<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1994.
FILE NO. 2-62329
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 19
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 17
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH CORPORATE BOND FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
ROGERS & WELLS
FUND ASSET MANAGEMENT, L.P.
BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, N.Y. 10166
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a) of Rule 485.
----------------
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 WAS FILED ON
NOVEMBER 29, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.
SUPPLEMENT TO PROSPECTUS DATED JANUARY 27, 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
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
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 Investment Objectives and Policies;
Registrant.............. Investment Policies of the Portfolios;
Additional Information
5. Management of the Fund.. Fee Table; Investment Adviser; Directors;
Portfolio Transactions; Additional
Information
6. Capital Stock and Other Cover Page; Dividends, Distributions and
Securities.............. Taxes; Additional Information
7. Purchase of Securities Alternative Sales Arrangements; Fee Table
Being Offered........... Purchase of Shares; Additional Information
8. Redemption or Alternative Sales Arrangements; Fee Table
Repurchase.............. Redemption of Shares; Shareholder Services
9. Pending Legal *
Proceedings.............
<CAPTION>
LOCATION
PART B --------
<C> <S> <C>
10. Cover Page.............. Cover Page
11. Table of Contents....... Table of Contents
12. General Information and Additional Information
History.................
13. Investment Objectives Investment Objectives and Policies;
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 Purchase of Shares; Determination of Net
Being Offered........... Asset Value; Redemption of Shares;
Systematic Withdrawal Plans; Retirement
Plans; Exchange Privilege
20. Tax Status.............. Dividends, Distributions and Taxes
21. Underwriters............ Distributor
22. Calculation of Performance Data
Performance Data........
23. Financial Statements.... Financial Statements
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.
</TABLE>
- --------
* Item inapplicable or answer negative.
<PAGE>
PROSPECTUS
January 27, 1994
MERRILL LYNCH CORPORATE BOND FUND, INC.
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. Each
Portfolio offers two classes of shares of Common Stock which may be purchased
at a price equal to the next determined net asset value per share, plus a sales
charge which, at the election of the purchaser, may be imposed (i) at the time
of purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). The deferred sales charges to which the Class B shares are subject
will consist of a contingent deferred sales charge which may be imposed on
(Continued on following page)
-------------------------
FUND ASSET MANAGEMENT, L.P.-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
-------------------------
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 January 27, 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.
-------------------------
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.
<PAGE>
(Continued from cover page)
redemptions made within four years of purchase in the case of Class B shares of
the High Income and Investment Grade Portfolios and two years in the case of
Class B shares of the Intermediate Term Portfolio and an ongoing account
maintenance and distribution fee. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other circumstances. Class A shares are not subject to ongoing fees; Class B
shares of each of the High Income and Investment Grade Portfolios pay an
ongoing account maintenance fee and an ongoing distribution fee at the annual
rate of 0.25% and 0.50%, respectively, of the Portfolio's average daily net
assets attributable to Class B shares. Class B shares of the Intermediate Term
Portfolio pay ongoing fees at the annual rate of 0.50% of the Portfolio's
average daily net assets attributable to Class B shares comprised of a 0.25%
fee for account maintenance services and a 0.25% fee for distribution services.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Investors should also
understand that over time the deferred sales charges related to Class B shares
may exceed the initial sales charge with respect to Class A shares. See
"Alternative Sales Arrangements."
Each share of Class A and Class B Common Stock of the Fund's Portfolios
represents identical interests in the applicable Portfolio and has the same
rights, except that Class B shares bear the expenses of the account maintenance
fee, distribution fee and certain other costs resulting from the deferred sales
charge arrangement, which will cause Class B shares to have a higher expense
ratio and to pay lower dividends than those related to Class A shares, and that
Class B shares have exclusive voting rights with respect to the distribution
fee. The two classes also have different exchange privileges.
Shares may be purchased directly from the Distributor, 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 ($250 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>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A and Class B shares follows.
<TABLE>
<CAPTION>
INVESTMENT INTERMEDIATE TERM
HIGH INCOME PORTFOLIO GRADE PORTFOLIO(a) PORTFOLIO(g)
------------------------- ----------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
---------- ---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Charge Im-
posed on Purchases (as a
percentage of offering
price).................. 4.00%(b) None 4.00%(b) None 2.00%(c) None
Sales Charge Imposed on
Dividend Reinvestments.. None None None None None None
Deferred Sales Charge (as
a percentage of original
purchase price or re-
demption proceeds,
whichever is lower)..... None 4.00%(d) None 4.00%(d) None 2.00%(h)
Exchange Fee............. None None None None None None
Annual Portfolio Operating
Expenses (as a percentage
of average assets net for
the year ended September
30, 1993):
Management Fees(e)....... .42 .42 .37 .37 .36 .36
12b-1 Fees (f)........... None .75% None .75% None .50%
Other Expenses:
Custodial Fees........... .01 .01 .01 .01 .01 .01
Shareholder Servicing
Costs................... .07 .08 .10 .11 .09 .08
Other Fees............... .05 .05 .05 .05 .12 .12
---------- ---------- --------- --------- -------- --------
Total Other Expenses.... .13 .14 .16 .17 .22 .21
---------- ---------- --------- --------- -------- --------
Total Portfolio Operating
Expenses................. .55% 1.31% .53% 1.29% .58% 1.07%
========== ========== ========= ========= ======== ========
</TABLE>
- ---------------------
(a) Effective January 27, 1994, the High Quality Portfolio will do business
under the name Investment Grade Portfolio.
(b) Reduced for purchases of $50,000 and over, decreasing to 1.00% for
purchases over $1,000,000 and to 0.50% for purchases of $2,500,000 and
over. Certain investors making purchases of $1,000,000 and over may,
however, pay a contingent deferred sales charge of up to 0.75% of amounts
redeemed within the first year after purchase in lieu of the 1.00% or
0.50% charges. See "Purchase of Shares--Initial Sales Charge Alternative"
on page 23.
(c) Reduced for purchases of $100,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain investors making purchases of
$1,000,000 and over may, however, pay a contingent deferred sales charge
of up to 0.50% of amounts redeemed within the first year after purchase in
lieu of the 0.50% charge. See "Purchase of Shares--Initial Sales Charge
Alternative" on page 23.
(d) During the first year, decreasing 1.0% annually to 0.0% after the fourth
year. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares" on page 25.
(e) See "Investment Adviser" on page 20.
(f) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan" on page 25.
(g) Up to November 12, 1992, the Intermediate Term Portfolio consisted of one
class of shares of Common Stock. Annual portfolio operating expenses for
Class B shares of the Intermediate Term Portfolio have been estimated
based on the Portfolio's operating expenses for the fiscal year ended
September 30, 1993.
(h) During the first year, decreasing 1.0% annually to 0.0% after the second
year. See "Purchase of Shares--Alternative Sales Arrangements" on page 22.
3
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
EXAMPLE:
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 In-
come Portfolio and Investment
Grade Portfolio the maximum $40
front-end sales charge and for
shares of the Intermediate Term
Portfolio the maximum $20 front-
end sales charge and assuming
(i) the operating expense ratio
set forth opposite the Portfolio
or Class thereof, (ii) a 5% an-
nual return throughout the peri-
ods indicated and (iii) redemp-
tion at the end of the period:
High Income Portfolio
Class A (.55%).................. $45.40 $56.92 $69.50 $106.17
Class B (1.31%)................. $53.34 $61.52 $71.82 $157.90
Investment Grade Portfolio*
Class A (.53%).................. $45.20 $56.31 $68.44 $103.83
Class B (1.29%)................. $53.14 $60.90 $70.76 $155.65
Intermediate Term Portfolio
Class A (.58%).................. $25.81 $38.21 $51.73 $ 91.12
Class B (1.07%)................. $30.91 $34.03 $59.01 $130.57
An investor would pay the follow-
ing expenses on the same $1,000
investment assuming no redemp-
tion at the end of the period:
High Income Portfolio
Class A (.55%).................. $45.40 $56.92 $69.50 $106.17
Class B (1.31%)................. $13.34 $41.52 $71.82 $157.90
Investment Grade Portfolio*
Class A (.53%).................. $45.20 $56.31 $68.44 $103.83
Class B (1.29%)................. $13.14 $40.90 $70.76 $155.65
Intermediate Term Portfolio
Class A (.58%).................. $25.81 $38.21 $51.73 $ 91.12
Class B (1.07%)................. $10.91 $34.03 $59.01 $130.57
</TABLE>
- --------
* Effective January 27, 1994, the High Quality Portfolio will do business under
the name Investment Grade Portfolio.
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 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.
In addition, the Example does not reflect the processing fee (presently $4.85)
Merrill Lynch may charge its customers for confirming purchases and
redemptions.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below 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, independent auditors. Financial statements for the year ended September
30, 1993 and the independent auditors' report thereon are included in the
Statement of Additional Information.
HIGH INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL FOR THE YEAR ENDED SEPTEMBER 30,
STATEMENTS: ---------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28 $ 8.15 $ 7.67 $ 8.24
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment in-
come--net....... .79 .87 .92 1.00 .95 .96 .95 .99 1.02 1.02
Realized and
unrealized gain
(loss) on in-
vestments--net.. .29 .82 .63 (1.13) (.37) (.15) (.23) .13 .48 (.57)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... 1.08 1.69 1.55 (.13) .58 .81 .72 1.12 1.50 .45
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment in-
come--net....... (.79) (.87) (.92) (1.00) (.96) (.96) (.95) (.99) (1.02) (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends. (.79) (.87) (.92) (1.00) (.96) (.96) (.95) (.99) (1.02) (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of year..... $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28 $ 8.15 $ 7.67
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 14.35% 25.22% 26.46% (1.95%) 7.69% 10.82% 8.82% 14.30% 20.60% 5.88%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .55% .59% .66% .68% .66% .64% .65% .71% .86% .84%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses........ .55% .59% .66% .68% .66% .64% .65% .71% .86% .84%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment in-
come--net....... 9.78% 11.44% 14.13% 14.22% 12.30% 12.33% 11.31% 11.68% 12.87% 12.97%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $886,784 $683,801 $522,703 $486,426 $641,619 $759,403 $811,558 $597,379 $299,145 $235,449
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turn-
over............ 34.85% 40.52% 39.95% 47.60% 56.00% 38.99% 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
FINANCIAL
STATEMENTS: ------------------------------------------
FOR THE
PERIOD
OCT. 21,
1988+ TO
SEPTEMBER
INCREASE 30,
(DECREASE) IN 1993 1992 1991 1990 1989
NET ASSET VALUE: ----------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92
----------- --------- --------- ---------- ------------
Investment in-
come--net....... .72 .81 .87 .95 .86
Realized and
unrealized gain
(loss) on in-
vestments--net.. .28 .83 .62 (1.12) (.40)
----------- --------- --------- ---------- ------------
Total from
investment
operations...... 1.00 1.64 1.49 (.17) .46
----------- --------- --------- ---------- ------------
Less dividends:
Investment in-
come--net....... (.72) (.81) (.87) (.95) (.86)
----------- --------- --------- ---------- ------------
Total dividends. (.72) (.81) (.87) (.95) (.86)
----------- --------- --------- ---------- ------------
Net asset value,
end of year..... $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
=========== ========= ========= ========== ============
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 13.35% 24.44% 25.32% (2.54%) 6.08%++
=========== ========= ========= ========== ============
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .56% .60% .67% .70% .70%*
=========== ========= ========= ========== ============
Expenses........ 1.31% 1.35% 1.42% 1.45% 1.45%*
=========== ========= ========= ========== ============
Investment in-
come--net....... 8.94% 10.42% 13.24% 13.69% 11.75%*
=========== ========= ========= ========== ============
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $1,823,275 $847,354 $264,486 $157,979 $120,969
=========== ========= ========= ========== ============
Portfolio turn-
over............ 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
INVESTMENT GRADE PORTFOLIO@
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL STATE- FOR THE YEAR ENDED SEPTEMBER 30,
MENTS: --------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value,
beginning of pe-
riod............ $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69 $ 10.93 $ 9.98 $ 10.37
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment in-
come--net...... .81 .88 .92 .95 1.00 .99 .99 1.11 1.20 1.21
Realized and
unrealized gain
(loss) on in-
vestments--net. .67 .71 .76 (.38) .17 .43 (1.08) .76 .95 (.39)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from in-
vestment opera-
tions........... 1.48 1.59 1.68 .57 1.17 1.42 (.09) 1.87 2.15 .82
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.81) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11) (1.20) (1.21)
Realized gains
on investments--
net............. (.16) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends
and distribu-
tions........... (.97) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11) -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69 $ 10.93 $ 9.98
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 12.78% 14.30% 16.18% 5.22% 11.09% 13.75% (1.14%) 17.66% 22.50% 8.60%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVER-
AGE NET
ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .53% .58% .61% .64% .66% .60% .59% .66% .85% .85%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses........ .53% .58% .61% .64% .66% .60% .59% .66% .85% .85%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment in-
come--net....... 6.94% 7.43% 8.26% 8.54% 9.04% 9.02% 8.52% 9.51% 11.41% 12.19%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DA-
TA:
Net assets, end
of period
(in thousands).. $407,625 $362,139 $324,818 $307,723 $289,804 $258,435 $238,637 $224,820 $135,910 $118,948
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turn-
over............ 121.34% 65.43% 126.32% 126.39% 212.85% 174.99% 126.19% 93.76% 141.40% 112.67%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS B
---------------------------------------------------
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL STATE- FOR THE YEAR ENDED SEPTEMBER 30,
MENTS: ---------------------------------------
FOR THE
PERIOD
OCT. 21,
1988+ TO
INCREASE SEPT 30,
(DECREASE) IN 1993 1992 1991 1990 1989
NET ASSET VALUE: --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value,
beginning of pe-
riod............ $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08
--------- --------- --------- --------- -----------
Investment in-
come--net...... .72 .79 .84 .86 .87
Realized and
unrealized gain
(loss) on in-
vestments--net. .67 .71 .76 (.38) .13
--------- --------- --------- --------- -----------
Total from in-
vestment opera-
tions........... 1.39 1.50 1.60 .48 1.00
--------- --------- --------- --------- -----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.72) (.79) (.84) (.86) (.87)
Realized gains
on investments--
net............. (.16) -- -- -- --
--------- --------- --------- --------- -----------
Total dividends
and distribu-
tions........... (.88) (.79) (.84) (.86) (.87)
--------- --------- --------- --------- -----------
Net asset value,
end of period... $ 12.81 $ 12.30 $ 11.59 $10.83 $ 11.21
========= ========= ========= ========= ===========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 11.92% 13.44% 15.30% 4.42% 9.44%++
========= ========= ========= ========= ===========
RATIOS TO AVER-
AGE NET
ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .54% .59% .62% .66% .70%*
========= ========= ========= ========= ===========
Expenses........ 1.29% 1.34% 1.37% 1.41% 1.45%*
========= ========= ========= ========= ===========
Investment in-
come--net....... 5.80% 6.65% 7.50% 7.77% 8.17%*
========= ========= ========= ========= ===========
SUPPLEMENTAL DA-
TA:
Net assets, end
of period
(in thousands).. $515,402 $325,706 $198,504 $174,914 $91,914
========= ========= ========= ========= ===========
Portfolio turn-
over............ 121.34% 65.43% 126.32% 126.39% 212.85%
========= ========= ========= ========= ===========
</TABLE>
INVESTMENT GRADE PORTFOLIO@
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
@ Effective January 27, 1994, the High Quality Portfolio will do business
under the name Investment Grade Portfolio.
6
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONCLUDED)
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION CLASS A
PROVIDED IN THE ----------------------------------------------------------------------------------------------
FINANCIAL FOR THE YEAR ENDED SEPTEMBER 30,
STATEMENTS: ----------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
NET ASSET VALUE: -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
INCREASE
(DECREASE) IN
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69 $ 10.86 $ 10.05 $ 10.43
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Investment
income--net..... .76 .88 .93 .97 .98 .96 .94 1.07 1.18 1.17
Realized and
unrealized gain
(loss) on
investments--
net............. .55 .62 .53 (.17) .05 .31 (.99) .83 .81 (.38)
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Total from
investment
operations...... 1.31 1.50 1.46 .80 1.03 1.27 (.05) 1.90 1.99 .79
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Less dividends
and
distributions:
Investment
income--net.... (.76) (.88) (.93) (.97) (.99) (.96) (.94) (1.07) (1.18) (1.17)
Realized gains
on
investments--
net............ (.14) -- -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Total dividends
and
distributions... (.90) (.88) (.93) (.97) (.99) (.96) (.94) (1.07) (1.18) (1.17)
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Net asset value,
end of period... $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69 $ 10.86 $ 10.05
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 11.40% 13.71% 13.97% 7.55% 9.79% 12.25% (0.72%) 18.09% 20.66% 8.20%
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .58% .62% .67% .71% .72% .62% .61% .62% .50% .50%
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Expenses........ .58% .62% .67% .71% .72% .62% .61% .62% .50% .50%
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Investment
income--net..... 6.42% 7.54% 8.35% 8.86% 8.97% 8.83% 8.09% 9.12% 11.00% 11.70%
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $193,505 $154,333 $103,170 $88,248 $87,001 $97,577 $111,207 $105,919 $48,095 $27,333
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Portfolio
turnover........ 180.52% 95.33% 132.56% 102.53% 148.75% 152.41% 152.53% 67.12% 48.48% 69.60%
======== ======== ======== ======= ======= ======= ======== ======== ======= =======
<CAPTION>
CLASS B
-----------------
FOR THE PERIOD
NOV. 13, 1992+ TO
SEPTEMBER 30,
1993
-----------------
<S> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 11.68
-----------------
Investment
income--net..... .61
Realized and
unrealized gain
(loss) on
investments--
net............. .90
-----------------
Total from
investment
operations...... 1.51
-----------------
Less dividends
and
distributions:
Investment
income--net.... (.61)
Realized gains
on
investments--
net............ (.14)
-----------------
Total dividends
and
distributions... (.75)
-----------------
Net asset value,
end of period... $ 12.44
=================
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 13.31%++
=================
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .57%*
=================
Expenses........ 1.07%*
=================
Investment
income--net..... 5.61%*
=================
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $134,122
=================
Portfolio
turnover........ 180.52%
=================
</TABLE>
- -----------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++Aggregate total investment return.
Further information about the Fund's performance 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.
7
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of each Portfolio may be purchased at a price equal to the next
determined net asset value per share, plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of the
purchase (the "initial sales charge alternative"), or (ii) on a deferred basis
(the "deferred sales charge alternative").
Class A Shares. An investor in any of the three Portfolios who elects the
initial sales charge alternative acquires Class A shares. Although Class A
shares incur a sales charge when they are purchased, they enjoy the benefit of
not being subject to any ongoing account maintenance fee or distribution fee
or any sales charge when they are redeemed. Certain purchases of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares."
Class B Shares. An investor in any of the three Portfolios who elects the
deferred sales charge alternative acquires Class B shares. Class B shares do
not incur a sales charge when they are purchased, but they are subject to an
ongoing account maintenance fee and an ongoing distribution fee at the annual
rate of 0.25% and 0.50%, respectively, for the High Income and Investment
Grade Portfolios, an ongoing distribution fee of 0.25% and an ongoing account
maintenance fee of 0.25% for the Intermediate Term Portfolio, and a sales
charge if they are redeemed within four years of purchase in the case of the
High Income and Investment Grade Portfolios and within two years in the case
of Class B shares of the Intermediate Term Portfolio. Class B shares enjoy the
benefit of permitting all of the investor's dollars to work from the time the
investment is made. The ongoing account maintenance and distribution fees paid
by Class B shares will cause such shares to have a higher expense ratio and to
pay lower dividends than those related to Class A shares.
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time might also
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees on Class B shares may
exceed the initial sales charge. Again, however, such investors must weigh
this consideration against the fact that not all of their funds will be
invested initially. Furthermore, the ongoing account maintenance and
distribution fees will be offset to the extent any return is realized on the
additional funds initially invested under the deferred alternative. However,
there can be no assurance as to the return, if any, which will be realized on
such additional funds. Certain other investors might determine it to be more
advantageous to have all their funds invested initially, although remaining
subject to continued account maintenance and distribution fees and, for a
four-year period of time in the case of the High Income and High Quality
Portfolios or a two-year period of time in the case of the Intermediate Term
Portfolio, a contingent deferred sales charge. See "Purchase of Shares-
Deferred Sales Charge Alternative-Class B Shares."
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge and,
in the case of the Class B shares, from the proceeds of the ongoing
distribution fee and, if applicable, the contingent deferred sales charge
incurred upon redemption within four years of purchase, in the case of the
High Income and Investment Grade Portfolios, or within two years of purchase,
8
<PAGE>
in the case of the Intermediate Term Portfolio. Sales personnel may receive
different compensation for selling Class A or Class B shares. Investors should
understand that the purpose and function of the deferred sales charges with
respect to the Class B shares are the same as those of the initial sales charge
with respect to the Class A shares.
Dividends paid by the Portfolios with respect to Class A and Class B 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 and distribution fees and any incremental transfer agency
costs relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value." Class A and Class B
shareholders of the Portfolios each have an exchange privilege for Class A and
Class B shares, respectively, of certain other mutual funds sponsored by
Merrill Lynch. Class A and Class B shareholders of the Portfolios also may
exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch. See "Shareholder Services--Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940 and state laws, will seek to assure that no such
conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND
OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE, OR TO HAVE THE ENTIRE PURCHASE PRICE INVESTED IN THE PORTFOLIO
WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT
MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST INVESTORS IN MAKING THIS
DETERMINATION, THE FEE TABLE ON THE NEXT PAGE SETS FORTH THE CHARGES
APPLICABLE TO EACH CLASS OF SHARES AND A DISCUSSION OF RELEVANT FACTORS IN
MAKING SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES -
ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 22.
9
<PAGE>
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 Corporation ("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
Transactions in Junk Bonds." Because investment in such junk bonds entails
relatively greater
10
<PAGE>
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."
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
11
<PAGE>
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 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
12
<PAGE>
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 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.
13
<PAGE>
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.
The table below shows the average monthly dollar-weighted market value, by
S&P's rating category, of the securities held by the Portfolio during the
fiscal year ended September 30, 1993.
<TABLE>
<CAPTION>
% MARKET
VALUE
CORPORATE
RATING % NET 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
14
<PAGE>
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 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 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
15
<PAGE>
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.
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
16
<PAGE>
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
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
17
<PAGE>
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; Purchase and Sale Contracts. The Fund may invest in
U.S. Government securities pursuant to repurchase agreements or purchase and
sale contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with a member bank of the Federal Reserve System or primary
dealer in U.S. Government securities. Under such agreements, the bank or
primary dealer agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. While purchase and sale
contracts are similar to repurchase agreements, purchase and sale contracts are
structured so as to be in substance more like the purchase and sale of the
underlying security than is the case with repurchase agreements. As a result,
the Investment Adviser believes that purchase and sale contracts are less
likely to be construed as collateralized loans than is the case with repurchase
agreements, as such agreements are traditionally structured in the banking and
brokerage community. Accordingly, the Investment Adviser believes that the
securities that are the subject of purchase and sale contracts may be less
susceptible to claims of the seller's creditors than the securities underlying
repurchase agreements. 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.
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
18
<PAGE>
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.
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
19
<PAGE>
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.
INVESTMENT ADVISER
The investment adviser to the Fund is Fund Asset Management, L.P. ("FAM").
The address of MLAM is Box 9011, Princeton, New Jersey 08543-9011. FAM or MLAM
acts as the investment adviser for over 50 other registered investment
companies.
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.) is itself a wholly-owned
subsidiary of 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 is a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. Fund Asset Management, Inc. was a wholly-owned subsidiary of Merrill Lynch
Investment Management, Inc., which did business as Merrill Lynch Asset
Management. ("MLAM"). MLAM was a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. prior to its reorganization and continues to be after its
reorganization.
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
year ended September 30,
20
<PAGE>
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).
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 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 five individuals, four 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, Director and Chief Executive Officer of MLAM and
FAM; Executive Vice President of Merrill Lynch & Co., Inc. since 1990;
Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
("Merrill Lynch") since 1990 and a Senior Vice President thereof from 1985 to
1990.
Ronald W. Forbes--Associate Professor of Finance, School of Business, State
University of New York at Albany.
Charles C. Reilly--Adjunct Professor, Columbia University Graduate School of
Business.
Kevin A. Ryan--Professor of Education at Boston University since 1982.
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.
21
<PAGE>
PURCHASE OF SHARES
Each Portfolio continuously offers its shares at a public offering price
based on its per share net asset value. 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"), a wholly-
owned subsidiary of MLAM, 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 $250 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.
Each of the Portfolios issues two classes of shares: Class A shares are sold
to investors choosing the initial sales charge alternative and Class B shares
are sold to investors choosing the deferred sales charge alternative. The two
classes of shares each represent interests in the same Portfolio of
investments, have the same rights and are identical in all respects, except
that Class B shares bear the expenses of the ongoing account maintenance and
distribution fees and the deferred sales arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and distribution
fees are paid. The two classes also have different exchange privileges. See
"Shareholder Services--Exchange Privilege." The net income attributable to
Class B shares and the dividends payable on Class B shares will be reduced by
the amount of the account maintenance and distribution fees and incremental
expenses associated with such account maintenance and distribution fees. Sales
personnel may receive different compensation for selling Class A or Class B
shares. Investors are advised that only Class A shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors in the
Portfolios to choose the method of purchasing shares that 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.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to an ongoing account
maintenance fee and distribution fee as described
22
<PAGE>
below. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance fee and distribution fee may exceed the initial sales
charge. Again, however, such investors must weigh this consideration against
the fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance fees and distribution fees will be offset to the
extent any return is realized on the additional funds initially invested under
the deferred alternative. Another factor that may be applicable under certain
circumstances is the payment of the Class B distribution fee and contingent
deferred sales charge is subject to certain limits as set forth under
"Purchase of Shares--Limitations on Sales Charges."
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for four years in the case of
the High Income and the Investment Grade Portfolios and for two years in the
case of the Intermediate Term Portfolio, a contingent deferred sales charge as
described below. For example, an investor in the High Income Portfolio subject
to the 4.0% initial sales charge will have to hold his investment at least 5
1/3 years for the ongoing 0.25% account maintenance fee and 0.50% distribution
fee of Class B shares to exceed the initial sales charge on Class A shares.
This example does not take into account the time value of money which further
reduces the impact of the ongoing 0.25% account maintenance fee and 0.50%
distribution fee of Class B shares on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of
time or the effects of any limits that may be imposed upon the payments of the
distribution fee and the contingent deferred sales charges.
INITIAL SALES CHARGE ALTERNATIVE
Sales charges for purchases of Class A 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 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>
CLASS A SHARES OF THE
HIGH INCOME AND
INVESTMENT GRADE PORTFOLIOS+
----------------------------------
SALES CHARGE
--------------------- DEALER
AMOUNT OF PURCHASE GROSS NET* DISCOUNT
- ------------------ --------- --------- -----------
<S> <C> <C> <C>
Less than $50,000....... 4.00% 4.17% 3.75%
$50,000 but less than
$100,000............... 3.50 3.63 3.25
$100,000 but less than
$250,000............... 3.00 3.09 2.75
$250,000 but less than
$500,000............... 2.50 2.56 2.25
$500,000 but less than
$750,000............... 2.00 2.04 1.75
$750,000 but less than
$1,000,000............. 1.50 1.52 1.25
$1,000,000 but less than
$2,500,000**........... 1.00 1.01 .80
$2,500,000 and more**... .50 .50 .40
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
----------------------------------
SALES CHARGE
--------------------- DEALER
AMOUNT OF PURCHASE GROSS NET* DISCOUNT
- ------------------ --------- --------- -----------
<S> <C> <C> <C>
Less than $100,000...... 2.00% 2.04% 1.80%
$100,000 but less than
$500,000............... 1.50 1.52 1.40
$500,000 but less than
$1,000,000............. 1.00 1.01 .90
$1,000,000 or more**.... .50 .50 .45
</TABLE>
- ---------------------
* Rounded to the nearest one-hundredth percent.
** A purchase of $1 million or more in a single transaction by an investor
(other than a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), or a deferred
compensation plan under Section 403(b) and Section 457 of the Code), or any
purchase by a TMASM Managed Trust, of Class A shares of the Fund's
Portfolios will not be subject to an initial sales charge. Such purchases
may be subject to a contingent deferred sales charge of up to 1% of the
dollar amount of the purchase if the shares are redeemed within one year
after purchase.
+ Effective January 27, 1994, the High Quality Portfolio will do business
under the name Investment Grade Portfolio.
Initial sales charges may be waived for shareholders purchasing $1 million or
more in a single transaction (other than a tax qualified retirement plan under
Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"), or a
deferred compensation plan under Section 403(b) and Section 457 of the Code), a
purchase by a TMASM Managed Trust, of Class A shares of the Fund. In addition,
purchases of Class A shares of the Fund made in connection with a single
investment of $1 million or more under the Merrill Lynch Mutual Fund Adviser
Program will not be subject to an initial sales charge. Purchases described in
this paragraph will be subject to a contingent deferred sales charge if the
shares are redeemed within one year after purchase at the following rates:
CLASS A SHARES OF HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS+
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million up to $2.5 million.................... 0.75%
Over $2.5 million up to $3.5 million............. 0.40%
Over $3.5 million up to $5 million............... 0.25%
Over $5 million.................................. 0.20%
</TABLE>
CLASS A SHARES OF INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million and over.............................. 0.50%
</TABLE>
---------------------
+ Effective January 27, 1994, the High Quality Portfolio will do
business under the name Investment Grade Portfolio.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act of 1933, as amended.
24
<PAGE>
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of each of the
Portfolios are offered at net asset value to Directors of the Fund, to
directors or trustees of certain other Merrill Lynch-sponsored investment
companies, to participants in certain benefit plans, 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 if
certain conditions set forth in the Statement of Additional Information are
met, to directors of Merrill Lynch & Co., Inc. and to employees of Merrill
Lynch & Co., Inc. and its subsidiaries. Class A shares are offered with reduced
sales charges, and in certain circumstances, at net asset value, to
participants in the Merrill Lynch BlueprintSM Program. See "Shareholder
Services--Merrill Lynch BlueprintSM Program." Class A shares are offered at net
asset value to certain retirement plans, including eligible 401(k) plans,
provided such plans meet the required number of eligible employees or required
amount of assets advised by the Investment Adviser or MLAM. Also, Class A
shares of any of the three Portfolios may be offered at net asset value in
connection with the acquisition of assets of other investment companies. Class
A 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 if the following conditions are satisfied: first, the investor must
purchase Class A shares of the Fund with the proceeds from a redemption of
shares of such other mutual fund and such fund must have imposed a sales charge
either at the time of purchase or on a deferred basis; second, such purchase of
Class A shares must be made within 90 days after such notice of termination of
the arrangement. Class A shares of the Portfolios are offered at net asset
value to shareholders of Merrill Lynch Prime Fund, Inc. and certain closed-end
funds advised by the Investment Adviser or MLAM who wish to immediately
reinvest the net proceeds from a sale of their shares in shares of the
Portfolios.
No initial sales charges are imposed upon Class A shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares of any of the three Portfolios at net asset value per share without the
imposition of a sales charge at the time of purchase. The Class B shares are
being sold without an initial sales charge so that the Portfolio will receive
the full amount of the investor's purchase payment. Merrill Lynch compensates
its financial consultants for selling Class B shares at the time of purchase
from its own funds. The proceeds of the contingent deferred sales charge and
the ongoing distribution fee discussed below are used to defray Merrill Lynch's
expenses, including compensating its financial consultants. The proceeds from
the ongoing account maintenance fee are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
Proceeds from the contingent deferred sales charges 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 Portfolios in connection with the sale of
the Class B shares, such as the payment of compensation to financial
consultants for selling Class B shares, from its own funds. Payments by the
Portfolios to the Distributor of the distribution fee under the distribution
plan described below also may be used in whole or in part by the Distributor
for this purpose. The combination of the contingent
25
<PAGE>
deferred sales charge and the ongoing account maintenance distribution fees
facilitates the ability of the Portfolios to sell the Class B shares without a
sales charge being deducted at the time of purchase. 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
contingent deferred sales charge schedule. Such schedule may be higher than the
deferred sales charge schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charge. Class B shares of the High Income and
Investment Grade Portfolios redeemed within four years of purchase and Class B
Shares of the Intermediate Term Portfolio redeemed within two years of
purchase, may be subject to a contingent deferred sales charge ("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
current market value 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 redemption of shares received
upon reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
HIGH INCOME OR SALES CHARGE AS A
INVESTMENT GRADE PORTFOLIO:* PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHANGE
---------------------------- -------------------
<S> <C>
0-1.................................................. 4.0%
1-2.................................................. 3.0%
2-3.................................................. 2.0%
3-4.................................................. 1.0%
4 and thereafter..................................... None
</TABLE>
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
INTERMEDIATE TERM PORTFOLIO: PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHANGE
---------------------------- -------------------
<S> <C>
0-1.................................................. 2.0%
1-2.................................................. 1.0%
2 and thereafter..................................... None
</TABLE>
- --------
* Effective January 27, 1994, the High Quality Portfolio will do 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 two
years or shares acquired pursuant to reinvestment of dividends or distributions
and then of shares held longest during the two-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 will be assumed to be made in the same order as a redemption.
26
<PAGE>
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 contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from an IRA or other
retirement plan or following the death or disability (as defined in the
Internal Revenue Code) of a shareholder. The contingent deferred sales charge
also is waived on redemption of shares in connection with certain group plans
through the Merrill Lynch BlueprintSM Program. See "Shareholder Services--
Merrill Lynch Blueprint 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 contingent deferred sales charge is set forth in the Statement of
Additional Information.
Distribution Plan. Pursuant to a Distribution Plan adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940, each Portfolio
pays the Distributor an 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 provides the account maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates the Distributor and Merrill
Lynch for providing account maintenance services to Class B shareholders. The
ongoing distribution fee compensates the Distributor and Merrill Lynch for
providing distribution services and bearing certain distribution-related
expenses of the Portfolio, including payments to financial consultants for
selling Class B shares of the Portfolio. 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 Portfolio's (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 fiscal year ended September 30, 1993, the High Income,
Investment Grade and Intermediate Term Portfolios paid the Distributor
$9,639,303, $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 Distribution Plan is designed to permit an
investor to purchase Class B shares through dealers without the assessment of a
front-end sales load and at the same time permit the dealer to compensate its
financial consultants in connection with the sale of the Class B shares. In
this regard, the purpose and function of the distribution fee and the CDSC of a
Portfolio are the same as those of the initial
27
<PAGE>
sales charge with respect to the Class A shares of such Portfolio in that the
deferred sales charges provide for the financing of the distribution of the
Portfolio's Class B shares.
The payments under the Class B Distribution Plan, as was the case with the
Prior Plan, are based on a percentage of average daily net assets regardless of
the amount of expenses incurred and, accordingly, distribution-related revenues
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 Distribution Plan. 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, 1992, 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 $15,083,000 (1.61% of Class B net assets at that
date) with respect to the High Income Portfolio and approximately $3,702,000
(1.01% of Class B net assets at that date) with respect to the Investment Grade
Portfolio and approximately $99,000 (.36% of Class B net assets at that date)
with respect to the Intermediate Term Portfolio. As of December 31, 1992 direct
cash expenses for the period since commencement of the offering of Class B
shares exceeded direct cash revenues by approximately $104,378 (.01% 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 $2,907,675 (.80%
of Class B net assets at that date) with respect to the Investment Grade
Portfolio and direct cash expenses exceeded direct cash revenues by
approximately $29,023 (.11% 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-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Plan from year to year. However,
the Distributor intends to seek annual continuation of the Distribution Plan.
In their review of the Distribution Plan, the Directors will not be asked to
take into consideration expenses incurred in connection with the distribution
of Class A shares or of shares of other funds for which the Distributor acts as
distributor. The distribution and account maintenance fees and the contingent
deferred sales charge in the case of Class B shares will not be used to
subsidize the sale of Class A shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges, such as the Fund's distribution fee and the
CDSC, but not the account maintenance fees. As applicable to the Fund, the
28
<PAGE>
maximum sales charge rule limits the aggregate of distribution fee payments and
CDSCs payable by the Fund to the sum of (1) 6.25% of eligible gross sales of
Class B shares (defined to exclude shares issued pursuant to dividend
reinvestment and exchanges) and (2) interest on the unpaid balance 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). 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") 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 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 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 September 30, 1993 for the High Income
and Investment Grade Portfolios, and for the period November 12, 1992
(commencement of Class B operations) to September 30, 1993 for the Intermediate
Term Portfolio:
DATA CALCULATED AS OF SEPTEMBER 30, 1993
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................ $1,529,124 $95,570 $9,241 $104,811 $15,936 $88,875 $9,116
Under Distributor's Vol-
untary
Waiver................. $1,529,124 $95,570 $7,646 $103,216 $15,936 $87,279 $9,116
</TABLE>
INVESTMENT GRADE PORTFOLIO + (IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNTS 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................ $442,469 $27,654 $4,181 $31,835 $8,169 $23,666 $2,577
Under Distributor's Vol-
untary
Waiver................. $442,469 $27,654 $2,213 $29,867 $8,169 $21,697 $2,577
</TABLE>
29
<PAGE>
INTERMEDIATE TERM PORTFOLIO (IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNTS 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................ $44,590 $2,787 $ 82 $2,869 $237 $2,631 $334
Under Distributor's Vol-
untary
Waiver................. $44,590 $2,787 $223 $3,010 $237 $2,772 $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.
+ Effective January 27, 1994, the High Quality Portfolio will do business
under the name Investment Grade Portfolio.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional 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 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
contingent deferred sales charge, if any, in the case of Class B Shares of the
Portfolios. Except for any contingent deferred sales load which may be
applicable to Class B 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.
30
<PAGE>
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., Transfer Agency
Mutual Fund Operations, 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 Fund 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.
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.
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; however, 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 charges 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 SHARES
As described in further detail in the Statement of Additional Information,
holders of Class A 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.
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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 Class B account maintenance and
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 shares will be lower than the per share dividends
and distributions on Class A shares as a result of the distribution and
transfer agency fees applicable to the Class B 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.
See "Shareholder Services--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 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
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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 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.
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.
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.
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
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<PAGE>
pertinent Code sections and the Regulations promulgated thereunder. The Code
and Regulations are subject to change by legislative or administrative action.
The Statement of Additional Information describes the effect of other
provisions of the Code on the Fund's shareholders.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.
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 can be obtained from
the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and after each dividend payment will receive a statement
from the Transfer Agent showing the cumulative activity in the account since
the beginning of the year. After the end of each year, shareholders will
receive federal income tax information regarding dividends and 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 may also maintain their accounts through Merrill Lynch.
Shareholders interested in transferring their shares from Merrill Lynch 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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares, and then must turn the certificates over to the
new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares 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.
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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 PLAN
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 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.
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 as soon as practicable after the payable
date. See "Dividends, Distributions and Taxes."
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-(800) MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the respective Portfolio or paid
out in cash, and, commencing ten days after the receipt by the Transfer Agent
of such notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
As described in further detail in the Statement of Additional Information, a
shareholder of shares subject to the initial sales charge may elect to make
systematic withdrawals from his Investment Account with respect to any
Portfolio on either a monthly or calendar quarterly basis.
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.
EXCHANGE PRIVILEGE
Shareholders of the Fund who have held all or part of their shares in any
Portfolio for at least 15 days may exchange their shares for shares of the
other Portfolios of the Fund, or with certain other mutual funds offered
through the Distributor. Class A shareholders of any of the three Portfolios
may exchange their shares ("outstanding Class A shares") for Class A shares of
another fund or another Portfolio of the Fund ("new Class A shares") on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales
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<PAGE>
charge payable at the time of the exchange on the new Class A shares. The
Fund's exchange privilege is modified with respect to purchases of Class A
shares under the Merrill Lynch Mutual Fund Adviser program. First, the initial
allocation of assets is made under the program. Then, any subsequent exchange
under the program of Class A shares of a fund for Class A shares of the Fund
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
fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under this program. Class B shareholders of any of the three
Portfolios of the Fund may exchange their shares ("outstanding Class B
shares") for Class B shares of the other Portfolios or another participating
fund ("new Class B shares") on the basis of relative net asset value per
share, without the payment of any contingent deferred sales charge that might
otherwise be due upon redemption of the outstanding Class B shares. For
purposes of computing the contingent deferred sales charge that may be payable
upon a disposition of the new Class B shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class
B shares. Class B shareholders of the fund exercising the exchange privilege
will continue to be subject to the fund's contingent deferred sales charge
schedule if such schedule is higher than the deferred sales charge schedule
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 contingent
deferred sales charge schedule or the deferred sales charge schedule relating
to the Class B shares of the fund from which the exchange has been made. Class
A and Class B shareholders of the Fund may also exchange their shares for
shares of certain money market funds, but in the case of an exchange from
Class B shares the period of time that shares are held in a money market fund
will not count toward satisfaction of the holding period requirement for
purposes of reducing the contingent deferred sales charge. Exercise of the
exchange privilege is treated as a sale for federal income tax purposes.
Further information regarding the exchange privilege, including sales load or
contingent deferred sales charge assessed on an exchange, if any, and the
objectives of these funds is contained in the Statement of Additional
Information. Before effecting an exchange, a shareholder of the Fund should
obtain the currently effective prospectus of the fund into which the exchange
is to be made.
MERRILL LYNCH BLUEPRINT SM PROGRAM
Class A shares and Class B shares of any of the three Portfolios are offered
to participants in the Merrill Lynch Blueprint SM Program ("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 shares of
the Portfolios through a Blueprint account will acquire the 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 Blueprint SM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
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PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield 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 Portfolios 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 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 shares, and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual or annualized rate of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charge, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
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 reduced sales charges in the case of Class A shares of
the Portfolios or waiver of the contingent deferred sales charge in the case of
Class B shares of investors in certain retirement plans, the performance data
may take into account the reduced, and not the maximum, sales charge or may not
take into account the contingent deferred sales charges and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the contingent deferred sales charge, a lower amount of expenses is
deducted. See "Purchase of Shares." The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate such total
return on a hypothetical investment in the Fund at the beginning of each
specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. The yield for the 30-
day period ending September 30, 1993 was 9.37% for Class A shares and 8.98% for
Class B shares of the High Income Portfolio, 5.25% for Class A shares and 4.70%
for Class B shares of the Investment Grade Portfolio, and 5.07% for Class A
shares and 4.66% for Class B shares of the Intermediate Term Portfolio.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
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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. 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 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 the distribution fee payable to the
Distributor, are accrued daily.
The net asset value per share of the Class A and Class B shares are expected
to be equivalent. Under certain circumstances, however, the per share net asset
value of the Class B shares may be lower than the per share net asset value of
the Class A shares reflecting the daily expense accruals of the distribution
and transfer agency fees applicable with respect to the Class B shares. Even
under those circumstances, the per share net asset value of the two classes
eventually will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential 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 one billion (1,000,000,000) shares of $.10 par value.
The shares are divided as follows: High Income Portfolio Series Common Stock
which is divided into two classes designated "Class A Common Stock" and "Class
B Common Stock" which consist of 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 two classes
designated "Class A Common Stock" and "Class B Common Stock" each of which
consist of 100,000,000 shares and the Intermediate Term Portfolio Series Common
Stock, which is divided into two classes designated "Class A Common Stock" and
"Class B Common Stock" each of which consists of 50,000,000 shares. Each class
of Common Stock of each Portfolio represents an interest in the same assets of
such Portfolio and is identical in all respects to the other class except that
the Class B shares bear certain expenses of the account maintenance
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<PAGE>
and distribution fees related to the Class B shares and have exclusive voting
rights with respect to matters relating to such account maintenance and
distribution expenditures. See "Purchase of Shares." The Fund has received an
order from the Securities and Exchange Commission (the "Commission") permitting
the issuance and sale of two 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; however the
creation of additional classes would require an additional order from the
Commission. There is no assurance that such an additional order will be issued.
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 or conversion 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.
For further information concerning the organization of the Fund, see the
Statement of Additional Information.
INDEPENDENT AUDITORS
Deloitte & Touche, 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 $10.00 per shareholder
account for Class A shares of the Portfolios and $12.00 per shareholder account
for Class B 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
The fiscal year of the Fund ends on September 30 of each year. The Fund will
send to its shareholders at least semiannually reports showing the Fund's
portfolio and other information. An annual report containing financial
statements, audited by independent auditors, will be sent to shareholders each
year.
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
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<PAGE>
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: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290
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 January 27, 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.
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APPENDIX: DESCRIPTION OF CORPORATE BOND RATINGS
RATINGS OF CORPORATE BONDS
Description of Corporate Bond Ratings of Moody's Investors Service, Inc.:
Aaa--Bonds 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.
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.
41
<PAGE>
Description of Corporate Bond Ratings of Standard & Poor's Corporation:
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--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
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.
42
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.--AUTHORIZATION FORM
NOTE: THIS FOR MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT PROGRAM
APPLICATION BY CALLING (800) 637-3766.
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase shares of Merrill Lynch Corporate
Bond Fund, Inc. and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
[_]High Income Portfolio Class A Shares
$______________
[_]High Income Portfolio Class B Shares
$______________
[_]Investment Grade Portfolio Class A
Shares
$______________
[_]Investment Grade Portfolio Class B
Shares
$______________
[_]Intermediate Term Portfolio Class A
Shares
$______________
[_]Intermediate Term Portfolio Class B
Shares
$______________
A. I enclose a check for $...... payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000). (Subsequent investments $50 or
more.) 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.
1. ........................... 4. ...........................
2. ........................... 5. ...........................
3. ........................... 6. ...........................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Options
ELECT [_] reinvest ELECT [_] reinvest
dividends capital gains
ONE [_] pay dividends in ONE [_] pay capital
cash gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
---------------
(Please Print)
Name ..........................................
First NameInitialLast Name Social Security
No. or Taxpayer
Name of Co-Owner (if any) ..................... Identification
First NameInitialLast Name No.
Address ....................................... [_][_][_][_][_][_][_][_][_]
...............................................
(Zip Code)
Occupation.....................................
Name and Address of Employer...................
...............................................
............................................... ......., 19..
(Zip Code) Date
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed on page of the
Prospectus) 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 UNDERREPORTING, AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
Signature of Owner ............ Signature of Co-Owner (if any) ..........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions
in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Corporate Bond Fund, Inc. at cost or
current offering price. Begin systematic withdrawal on ... 19. . Withdrawals to
be made either (check one) [_] Monthly [_] Quarterly. Quarterly withdrawals
are made on the 24th day of March, June, September and December.
Specify withdrawal amount (check one): [_] $...... or [_] .....% of the current
value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below:
(b) I hereby authorize Payment by
(a) I hereby authorize Payment by Direct Deposit to Bank Account and
Check (if necessary) debit entries and
adjustments for any credit entries
made in error to my account.
Draw checks payable
check one)
[_] as indicated in item 1. Specify type of account (check
[_] to the order of ................ one) [_] checking [_] savings
I agree that this authorization will
remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Mail to (check one)
[_] The address indicated in item
1.
[_] Name (Please Print)
Address............................... Name on your Account..................
Signature of Owner.................... Bank..... Bank #...... Account #.....
Signature of Co-Owner (if any)........ Bank Address..........................
Signature of Depositor..... Date......
Signature of Depositor (if joint
account)..............................
NOTE: If Automatic Direct Deposit is
elected, your blank, unsigned check
marked "VOID" or a deposit slip from
your savings account should accompany
this Application.
43
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.--AUTHORIZATION FORM
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase shares of Merrill Lynch Corporate Bond Fund, Inc.,
subject to the terms set forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS DRAWN
BY FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw
checks or an automated clearing To ............................. Bank
house ("ACH") debit each month on my (Investor's Bank)
bank account for investment in Bank Address ........................
Merrill Lynch Corporate Bond Fund,
Inc., as indicated below:
City .......... State ........... Zip
Amount of each check or ACH debit
$ ................................ As a convenience to me, I hereby
request and authorize you to pay and
Account No. ...................... charge to my account checks or ACH
debits drawn on my account by and
Please date and invest checks or payable to Financial Data Services,
draw ACH debits on the 20th of Inc. Transfer Agency Mutual Fund
each month beginning ............. Operations, P.O. Box 45289,
Jacksonville, Florida 32232-5289. I
(Month) agree that your rights in respect to
or as soon thereafter as possible. each such check or debit shall be
the same as if it were a check drawn
I agree that you are preparing on you and signed personally by me.
these checks or drawing these debits This authority is to remain in
voluntarily at my request and that effect until revoked by me in
you shall not be liable for any loss writing. Until you receive such
arising from any delay in preparing notice, you shall be fully protected
or failure to prepare any such check in honoring any such check or debit.
or debit. If I change banks or I further agree that if any such
desire to terminate or suspend this check or debit be dishonored,
program, I agree to notify you whether with or without cause and
promptly in writing. whether intentionally or
I further agree that if a check or inadvertently, you shall be under no
debit is not honored upon liability.
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 returned check or
dishonored debit.
.....................................
Date Signature of Depositor
.....................................
Date Signature of Depositor .....................................
Bank Signature of Depositor
................................... Account (If joint account, both
Signature of Depositor Number must sign)
(If joint account, both must sign)
Note: If Automatic Investment Plan
is elected, your blank, unsigned
check marked "VOID" should accompany
this Application.
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION (AVAILABLE TO HOLDERS OF CLASS A 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......
Gentlemen: Date of Initial
Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Corporate Bond Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charges for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $750,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund prospectus.
I agree to the terms and conditions of the 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 Common Stock of Merrill Lynch Corporate Bond Fund, Inc., held as
security.
By .................................. .....................................
Signature of Owner Signature (If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name ............................ (2) Name ............................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, We hereby authorize Merrill Lynch Funds
Stamp 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.
- -
This form when completed
should be mailed to:
Merrill Lynch Corporate ...............................................
Bond Fund, Inc. Dealer Name and Address
c/o Financial Data By ............................................
Services, Inc. Authorized Signature of Dealer
[_][_][_]
Branch-Code [_][_][_][_] ...................
F/C No. F/C Last Name
Transfer Agency Mutual
Fund Operations
P.O. Box 45289
Jacksonville, Florida
32232-5289
[_][_][_] [_][_][_][_][_]
Dealer's Customer F/C No.
44
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
45
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
46
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
47
<PAGE>
Code # 10046
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION 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 LAW-
FULLY BE MADE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 5
Alternative Sales Arrangements............................................. 10
Investment Objectives and Policies......................................... 10
Investment Policies of the Portfolios...................................... 10
Risk Factors in Transactions in Junk Bonds................................ 13
Interest Rate Futures and Options Thereon................................. 14
Other Portfolio Strategies................................................ 18
Investment Restrictions................................................... 20
Investment Adviser......................................................... 20
Directors.................................................................. 21
Purchase of Shares......................................................... 22
Alternative Sales Arrangements............................................ 22
Initial Sales Charge Alternative.......................................... 23
Deferred Sales Charge Alternative--Class B Shares......................... 25
Limitations on the Payment of Deferred Sales Charges...................... 28
Redemption of Shares....................................................... 30
Redemption................................................................ 31
Repurchase................................................................ 31
Reinstatement Privilege--Class A Shares................................... 31
Dividends, Distributions and Taxes......................................... 32
Dividends and Distributions............................................... 32
Federal Income Taxes...................................................... 32
Portfolio Transactions..................................................... 34
Shareholder Services....................................................... 34
Investment Account........................................................ 34
Automatic Investment Plan................................................. 35
Reinvestment of Dividends and Capital Gain Distributions.................. 35
Systematic Withdrawal Plans............................................... 35
Retirement Plans.......................................................... 35
Exchange Privilege........................................................ 35
Merrill Lynch Blueprint(TM) Program....................................... 36
Performance Data........................................................... 37
Additional Information..................................................... 38
Determination of Net Asset Value.......................................... 38
Organization of the Fund.................................................. 38
Independent Auditors...................................................... 39
Custodian................................................................. 39
Transfer Agency Services.................................................. 39
Legal Counsel............................................................. 39
Reports to Shareholders................................................... 39
Additional Information.................................................... 40
Appendix: Description of Corporate Bond Ratings............................ 41
Authorization Form......................................................... 43
</TABLE>
PROSPECTUS
(ART)
- -------------------------------------------------------------------------------
MERRILL LYNCH
CORPORATE BOND
FUND, INC.
Shares of Common Stock
January 27, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------
January 27, 1994
MERRILL LYNCH CORPORATE BOND FUND, INC.
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. Each Portfolio
offers two classes of shares of Common Stock which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charge with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Each Class A share and Class B
share of a Portfolio represents an identical interest in the investment
portfolio of that Portfolio and has the same right, except that Class B shares
bear the expenses of the distribution fee and certain other costs resulting
from the deferred sales charge arrangement and have exclusive voting rights
with respect to the distribution fee. The two classes also have different
exchange privileges.
-------------------------
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 January 27, 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, L.P.-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
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 10 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 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.
2
<PAGE>
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.
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
3
<PAGE>
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 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.
4
<PAGE>
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 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.
5
<PAGE>
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).
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.
6
<PAGE>
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).
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.
7
<PAGE>
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; Purchase and Sale Contracts. As described in the
Prospectus, the Fund may invest in securities pursuant to repurchase agreements
or purchase and sale contracts. 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 case of repurchase agreements,
the prices at which the trades are conducted do not reflect accrued interest on
the underlying obligations; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. 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. In the case of a repurchase
agreement, 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; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. 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. A purchase and
sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that the securities are owned by the Fund. In the event
of a default under such a repurchase agreement or under a purchase
8
<PAGE>
and sale contract, 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. While the substance of purchase 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 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.
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 Box 9011, Princeton, New Jersey 08540-9011.
Arthur Zeikel--President and Director (1)(2)--President, Director and Chief
Investment Officer of Fund Asset Management, L.P. (referred to below as the
"Investment Adviser" or "FAM") since 1977; President of Merrill Lynch
Investment Management, Inc., doing business as Merrill Lynch Asset Management
L.P. ("MLAM"), 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 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.
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
9
<PAGE>
University Center for Advancement of Ethics and Character. Formerly taught on
the faculties of the University of Chicago, Stanford University and The Ohio
State University.
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.
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 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).
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 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, West and White 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 October 31, 1993, 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 October 31, 1993, 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.
10
<PAGE>
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.
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 subsidiary 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. FAM is a wholly-owned subsidiary
of Merrill Lynch & Co., Inc. Fund Asset Management, Inc. was a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc., which did business as
Merrill Lynch Asset Management. MLAM was a wholly-owned subsidiary of Merrill
Lynch & Co., Inc. prior to its reorganization and continues to be after its
reorganization.
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
11
<PAGE>
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 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
AGGREGATE OF AVERAGE DAILY NET INCOME GRADE TERM
ASSETS OF THE THREE COMBINED PORTFOLIOS 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>
- --------
* Effective January 27, 1994, the High Quality Portfolio will do business under
the name Investment Grade Portfolio.
Certain of the states in which the shares of the Fund are qualified for sale
impose limitations on the expenses of the Fund. At the date of this Statement
of Additional Information, the most restrictive state 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 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
12
<PAGE>
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 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 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., Merrill Lynch Investment Management, 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,
1993 to March 1, 1994 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, 1994 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 $10.00 per
shareholder account for Class A shares of the Portfolios and a fee of $12.00
per shareholder account for Class B shares of the Portfolios. For the year
ended September 30, 1993, the Fund paid FDS a fee of $2,707,499.
Section 11(a) of the Securities Exchange Act of 1934 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 the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any 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.
13
<PAGE>
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 38 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,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset 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 the distribution fee 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 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. 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.
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
14
<PAGE>
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.
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.
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.
15
<PAGE>
PURCHASE OF SHARES
Each Portfolio issues two classes of shares: Class A shares are sold to
investors choosing the initial sales charge alternative and Class B shares are
sold to investors choosing the deferred sales charge alternative. The two
classes of shares of each Portfolio represent interests in the same portfolio
of investments of such Portfolio, have the same rights and are identical in all
respects, except that Class B shares bear the expenses of the deferred sales
arrangements and any expenses (including incremental transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distributions
fee is paid. The two classes also have different exchange privileges. See
"Shareholder Services--Exchange Privilege."
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the three Portfolios permit investors
to choose the method of purchasing shares that 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 Fund has entered into separate distribution agreements (the "Distribution
Agreements") with the Distributor, one in connection with the continuous
offering of Class A shares of the three Portfolios and the other in connection
with the continuous offering of Class B shares of the three Portfolios. The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of the 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.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
For the fiscal years ended September 30, 1991, 1992 and 1993, the Distributor
received $1,523,659, $3,920,517 and $5,600,676, 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
Reduced Sales Charges. As described generally in the Prospectus, a reduced
sales charge is available for any purchase of Class A shares of the High Income
Portfolio or Investment Grade Portfolio in excess of $50,000 and Class A shares
of the Intermediate Term Portfolio in excess of $100,000. 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 or her spouse and their children under the age of 21 years
purchasing shares for his, her or their own accounts, 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 purchases by any "company", as that term is
16
<PAGE>
defined in the Investment Company Act of 1940, 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 at a discount of shares of the
Fund or shares of other registered investment companies. The term "purchase"
does not include purchases by any group of individuals whose sole
organizational nexus is that the participants 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.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which investors are permitted to purchase Class A shares
of any of the three Portfolios at the offering price applicable to the total of
(a) the dollar amount 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 shares of all of the funds (including each of the
Portfolios) with an initial sales charge or a deferred sales charge distributed
by 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 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.
Letter of Intention. Reduced sales charges are applicable to purchases
through any dealer aggregating $50,000 or more of Class A shares of the High
Income Portfolio or the High Quality Portfolio and $100,000 or more of Class A
shares of the Intermediate Term Portfolio made within a thirteen-month period
starting with the first purchase pursuant to a Letter of Intention in the form
provided by the Distributor. Purchases of shares of certain other investment
companies sold with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor may be aggregated with purchases
of shares in a Portfolio for purposes of reaching the $50,000 and $100,000
levels. 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 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 shares of any of the three Portfolios
or of any other investment company with an initial sales charge or a deferred
sales charge for which the Distributor acts as the distributor 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 shares of the Portfolio purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Shares equal to five percent of the intended amount will be held in
escrow during the thirteen-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 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
Merrill Lynch Ready Assets Trust, Merrill Lynch U.S.A. Government Reserves or
Merrill Lynch Retirement Reserves Money Fund into any Portfolio that creates a
sales charge will count toward completing a new or existing Letter of Intention
in any Portfolio.
17
<PAGE>
Merrill Lynch Blueprint SM Program. Class A shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint SM
Program ("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 shares of
the Portfolios through Blueprint will acquire such shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $5,000.01 at 3.5% for the High Income and Investment
Grade Portfolios and 1.8% for the Intermediate Term Portfolios. Purchases of
$5,000 or more will be at the standard sales charge rate disclosed in the
Prospectus). In addition, Class A 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 shareholders through Blueprint may differ from those available to other
investors. Class A shares are offered at net asset value, with a waiver of the
front-end sales charge, 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 Eligible Retirement Plans (see definition below) whose
Trustee and/or Plan Sponsor offers the Merrill Lynch Directed IRA Rollover
Program. Eligible Retirement Plans include (a) plans qualified under Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code") with a
salary reduction feature offering a menu of investments to plan participants,
provided such plan initially has 1,000 or more employees eligible to
participate in the plan (employees eligible to participate in retirement plans
of the same sponsoring employer or its affiliates may be aggregated); or (b)
tax qualified retirement plans within the meaning of Section 401(a) of the Code
or deferred compensation plans within the meaning of Section 403(b) of the
Code, provided the plan (i) initially invested $5 million or more in existing
plan assets in portfolios, mutual funds or trusts advised by MLAM or its
subsidiaries or (ii) has accumulated $5 million or more in existing plan assets
invested in mutual funds advised by MLAM or its subsidiaries, which charge a
front-end sales charge or contingent deferred sales charge (assets of
retirement plans with the same sponsor or an affiliated sponsor may be
aggregated). Orders for purchases and redemptions 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. 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.
Merrill Lynch clients that received and accepted proposals to purchase Class
A shares of any of the three Portfolios with a waiver of the front-end sales
load pursuant to the prospectus disclosure in effect prior to February 1, 1991,
under the heading "Merrill Lynch Group Financial Services" may continue to
purchase such shares with a waiver of the front-end sales charge and waiver of
the initial and subsequent minimum investment requirements.
Purchases Through Certain Merrill Lynch Financial Consultants. Class A 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 purchase such 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, such redemption must have been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption must have been maintained in the interim in cash or a money market
fund.
18
<PAGE>
Purchase Privileges of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
employees of Merrill Lynch & Co., Inc. and its subsidiaries 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. Directors of Merrill Lynch &
Co., Inc. may purchase Class A shares of the Fund at net asset value.
Class A shares of the Fund 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.
Class A shares of the Fund are offered at net asset value to shareholders of
certain closed-end funds advised by the Investment Adviser or MLAM who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund. 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
Fund, (ii) 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.
A purchase of $1 million or more in a single transaction by an investor
(other than a tax qualified retirement plan under Section 401 of the Internal
Revenue code of 1986, as amended (the "Code"), or a defined compensation plan
under Section 403(b) and Section 457 of the Code), or a purchase by a TMA SM
Managed Trust, of Class A shares of the Fund's Portfolios will not be subject
to an initial sales charge. Such purchases will be subject to a contingent
deferred sales charge if the shares are redeemed within one year after
purchase at the following rates:
CLASS A SHARES OF HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS*
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million up to $2.5 million................... 0.75%
Over $2.5 million up to $3.5 million............ 0.40%
Over $3.5 million up to $5 million.............. 0.25%
Over $5 million................................. 0.20%
</TABLE>
CLASS A SHARES OF INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million and over.............................. 0.50%
</TABLE>
------------
* Effective January 27, 1994, the High Quality Portfolio will do business
under the name Investment Grade Portfolio.
19
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class A shares of the Portfolios may be reduced to the net asset value per
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.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares -- Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for
certain information with respect to the Distribution Plan of the Fund. For the
three months ended December 31, 1993 the High Income, Investment Grade and
Intermediate Term Portfolios incurred distribution fees of $3,737,375,
$1,005,148 and $183,384, respectively. For the fiscal year ended September 30,
1993 the High Income, Investment Grade and Intermediate Term Portfolios
incurred distribution fees 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 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 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."
The payment of the account maintenance fee and distribution fee is subject to
the provisions of Rule 12b-1 under the Investment Company Act of 1940. Among
other things, the Distribution Plan provides that the Distributor shall provide
and the directors shall review quarterly reports of the disbursement of the
distribution fees paid to the Distributor. In their consideration of the
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 the Class B shareholders of the three Portfolios. The 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 the Distribution Plan in accordance with Rule 12b-
1, the Independent Directors concluded that there is reasonable likelihood that
the Distribution Plan will benefit the Fund and its Class B shareholders. The
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 Class B voting securities of any Portfolio. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by any Portfolio without approval of the Class B shareholders of any
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 interest in the Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place.
20
<PAGE>
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
Securities and Exchange 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 shares of any Portfolio, including
redemption through repurchase by the Fund, have a one-time privilege to
reinstate their accounts by purchasing shares of the same class 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
21
<PAGE>
absence of the reinstatement privilege. Instead, such load charge will be
treated as an amount paid for the subsequently acquired shares and will be
included in the shareholder's tax basis for such shares.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B 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 two years of purchase are subject to a
contingent deferred sales charge under most circumstances, the charge is
waived on redemptions of Class B shares in 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 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.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends, Distributions and Taxes" on page 32 of the
Prospectus.
22
<PAGE>
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 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.
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.
23
<PAGE>
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 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.
24
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A Class A shareholder of any of the Portfolios may elect to make 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 such shares having a value, based
upon the current net asset value, of $5,000 or more, and monthly withdrawals
are available for shareholders with such shares having a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify either a dollar
amount or a percentage of the value of his shares. Redemptions will be made at
net asset value as determined at the close of business on the New York Stock
Exchange 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 shares will be redeemed at the close of business on
the following business day. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment
Account are automatically reinvested in 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 Transfer Agent or the
Distributor.
Withdrawal payments should not be considered as dividends, yields or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. Each Portfolio will accept additions to an
Investment Account in which an election has been made to receive systematic
withdrawals only if 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.
A Class A shareholder whose shares are held within a CMA(R) or CBA(R) 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.
25
<PAGE>
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 $250 and the minimum subsequent
purchase is $1 (except that the minimum initial purchase through the Merrill
Lynch BlueprintSM Program is $100).
Class A shares are offered at net asset value to tax qualified retirement
plans within the meaning of Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and deferred compensation plans within the
meaning of Sections 403(b) and 457 of the Code ("Retirement Plans"), provided
the plan has $5 million or more in existing plan assets initially invested in
portfolios, mutual funds or trusts advised either directly or through a
subsidiary by MLAM. Class A shares may also be offered at net asset value to
Retirement Plans, provided the plan has accumulated $5 million or more in
existing plan assets invested in mutual funds advised by MLAM charging a
front-end sales charge or contingent deferred sales charge. Assets of
Retirement Plans with the same sponsor or an affiliated sponsor may be
aggregated. Retirement Plans that are also qualified under Section 401(k) of
the Code with a salary reduction feature offering a menu of investments to
plan participants ("Eligible 401(k) Plans") are also offered Class A shares at
net asset value, provided such plan initially has 1,000 or more employees
eligible to participate in the plan. Employees eligible to participate in
Retirement Plans of the same sponsoring employer or its affiliates may be
aggregated. Retirement plans 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 Blueprint SM 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 Retirement Plan which does not meet the
above described qualifications to purchase Class A shares at net asset value
has the option of purchasing Class A shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the specified
requirements, then it may purchase Class B shares with a waiver of the
contingent deferred sales charge upon redemption. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Retirement Plans.
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.
26
<PAGE>
EXCHANGE PRIVILEGE
Shareholders of the Fund who have held all or part of their shares in any
Portfolio for at least 15 days may exchange their shares for shares of the same
class in another Portfolio of the Fund or in certain other funds advised by
MLAM or the Investment Adviser. To qualify for the Exchange Privilege, it is
required that shares to be exchanged have a net asset value of at least $250.
Shareholders of each of the Portfolios may exchange their shares for shares
of the same class of Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Arizona Municipal Bond
Fund, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Balanced Fund For Investment and Retirement, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Bond Fund, Merrill Lynch
California Insured Municipal Bond Fund, Merrill Lynch California Limited
Maturity Municipal Bond Fund, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Colorado Municipal Bond Fund, Merrill Lynch Developing Capital Markets Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Federal Securities Trust, Merrill Lynch Florida Municipal Bond Fund, Merrill
Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch Fund for
Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings (residents of Arizona must meet investor suitability standards),
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of
Wisconsin must meet investor suitability standards), Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Muncipal Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Municipal Intermediate Term Fund, Merrill Lynch Massachusetts Municipal
Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch Michigan
Limited Maturity Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond
Fund, Merrill Lynch Natural Resources Trust, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New Jersey Limited Maturity Muncipal Bond Fund,
Merrill Lynch New York Municipal Bond Fund, Meriill Lynch New York Limited
Maturity Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund,
Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Reserves Money Fund, Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas
Municipal Bond Fund, Merrill Lynch Treasury Fund, Merrill Lynch Utility Income
Fund, Inc., and Merrill Lynch World Income Fund, Inc., on the basis described
below. In addition, Class A shareholders of the Fund may exchange their Class A
shares for shares of Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust (or Merrill Lynch
Retirement Reserves Money Fund if the exchange occurs within certain retirement
plans) (together the "Class A money market funds"), and Class B shareholders of
the Fund may exchange their Class B shares for shares of Merrill Lynch Treasury
Fund, Merrill Lynch Government Fund, Merrill Lynch Institutional Fund and
Merrill Lynch Institutional Tax-Exempt Fund (together the "Class B money market
funds") on the basis described below. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other
27
<PAGE>
funds, on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A shares and the sales charge payable at the time
of the exchange on the new Class A shares. With respect to outstanding Class A
shares as to which previous exchanges have taken place, the "sales charge
previously paid" will include the aggregate of the sales charges paid with
respect to such Class A shares in the initial purchase and any subsequent
exchange. Class A shares issued pursuant to dividend reinvestment are sold on a
no-load basis in each of the funds offering Class A shares. For purposes of the
exchange privilege, Class A shares received upon dividend reinvestment will be
exchanged into the Class A shares of the other Portfolios or into shares of the
Class A money market funds without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales load 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 contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule 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
contingent deferred sales charge schedule or the deferred sales charge schedule
relating to the Class B shares of the fund from which the exchange has been
made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Basic 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 Basic Value Fund and
receive cash. There will be no contingent deferred sales load due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the two year holding period for the Merrill Lynch Basic 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 Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B 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 contingent deferred
sales charge. However, shares of a Class B money market fund which were
acquired as a result of an exchange for Class B shares of a fund may, in turn,
be exchanged back into Class B shares of any fund offering such shares, in
which event the holding period for Class B shares of the fund will be
aggregated with previous holding periods for purposes of reducing the
contingent deferred sales charge. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund after
having held the Class B shares of the Fund for two and a half years and two
years later decide to redeem the shares of Merrill Lynch Institutional Fund for
cash. At the time of this redemption, the 2% contingent deferred sales charge
that would have been due had the Class B shares of the Fund been redeemed for
cash rather than exchanged for shares of Merrill Lynch 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
contingent deferred sales load.
28
<PAGE>
Merrill Lynch Mutual Fund Adviser Program. Class A shareholders of the Fund
that participate in the Merrill Lynch Mutual Fund Adviser Program may exchange
Class A shares of the Fund for Class A shares of the funds listed below at net
asset value. Once the initial allocation of assets is made under the program,
any subsequent exchange under the program of Class A shares of a fund for Class
A shares of the Fund will be made on the basis of the relative net asset values
of the shares being exchanged with no additional charges for any difference
between the sales charge previously paid on Fund shares exchanged and the sales
charge payable on Fund shares acquired in the exchange.
The funds into which exchanges may be made and their respective investment
objectives are as follows:
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,
consisting principally of mortgage-backed
and asset-backed 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 West-
ern Hemisphere (i.e., North and South Amer-
ica and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries 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 in-
termediate-term investment grade Arizona Mu-
nicipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona in-
come taxes as is consistent with prudent in-
vestment management.
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 securi-
ties.
Merrill Lynch Basic Value
Fund, Inc. ...................
Capital appreciation and, secondarily, income
by investing in securities, primarily equi-
ties, that management of the fund believes
are undervalued and therefore represent ba-
sic investment value.
29
<PAGE>
Merrill Lynch California
Municipal Bond Fund...........
A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and California income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch California
Insured Municipal Bond Fund...
A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with 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 in-
sured California Municipal Bonds.
Merrill Lynch California
Limited Maturity municipal
Bond Fund................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade California Municipal Bonds.
Merrill Lynch Capital Fund, The highest total investment return consis-
Inc. ......................... tent with prudent risk through a fully man-
aged investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series, a series fund, whose objec-
tive is as high a level of income exempt
from Federal and Colorado income taxes as is
consistent with prudent investment manage-
ment.
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, Capital appreciation primarily through in-
Inc. ......................... vestment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
Merrill Lynch EuroFund......... Capital appreciation primarily through in-
vestment in equity securities of corpora-
tions domiciled in Western Europe.
30
<PAGE>
Merrill Lynch Federal
Securities Trust .............
High current return through investments in
U.S. government and governmental agency se-
curities, including GNMA mortgage-backed
certificates and other mortgage-backed gov-
ernment securities.
Merrill Lynch Florida
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal income taxes as is consis-
tent with prudent investment management
while seeking to offer shareholders the op-
portunity 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 Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent invest-
ment management while seeking to offer
shareholders the opportunity to own securi-
ties exempt from Florida intangible personal
property taxes through investment in a port-
folio primarily of intermediate-term invest-
ment grade Florida Municipal Bonds.
Merrill Lynch Fund for
Tomorrow, Inc............ Long-term growth through investment in a
portfolio of good quality securities, pri-
marily 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 di-
versified 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 investment return, consistent with
prudent risk, through a fully managed in-
vestment policy utilizing United States and
foreign equity, debt, and money market
securities.
Merrill Lynch Global Bond Fund
For Investment And
Retirement.................... High total investment return from investment
in government and corporate bonds denomi-
nated in various currencies and multi-na-
tional currency units.
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<PAGE>
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 war-
rants or options.
Merrill Lynch Global
Holdings(resident of Arizona
must meet investor
suitability standards)...
The highest total investment return consis-
tent with prudent risk through worldwide in-
vestment in an internationally diversified
portfolio of securities.
Merrill Lynch Global Utility
Fund, Inc.....................
Capital appreciation and current income
through investment in equity and debt secu-
rities issued by domestic and foreign compa-
nies which are primarily engaged in the own-
ership or operation of facilities used to
generate, transmit, or distribute electrici-
ty, telecommunications, gas, or water.
Merrill Lynch Government Fund.. A series of Merrill Lynch Funds For Institu-
tions Series. Current income consistent with
liquidity and security of principal from in-
vestment in securities issued or guaranteed
by the U.S. Government, its agencies and in-
strumentalities and in repurchase agreements
secured by such obligations.
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 em-
phasis on those securities which management
of the Fund believes to be undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)........
Capital appreciation through worldwide in-
vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in healthcare.
Merrill Lynch Institutional A series of Merrill Lynch Funds For Institu-
Fund.......................... tions Series. Maximum current income consis-
tent with liquidity and the maintenance of a
high-quality portfolio of money market secu-
rities.
Merrill Lynch Institutional
Tax-Exempt Fund...............
Current income exempt from Federal income
taxes, preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality munic-
ipal bonds.
32
<PAGE>
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 securi-
ties.
Merrill Lynch Maryland
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt 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 Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Massachusetts income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and Mas-
sachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of in-
termediate-term investment grade Massachu-
setts Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt 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 Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through in-
vestment in a portfolio primarily of inter-
mediate-term investment grade Michigan Mu-
nicipal Bonds.
Merrill Lynch Minnesota
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Minnesota income taxes
as is consistent with prudent investment
management.
33
<PAGE>
Merrill Lynch Municipal Bond
Fund, Inc.....................
Tax-exempt income from three separate diver-
sified 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 in-
come exempt from Federal income taxes by in-
vesting 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 Natural
Resources Trust...............
Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess substan-
tial natural resource assets.
Merrill Lynch New Jersey
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal 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 Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is 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 in-
vestment grade New Jersey Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund...........
Currently a portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series fund,
whose objective is 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.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment man-
agement through investment in a portfolio
primarily of intermediate-term investment
grade New York Municipal Bonds.
34
<PAGE>
Merrill Lynch North Carolina
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and North Carolina income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Ohio Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt 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 Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Oregon income taxes as
is consistent with prudent investment
management.
Merrill Lynch Pacific Fund, Capital appreciation by investing in equity
Inc........................... securities of corporations domiciled in Far
Eastern or Western Pacific countries, in-
cluding Japan, Australia, Hong Kong, Singa-
pore and the Philippines.
Merrill Lynch Pennsylvania
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State Mu-
nicipal 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 Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide as
high a level of income exempt from Federal
and Pennsylvania income taxes as is consis-
tent with prudent investment management
through investment in a portfolio of inter-
mediate-term investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc. ......................... equity and fixed income securities, includ-
ing tax-exempt securities, of issuers in
weak financial condition or experiencing
poor operating results believed to be under-
valued relative to the current or prospec-
tive condition of such issuer.
Merrill Lynch Ready Assets Preservation of capital, liquidity and the
Trust......................... highest possible current income consistent
with the foregoing objective from the short-
term money market securities in which the
Trust invests.
35
<PAGE>
Merrill Lynch Retirement
Reserves Money Trust
(available only if the
exchange occurs with certain
retirement plans).............
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, 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 Short-term
Global Income Fund, Inc.......
Current income at as high a level as is con-
sistent 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 world-
wide investment in equity securities of com-
panies 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 Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal income taxes as is consis-
tent with prudent investment management by
investing primarily in a portfolio of long-
term, investment grade obligations issued by
the State of Texas, its political subdivi-
sions, agencies and instrumentalities.
Merrill Lynch Treasury Fund.... A series of Merrill Lynch Funds For Institu-
tions Series. Current income consistent with
liquidity and security of principal from in-
vestment in direct obligations of the U.S.
Treasury and up to 10% of its total assets
in repurchase agreements secured by such ob-
ligations.
36
<PAGE>
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 re-
purchase agreements relating to such securi-
ties.
Merrill Lynch U.S. Treasury
Money Fund....................
Preservation of capital, liquidity and cur-
rent income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct obli-
gations of the U.S. Treasury.
Merrill Lynch Utility Income
Fund, Inc. ..............
High current income through investment in eq-
uity and debt securities issued by companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, telecom-
munications, gas or water.
Merrill Lynch World Income
Fund, Inc. .............. High current income by investing in a global
portfolio of fixed income securities denomi-
nated in various currencies, including mul-
ti-national currencies.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes."
To exercise the exchange privilege, shareholders should contact their listed
dealer, who will advise the Fund of the exchange, or the shareholder may write
to the Transfer Agent requesting that the exchange be effected. Such letter
must be signed exactly as the account is registered with signature(s)
guaranteed by an "eligible guarantor institution" (including, for example,
Merrill Lynch branch offices and certain other financial institutions) as such
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by the transfer
agent through the use of industry publications. 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. These funds may suspend the continuous
offering of their shares to the public at any time and thereafter may resume
such offering from time to time.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes and, depending upon the circumstances, a
short- or long-term capital gain or loss may be realized. In a revenue ruling
issued by the Internal Revenue Service relative to an investment company with
several portfolios and under circumstances substantially similar to those of
the Fund, an exchange of shares between
37
<PAGE>
portfolios of such investment company was deemed to be a sale for federal
income tax purposes. See "Dividends, Distribution and Taxes--Federal Income
Taxes." In addition, any shareholder of the Fund who exercises the exchange
privilege must certify to such other fund his Social Security Number or
Taxpayer Identification Number if he wishes to avoid a 31% backup withholding
tax on the proceeds of redemptions paid to him, and also that he is not subject
to the backup withholding tax if he wishes to avoid a 31% backup withholding
tax on dividend distributions made to him by such other fund.
Under the Code, 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.
This exchange privilege may be modified or terminated at any time on sixty
days (60) notice. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. The exchange privilege is
available only in states where the exchange legally may be made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield
figures are based on the Fund's historical performance and are not intended to
indicate future performance. Average annual total return and yield are
determined 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.
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.
38
<PAGE>
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.
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED
ON A HYPOTHETICAL REDEEMABLE VALUE OF 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
------ ---------- --------- ------------ -------------- -------------- ---------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
One Year Ended September
30, 1993
Class A................ 8.26% 9.78% 9.17% $1,082.60 $1,097.80 $1,091.70
Class B................ 7.92% 9.35% -- $1,079.20 $1,093.50 --
Five Years Ended Septem-
ber 30, 1993........... 10.94% 12.91% 10.81% $1,680.60 $1,835.50 $1,670.70
Ten Years Ended Septem-
ber 30, 1993........... 11.46% 12.44% 11.12% $2,958.10 $3,230.70 $2,870.30
Class B Shares
10/21/88-9/30/93...... 10.97% 12.97% -- $1,672.90 $1,827.50 --
Class B Shares
11/12/92-9/30/93...... -- -- 11.31% -- -- $1,113.10
</TABLE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF A
EXPRESSED AS A PERCENTAGE BASED HYPOTHETICAL
ON A HYPOTHETICAL $1,000 $1,000 INVESTMENT AT THE END OF
INVESTMENT THE 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>
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
+Effective January 27, 1994, the High Quality Portfolio will do business under
the name Investment Grade Portfolio.
39
<PAGE>
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 $1,000 INVESTMENT AT THE END OF THE
INVESTMENT 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 opera-
tions** to September
30, 1993
Class A................ 358.83% 425.11% 341.41% $4,588.30 $5,251.10 $4,414.10
Class B................ 67.29% 82.75% 11.31% $1,672.90 $1,827.50 $1,113.10
</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
12, 1992.
+Effective January 27, 1994, the High Quality Portfolio will do 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 may take into
account the reduced, and not the maximum, 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 one billion
(1,000,000,000) 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 two classes designated "Class A
Common Stock" and "Class B Common Stock" which consist of 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 two classes designated "Class A Common Stock" and "Class B
Common Stock" each of which consists of 100,000,000 shares and the
Intermediate Term Portfolio Series Common Stock, which is divided into two
classes designated "Class A Common Stock" and "Class B 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 only
that Portfolio and 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. 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
40
<PAGE>
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.
APPENDIX
INTEREST RATE FUTURES, OPTIONS THEREON AND OPTIONS ON DEBT SECURITIES
The Fund may trade options on debt securities, purchase and sell interest
rate 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
41
<PAGE>
then made, additional cash is required to be paid to or released by the FCM,
and the Fund realizes a loss or gain. In addition, a commission is paid on each
completed purchase and sale transaction.
The Fund will deal only in standardized contracts on recognized exchanges.
The clearing members of an exchange's clearing corporation guarantee the
performance of their futures contracts through the clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (known as the "holder") the right, but not the obligation, to enter
into a long position in the underlying futures contract (i.e., purchase the
futures contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put" option, at a
fixed price (the "exercise" or "strike" price) up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium". The maximum amount of risk the purchaser of the option assumes is
equal to the premium, the transaction costs and the unrealized profits, if any,
although this entire amount may be lost. Upon exercise of the option by the
holder, the contract market clearing corporation establishes a corresponding
short position for the seller, or "writer" of the option in the case of a call
option, or a corresponding long position in the case of a put option, at the
strike price. In the event that an option is exercised, the holder will be
subject to all the risks associated with the trading of futures contracts. An
option becomes worthless when it expires.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the holder of the option may be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts, which are
described on page 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
42
<PAGE>
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 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.
43
<PAGE>
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
Princeton, New Jersey
October 29, 1993
44
<PAGE>
<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>
45
<PAGE>
<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>
46
<PAGE>
<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>
47
<PAGE>
<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>
48
<PAGE>
<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>
49
<PAGE>
<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>
50
<PAGE>
<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>
51
<PAGE>
<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>
52
<PAGE>
<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>
53
<PAGE>
<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>
54
<PAGE>
<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>
55
<PAGE>
<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>
56
<PAGE>
<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>
57
<PAGE>
<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>
58
<PAGE>
<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
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>
59
<PAGE>
<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>
60
<PAGE>
<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>
61
<PAGE>
<TABLE>
FINANCIAL INFORMATION (continued)
<CAPTION>
Statements of Operations for the Year Ended September 30, 1993
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>
62
<PAGE>
<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>
63
<PAGE>
<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>
64
<PAGE>
<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>
65
<PAGE>
<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>
66
<PAGE>
<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>
67
<PAGE>
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
68
<PAGE>
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
============ =========== ============
69
<PAGE>
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
=========== ============
70
<PAGE>
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.
71
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
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
Investment Restrictions................................................... 6
Management of the Fund.................................................... 9
Directors and Officers................................................... 9
Investment Advisory Arrangements......................................... 11
Duration and Termination................................................. 13
Transfer Agency Services Arrangements.................................... 13
Determination of Net Asset Value.......................................... 14
Portfolio Transactions.................................................... 14
Portfolio Turnover....................................................... 15
Purchase of Shares........................................................ 16
Alternative Sales Arrangements........................................... 16
Initial Sales Charge Alternative--Class A Shares......................... 16
Reduced Initial Sales Charges............................................ 16
Deferred Sales Charge Alternative--Class B Shares........................ 20
Redemption of Shares...................................................... 21
Repurchase............................................................... 21
Reinstatement Privilege.................................................. 21
Contingent Deferred Sales Charge--Class B Shares......................... 22
Dividends, Distributions and Taxes........................................ 22
Dividends and Distributions.............................................. 22
Federal Income Taxes..................................................... 23
Tax Treatment of Transactions in Options on Debt Securities, Futures Con-
tracts and
Options Thereon......................................................... 24
Systematic Withdrawal Plans.............................................. 25
Retirement Plans......................................................... 26
Exchange Privilege....................................................... 27
Performance Data......................................................... 38
Additional Information................................................... 40
Organization of the Fund................................................ 40
Appendix................................................................. 41
Interest Rate Futures, Options Thereon and Options on Debt Securities... 41
Independent Auditors' Report............................................ 44
Financial Statements.................................................... 45
</TABLE>
Code #10210
STATEMENT OF ADDITIONAL INFORMATION
(ART)
- -------------------------------------------------------------------------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
January 27, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
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 each of the years in the ten-year period
ended September 30, 1993, Investment Grade Portfolio for each of the
years in the ten-year period ended September 30, 1993. Intermediate
Term Portfolio for each of the years in the ten-year period ended
September 30, 1993.
Contained in Part B (to be filed by Amendment):
Schedules of Investments, September 30, 1993.
Statements of Assets and Liabilities as of September 30, 1993.
Statements of Operations for the year ended September 30, 1993.
Statements of Changes in Net Assets for the years ended September
30, 1993 and 1992.
Financial Highlights:
High Income Portfolio for each of the years in the five-year
period ended September 30, 1993.
Investment Grade Portfolio for each of the years in the five-
year period ended September 30, 1993.
Intermediate Term Portfolio for each of the years in the five-
year period ended September 30, 1993.
(b) Exhibits
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. (incorporated by reference to
Exhibit A.6(a) filed with Post-Effective Amendment No. 5).
(b) Form of Selected Dealers Agreement between Registrant and selected
dealers (incorporated by reference to Exhibit A.6(b) filed with
Amendment No. 2).
(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) 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).
7. --Inapplicable.
C-1
<PAGE>
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, independent accountants for the
Registrant (to be filed by amendment).
12. --Inapplicable.
13. --Inapplicable.
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)Distribution Plan of Registrant (incorporated by reference to
Exhibit 15 filed with Post-Effective Amendment No. 13).
(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).
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).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
ITEM 26. NUMBER OF RECORD HOLDERS
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AS OF
TITLE OF CLASS DECEMBER 31, 1993
-------------- --------------------
<S> <C>
High Income Portfolio Class A common stock, par value
$0.10 per share.......................................... 7,644
High Income Portfolio Class B common stock, par value
$0.10 per share.......................................... 2,188
Investment Grade Portfolio Class A common stock, par value
$0.10 per share.......................................... 1,910
Investment Grade Portfolio Class B common stock, par value
$0.10 per share.......................................... 586
Intermediate Term Portfolio Class A common stock, par
value $0.10 per share.................................... 643
Intermediate Term Portfolio Class B common stock, par
value $0.10 per share.................................... 121
</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
C-2
<PAGE>
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
Agreement, 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 Certificate of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B 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 High
Income Municipal Bond Fund, Inc., Merrill Lynch Funds For Institutions Series,
Merrill Lynch Institutional Tax-Exempt Fund, Merrill Lynch Multi-State Ltd.
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., MuniYield California Fund,
Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Michigan Fund, Inc., MiniYield
Michigan 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 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 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., CMA Multi-State Municipal Series Trust, MuniEnhanced Fund, Inc.,
CMA Treasury Fund, MuniVest Fund, Inc., Apex Municipal Fund Inc., World Income
Fund, Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNew York
Holdings, Inc., Merrill Lynch Asset Management, acts as investment adviser for
the following registered investment companies: Merrill Lynch Adjustable Rate
Securities Fund, Inc., Convertible Holdings, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Capital Fund, 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 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 Prime Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Natural 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 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 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 Institutional Tax-Exempt
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.
C-3
<PAGE>
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>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH 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.
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
Director and Secretary of 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 Senior Vice President and
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
the MLFD.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- -------------------------------- ----------------------------------
<S> <C> <C>
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>
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, Apex Municipal Fund Inc., CMA Money Fund, CMA Government Securities Fund,
CMA Tax-Exempt Fund, CMA Treasury Fund, Corporate High Yield Fund II, CBA Money
Fund, The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund,
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 New York Insured Fund III, Inc., MuniYield
Pennsylvania Insured Fund, 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. and MuniYield Quality Fund, 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 Trustee
Arthur Zeikel............... Director None
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 Assistant None
Treasurer
William M. Breen............ Vice President None
Mark A. DeSario............. Vice President None
James T. Fatseas............ Vice President None
Stanley Graczyk............. Vice President None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
---- ---------------------------- ---------------------
<S> <C> <C>
William Wasel............... Vice President None
Debra W. Landsman-Yaros..... Vice President None
Mark E. Maguire............. Assistant Vice President None
Patricia A. Schena.......... Assistant 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.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
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-6
<PAGE>
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 THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT TO THE 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 27TH DAY OF JANUARY, 1994.
Merrill Lynch Corporate Bond Fund,
Inc.
(Registrant)
/s/ Arthur Zeikel
By___________________________________
(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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
- -------------------------------------------
(Arthur Zeikel) President and Director
(Principal Executive
Officer) January 27, 1994
/s/ Gerald M. Richard
- -------------------------------------------
(Gerald M. Richard) Treasurer (Principal
Financial and
Accounting Officer) January 27, 1994
*
- -------------------------------------------
(Ronald W. Forbes) Director
*
- -------------------------------------------
(Charles C. Reilly) Director
*
- -------------------------------------------
(Kevin A. Ryan) Director
*
- -------------------------------------------
(Richard R. West) Director
*
- -------------------------------------------
(Marc A. White) Director
*By
/s/ Arthur Zeikel
_____________________________________ January 27, 1994
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE NO.
------- --------
<C> <S> <C>
11 --Consent of Deloitte & Touche, independent accountants for
the Registrant*............................................
</TABLE>
- --------
* Filed herewith.
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
PROSPECTUS BACKCOVER DEPICTION OF BONDS
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION BACKCOVER DEPICTION OF BONDS
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Corporate Bond Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 19 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
Princeton, New Jersey
January 25, 1994
