D Intermediate Term
Portfolio Series Common Stock and Class D Investment Grade Portfolio Series
Common Stock, par value $0.10 per share, of the Fund (collectively, the "Class
D Shares"), and as such has the right to distribute Class D shares of the Fund
for resale. The Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended, and its Class D shares being
offered to the public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class D Shares Distribution Agreement
(the "Distribution Agreement") between ourself and the Fund and reference is
made herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used herein refer to the
prospectus and statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class D shares of the Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you shall act
as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Fund, to participants in such program.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional
1
<PAGE> 19
Information of the Fund. The procedure relating to the handling of orders
shall be subject to Section 5 hereof and instructions which we or the Fund
shall forward from time to time to you. All orders are subject to acceptance
or rejection by the Distributor or the Fund in the sole discretion of either.
The minimum initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of the Fund.
3. The sales charges for sales to the public, computed as percentages
of the public offering price and the amount invested, and the related discount
to Selected Dealers are as follows:
HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Less than $25,000 . . . . . . . . . . . . . 4.00% 4.16% 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 over** . . . . . . . . . . . .00% .00% .00%
</TABLE>
- ------------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
2
<PAGE> 20
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Less than $100,000 . . . . . . . . . . . . 1.00% 1.01% .95%
$100,000 but less
than $250,000 . . . . . . . . . . . . . . .75% .76% .70%
$250,000 but less
than $500,000 . . . . . . . . . . . . . . .50% .50% .45%
500,000 but less
than $1,000,000 . . . . . . . . . . . . . .30% .30% .27%
$1,000,000 or more** . . . . . . . . . . . .00% .00% .20%
</TABLE>
- ------------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
3
<PAGE> 21
The term "purchase" 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 Class D shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class D shares for
a single trust estate or single fiduciary account 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 of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class D shares of the Fund or Class D 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 reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase Class D
shares of the Fund 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 Class A, Class B, Class C and Class D shares
of the Fund and of any other investment company with an initial sales charge
for which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more for the High Income and the Investment Grade Portfolios, and
$100,000 or more for the Intermediate Term Portfolio of Class A shares or of
Class D shares of any other investment company with an initial sales charge for
which the Distributor acts as the distributor made through you within a
thirteen-month period starting with the first purchase pursuant to a Letter of
Intention in the form provided in the Prospectus. 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. If the intended amount of
shares is not purchased within the thirteen-month period, an appropriate price
adjustment will be made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to the public qualifying for reduced sales charges.
4
<PAGE> 22
Further information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
4. You shall not place orders for any of the Class D shares of a
Portfolio unless you have already received purchase orders for such Class D
shares at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or sell
any of the Class D shares except under circumstances that will result in
compliance with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class D shares you will furnish to
each person to whom any such sale or offer is made a copy of the Prospectus
and, if requested, the Statement of Additional Information (as then amended or
supplemented) and will not furnish to any person any information relating to
the Class D shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Additional Information
(as then amended or supplemented) or cause any advertisement to be published in
any newspaper or posted in any public place without our consent and the consent
of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class D shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and
subject to the compensation provisions of Section 3 hereof and (ii) to tender
Class D shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
7. If any Class D shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
Class D shares.
8. No person is authorized to make any representations concerning
Class D shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class D
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement
5
<PAGE> 23
of Additional Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's Prospectus,
Statement of Additional Information, periodic reports and proxy solicitation
material is our sole responsibility and not the responsibility of the Fund, and
you agree that the Fund shall have no liability or responsibility to you in
these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the Statement
of Additional Information at or prior to the time of offering or sale and you
agree thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class D shares entirely or to certain
persons or entities in a class or classes specified by us. Each party hereto
has the right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association
of Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class D shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class D
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.
6
<PAGE> 24
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class D shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:
--------------------------------------------------
Address: 800 Scudders Mill Road
---------------------------------------------
Plainsboro, New Jersey 08536
-----------------------------------------------------
Date: , 1994
------------------------------------------------
7
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH CORPORATE BOND FUND, INC.:
We consent to the use in Post-Effective Amendment No. 20 to Registration
Statement No. 2-62329 of our report dated October 29, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 10, 1994
<PAGE> 1
[Merrill Lynch Asset Management Letterhead]
October __, 1994
Merrill Lynch Corporate Bond
Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
Merrill Lynch Asset Management, L.P. ("MLAM") agrees to
purchase one share of Class C Common Stock, par value $.10 per share, and one
share of Class D Common Stock, par value $.10 per share (the "Shares"), of the
High Income Portfolio of Merrill Lynch Corporate Bond Fund, Inc. (the "Fund")
at a price of $________ per share. MLAM shall tender to the Fund the amount of
$________ in full payment for the Shares.
MLAM represents and warrants to the Fund that the Shares
are being acquired for investment and not with a view to distribution thereof,
and that MLAM has no present intention to redeem or dispose of any of the
Shares.
Very truly yours,
MERRILL LYNCH ASSET
MANAGEMENT, L.P.
By: Princeton Service, Inc.
General Partner
-------------------------
By:
Title:
<PAGE> 1
[Merrill Lynch Asset Management Letterhead]
October __, 1994
Merrill Lynch Corporate Bond
Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
Merrill Lynch Asset Management, L.P. ("MLAM") agrees to
purchase one share of Class C Common Stock, par value $.10 per share, and one
share of Class D Common Stock, par value $.10 per share (the "Shares"), of the
Investment Grade Portfolio of Merrill Lynch Corporate Bond Fund, Inc. (the
"Fund") at a price of $________ per share. MLAM shall tender to the Fund the
amount of $________ in full payment for the Shares.
MLAM represents and warrants to the Fund that the Shares
are being acquired for investment and not with a view to distribution thereof,
and that MLAM has no present intention to redeem or dispose of any of the
Shares.
Very truly yours,
MERRILL LYNCH ASSET
MANAGEMENT, L.P.
By: Princeton Service, Inc.
General Partner
-------------------------
By:
Title:
<PAGE> 1
[Merrill Lynch Asset Management Letterhead]
October __, 1994
Merrill Lynch Corporate Bond
Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
Merrill Lynch Asset Management, L.P. ("MLAM") agrees to
purchase one share of Class C Common Stock, par value $.10 per share, and one
share of Class D Common Stock, par value $.10 per share (the "Shares"), of the
Intermediate Term Portfolio of Merrill Lynch Corporate Bond Fund, Inc. (the
"Fund") at a price of $________ per share. MLAM shall tender to the Fund the
amount of $________ in full payment for the Shares.
MLAM represents and warrants to the Fund that the Shares
are being acquired for investment and not with a view to distribution thereof,
and that MLAM has no present intention to redeem or dispose of any of the
Shares.
Very truly yours,
MERRILL LYNCH ASSET
MANAGEMENT, L.P.
By: Princeton Service, Inc.
General Partner
-------------------------
By:
Title:
<PAGE> 1
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH CORPORATE BOND FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and
between Merrill Lynch Corporate Bond Fund, Inc., a (the "Fund"), and Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Fund is comprised of three separate portfolios, namely,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio (the "Portfolios"), each of which pursues its own investment
objective through separate investment policies, and may in the future comprise
one or more additional portfolios; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of shares of
the Class D High Income Portfolio Series Common Stock, the Class D Investment
Grade Portfolio Series Common Stock and the Class D Intermediate Term Portfolio
Series Common Stock, par value $0.10 per share (the "Class D shares"), of each
Portfolio of the Fund to the public; and
WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee to MLFD with respect to
Class D shares of each Portfolio of the Fund; and
<PAGE> 2
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and
shareholders of each Portfolio.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 nder the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan
at the end of each month at the annual rate of 0.25% (in the case of the High
Income Portfolio and the Investment Grade Portfolio) and 0.10% (in the case of
the Intermediate Term Portfolio) of average daily net assets of such Portfolio
relating to Class D shares to compensate MLFD and securities firms with which
MLFD enters into related agreements ("Sub-Agreements") pursuant to Paragraph 2
hereof for providing account maintenance activities with respect to Class D
shareholders of the Portfolio. Expenditures under the Plan may consist of
payments to financial consultants for maintaining accounts in connection with
Class D shares of each Portfolio of the Fund and payment of expenses incurred
in connection with such account maintenance activities including the costs of
making services available to shareholders including assistance in connection
with inquiries related to shareholder accounts. Only account maintenance
expenditures properly attributable to the sale of Class D shares of a Portfolio
will be used to justify any fee paid by the Fund with respect to that Portfolio
pursuant to this Plan, and, to the extent that such expenditures relate to more
than one Portfolio, the expenditures will be allocated between the affected
Portfolios in a manner deemed appropriate by the Board of Directors of the
Fund.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as
is reasonably necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
2
<PAGE> 3
4. This Plan shall not take effect with respect to a Portfolio of the
Fund until it has been approved by a vote of at least a majority, as defined in
the Investment Company Act, of the outstanding Class D voting securities of
such Portfolio.
5. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of a majority of both (a) the
Board of Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund, as defined in the Investment Company Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on the Plan and such
related agreements.
6. The Plan shall continue in effect for so long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 5.
7. The Plan may be terminated at any time with respect to a Portfolio
of the Fund by vote of a majority of the Rule 12b-1 Directors, or by vote of a
majority of the outstanding Class D voting securities of such Portfolio.
8. The Plan may not be amended to increase materially the rate of
payments provided for in Paragraph 1 hereof with respect to a Portfolio of the
Fund unless such amendment is approved by at least a majority, as defined in
the Investment Company Act, of the outstanding Class D voting securities of
such Portfolio, and by the Board of Directors of the Fund in the manner
provided for in Paragraph 5 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval and annual
renewal in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
10. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 3 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH CORPORATE BOND FUND, INC.
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
4
<PAGE> 5
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between
Merrill Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, MLFD has entered into an agreement with Merrill Lynch
Corporate Bond Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class D shares of
the Class D High Income Portfolio Series Common Stock, the Class D Investment
Grade Portfolio Series Common Stock and the Class D Intermediate Term Portfolio
Series Common Stock, par value $0.10 per share (the "Class D shares"), of the
Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% (in the case
of the High Income Portfolio and the Investment Grade Portfolio) and 0.10% (in
the case of the Intermediate Term Portfolio) of average daily net assets of the
Fund relating to Class D shares for providing account maintenance activities
and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities
and services with respect to the Class D shares of the Fund and incur
expenditures in connection with such activities and services, of the types
referred to in Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement,
MLFD shall pay the Securities Firm a fee at the end of
<PAGE> 6
each calendar month in an amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the fee
during such period referred to in Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Board of Directors of the Fund and (b)
those Directors of the Fund who are not "interested persons" of the Fund, as
defined in the Act, and have no direct or indirect financial interest in the
operation of the Plan, this Agreement or any agreements related to the Plan or
this Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
----------------------------------
2
<PAGE> 1
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH CORPORATE BOND FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and
between a Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Fund is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Fund is comprised of three separate portfolios, namely,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio (the "Portfolios"), each of which pursues its own investment
objective through separate investment policies, and may in the future comprise
one or more additional portfolios; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of shares of
the Class C High Income Portfolio Series Common Stock, the Class C Investment
Grade Portfolio Series Common Stock and the Class C Intermediate Term Portfolio
Series Common Stock, par value $0.10 per share (collectively, the "Class C
shares"), of each Portfolio of the Fund to the public; and
WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Class C shares of each Portfolio of the Fund; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and
shareholders of each Portfolio.
<PAGE> 2
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan
at the end of each month with respect to each Portfolio of the Fund at the
annual rate of 0.25% of average daily net assets of such Portfolio relating to
Class C shares to compensate MLFD and securities firms with which MLFD enters
into related agreements pursuant to Paragraph 3 hereof ("Sub-Agreements") for
providing account maintenance activities with respect to Class C shareholders
of the Portfolio. Expenditures under the Plan may consist of payments to
financial consultants for maintaining accounts in connection with Class C
shares of each Portfolio of the Fund and payment of expenses incurred in
connection with such account maintenance activities including the costs of
making services available to shareholders including assistance in connection
with inquiries related to shareholder accounts. Only account maintenance
expenditures properly attributable to the sale of Class C shares of a Portfolio
will be used to justify any fee paid by the Fund with respect to that Portfolio
pursuant to this Plan, and, to the extent that such expenditures relate to more
than one Portfolio, the expenditures will be allocated between the affected
Portfolios in a manner deemed appropriate by the Board of Directors of the
Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan with
respect to each Portfolio of the Fund at the end of each month at the annual
rate of 0.55% (in the case of the High Income Portfolio and the Investment
Grade Portfolio) or 0.25% (in the case of the Intermediate Term Portfolio) of
average daily net assets of such Portfolio relating to Class C shares to
compensate MLFD and securities firms with which MLFD enters into related
Sub-Agreements for providing sales and promotional activities and services.
Such activities and services will relate to the sale, promotion and marketing
of the Class C shares of the Portfolio. Such expenditures may consist of sales
commissions to financial consultants for selling Class C shares of the
Portfolio, compensation, sales incentives and payments to sales and marketing
personnel, and the payment of expenses incurred in its sales and promotional
activities, including advertising expenditures related to the Portfolio and the
costs of preparing and distributing promotional materials. The distribution
fee may also be used to pay the financing costs of carrying the unreimbursed
expenditures described in this Paragraph 2. Payment of the distribution fee
described in this Paragraph 2 shall be subject to any limitations set forth in
any applicable regulation of the National Association of Securities Dealers,
Inc. Only distribution expenditures properly attributable to the sale of Class
C shares of a Portfolio will be used to justify any fee
2
<PAGE> 3
paid by the Fund with respect to that Portfolio pursuant to this Plan, and, to
the extent that such expenditures relate to more than one Portfolio, the
expenditures will be allocated between the affected Portfolios in a manner
deemed appropriate by the Board of Directors of the Fund.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect with respect to a Portfolio of the
Fund until it has been approved by a vote of at least a majority, as defined in
the Investment Company Act, of the outstanding Class C voting securities of
such Portfolio.
6. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of a majority of both (a) the
Board of Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund, as defined in the Investment Company Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on the Plan and such
related agreements.
7. The Plan shall continue in effect for so long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
8. The Plan may be terminated at any time with respect to a Portfolio
of the Fund by vote of a majority of the Rule 12b-1 Directors, or by vote of a
majority of the outstanding Class C voting securities of such Portfolio.
9. The Plan may not be amended to increase materially the rate of
payments provided for herein with respect to a Portfolio
3
<PAGE> 4
of the Fund unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class C voting
securities of such Portfolio, and by the Board of Directors of the Fund in the
manner provided for in Paragraph 6 hereof, and no material amendment to the
Plan shall be made unless approved in the manner provided for approval and
annual renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 4 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH CORPORATE BOND FUND, INC.
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
4
<PAGE> 5
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, MLFD has entered into an agreement with Merrill Lynch
Corporate Bond Fund, Inc., a Maryland corporation, (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of shares of the Class
C High Income Portfolio Series Common Stock, the Class C Investment Grade
Portfolio Series Common Stock and the Class C Intermediate Term Portfolio
Series Common Stock par value $0.10 per share (the "Class C shares"), of the
Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a distribution fee from
the Fund at the annual rate of 0.55% (in the case of the High Income Portfolio
and the Investment Grade Portfolio) or 0.25% (in the case of the Intermediate
Term Portfolio) of average daily net assets of the Fund relating to Class C
shares for providing sales and promotional activities and services related to
the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for
the Fund's Class C shareholders and the Securities Firm is willing to perform
such activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities
and services with respect to the Class C shares of the Fund and incur
expenditures in connection with such activities and services of the types
referred to in Paragraph 1 of the Plan.
<PAGE> 6
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C shares of the
Fund, and incur distribution expenditures, of the types referred to in
Paragraph 2 of the Plan.
3. As compensation for its activities and services performed under
this Agreement, MLFD shall pay the Securities Firm an account maintenance fee
and a distribution fee at the end of each calendar month in an amount agreed
upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved
by votes of a majority of both (a) the Board of Directors of the Fund and (b)
those Directors of the Fund who are not "interested persons" of the Fund, as
defined in the Act, and have no direct or indirect financial interest in the
operation of the Plan, this Agreement or any agreements related to the Plan or
this Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-----------------------------------
Title:
2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> HIGH INCOME PORTFOLIO
<S> <C>
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<PERIOD-START> OCT-01-1992
<PERIOD-END> SEP-30-1993
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> INVESTMENT GRADE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1993
<PERIOD-START> OCT-01-1992
<PERIOD-END> SEP-30-1993
<INVESTMENTS-AT-COST> 847228434
<INVESTMENTS-AT-VALUE> 899724840
<RECEIVABLES> 55789591
<ASSETS-OTHER> 62859
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<TOTAL-ASSETS> 955577290
<PAYABLE-FOR-SECURITIES> 27919274
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<OTHER-ITEMS-LIABILITIES> 4631490
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<SHARES-COMMON-PRIOR> 29451456
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<ACCUMULATED-NET-GAINS> 34748771
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<NET-ASSETS> 407624397
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<PER-SHARE-NII> .81
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<PER-SHARE-DIVIDEND> .81
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<SERIES>
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<NAME> INTERMEDIATE TERM PORTFOLIO
<S> <C>
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<PERIOD-START> OCT-01-1992
<PERIOD-END> SEP-30-1993
<INVESTMENTS-AT-COST> 309034539
<INVESTMENTS-AT-VALUE> 322623074
<RECEIVABLES> 16571404
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<TOTAL-ASSETS> 339267092
<PAYABLE-FOR-SECURITIES> 9986071
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<OTHER-ITEMS-LIABILITIES> 1654316
<TOTAL-LIABILITIES> 11640387
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 307083975
<SHARES-COMMON-STOCK> 15551731
<SHARES-COMMON-PRIOR> 12834279
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6954195
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13588535
<NET-ASSETS> 193505033
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<INTEREST-INCOME> 16310031
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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</TABLE>
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that Cynthia A. Montgomery
hereby constitutes and appoints Arthur Zeikel and Gerald M. Richard, and each
of them, her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for her and in her name, place and stead, in
any and all capacities, to sign any and all Amendments (including pre-effective
and post-effective amendments) to the Registration Statement (File No. 2-57354)
of The Municipal Bond Fund, Inc. and to the Registration Statement (File No.
2-62329) of the Corporate Bond Fund, Inc., and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange and Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: September 9, 1994
/s/ Cynthia A. Montgomery
-----------------------------------------------
Cynthia A. Montgomery
