<PAGE>
PROSPECTUS
JANUARY 31, 1995
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company consisting of three separate
Portfolios. The primary objective of each Portfolio is to provide shareholders
with as high a level of current income as is consistent with the investment
policies of such Portfolio and with prudent investment management. As a
secondary objective, each Portfolio seeks capital appreciation when consistent
with its primary objective. Each Portfolio invests primarily in a diversified
portfolio of corporate fixed-income securities, such as corporate bonds and
notes, convertible securities and preferred stocks. There can be no assurance
that the objectives of any Portfolio will be realized. Each of the Portfolios
pursues its investment objective through the separate investment policies
described below:
High Income Portfolio invests principally in fixed-income securities which
are rated in the lower rating categories of the established rating services
(Baa or lower by Moody's Investors Service, Inc. or BBB or lower by Standard &
Poor's Corporation), or in unrated securities of comparable quality. Such
securities, which may constitute as much as 100% of the Portfolio's
investments, generally involve greater volatility of price and risks to
principal and income than securities in the higher rating categories.
Investment Grade Portfolio invests primarily in long-term corporate bonds
rated A or better by either rating service. The Investment Grade Portfolio was
formerly known as the High Quality Portfolio. Except for the change in name,
no other changes to the Portfolio or in its investment objectives or policies
occurred.
Intermediate Term Portfolio invests primarily in bonds rated in the four
highest rating categories (Baa or higher by Moody's Investors Service, Inc. or
BBB or higher by Standard & Poor's Corporation) with a maximum remaining
maturity not to exceed ten years and, depending on market conditions, an
average remaining maturity of five to seven years is anticipated.
Each Portfolio is in effect a separate fund issuing its own shares. Pursuant
to the Merrill Lynch Select Pricing SM System, each of the Fund's Portfolios
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Intermediate
Term Portfolio are available only through the Exchange Privilege. The Merrill
Lynch Select Pricing SM System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. See "Merrill Lynch Select Pricing SM
System" on page 5.
(continued on following page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund.
Investors should read and retain this Prospectus for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated January
31, 1995, and is available upon request and without charge, by calling or
writing the Fund at the address and telephone number set forth above. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
(continued from cover page)
Shares of the Fund's Portfolios may be purchased directly from the
Distributor, P.O. Box 9011, Princeton, New Jersey 08543-9011, (609) 282-2800,
or from other securities dealers which have entered into selected dealer
agreements with the Distributor. See "Purchase of Shares," below. Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions effected directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
The minimum initial purchase for shares of each Portfolio is $1,000 ($100 for
retirement plans), and the minimum subsequent purchase is $50 ($1 for
retirement plans). A shareholder may have his shares redeemed at the net asset
value per share of the Portfolio represented by the redeemed shares.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO(A)
---------------------------------------------- ----------------------------------------------
CLASS A(C) CLASS B(D) CLASS C(E) CLASS D(E) CLASS A(C) CLASS B(D) CLASS C(E) CLASS D(E)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of
offering price).. 4.00%(f) None None 4.00%(f) 4.00%(f) None None 4.00%(f)
Sales Charge
Imposed on
Dividend
Reinvestments.... None None None None None None None None
Deferred Sales
Charge (as a
percentage of
original purchase
price or
redemption
proceeds,
whichever
is lower)........ None(h) 4.00%(m) 1.00%(n) None(h) None(h) 4.00%(m) 1.00%(n) None(h)
Exchange Fee..... None None None None None None None None
Annual Portfolio
Operating
Expenses(i):
Management
Fees(j).......... 0.42 0.42 0.42 0.42 0.37 0.37 0.37 0.37
12b-1 Fees(k):
Account
Maintenance Fees. None 0.25 0.25 0.25 None 0.25 0.25 0.25
Distribution
Fees............. None 0.50(p) 0.55 None None 0.50(p) 0.55 None
Other Expenses:
Custodial Fees... 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Shareholder
Servicing
Costs(l)......... 0.07 0.08 0.08 0.07 0.11 0.12 0.12 0.11
Other Fees....... 0.03 0.03 0.03 0.03 0.04 0.04 0.04 0.04
---- ---- ---- ---- ---- ---- ---- ----
Total Other
Expenses........ 0.11 0.12 0.12 0.11 0.16 0.17 0.17 0.16
---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
Operating
Expenses......... 0.53% 1.29% 1.34% 0.78% 0.53% 1.29% 1.34% 0.78%
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
INTERMEDIATE TERM PORTFOLIO(B)
-------------------------------------------------
CLASS A(C) CLASS B(D) CLASS C(E)(Q) CLASS D(E)
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of
offering price).. 1.00%(g) None None 1.00%(g)
Sales Charge
Imposed on
Dividend
Reinvestments.... None None None None
Deferred Sales
Charge (as a
percentage of
original purchase
price or
redemption
proceeds,
whichever
is lower)........ None(h) 1.00%(o) 1.00%(n) None(h)
Exchange Fee..... None None None None
Annual Portfolio
Operating
Expenses(i):
Management
Fees(j).......... 0.37 0.37 0.37 0.37
12b-1 Fees(k):
Account
Maintenance Fees. None 0.25 0.25 0.10
Distribution
Fees............. None 0.25(p) 0.25 None
Other Expenses:
Custodial Fees... 0.01 0.01 0.01 0.01
Shareholder
Servicing
Costs(l)......... 0.10 0.11 0.11 0.10
Other Fees....... 0.05 0.05 0.05 0.05
---- ---- ---- ----
Total Other
Expenses........ 0.16 0.17 0.17 0.16
---- ---- ---- ----
Total Portfolio
Operating
Expenses......... 0.53% 1.04% 1.04% 0.63%
==== ==== ==== ====
</TABLE>
- ----
(a) As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
(b) Up to November 12, 1992, the Intermediate Term Portfolio consisted of one
class of shares of Common Stock.
(c) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"-- page 30.
(d) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 32.
(e) Prior to October 21, 1994, the Fund had not offered its Class C and Class
D shares to the public.
(f) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 30.
(g) Reduced for purchases of $100,000 and over. Class A or Class D purchases
of $1,000,000 or more are not subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 30.
(h) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(i) Information for Class A and Class B shares is stated for the fiscal year
ended 9/30/94. Information under "Other Expenses" for Class C and Class D
shares is estimated for the fiscal year ending 9/30/95.
(j) See "Investment Adviser"--page 26.
(k) See "Purchase of Shares--Distribution Plans"--page 37.
(l) See "Additional Information--Transfer Agency Services"--page 52.
(m) Decreasing 1% annually thereafter to 0.0% after the fourth year.
(n) For one year, decreasing to 0.0% after the first year.
(o) Decreasing 1.0% annually thereafter to 0.0% after the first year.
(p) Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
(q) Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege. See page 47.
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
An investor in the
Portfolios (and Classes)
listed below would pay
the following expenses on
a $1,000 investment,
including for Class A
shares of the High Income
Portfolio and Investment
Grade Portfolio the
maximum $40 front-end
sales charge and for
shares of the
Intermediate Term
Portfolio the maximum $10
front-end sales charge
and assuming (i) the
operating expense ratio
set forth opposite the
Portfolio or Class
thereof, (ii) a 5% annual
return throughout the
periods indicated and
(iii) redemption at the
end of the period:
High Income Portfolio
Class A................. $ 45 $ 56 $ 68 $ 104
Class B................. $ 53 $ 61 $ 71 $ 156
Class C................. $ 24 $ 42 $ 73 $ 161
Class D................. $ 48 $ 64 $ 82 $ 133
Investment Grade
Portfolio*
Class A................. $ 45 $ 56 $ 68 $ 104
Class B................. $ 53 $ 61 $ 71 $ 156
Class C................. $ 24 $ 42 $ 73 $ 161
Class D................. $ 48 $ 64 $ 82 $ 133
Intermediate Term
Portfolio
Class A................. $ 15 $ 27 $ 39 $ 76
Class B................. $ 21 $ 33 $ 57 $ 127
Class C**............... $ 21 $ 33 $ 57 $ 127
Class D................. $ 16 $ 30 $ 45 $ 88
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
High Income Portfolio
Class A................. $ 45 $ 56 $ 68 $ 104
Class B................. $ 13 $ 41 $ 71 $ 156
Class C................. $ 14 $ 42 $ 73 $ 161
Class D................. $ 48 $ 64 $ 82 $ 133
Investment Grade
Portfolio*
Class A................. $ 45 $ 56 $ 68 $ 104
Class B................. $ 13 $ 41 $ 71 $ 156
Class C................. $ 14 $ 42 $ 73 $ 161
Class D................. $ 48 $ 64 $ 82 $ 133
Intermediate Term
Portfolio
Class A................. $ 15 $ 27 $ 39 $ 76
Class B................. $ 11 $ 33 $ 57 $ 127
Class C**............... $ 11 $ 33 $ 57 $ 127
Class D................. $ 16 $ 30 $ 45 $ 88
</TABLE>
- --------
* As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
** Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege.
4
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding
costs and expenses that a shareholder in a Portfolio (and Classes) of the Fund
will bear directly or indirectly. The Example set forth above assumes the
reinvestment of all dividends and distributions and utilizes a five percent
annual rate of return as mandated by Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN OF ANY PORTFOLIO AND ACTUAL EXPENSES
OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR THE
PURPOSE OF THE EXAMPLE. Class B and Class C shareholders who hold their shares
for an extended period of time may pay more in 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD"). In addition, the Example does not reflect the processing fee
(presently $4.85) Merrill Lynch may charge its customers for confirming
purchases and redemptions.
MERRILL LYNCH SELECT PRICING SM SYSTEM
Each Portfolio of the Fund offers four classes of shares under the Merrill
Lynch Select PricingSM System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C (for the High Income and
Investment Grade Portfolios only) are sold to investors choosing the deferred
sales charge alternatives. Class C shares of the Intermediate Term Portfolio
are offered only through the Exchange Privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or certain other funds.
The Merrill Lynch Select PricingSM System is used by more than 50 mutual funds
advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate, Fund
Asset Management, L.P. ("FAM" or the "Investment Adviser"). Funds advised by
MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of one of the Fund's
Portfolios represents an identical interest in the investment portfolio of that
Portfolio and has the same rights, except that Class B, Class C and Class D
shares bear the expenses of the ongoing account maintenance fees and Class B
and Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The deferred sales charges and account maintenance fees
that are imposed on Class B and Class C shares of a Portfolio, as well as the
account maintenance fees that are imposed on the Class D shares of a Portfolio,
will be imposed directly against those classes and not against all assets of
the relevant Portfolio and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by a Portfolio for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not
5
<PAGE>
be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/),(/3/)
- -----------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0% ten years(/4/)
- -----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year
- -----------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Portfolios are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
6
<PAGE>
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(/2/),(/3/)
- ------------------------------------------------------------------------------------------
B CDSC for one year, at a rate 0.25% 0.25% B shares convert to
of 1.0% during the first D shares automatically
year, decreasing to 0.0% after after approximately
the first year ten years(/4/)
- ------------------------------------------------------------------------------------------
C(/5/) 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year
- ------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $100,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Portfolios are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(5) Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege. See p. 47.
Class A: Class A shares of a Portfolio incur an initial sales charge when they
are purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A
shares in that account. Other eligible investors include certain
retirement plans and participants in certain investment programs. In
addition, Class A shares will be offered to directors and employees
of Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the
term "subsidiaries," when used herein with respect to ML & Co.,
includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
4.00% for the High Income and Investment Grade Portfolios and 1.00%
for the Intermediate Term Portfolio, and is reduced for purchases of
$25,000 and over for the High Income and Investment Grade Portfolios
or $100,000 for the Intermediate Term Portfolio. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases
7
<PAGE>
will be subject to a contingent deferred sales charge ("CDSC") of 1.0%
for the High Income and Investment Grade Portfolios or 0.20% for the
Intermediate Term Portfolio, if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares".
Class B: Class B shares of a Portfolio do not incur a sales charge when they
are purchased, but they are subject to an ongoing account maintenance
fee of 0.25% of the Portfolio's average net assets attributable to the
Class B shares, an ongoing distribution fee of 0.50% of average net
assets attributable to Class B shares for the High Income and
Investment Grade Portfolios, or 0.25% of average net assets
attributable to Class B shares for the Intermediate Term Portfolio and
a CDSC if they are redeemed within four years of purchase for the High
Income and Investment Grade Portfolios or within one year of purchase
for the Intermediate Term Portfolio. Approximately ten years after
issuance, Class B shares of a Portfolio will convert automatically
into Class D shares of that Portfolio, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately eight
years. If Class B shares of a Portfolio are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired. Automatic conversion of
Class B shares into Class D shares will occur at least once a month on
the basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal
income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares and for
certain retirement plans is modified as described under "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares of a Portfolio do not incur a sales charge when they
are purchased, but they are subject to an ongoing account maintenance
fee of 0.25% of average net assets and an ongoing distribution fee of
0.55% of average net assets for the High Income and Investment Grade
Portfolios or 0.25% of average net assets for the Intermediate Term
Portfolio. Class C shares are also subject to a CDSC if they are
redeemed within one year of purchase. Although Class C shares are
subject to a 1.0% CDSC for only one year (as compared to four years
for Class B shares of the High Income and Investment Grade Portfolios
and one year for the Intermediate Term Portfolio), Class C shares have
no conversion feature and, accordingly, an investor that purchases
Class C shares will be subject to distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege.
Class D: Class D shares of a Portfolio incur an initial sales charge when they
are purchased and are subject to an ongoing account maintenance fee of
0.25% of average net assets for the High Income and
8
<PAGE>
Investment Grade Portfolios and 0.10% of average net assets for the
Intermediate Term Portfolio. Class D shares are not subject to an ongoing
distribution fee or any CDSC when they are redeemed. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% for the High Income and Investment Grade Portfolios or 0.20%
for the Intermediate Term Portfolio, if the shares are redeemed within
one year of purchase. The schedule of initial sales charges and
reductions for Class D shares is the same as the schedule for Class A
shares. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares of a Portfolio will be converted
into Class D shares of that Portfolio after a conversion period of
approximately ten years, and thereafter investors will be subject to lower
ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors
9
<PAGE>
in Class B shares should take into account whether they intend to redeem their
shares within the CDSC period and, if not, whether they intend to remain
invested until the end of the conversion period and thereby take advantage of
the reduction in ongoing fees resulting from the conversion into Class D
shares. Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
10
<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 LLP, independent auditors. Financial statements for the year
ended September 30, 1994, and the independent auditors' report thereon, are
included in the Statement of Additional Information. Financial Information is
not presented for Class C or Class D Shares, because no shares of those classes
were publicly issued as of the year ended September 30, 1994.
HIGH INCOME PORTFOLIO
THE
FOLLOWING
PER
SHARE
DATA
AND
RATIOS
HAVE
BEEN
DERIVED
FROM
INFORMATION
PROVIDED
IN THE
FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28 $ 8.15 $ 7.67
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .75 .79 .87 .92 1.00 .95 .96 .95 .99 1.02
Realized and
unrealized gain
(loss) on
investments--
net............. (.47) .29 .82 .63 (1.13) (.37) (.15) (.23) .13 .48
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... .28 1.08 1.69 1.55 (.13) .58 .81 .72 1.12 1.50
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment
income--net..... (.75) (.79) (.87) (.92) (1.00) (.96) (.96) (.95) (.99) (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends. (.75) (.79) (.87) (.92) (1.00) (.96) (.96) (.95) (.99) (1.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28 $ 8.15
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 3.42% 14.35% 25.22% 26.46% (1.95%) 7.69% 10.82% 8.82% 14.30% 20.60%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .53% .55% .59% .66% .68% .66% .64% .65% .71% .86%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses........ .53% .55% .59% .66% .68% .66% .64% .65% .71% .86%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 9.27% 9.78% 11.44% 14.13% 14.22% 12.30% 12.33% 11.31% 11.68% 12.87%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands).. $876,573 $886,784 $683,801 $522,703 $486,426 $641,619 $759,403 $811,558 $597,379 $299,145
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio
turnover........ 32.52% 34.85% 40.52% 39.95% 47.60% 56.00% 38.99% 56.95% 32.97% 82.18%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS B
-------------------------------------------------------------------
FOR THE
PERIOD
OCT. 28,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO
------------------------------------------------------ SEPT. 30,
1994 1993 1992 1991 1990 1989
----------- ----------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92
----------- ----------- --------- --------- ---------- ------------
Investment
income--net..... .69 .72 .81 .87 .95 .86
Realized and
unrealized gain
(loss) on
investments--
net............. (.47) .28 .83 .62 (1.12) (.40)
----------- ----------- --------- --------- ---------- ------------
Total from
investment
operations...... .22 1.00 1.64 1.49 (.17) .46
----------- ----------- --------- --------- ---------- ------------
Less dividends:
Investment
income--net..... (.69) (.72) (.81) (.87) (.95) (.86)
----------- ----------- --------- --------- ---------- ------------
Total dividends. (.69) (.72) (.81) (.87) (.95) (.86)
----------- ----------- --------- --------- ---------- ------------
Net asset value,
end of period... $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
=========== =========== ========= ========= ========== ============
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 2.66% 13.35% 24.44% 25.32% (2.54%) 6.08%++
=========== =========== ========= ========= ========== ============
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .54% .56% .60% .67% .70% .70%*
=========== =========== ========= ========= ========== ============
Expenses........ 1.29% 1.31% 1.35% 1.42% 1.45% 1.45%*
=========== =========== ========= ========= ========== ============
Investment
income--net..... 8.53% 8.94% 10.42% 13.24% 13.69% 11.75%*
=========== =========== ========= ========= ========== ============
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands).. $2,347,223 $1,823,275 $847,354 $264,486 $157,979 $120,969
=========== =========== ========= ========= ========== ============
Portfolio
turnover........ 32.52% 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.
11
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
INVESTMENT GRADE PORTFOLIO@
THE
FOLLOWING
PER
SHARE
DATA
AND
RATIOS
HAVE
BEEN
DERIVED
FROM
INFORMATION
PROVIDED
IN THE
FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69 $ 10.93 $ 9.98 $ 10.37
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .75 .81 .88 .92 .95 1.00 .99 .99 1.11 1.20 1.21
Realized and
unrealized gain
(loss) on
investments--
net............. (1.49) .67 .71 .76 (.38) .17 .43 (1.08) .76 .95 (.39)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... (.74) 1.48 1.59 1.68 .57 1.17 1.42 (.09) 1.87 2.15 .82
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends
and
distributions:
Investment
income--net..... (.75) (.81) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11) (1.20) (1.21)
Realized gain on
investments--
net............. (.10) (.16) -- -- -- -- -- -- -- -- --
In excess of
realized gain on
investments--
net............. (.45) -- -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends
and
distributions... (1.30) (.97) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11) (1.20) (1.21)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 10.77 $ 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
asset value per
share........... (6.03%) 12.78% 14.30% 16.18% 5.22% 11.09% 13.75% (1.14%) 17.66% 22.50% 8.60%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .53% .53% .58% .61% .64% .66% .60% .59% .66% .85% .85%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses........ .53% .53% .58% .61% .64% .66% .60% .59% .66% .85% .85%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 6.61% 6.94% 7.43% 8.26% 8.54% 9.04% 9.02% 8.52% 9.51% 11.41% 12.19%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $366,792 $407,625 $362,139 $324,818 $307,723 $289,804 $258,435 $238,637 $224,820 $135,910 $118,948
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio
turnover........ 159.05% 121.34% 65.43% 126.32% 126.39% 212.85% 174.99% 126.19% 93.76% 141.40% 112.67%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
CLASS B
------------------------------------------------------------
FOR THE
PERIOD
OCT 21,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO
------------------------------------------------- SEPT. 30,
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08
-------- -------- -------- -------- -------- -------
Investment
income--net..... .66 .72 .79 .84 .86 .87
Realized and
unrealized gain
(loss) on
investments--
net............. (1.49) .67 .71 .76 (.38) .13
-------- -------- -------- -------- -------- -------
Total from
investment
operations...... (.83) 1.39 1.50 1.60 .48 1.00
-------- -------- -------- -------- -------- -------
Less dividends
and
distributions:
Investment
income--net..... (.66) (.72) (.79) (.84) (.86) (.87)
Realized gain on
investments--
net............. (.10) (.16) -- -- -- --
In excess of
realized gain on
investments--
net............. (.45) -- -- -- -- --
-------- -------- -------- -------- -------- -------
Total dividends
and
distributions... (1.21) (.88) (.79) (.84) (.86) (.87)
-------- -------- -------- -------- -------- -------
Net asset value,
end of period... $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
======== ======== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... (6.73%) 11.92% 13.44% 15.30% 4.42% 9.44%++
======== ======== ======== ======== ======== =======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .54% .54% .59% .62% .66% .70%*
======== ======== ======== ======== ======== =======
Expenses........ 1.29% 1.29% 1.34% 1.37% 1.41% 1.45%*
======== ======== ======== ======== ======== =======
Investment
income--net..... 5.85% 5.80% 6.65% 7.50% 7.77% 8.17%*
======== ======== ======== ======== ======== =======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $483,053 $515,402 $325,706 $198,504 $174,914 $91,914
======== ======== ======== ======== ======== =======
Portfolio
turnover........ 159.05% 121.34% 65.43% 126.32% 126.39% 212.85%
======== ======== ======== ======== ======== =======
</TABLE>
- -----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
@ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
12
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONCLUDED)
INTERMEDIATE TERM PORTFOLIO
THE
FOLLOWING
PER
SHARE
DATA
AND
RATIOS
HAVE
BEEN
DERIVED
FROM
INFORMATION
PROVIDED
IN THE
FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of pe-
riod............ $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69 $ 10.86 $ 10.05 $ 10.43
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Investment in-
come--net....... .75 .76 .88 .93 .97 .98 .96 .94 1.07 1.18 1.17
Realized and
unrealized gain
(loss) on in-
vestments--net.. (1.26) .55 .62 .53 (.17) .05 .31 (.99) .83 .81 (.38)
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Total from in-
vestment opera-
tions........... (.51) 1.31 1.50 1.46 .80 1.03 1.27 (.05) 1.90 1.99 .79
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.75) (.76) (.88) (.93) (.97) (.99) (.96) (.94) (1.07) (1.18) (1.17)
Realized gain on
investments--
net............. -- (.14) -- -- -- -- -- -- -- -- --
In excess of re-
alized gain on
investments--
net............. (.28) -- -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Total dividends
and distribu-
tions........... (1.03) (.90) (.88) (.93) (.97) (.99) (.96) (.94) (1.07) (1.18) (1.17)
-------- -------- -------- -------- ------- ------- ------- -------- -------- ------- -------
Net asset value,
end of period... $ 10.90 $ 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 as-
set value per
share........... (4.25%) 11.40% 13.71% 13.97% 7.55% 9.79% 12.25% (0.72%) 18.09% 20.66% 8.20%
======== ======== ======== ======== ======= ======= ======= ======== ======== ======= =======
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .53% .58% .62% .67% .71% .72% .62% .61% .62% .50% .50%
======== ======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Expenses........ .53% .58% .62% .67% .71% .72% .62% .61% .62% .50% .50%
======== ======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Investment in-
come--net....... 6.48% 6.42% 7.54% 8.35% 8.86% 8.97% 8.83% 8.09% 9.12% 11.00% 11.70%
======== ======== ======== ======== ======= ======= ======= ======== ======== ======= =======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)...... $170,222 $193,505 $154,333 $103,170 $88,248 $87,001 $97,577 $111,207 $105,919 $48,095 $27,333
======== ======== ======== ======== ======= ======= ======= ======== ======== ======= =======
Portfolio turn-
over............ 155.42% 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
SEPT. 30,
1994 1993
---------- ------------
<S> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of pe-
riod............ $ 12.44 $ 11.68
---------- ------------
Investment in-
come--net....... .69 .61
Realized and
unrealized gain
(loss) on in-
vestments--net.. (1.26) .90
---------- ------------
Total from in-
vestment opera-
tions........... (.57) 1.51
---------- ------------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.69) (.69)
Realized gain on
investments--
net............. -- (.14)
In excess of re-
alized gain on
investments--
net............. (.28) --
---------- ------------
Total dividends
and distribu-
tions........... (.97) (.75)
---------- ------------
Net asset value,
end of period... $ 10.90 $ 12.44
========== ============
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... (4.72%) 13.31%++
========== ============
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees..... .54% .57%*
========== ============
Expenses........ 1.04% 1.07%*
========== ============
Investment in-
come--net....... 5.98% 5.61%*
========== ============
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)...... $141,212 $134,122
========== ============
Portfolio turn-
over............ 155.42% 180.52%
========== ============
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
Further information about the performance of each Portfolio is contained in
the Fund's Annual Report, which can be obtained, without charge, upon request.
The Fund, a Maryland corporation, is a diversified, open-end investment
company which is comprised of three separate portfolios: the Investment Grade
Portfolio, the Intermediate Term Portfolio and the High Income Portfolio. Each
Portfolio is in effect a separate fund issuing its own shares. A shareholder's
interest is limited to the assets of the Portfolio in which he holds shares,
and a shareholder is entitled to a pro rata share of all dividends and
distributions arising from the net income and capital gains on the investments
of such Portfolio. Each Portfolio bears the expenses directly attributable to
it and a portion of the Fund's general administrative expenses allocated on the
basis of asset size.
13
<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 in the Statement of Additional
Information.
INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objectives through the separate
investment policies described below:
High Income Portfolio seeks high current income by investing principally in
fixed-income securities which are rated in the lower rating categories of the
established rating services (Baa or lower by Moody's Investors Service, Inc.
("Moody's") and BBB or lower by Standard & Poor's Ratings Group ("S&P")), or in
unrated securities of comparable quality. Securities rated below Baa by Moody's
or below BBB by S&P, and unrated securities of comparable quality are commonly
known as "junk bonds". See "Appendix: Description of Corporate Bond Ratings"
for additional information concerning rating categories. Junk bonds may
constitute as much as 100% of the Portfolio's investments. Although junk bonds
can be expected to provide
14
<PAGE>
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 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".
15
<PAGE>
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the High
Income Portfolio may purchase higher-rated securities if the Investment Adviser
believes that the risk of loss of income and principal may be substantially
reduced with only a relatively small reduction in yield. In addition, under
unusual market or economic conditions, the High Income Portfolio for temporary
defensive or other purposes may invest up to 100% of its assets in securities
issued or guaranteed by the United States Government or its instrumentalities
or agencies, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by an established
rating agency, or other fixed-income securities deemed by the Investment
Adviser to be consistent with a defensive posture, or may hold its assets in
cash. The yield on such securities may be lower than the yield on lower-rated
fixed-income securities.
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
16
<PAGE>
intermediate-term maturity securities may be adversely affected to a
substantial degree. Therefore, management will seek to mitigate the effect of
any such interest rate development by shortening the average maturity of
securities held by the Portfolio during such periods. Active management
strategy within the overall investment guidelines will thus seek to provide an
attractive total return. The Intermediate Term Portfolio may continue to hold
securities which, after being purchased by the Portfolio, are downgraded to a
rating lower than the four highest categories of S&P or Moody's. As in the
other Portfolios, under unusual market or economic conditions, the Portfolio
for temporary defensive or other purposes may invest up to 100% of its assets
in obligations of or guaranteed by the United States Government or its
instrumentalities or agencies, certificates of deposit, bankers' acceptances
and other bank obligations, commercial paper rated in the highest category by
an established rating agency or other fixed-income securities deemed by the
Investment Adviser to be consistent with the objectives of the Portfolio, or
the Portfolio may hold its assets in cash.
RISK FACTORS IN TRANSACTIONS IN JUNK BONDS
Junk bonds are regarded as being predominantly speculative as to the issuer's
ability to make payments of principal and interest. Investment in such
securities involves substantial risk. Issuers of junk bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of junk bonds may be more likely to experience
financial stress, especially if such issuers are highly leveraged. In addition,
the market for junk bonds is relatively new and has not weathered a major
economic recession, and it is unknown what effects such a recession might have
on such securities. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of junk bonds
because such securities may be unsecured and may be subordinated to other
creditors of the issuer. While most of the high yield bonds in which the
Portfolio may invest do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the Portfolio purchases a
particular security, in which case the Portfolio may experience losses and
incur costs.
Junk bonds frequently have call or redemption features that would permit an
issuer to repurchase the security from the High Income Portfolio. If a call
were exercised by the issuer during a period of declining interest rates, the
High Income Portfolio likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to the High
Income Portfolio and dividends to shareholders.
Junk bonds tend to be more volatile than higher rated fixed income
securities, so that adverse economic events may have a greater impact on the
prices of junk bonds than on higher rated fixed income securities. Like higher
rated fixed income securities, junk bonds are generally purchased and sold
through dealers who make a market in such securities for their own accounts.
However, there are fewer dealers in the junk bond market which may be less
liquid than the market for higher rated fixed income securities, even under
normal economic conditions. Also, there may be significant disparities in the
prices quoted for junk bonds by various
17
<PAGE>
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.
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.
18
<PAGE>
The table below shows the average monthly dollar-weighted market value, by
S&P's rating category, of the bonds held by the Portfolio during the fiscal
year ended September 30, 1994.
<TABLE>
<CAPTION>
% MARKET VALUE
% NET CORPORATE
RATING ASSETS BONDS
------ ------ --------------
<S> <C> <C>
AAA .42% .42%
AA -- --
A 4.38 4.42
BBB 0.61 0.62
BB 19.21 19.43
B 57.84 58.50
CCC 4.20 4.25
CC 0.16 0.16
C 0.65 0.66
D -- --
NR 11.41 11.54
----- ------
98.88% 100.00%
===== ======
</TABLE>
INVESTMENTS IN FOREIGN SECURITIES
Each Portfolio of the Fund may invest in securities issued by foreign
governments or political subdivisions or instrumentalities thereof ("Foreign
Government Securities"). Each Portfolio of the Fund may also invest in
securities issued by foreign companies ("Foreign Corporate Securities").
Foreign Government Securities and Foreign Corporate Securities are referred to
collectively herein as "Foreign Securities". A Portfolio may only invest in
Foreign Securities if, at the time of acquisition, no more than 25% of the
assets of such Portfolio (taken at market value at the time of the investment)
would be invested in Foreign Securities following such investment, and a
Portfolio may only invest in Foreign Corporate Securities, if at the time of
acquisition, no more than 10% of the assets of such Portfolio (taken at market
value at the time of the investment) would be invested in Foreign Corporate
Securities following such investment. For purposes of the foregoing limitation,
securities issued by a foreign company but assumed or guaranteed by a domestic
company, including Eurodollar securities, will not be considered Foreign
Corporate Securities but will be considered Foreign Securities.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments may be subject to foreign withholding taxes.
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
19
<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, bond
or bond index futures contracts ("futures contracts"), which are described in
the Appendix to the Statement of Additional Information, for the purpose of
hedging its portfolio of fixed-income securities against the adverse effects of
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
20
<PAGE>
selling and closing out futures positions (which is done by taking an opposite
position-in this case purchasing a futures contract-which operates to terminate
the position in the initial futures contract), commissions and transaction
costs for futures transactions may be lower than transaction costs incurred in
the purchase and sale of an equivalent amount of fixed-income securities. In
addition, the ability of a Portfolio to trade in the standardized contracts
available in the futures market may offer a more effective hedging strategy
than a program to reduce the average maturity of portfolio securities, due to
the unique and varied credit and technical characteristics of the corporate
debt instruments available to a Portfolio seeking to restructure its portfolio
of such securities. Employing futures as a hedge may also permit a Portfolio to
assume a hedging posture without reducing the stated coupon or imputed yield on
its investments. As a result of such futures transactions, however, the
Portfolios may be forced to forego in whole or in part the benefit of any
increase in the value of the securities being hedged.
A Portfolio may also purchase futures contracts in anticipation of a decline
in interest rates when it is not fully invested in fixed-income securities in
order to gain rapid market exposure that may in part or entirely offset an
increase in the cost of securities it intends to purchase. As such purchases
are made, an equivalent amount of futures contracts will be closed out. In a
substantial majority of these transactions, the Portfolios will purchase fixed-
income securities upon termination of the futures contracts. However, due to
changing market conditions and interest rate forecasts, the Portfolios may
terminate a futures position without a corresponding purchase of securities,
although the Portfolios' ability to do so may be subject to certain regulatory
restrictions.
Options on Futures Contracts. The Portfolios may purchase and write (i.e.,
sell) call and put options on futures contracts which are traded on contract
markets and enter into closing transactions with respect to such options to
terminate an existing position.
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
21
<PAGE>
considered "commodity pools", as defined under such regulations, as a result of
their entering into the transactions in futures contracts and related options
described herein, provided, among other things, that: (1) such transactions are
entered into solely for bona fide hedging purposes, as defined under CFTC
regulations or, in the case of long futures positions, the total value of such
positions does not exceed an amount determined by reference to certain
segregated funds and securities and accrued profits on such position, and (2)
no Portfolio enters into transactions in futures contracts or related options
for which the aggregate initial margin and premiums exceeds 5% of its total
assets.
When a Portfolio purchases a futures contract or a call option thereon or
writes a put option thereon, an amount of cash or cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
Risk Factors in Transactions in Futures Contracts and Options Thereon. A
Portfolio's ability effectively to hedge all or a portion of its fixed income
securities through the use of futures and options thereon depends in part on
the degree to which price movements in the security underlying the futures
contract or option correlate with price movements of the fixed-income
securities held by the Portfolio. Changes in the general level of interest
rates can be expected to have a similar impact on the market value of both U.S.
Government securities that are the subject of the futures contracts and other
fixed-income investments. However, inasmuch as the Portfolios invest
predominantly in the debt obligations of corporate issuers, the correlation
will probably not be perfect. Changes in interest rates may have a differential
impact on the value of private sector debt instruments as compared with U.S.
Government debt obligations. In addition, disparities in the average maturity
or the quality of a Portfolio's investments as compared to the financial
instrument underlying a futures or option contract may also reduce the
correlation in price movements. General economic and political factors other
than interest rate movements may also have a disparate effect on the value of
corporate obligations and U.S. Government securities. The use of financial
futures will therefore probably not be an effective hedge against market risks
other than a general interest rate risk. Transactions in options on futures
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
22
<PAGE>
options and futures positions also could have an adverse impact on the
Portfolio's ability effectively to hedge its portfolio. There is also the risk
of loss by the Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related
option, or the exchange or clearing organization on which those contracts are
traded.
The liquidity of a market in a futures contract and options thereon may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges or contract markets on which these futures and options are traded
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures or options positions at the price desired by the
Portfolio. Prices have in the past moved to the daily limit on a number of
occasions, including consecutive trading days.
In addition to the risks of imperfect correlation and lack of a liquid market
for such instruments, transactions in futures and options involve other risks,
including those related to leveraging and the potential for incorrect forecasts
of the direction and extent of interest rate movements within a given time
frame. Reference is made to the Statement of Additional Information and the
Appendix thereto concerning additional risk factors with respect to the Fund's
options and futures strategies.
OTHER PORTFOLIO STRATEGIES
The Fund may engage in the portfolio strategies described below and may also
lend portfolio securities, and invest in restricted securities and foreign
securities. Reference is made to the Statement of Additional Information for a
more complete description of such strategies.
Repurchase Agreements. The Fund may invest in U.S. Government securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or primary dealer or an
affiliate thereof in U.S. Government securities or an affiliate thereof. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the event of default by the seller under a repurchase agreement construed to
be a collateralized loan, the Fund may suffer time delays and incur costs or
possible losses in connection with such transactions.
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
23
<PAGE>
or liquid high grade debt obligations in an aggregate amount equal to the
amount of its commitments in connection with such purchase transactions.
Restricted Securities. From time to time a Portfolio of the Fund may invest
in securities the disposition of which is subject to legal restrictions, such
as restrictions imposed by the Securities Act of 1933 on the resale of
securities acquired in private placements. If registration of such securities
under the Securities Act is required, such registration may not be readily
accomplished, and if such securities may be resold without registration, such
resale may be permissible only in limited quantities. In either event, a
Portfolio of the Fund may not be able to sell its restricted securities at a
time which, in the judgment of the Investment Adviser, would be most opportune.
Standby Commitment Agreements. The High Income Portfolio of the Fund may from
time to time enter into standby commitment agreements. Such agreements commit
the Portfolio, for a stated period of time, to purchase a stated amount of a
fixed income security which may be issued and sold to the Portfolio at the
option of the issuer. The price and coupon of the security is fixed at the time
of the commitment. At the time of entering into the agreement the Portfolio is
paid a commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately .5% of the aggregate purchase price of
the security which the Portfolio has committed to purchase. The Portfolio will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price which is considered advantageous
to the Portfolio. The Portfolio will not enter into a standby commitment with a
remaining term in excess of 45 days and will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 10% of its assets taken at the
time of acquisition of such commitment or security. The Portfolio will at all
times maintain a segregated account with its custodian of cash or liquid, high-
grade debt obligations in an amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Portfolio may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Portfolio's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
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
24
<PAGE>
in which an amount of cash or short-term securities equal to the exercise price
of the put has been segregated with the Fund's custodian). By writing covered
options on U.S. Treasury securities, a Portfolio will be able to increase its
return on the underlying securities by the amount of the premium, if the option
expires unexercised, or by the amount of any profits earned by closing out the
option position. The Portfolio may be required, however, to forego benefits
which could have been obtained from an increase in the value of securities on
which a call is written or a decrease in the value of securities on which a put
is written. As a result, the Portfolio may receive less total return, and at
other times greater total return, than if it had not written options.
The Portfolios also may purchase put options on optionable U.S. Treasury
bills, notes and bonds held in a Portfolio and, under certain limited
circumstances described in the Statement of Additional Information, call
options on such instruments. Purchases of put options may enable the Portfolios
to limit the risk of declines in the value of the portfolio security underlying
the put, until the expiration of the option or the closing of the option
transaction. By purchasing a put, however, a Portfolio will be required to pay
the premium, which will reduce the benefits obtained from the transaction.
Although options written by a Portfolio may be terminated prior to exercise
or expiration, by entering into an offsetting transaction, the ability to do so
depends upon the presence of a liquid secondary market on the exchange on which
the option is traded. If no such market is available, the Portfolio may be
unable to terminate existing positions and may be subject to exercise of the
option under unfavorable circumstances. The Portfolios will enter into
transactions in options on debt securities only when the management of the Fund
believes that a liquid secondary market for such options is available.
Reference is made to the Appendix to the Statement of Additional Information
for further information regarding the trading of options on debt securities.
Exchanges generally introduce options series on specific issues of U.S.
Treasury bonds and notes as such securities are issued. Such Exchanges,
however, do not ordinarily introduce new series of options on such issues to
replace expiring series inasmuch as trading interest tends to center on the
most recently auctioned issues of Treasury bonds and notes. Consequently,
options representing a full range of expirations will not usually be available
for every issue on which options are traded.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (including a majority of the shares of
each Portfolio). Among such restrictions are prohibitions against the Fund's
investing more than 5% of the total assets of any Portfolio in the securities
of any one issuer, purchasing more than 10% (i) in principal amount of
outstanding securities of an issuer, or (ii) of outstanding voting securities
of an issuer, and investing more than 25% of the total assets of any Portfolio
in the securities of issuers primarily engaged in the same industry. Investors
are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
25
<PAGE>
INVESTMENT ADVISER
The investment adviser to the Fund is Fund Asset Management, L.P. The address
of FAM is P.O. Box 9011, Princeton, New Jersey 08543-9011. FAM or MLAM acts as
the investment adviser for over 100 other registered investment companies. FAM
or MLAM also offers portfolio management and portfolio analysis services to
individuals and institutions. As of December 31, 1994, FAM and MLAM had a total
of approximately $163.8 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of FAM.
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, 1994, FAM received advisory fees from the Fund in the
amount of $17,493,674, of which $12,959,206 was received with respect to the
High Income Portfolio (representing .42% of its average net assets), $3,316,386
was received with respect to the Investment Grade Portfolio (representing .37%
of its average net assets) and $1,218,082 was received with respect to the
Intermediate Term Portfolio (representing .37% 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, 1994 were $44,372,419, of which $33,140,963 was attributable to the High
Income Portfolio (.53% and 1.29% of average net assets represented by Class A
and Class B shares, respectively), $8,715,825 was attributable to the
Investment Grade Portfolio (.53% and 1.29% of average net assets represented by
Class A and Class B shares, respectively), $2,515,631 was attributable to the
Intermediate Term Portfolio (.53% and 104% 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.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act of 1940 which incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser
26
<PAGE>
include a ban on acquiring any securities in a "hot" initial public offering
and a prohibition from profiting on short-term trading in securities. In
addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act of
1940. The Directors of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act of 1940. The
Board of Directors elects officers of the Fund annually.
The Directors of the Fund and their principal employment are as follows:
Arthur Zeikel*--President and Chief Executive Officer of MLAM and FAM;
Executive Vice President of ML & Co.; Executive Vice President of Merrill
Lynch, and a Senior Vice President thereof; Director of the Distributor, Inc.
Ronald W. Forbes--Associate Professor of Finance, School of Business, State
University of New York at Albany.
Cynthia A. Montgomery--Professor, Harvard Business School.
Charles C. Reilly--Adjunct Professor, Columbia University Graduate School of
Business.
Kevin A. Ryan--Professor of Education at Boston University. Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
Richard R. West--Professor of Finance at New York University School of
Business Administration.
PURCHASE OF SHARES
Each Portfolio continuously offers its shares at a public offering price
based on its per share net asset value plus sales charges imposed either at
the time of purchase or on a deferred basis depending upon the class of shares
selected by the investor under the Merrill Lynch Select Pricing SM System. Net
asset value is determined in the manner set forth under "Additional
Information--Determination of Net Asset Value". Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), an affiliate of both the Investment
Adviser and Merrill Lynch, acts as the distributor of the shares. Shares may
be purchased directly from the Distributor or from other securities dealers,
including Merrill Lynch, with whom the Distributor has entered into selected
dealer agreements. The minimum initial purchase in each Portfolio is $1,000.
The minimum subsequent
- --------
*Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
27
<PAGE>
purchase in each Portfolio is $50. For retirement plans, the minimum initial
purchase in each Portfolio is $100 and the minimum subsequent purchases
requirement is $1. Merrill Lynch charges its customers a processing fee
(currently $4.85) to confirm a sale of shares to such customers.
As to purchase orders received by securities dealers prior to the close of
the New York Stock Exchange (generally 4:00 pm New York City time) on the day
the order is placed with the Distributor, including orders received after the
close on the previous day, the applicable offering price will be based on the
net asset value determined as of 15 minutes after the close of the New York
Stock Exchange on the day the order is placed with the Distributor, provided
the order is received by the Distributor not later than 30 minutes after the
close of business on the New York Stock Exchange (generally 4:00 p.m., New
York City time), on that day. If the purchase orders are not received by the
Distributor as of 30 minutes after the close of business on the New York Stock
Exchange such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Fund. Neither the Distributor
nor securities dealers are permitted to withhold placing orders to benefit
themselves by a price change. The Fund reserves the right to suspend the sale
of its shares to the public in response to conditions in the securities
markets, or otherwise. Any order may be rejected by the Distributor or the
Fund.
Each of the Portfolios issues four classes of shares under the Merrill Lynch
Select Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Class A and Class D shares are sold
to investors choosing the initial sales charge alternative and Class B and
Class C shares are sold to investors choosing the deferred sales charge
alternative. Class C shares of the Intermediate Term Portfolio are available
only through the Exchange Privilege and may not be purchased except through
exchange of Class C shares of another Portfolio or another MLAM-advised mutual
fund.
The alternative sales arrangements of the Fund permit investors in the
Portfolios to choose the method of purchasing shares that they believe is most
beneficial given the amount of their purchase, the length of time the investor
expects to hold his shares and other relevant circumstances. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge, as discussed below, or to have the entire
initial purchase price invested in one of the Portfolios with the investment
thereafter being subject to ongoing account maintenance and distribution fees.
A discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing SM System
is set forth under "Merrill Lynch Select Pricing SM System" on page 5.
Each Class A, Class B, Class C and Class D share of a Portfolio represents
identical interests in the Portfolio and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The deferred sales
charges and account maintenance fees that are imposed on Class B and Class C
shares, as well as the account maintenance fees that are imposed on Class D
shares, will be imposed directly against those classes and not against all
assets of the Portfolio and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by a Portfolio for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares of a Portfolio
each have exclusive voting rights with respect to the Rule 12b-1
28
<PAGE>
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. See "Distribution Plans" below.
Each class has different exchange privileges. See "Shareholder Services--
Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following tables set forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
HIGH INCOME AND INVESTMENT GRADE PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/),(/3/)
- ---------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing ten years(/4/)
1.0%
annually to 0.0%
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year
- ---------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Portfolios are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
29
<PAGE>
INTERMEDIATE TERM PORTFOLIO
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(/2/),(/3/)
- ---------------------------------------------------------------------------------------------
B CDSC for one year, at a 0.25% 0.25% B shares convert to
rate of 1.0% during the D shares automatically
first after approximately
year, decreasing to 0.0% ten years(/4/)
after
the first year
- ---------------------------------------------------------------------------------------------
C5 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year
- ---------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $100,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Portfolios are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(5) Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege. See p. 47.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D
shares. Sales charges for purchases of Class A and Class D shares of the
Portfolios, computed as indicated below, are reduced on larger purchases. The
Distributor may reallow as a discount all or a part of 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:
30
<PAGE>
<TABLE>
<CAPTION>
HIGH INCOME AND
INVESTMENT GRADE PORTFOLIOS+
---------------------------------------------------
SALES LOAD AS A DISCOUNT TO
SALES LOAD PERCENTAGE OF SELECT DEALERS
AS A PERCENTAGE NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OF OFFERING PRICE INVESTED* OF OFFERING PRICE
- ------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000.......... 4.00% 4.16% 3.75%
$25,000 but less than
$50,000................... 3.75 3.90 3.50
$50,000 but less than
$100,000.................. 3.25 3.36 3.00
$100,000 but less than
$250,000.................. 2.50 2.56 2.25
$250,000 but less than
$1,000,000................ 1.50 1.52 1.25
$1,000,000 and more**...... .00 .00 .00
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
---------------------------------------------------
SALES LOAD AS A DISCOUNT TO
SALES LOAD AS A PERCENTAGE OF SELECT DEALERS AS
PERCENTAGE OF NET AMOUNT A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $100,000......... 1.00% 1.01% .95%
$100,000 but less than
$250,000.................. .75 .76 .70
$250,000 but less than
$500,000.................. .50 .50 .45
$500,000 but less than
$1,000,000................ .30 .30 .27
$1,000,000 or more**....... .00 .00 .00
</TABLE>
- --------
*Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more. If the sales charge is waived, such purchases will be
subject to a CDSC of 1.0% for the High Income and Investment Grade
Portfolios or 0.20% for the Intermediate Term Portfolio if the shares are
redeemed within one year after purchase. Class A purchases of the High
Income and Investment Grade Portfolios made prior to October 21, 1994 may
be subject to a CDSC if the shares are redeemed within one year of purchase
at the following rates: 0.75% on purchases of $1,000,000 to $2,500,000;
0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on purchases of
$3,500,001 to $5,000,000; and 0.20% on purchases of more than $5,000,000 in
lieu of paying an initial sales charge. Class A purchases of the
Intermediate Term Portfolio made prior to October 21, 1994 may be subject
to a CDSC of 0.50% on purchases of more than $1,000,000 if the shares are
redeemed within one year of purchase in lieu of paying an initial sales
charge. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% (with respect to the High Income and Investment Grade
Portfolios) or 0.30% (with respect to the Intermediate Term Portfolio) will
be imposed on purchases of $1 million or more of Class A or Class D shares
by certain 401(k) plans.
+As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
During the year ended September 30, 1994, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 24,265,055,
8,030,423 and 3,674,523 Class A shares, respectively, for aggregate net
proceeds of $196,408,023, $93,135,987 and $43,208,064, respectively. The gross
sales charges for the sale of Class A shares of the High Income Portfolio,
Investment Grade Portfolio and Intermediate Portfolio were $2,412,703,
$495,904 and $260,875 respectively, of which $189,125, $40,161 and $23,177,
respectively, were received by the Distributor, and $2,223,578, $455,743 and
$237,698, respectively, were received by Merrill Lynch. For the year ended
September 30, 1994, the Distributor received CDSC's of $2,250, $0 and $0,
respectively, for the High Income Portfolio, Investment Grade Portfolio and
Intermediate Term Portfolio, all of which were paid to Merrill Lynch.
31
<PAGE>
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch Blueprint SM
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such
plans meet the required minimum number of eligible employees or required
amount of assets advised by FAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs provided that the program has $3 million or more initially invested
in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment programs including TMA SM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services and certain purchases made in connection with the Merrill
Lynch Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to Merrill Lynch & Co., Inc. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds who wish to reinvest the net proceeds
from a sale of their closed-end fund shares of common stock in shares of the
Fund also may purchase Class A shares of the Fund if certain conditions set
forth in the Statement of Additional Information are met. For example, Class A
shares of the Fund and certain other MLAM-advised mutual funds are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a financial consultant, if
certain conditions set forth in the Statement of Additional Information are
met. Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
32
<PAGE>
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the High Income and Investment
Grade Portfolios are subject to a four year CDSC and Class B shares of the
Intermediate Term Portfolio are subject to a one year CDSC, while Class C
shares are subject only to a one year 1.0% CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B shares,
together with shares issued upon dividend reinvestment with respect to those
shares, are automatically converted into Class D shares of the Portfolio and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares of each
Portfolio are subject to an account maintenance fee of 0.25% of net assets.
Class B and Class C shares of the High Income and Investment Grade Portfolios
are subject to distribution fees of 0.50% and 0.55%, respectively, of net
assets. Both Class B and Class C shares of the Intermediate Term Portfolio are
subject to distribution fees of 0.25% of net assets. See "Distribution Plans".
The proceeds from the account maintenance fees are used to compensate Merrill
Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below. Class C shares of the Intermediate Term Portfolio are available
only through the Exchange Privilege.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately ten years after issuance, Class B shares of
a Portfolio will convert automatically into Class D shares of that Portfolio,
which are subject to an account maintenance fee but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight years.
If Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase for the High Income and Investment Grade
Portfolios, or within one year of purchase for
33
<PAGE>
the Intermediate Term Portfolio, may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge on Class B shares applicable for the period starting October 21, 1994:
HIGH INCOME OR INVESTMENT GRADE PORTFOLIO:*
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -------------------
<S> <C>
0-1.................................................... 4.0%
1-2.................................................... 3.0%
2-3.................................................... 2.0%
3-4.................................................... 1.0%
4 and thereafter....................................... None
</TABLE>
INTERMEDIATE TERM PORTFOLIO:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -------------------
<S> <C>
0-1.................................................... 1.0%
Thereafter............................................. None
</TABLE>
- --------
*As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest possible applicable rate being charged. Therefore, with respect to
the High Income and Investment Grade Portfolios, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. It will be assumed, with respect to the
Intermediate Term Portfolio, that the redemption is of shares held for over one
year or shares acquired pursuant to reinvestment of dividends or distributions
and then of shares held longest during the one-year period. The CDSC will not
be applied to dollar amounts representing an increase in the net asset value
since
34
<PAGE>
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 Class B shares of
the High Income Portfolio at $10 per share (at a cost of $1,000) and in the
third year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional shares upon dividend
reinvestment. If at such time the investor makes his first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to charge because of
dividend reinvestment. With respect to the remaining 40 shares, the CDSC is
applied only to the original cost of $10 per share and not to the increase in
net asset value of $2 per share. Therefore, $400 of the $600 redemption
proceeds will be charged at a rate of 2.0% (the applicable rate in the third
year after purchase).
The Class B contingent deferred sales charge is waived on redemptions of
shares in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following
the death or disability (as defined in the Code) of a shareholder. The Class B
contingent deferred sales charge also is waived on redemption of shares in
connection with certain group plans through the Merrill Lynch Blueprint SM
Program. See "Shareholder Services--Merrill Lynch Blueprint SM Program". The
contingent deferred sales charge is waived on redemption of shares by certain
eligible 401(a) and eligible 401(k) plans. The contingent deferred sales
charge is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and are rolled over into a Merrill
Lynch, Pierce, Fenner & Smith Incorporated or Merrill Lynch Trust Company
custodied Individual Retirement Account and held in such account at the time
of redemption. Additional information concerning the waiver of the Class B
contingent deferred sales charge is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge on Class C shares of the High Income, Investment Grade and Intermediate
Term Portfolios:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -------------------
<S> <C>
0-1.................................................... 1.0%
Thereafter............................................. None
</TABLE>
35
<PAGE>
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the relevant Portfolio. Class D shares are subject to an
ongoing account maintenance fee of 0.25% of net assets for the High Income and
Investment Grade Portfolios and 0.10% of net assets for the Intermediate Term
Portfolio, but are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class D shares will occur
at least once each month (on the "Conversion Date") on the basis of the
relative net asset values of the shares of the two classes on the Conversion
Date, without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchase or sale of
the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Plan was
established), all Class B shares of all MLAM-advised mutual funds held in that
Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that retirement plan will be
sold Class D shares of the appropriate funds at net asset value per share.
In the event that all Class B shares of a Portfolio held in a single account
are converted to Class D shares on a Conversion Date, shares representing
reinvestment of declared but unpaid dividends on those
36
<PAGE>
Class B shares also will be converted to Class D shares; otherwise, only Class
B shares purchased through reinvestment of dividends paid will convert to Class
D shares on the Conversion Date.
The minimum value of Class B shares of a Portfolio held in a single account
that will be converted on any Conversion Date is $50; however, if at a
Conversion Date the conversion of Class B shares to Class D shares of a
Portfolio in a single account will result in less than $50 worth of Class B
shares being left in the account, all of the Class B shares of that Portfolio
held in the account on the Conversion Date will be converted to Class D shares
of the Portfolio.
Class B shareholders holding share certificates must deliver such
certificates to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. Shares evidenced by certificates that are not
received by the Transfer Agent at least one week prior to the Conversion Date
will be converted into Class D shares on the next scheduled Conversion Date
after such certificates are delivered.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% of average daily net assets of the relevant class and
Portfolio for Class B, Class C and Class D shares of the High Income and
Investment Grade Portfolios, and for Class B and Class C shares of the
Intermediate Term Portfolio, and 0.10% of average daily net assets attributable
to the relevant class and Portfolio for Class D shares of the Intermediate Term
Portfolio in order to compensate the Distributor and Merrill Lynch (pursuant to
a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% and
0.55%, respectively, of average daily net assets attributable to the relevant
class and Portfolio for Class B and Class C shares of the High Income and
Investment Grade Portfolios, and 0.25% of average daily net assets attributable
to the relevant class and Portfolio for Class B and Class C shares of the
Intermediate Term Portfolio, in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Portfolio. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and
37
<PAGE>
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% (in the case
of the High Income Portfolio and Investment Grade Portfolio) and 0.50% (in the
case of the Intermediate Term Portfolio) of the average daily net assets for
the Class B shares of the respective Portfolios (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are identical
to the aggregate fee rate payable and the services provided under the
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled. For the fiscal year ended September
30, 1994 the High Income, Investment Grade and Intermediate Term Portfolios
paid the Distributor $16,431,011, $3,845,744, and $733,272, respectively,
pursuant to the Distribution Plan, all of which was paid to Merrill Lynch for
providing shareholder and distribution-related services.
The payments under the Distribution Plans, as was the case with the Prior
Plan, are based on a percentage of average daily net assets attributable to the
relevant shares regardless of the amount of expenses incurred and, accordingly,
distribution-related revenues from the Distribution Plans may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans. This information is
presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, the contingent deferred sales charges and certain
other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and the contingent deferred sales charges and the expenses
consist of financial consultation compensation. At December 31, 1993, the last
date at which fully allocated data is available, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch exceeded fully allocated
accrual revenues for such period by approximately $31,474,000 (1.53% of Class B
net assets at that date) with respect to the High Income Portfolio and
approximately $5,594,000 (1.11% of Class B net assets at that date) with
respect to the Investment Grade Portfolio and approximately $682,000 (4.6% of
Class B net assets at that date) with respect to the Intermediate Term
Portfolio. As of December 31, 1993, direct cash expenses for the period since
commencement of the offering of Class B shares exceeded direct cash revenues by
approximately $443,796 (.02% of Class B net assets at that date) with respect
to the High Income Portfolio and direct cash revenues exceeded direct cash
expenses by approximately $4,382,469 (.87% of Class B net assets at that date)
with respect to the Investment Grade Portfolio and direct cash revenues
exceeded direct cash expenses by approximately $140,742 (.10% of Class B net
assets at that date) with respect to the Intermediate Term
38
<PAGE>
Portfolio. As of September 30, 1994, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$6,164,454 (.36% of Class B net assets at that date) with respect to the High
Income Portfolio. As of September 30, 1994, direct cash revenues for the period
since commencement of the offering of Class B shares exceeded direct cash
expenses by $6,484,346 (1.34% of Class B net assets at that date) with respect
to the Investment Grade Portfolio. As of September 30, 1994, direct cash
revenues for the period since commencement of the offering of Class B shares
exceeded direct cash expenses by $637,081 (.45% of Class B net assets at that
date) with respect to the Intermediate Term Portfolio.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of Directors of the Fund will approve the continuance
of the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges, the
account maintenance fee, the distribution fee and/or the CDSCs received with
respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges, such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fees. The maximum sales charge rule is applied
separately by each class of a Portfolio. As applicable to the Fund, the maximum
sales charge rule limits the aggregate of distribution fee payments and CDSCs
payable by a Portfolio to the sum of (1) 6.25% of eligible gross sales of Class
B shares and Class C shares of that Portfolio, computed separately (defined to
exclude shares issued pursuant to dividend reinvestment and exchanges) and (2)
interest on the unpaid balance for the respective class and portfolio computed
separately at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with Class B
shares in each Portfolio is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charge at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee with respect to Class B shares, and
any CDSCs will be paid to the Fund rather than to the Distributor; however, the
Fund will continue to make payments of the account maintenance fees. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances, payment in
excess of the amount payable under the NASD formula will not be made.
39
<PAGE>
The following tables set forth comparative information as of September 30,
1994 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, 1994 for the High Income
and Investment Grade Portfolios, and for the period November 12, 1992
(commencement of Class B operations) to September 30, 1994 for the
Intermediate Term Portfolio. Because Class C shares of the Fund had not been
publicly issued prior to September 30, 1994, information concerning Class C
shares is not provided below.
DATA CALCULATED AS OF SEPTEMBER 30, 1994
HIGH INCOME PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $2,293,990 $143,374 $17,771 $161,145 $30,809 $130,336 $11,736
Under Distributor's Vol-
untary Waiver.......... $2,293,990 $143,374 $11,469 $154,843 $30,809 $124,035 $11,736
</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................ $579,182 $36,199 $6,318 $42,517 $11,767 $30,750 $2,415
Under Distributor's
Voluntary Waiver....... $579,182 $36,199 $2,895 $39,094 $11,767 $27,328 $2,415
</TABLE>
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................ $83,084 $5,193 $379 $5,572 $862 $4,709 $353
Under Distributor's
Voluntary Waiver....... $83,084 $5,193 $415 $5,608 $862 $4,746 $353
</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.
40
<PAGE>
(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 the exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of
these distribution fee payments made prior to July 6, 1993 under the Prior
Plan at the 0.50% rate, 0.25% of average daily net assets has been treated
as a distribution fee and 0.25% of average daily net assets has been
deemed to have been a service fee and not subject to the NASD maximum
sales charge rule.
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of each Portfolio upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption in the case of Class A or Class D shares of the
Portfolios, and is the net asset value per share next determined after the
initial receipt of proper notice of redemption, less the applicable CDSC, if
any, in the case of Class B or Class C Shares of the Portfolios. Except for
any contingent deferred sales load which may be applicable to Class B or Class
C Shares of the three Portfolios, there will be no charge for redemption if
the redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their total holdings also will receive upon redemption all
dividends declared on the shares redeemed. If a shareholder redeems all of the
shares in his account, he will receive, in addition to the net asset value of
the shares redeemed, a separate check representing all dividends declared but
unpaid. If a shareholder redeems a portion of the shares in his account, the
dividends declared but unpaid on the shares redeemed will be distributed on
the next dividend payment date.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by
each Portfolio at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Att: TAMFO,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., Transfer Agency Mutual Funds Operations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the shares to be
redeemed. The notice in either event requires the signature(s) of all persons
in whose name(s) the shares are registered, signed exactly as their name(s)
appears on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry
41
<PAGE>
publications. Notarized signatures are not sufficient. Examples of "eligible
guarantor institutions" include most commercial banks and broker dealers
(including, for example, Merrill Lynch branch offices). Information regarding
other financial institutions which qualify as "eligible guarantor institutions"
may be obtained from the Transfer Agent. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days after receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time, not exceeding ten
days, as it has assured itself that good payment (e.g., cash or certified check
drawn on a United States bank) has been collected for the purchase of such
shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. As described in the Statement of
Additional Information, the repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities dealers may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. The Fund reserves the right
to reject any order for repurchase, which right of rejection might adversely
affect shareholders seeking redemption through the repurchase procedure.
Merrill Lynch may charge its customers a processing fee (currently $4.85) to
confirm a repurchase of shares to such customers. Redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
As described in further detail in the Statement of Additional Information,
holders of Class A or Class D shares of any of the three Portfolios who have
redeemed their shares have a one-time privilege to reinstate their accounts by
purchasing shares of the same class at net asset value without a sales charge
up to the dollar amount redeemed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of the net
investment income of each Portfolio, if any. The net investment income of each
Portfolio is declared as dividends daily immediately prior to the determination
of the net asset value of each Portfolio on that day and reinvested monthly in
additional full and fractional shares of each Portfolio at net asset value
unless the shareholder elects to receive such dividends in cash. The net
investment income of each Portfolio for dividend purposes consists of interest
and dividends
42
<PAGE>
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of net asset value. Expenses of each Portfolio,
including the advisory fee and any account maintenance and/or distribution fees
(if applicable), are accrued daily. Shares will accrue dividends as long as
they are issued and outstanding. The per share dividends and distributions on
Class B and Class C shares will be lower than the per share dividends and
distributions on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable to the
Class B and Class C shares. Similarly, the per share dividends and
distributions on Class D shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Additional Information--
Determination of Net Asset Value". Shares are issued and outstanding as of the
settlement date of a purchase order to the settlement date of a redemption
order.
In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. All net realized long-or short-term capital gains of the Fund,
if any, including gains from option and futures contract transactions, are
declared and distributed to the shareholders of the Portfolio or Portfolios to
which such gains are attributable annually after the close of the Fund's fiscal
year.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gain Distributions" for information concerning the manner in which dividends
and distributions may be automatically reinvested in shares of any Portfolio.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of any
Portfolio or received in cash.
FEDERAL INCOME TAXES
The Fund has in the past elected the special tax treatment afforded regulated
investment companies under the Code. The Fund believes that it has qualified
for such treatment and intends to continue to qualify therefor. If it so
qualifies, the Fund (but not its shareholders) will be relieved of federal
income tax on the amount it distributes to Class A, Class B, Class C and Class
D shareholders (together, the "shareholders"). If in any taxable year the Fund
does not qualify as a regulated investment company, all of its taxable income
will be taxed to the Fund at corporate rates. Under the Code, each Portfolio of
the Fund is treated as a separate corporation for federal income tax purposes
and, thus, each Portfolio will be required to satisfy the qualification
requirements under the Code for regulated investment company treatment.
The Fund contemplates declaring as dividends substantially all of its net
investment income. See "Dividends and Distributions". Dividends paid by the
Fund from its investment income and distributions of the Fund's net realized
short-term capital gains are taxable to shareholders as ordinary income.
Distributions made from net realized long-term capital gains are taxable to
shareholders as long-term capital gains. Dividends and distributions will be
taxable to shareholders as ordinary income or capital gains, whether received
in cash or reinvested in additional shares of the Fund. The maximum tax rate
imposed on capital gains for individual taxpayers is 28 percent. Financial Data
Services, Inc., the Fund's transfer agent, will
43
<PAGE>
send each shareholder a monthly dividend statement which will include the
amount of dividends paid and identify whether such dividends represent ordinary
income or capital gains.
Upon sale or exchange of shares in the Fund, a shareholder will realize
short-or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares.
The Fund may recognize interest attributable to it from holding zero coupon
securities. Current federal law requires that, for most zero coupon securities,
the Fund must accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. In addition, the Fund may invest in
pay-in-kind securities on which payments of interest consist of securities
rather than cash. As an investment company, the Fund must pay out substantially
all of its net investment income each year. Accordingly, the Fund may be
required to pay out as an income distribution each year an amount which is
greater than the total amount of cash interest the Fund actually received. Such
distributions will be made from the cash assets of the Fund or by sales of
portfolio securities, if necessary. The Fund may realize a gain or loss from
such sales.
Some shareholders may be subject to a 31% withholding tax on ordinary income
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom no certified taxpayer identification number is on file with the
Fund or who, to the Fund's knowledge, have furnished an incorrect number. An
investor when establishing an account must certify under penalty of perjury
that such number is correct and that he is not otherwise subject to backup
withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided under an applicable
treaty. Shareholders who are nonresident aliens or foreign entities are urged
to consult their own tax advisers concerning the applicability of the United
States withholding tax.
For shares of a Portfolio of the Fund acquired after October 3, 1989, if a
shareholder exercises his exchange privilege within 90 days after the date such
shares were acquired to acquire shares in another Portfolio of the Fund or a
second Fund ("New Fund"), then the loss, if any, recognized on the exchange
will be reduced (or the gain, if any, increased) to the extent the load charge
paid to the Fund reduces any load charge such shareholder would have been
required to pay on the acquisition of the New Fund shares in the absence of the
exchange privilege. Instead, such load charge will be treated as an amount paid
for the New Fund shares and will be included in the shareholder's basis for
such shares.
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Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month will be deemed to have been
received on December 31 of such year if actually paid during the following
January.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Regulations promulgated thereunder. The Code and Regulations are
subject to change by legislative or administrative action either prospectively
or retroactively.
The Statement of Additional Information describes the effect of other
provisions of the Code on the Fund's shareholders.
Ordinary income and capital gains dividends may also be subject to state and
local taxes.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.
PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Board of Directors, the Investment Adviser is primarily
responsible for the portfolio decisions of each Portfolio and the placing of
its portfolio transactions. In placing orders, it is the policy of each
Portfolio to obtain the best price and execution for its transactions.
Affiliated persons of the Fund, including Merrill Lynch, may serve as its
broker in over-the-counter transactions conducted on an agency basis.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of its Portfolios. Full details as
to each of such services and copies of the various plans described below can be
obtained from the Fund, the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchase and the reinvestment of ordinary income and long-
term
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capital gain distributions. These statements will also show any other activity
in the account since the previous statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestments of ordinary income
dividends and long-term capital gain distributions. A shareholder may make
additions to his Investment Account at any time by purchasing shares at the
applicable public offering price either through a securities dealer which has
entered into a selected dealers agreement with the Distributor or by mail
directly to the Transfer Agent, acting as agent for the Distributor.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of a
Portfolio, a shareholder either must redeem the Class A or Class D shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of a Portfolio, a shareholder must either
redeem the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
An Automatic Investment Plan is available to shareholders who initially
invest a minimum of $1,000 and whose positions in any Portfolio of Class A and
Class D shares are held with the Transfer Agent may authorize preauthorized
checks of $50 or more to charge the bank account of the shareholder on a
regular basis to provide systematic additions to the Investment Account of such
shareholder. Shareholders who initially invest a minimum of $1,000 and whose
positions in any Portfolio of the Fund are maintained in a CMA (R) account may
participate in the CMA (R) Automated Investment Program, through which
investments in any Portfolio of the Fund may be made on a regularly scheduled
basis ranging from weekly to semiannually in amounts of $100 or more ($1 for
retirement accounts).
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will
automatically be reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the respective Portfolio, and
class, without sales
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charge, as of the close of business on the payment date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gain distributions, or both, in cash, in which event
payment will be mailed or directly deposited as soon as practicable after the
payable date. See "Dividends, Distributions and Taxes".
A shareholder may at any time, by written notification to Merrill Lynch if
the shareholder's account is maintained with Merrill Lynch or by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
As described in further detail in the Statement of Additional Information, a
shareholder of Class A or Class D shares may elect to make systematic
withdrawals from his Investment Account with respect to any Portfolio on
either a monthly, bimonthly, quarterly, semiannual or annual basis subject to
certain conditions.
RETIREMENT PLANS
As described in further detail in the Statement of Additional Information,
eligible shareholders of the Fund may participate in a variety of qualified
employee benefit plans which are available from Merrill Lynch.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of a Portfolio have an exchange
privilege with the other Portfolios and certain other MLAM-advised mutual
funds. There is currently no limitation on the number of times a shareholder
may exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A
shares of the other Portfolio or second fund in his account in which the
exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of the other Portfolio or a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
other Portfolio or the second fund in his account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the other Portfolio
or second fund, the shareholder will receive Class D shares of the other
Portfolio or second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of another Portfolio or a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of
the other Portfolio or second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge
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previously paid on the Class A or Class D shares being exchanged and the sales
charge payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares of a Portfolio will be exchangeable with
shares of the same class of other MLAM-advised mutual funds. Class C shares of
the Intermediate Term Portfolio are available only through the Exchange
Privilege.
Shares of a Portfolio which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Portfolio. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of a Portfolio is "tacked" to the holding period of
the newly acquired shares of the other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of a Portfolio exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to that Portfolio if
such schedule is higher than the CDSC schedule relating to the new Class B
shares. In addition, Class B shares of a Portfolio acquired through use of the
exchange privilege will be subject to the Portfolio's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of
the MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
Each Portfolio's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA
program. Then, any subsequent exchange under the MFA program of Class A or
Class D shares of a MLAM-advised mutual fund for Class A or Class D shares of
a Portfolio will be made solely on the basis of the relative net asset values
of the shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
MLAM-advised mutual fund and the sales charge payable on the shares of the
Portfolio being acquired in the exchange under the MFA program.
MERRILL LYNCH BLUEPRINT SM PROGRAM
Class D shares of any of the three Portfolios are offered to participants in
the Merrill Lynch Blueprint SM Program ("Blueprint"). In addition,
participants in Blueprint who own Class A shares of the Fund may purchase
additional Class A shares of the Fund through Blueprint. Blueprint is directed
to small investors, group or corporate IRAs and participants in certain
affinity groups such as benefit plans, credit unions and trade associations.
Investors placing orders to purchase Class A or Class D shares of the
Portfolios through a
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Blueprint account will acquire such Class A or Class D shares at a reduced
sales charge calculated in accordance with the standard Blueprint sales charge
schedules. Class B shares of any of the three Portfolios are offered through
Blueprint only to members of certain affinity groups. The contingent deferred
sales load will be waived in connection with orders to purchase Class B shares
of the Portfolios through Blueprint provided that the shareholder is a
participant in a qualified group plan at the time of purchase. However,
services available to Fund shareholders through Blueprint may differ from
those available to other Fund shareholders. Orders for purchase and redemption
of shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. There will be no minimum initial or
subsequent purchase requirement for participants who are part of an automatic
investment plan. Additional information concerning placing orders to purchase
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PERFORMANCE DATA
From time to time the Fund may include the average annual total return and
yield of a Portfolio for various specified time periods in advertisements or
information furnished to present or prospective shareholders. Average annual
total return and yield are computed separately for the Class A, Class B,
Class C and Class D shares of each Portfolio in accordance with formulas
specified by the Securities and Exchange Commission (the "Commission").
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return will be computed assuming all dividends
and distributions are reinvested and taking into account all applicable
recurring and nonrecurring expenses, including any contingent deferred sales
charge that would be applicable to a complete redemption of the investment at
the end of the specified period such as in the case of Class B and Class C
shares and the maximum sales charge in the case of Class A and Class D shares.
Dividends paid by a Portfolio with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. Each
Portfolio of the Fund will include performance data for all classes of shares
of that Portfolio in any advertisement or information including performance
data of the Fund.
The Fund also may quote total return and aggregate total return performance
data of a Portfolio for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual or annualized rate of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charge,
actual annual or annualized total return data
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generally will be lower than average annual total return data since the average
annual rates of return reflect compounding; aggregate total return generally
will be higher than average annual total return data since the aggregate rates
of return reflect compounding over a longer period of time. In advertisements
distributed to investors whose purchases are subject to waiver of the CDSC in
the case of Class B and Class C shares (such as investors in certain retirement
plans) or to reduced sales charges in the case of Class A and Class D shares,
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the contingent deferred sales charges and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the contingent deferred sales charge, a lower amount of
expenses is deducted. See "Purchase of Shares". A Portfolio's total return may
be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical investment in that Portfolio at
the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. The yield for the 30-
day period ending September 30, 1994 was 9.86% for Class A shares and 9.49% for
Class B shares of the High Income Portfolio, 6.89% for Class A shares and 6.39%
for Class B shares of the Investment Grade Portfolio, and 6.90% for Class A
shares and 6.51% for Class B shares of the Intermediate Term Portfolio. The
yield for the 30-day period ending December 31, 1994 was 11.83% for Class C
shares and 12.27% for Class D shares of the High Income Portfolio, 6.91% for
Class C shares and 7.21% for Class D shares of the Investment Grade Portfolio,
and 7.54% for Class C shares and 7.65% for Class D shares of the Intermediate
Term Portfolio.
Total return and yield figures are based on a Portfolio's historical
performance and are not intended to indicate future performance. A Portfolio's
total return and yield will vary depending on market conditions, the securities
held by that Portfolio, that Portfolio's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The
value of an investment in a Portfolio will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare the performance of a Portfolio to that of
the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite
Index, the Dow Jones Industrial Average, or performance data contained in
publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine or Fortune Magazine. In
addition, from time to time the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar Publications, Inc. in advertising
or supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Portfolio is
determined once daily by FAM immediately after the declaration of dividends as
of 15 minutes after the close of business on the New York Stock Exchange
(generally 4:00 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
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sell or redeem shares. The net asset value per share of a Portfolio is computed
by dividing the sum of the value of the portfolio securities held by such
Portfolio plus any cash or other assets minus all liabilities by the total
number of shares of such Portfolio outstanding at such time, rounded to the
nearest cent. Expenses, including the investment advisory fee payable to FAM
and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily. The Fund employs Merrill Lynch Securities
Pricing Service ("MLSPS"), an affiliate of the Investment Adviser, to provide
certain securities prices for the Fund. For the fiscal year ended September 30,
1994, MLSPS received pricing fees of $1,188 for the High Income Portfolio, $719
for the Investment Grade Portfolio and $457 for the Intermediate Term
Portfolio.
The per share net asset value of Class A shares of a Portfolio generally will
be higher than the per share net asset value of Class B, Class C and Class D
shares of that Portfolio, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fee applicable with respect to Class D shares. Moreover,
the per share net asset value of Class D shares generally will be higher than
the per share net asset value of the Class B and Class C shares, reflecting the
daily expense accruals of the distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the four classes of a Portfolio
eventually will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount
of the expense accrual differentials between the classes.
ORGANIZATION OF THE FUND
The Fund, a Maryland corporation, is a diversified, open-end management
company which was organized in August 1978 and which commenced operations on
November 10, 1978 as the Merrill Lynch High Income Fund, Inc. The Fund was
reorganized on September 8, 1980 to add the High Quality Portfolio and the
Intermediate Term Portfolio. Prior to the reorganization, the Fund consisted
solely of the High Income Portfolio. The Investment Grade Portfolio and the
Intermediate Term Portfolio commenced operations on October 31, 1980. The Fund
is authorized to issue two billion (2,000,000,000) shares of $.10 par value.
The shares are divided as follows: High Income Portfolio Series Common Stock
which is divided into four classes designated "Class A Common Stock", "Class B
Common Stock", "Class C Common Stock" and "Class D Common Stock", which consist
of 200,000,000 shares, 500,000,000 shares, 200,000,000 shares and 500,000,000
shares, respectively, High Quality Portfolio Series Common Stock (which does
business under the name "Investment Grade Portfolio") which is divided into
four classes designated "Class A Common Stock", "Class B Common Stock", "Class
C Common Stock" and "Class D Common Stock", each of which consist of
100,000,000 shares and the Intermediate Term Portfolio Series Common Stock,
which is divided into four classes designated "Class A Common Stock", "Class B
Common Stock", "Class C Common Stock" and "Class D Common Stock", each of which
consists of 50,000,000 shares. Each Class A, Class B, Class C and Class D share
of Common Stock of each Portfolio represents an interest in the same assets of
such Portfolio and is identical in all respects to shares of the other classes,
except that the Class B, Class C and Class D shares bear certain expenses
related to the account maintenance fees associated with such shares, and Class
B and Class C shares bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to such account maintenance and distribution expenditures, as applicable. See
"Purchase of Shares". The Fund has received an order from the Securities and
Exchange Commission permitting the issuance and sale of multiple classes of
Common Stock of each of
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the Fund's Portfolios. The Directors of the Fund may classify and reclassify
the shares of the Fund into additional classes of Common Stock at a future
date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders unless under the Investment Company Act of 1940
shareholders are required to act on any of the following matters: (i) election
of Directors; (ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Voting rights for Directors are not cumulative. Shares issued are
fully paid and nonassessable and have no preemptive rights. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except that, as noted above, Class B,
Class C and Class D shares bear certain additional expenses.
For further information concerning the organization of the Fund, see the
Statement of Additional Information.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, independent auditors, has been selected as the
independent auditors of the Fund.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, acts as Custodian
of the Fund's assets.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. ("FDS"), which is a wholly owned subsidiary of
Merrill Lynch & Co., Inc., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, FDS is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, FDS receives an annual fee of $11.00 per shareholder
account for Class A and Class D shares of the Portfolios and $14.00 per
shareholder account for Class B and Class C shares of the Portfolios and is
entitled to reimbursement for out-of-pocket expenses incurred by it under the
Transfer Agency Agreement.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Fund and passes upon
legal matters for the Fund in connection with the shares offered by this
Prospectus.
REPORTS TO SHAREHOLDERS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes
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to receive separate copies of each report and communication for each of the
shareholder's related accounts the shareholder should notify in writing:
FINANCIAL DATA SERVICES, INC.
ATTN: TAMFO
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission.
The Statement of Additional Information, dated January 31, 1995, 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.
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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.
DESCRIPTION OF CORPORATE BOND RATINGS OF
STANDARD & POOR'S RATINGS GROUP:
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. BB
CC indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is being
paid.
D Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
55
<PAGE>
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56
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH
BLUEPRINT SM PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C>
[_] High Income Portfolio Class A [_] Investment Grade Portfolio Class A [_] Intermediate Term Portfolio Class A
Shares Shares Shares
[_] High Income Portfolio Class B [_] Investment Grade Portfolio Class B [_] Intermediate Term Portfolio Class B
Shares Shares Shares
[_] High Income Portfolio Class C [_] Investment Grade Portfolio Class C [_] Intermediate Term Portfolio Class D
Shares Shares Shares
[_] High Income Portfolio Class D [_] Investment Grade Portfolio Class D
Shares Shares
</TABLE>
of Merrill Lynch Corporate Bond Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A share, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name..........................................................................
First Name Initial Last Name
Name of Co-Owner (if any).....................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Corporate Bond, Inc. Authorization
Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account .........................................................
Bank Name ....................................................................
Bank Number ...................... Account Number ............................
Bank Address .................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor .......................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
57
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Dividends,
Distributions and Taxes--Federal Income Taxes") either because I have not been
notified that I am subject thereto as a result of a failure to report all
interest or dividends, or the Internal Revenue Service ("IRS") has notified me
that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (Available to holders of
Class A or Class D shares of the Intermediate Term Portfolio, the Investment
Grade Portfolio or the High Income Portfolio. See terms and conditions in the
Statement of Additional Information)
..................., 19......
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase [_] Class A
or [_] Class D (choose one) shares of the [_] High Income
Portfolio [_] Investment Grade Portfolio [_] Intermediate Term Portfolio
(choose one) of Merrill Lynch Corporate Bond Fund, Inc. or any other
investment company with an initial sales charge or deferred sales charge for
which Merrill Lynch Funds Distributor, Inc. acts as distributor over the next
13 month period which will equal or exceed:
High Income Portfolio or Investment Grade
Portfolio: [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Intermediate Term Portfolio:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Corporate Bond
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Corporate Bond Fund, Inc. held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
Branch Office, Address, Stamp. our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the Shareholder's
signature.
__ __
| | .......................................
Dealer Name and Address
| | By ....................................
-- -- Authorized Signature of Dealer
This form when completed should be
mailed to: [_][_][_] [_][_][_][_] ...........
Merrill Lynch Corporate Bond Branch- F/C No. F/C Last
Fund, Inc. c/o Financial Data Code Name
Services, Inc. Att: TAMFO P.O.
Box 45289 Jacksonville, [_][_][_] [_][_][_][_][_]
Florida 32232-5289 Dealer's Customer A/C No.
58
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
Social Security No. or
Name ........................................ Taxpayer Identification
First Name Initial Last Name No.
Name of Co-Owner (if any)....................
First Name Initial Last Name
Address...................................... Account Number ..............
(if existing account)
.............................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares of the [_] High Income
Portfolio [_] Investment Grade Portfolio [_] Intermediate Term Portfolio
(choose one) of Merrill Lynch Corporate Bond Fund, Inc. at cost or current
offering price. Withdrawals to be made either (check one) [_] Monthly on the
24th day of each month, or [_] Quarterly on the 24th day of March, June,
September and December. If the 24th falls on a weekend or holiday, the next
succeeding business day will be utilized. Begin systematic withdrawals on
. . . . . . . . . .(month) or as soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares (choose
one) in the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of the [_] High Income Portfolio [_] Investment Grade Portfolio [_]
Intermediate Term Portfolio (choose one) of Merrill Lynch Corporate Bond Fund,
Inc. subject to the terms set forth below. In the event that I am not eligible
to purchase Class A shares, I understand that Class D shares will be
purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an
ACH debit each month on my bank To...............................Bank
account for investment in Merrill (Investor's Bank)
Lynch Corporate Bond Fund, Inc., as
indicated below:
Amount of each ACH debit $......... Bank Address.........................
Account No. ....................... City...... State...... Zip Code......
Please date and invest ACH debits on As a convenience to me, I hereby re-
the 20th of each month beginning quest and authorize you to pay and
charge to my account ACH debits
......(month) or as soon thereafter as drawn on my account by and payable
possible. to Financial Data Services, Inc., I
agree that your rights in respect of
I agree that you are drawing these each such debit shall be the same as
ACH debits voluntarily at my request if it were a check drawn on you and
and that you shall not be liable for signed personally by me. This au-
any loss arising from any delay in thority is to remain in effect until
preparing or failure to prepare any revoked by me in writing. Until you
such debit. If I change banks or de- receive such notice, you shall be
sire to terminate or suspend this fully protected in honoring any such
program, I agree to notify you debit. I further agree that if any
promptly in writing. I hereby autho- such debit be dishonored, whether
rize you to take any action to cor- with or without cause and whether
rect erroneous ACH debits of my bank intentionally or inadvertently, you
account or purchases of fund shares shall be under no liability.
including liquidating shares of the
Fund and crediting my bank account. I ............ ......................
further agree that if a debit is not Date Signature of
honored upon presentation, Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ ......................
Investment Plan and to liquidate suf- Bank Signature of Depositor
ficient shares held in my account to Account (If joint account,
offset the purchase made with the Number both must sign)
dishonored debit.
NOTE: IF AUTOMATIC INVESTMENT PLAN
IS ELECTED, YOUR BLANK, UNSIGNED
............ ..................... CHECK MARKED "VOID" SHOULD ACCOMPANY
Date Signature of THIS APPLICATION.
Depositor
.....................
Signature of Depositor
(If joint account,
both must sign)
60
<PAGE>
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61
<PAGE>
[This page is intentionally left blank.]
62
<PAGE>
[This page is intentionally left blank.]
63
<PAGE>
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 DISTRIBUTOR. 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
Merrill Lynch Select Pricing SM System..................................... 5
Financial Highlights....................................................... 11
Investment Objectives and Policies......................................... 14
Investment Policies of the Portfolios...................................... 14
Risk Factors in Transactions in Junk Bonds................................ 17
Investments in Foreign Securities......................................... 19
Interest Rate Futures and Options Thereon................................. 19
Other Portfolio Strategies................................................ 23
Investment Restrictions................................................... 25
Investment Adviser......................................................... 26
Code of Ethics............................................................ 26
Directors.................................................................. 27
Purchase of Shares......................................................... 27
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 30
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 32
Distribution Plans........................................................ 37
Limitations on the Payment of Deferred Sales Charges...................... 39
Redemption of Shares....................................................... 41
Redemption................................................................ 41
Repurchase................................................................ 42
Reinstatement Privilege--
Class A and Class D Shares............................................... 42
Dividends, Distributions and Taxes......................................... 42
Dividends and Distributions............................................... 42
Federal Income Taxes...................................................... 43
Portfolio Transactions..................................................... 45
Shareholder Services....................................................... 45
Investment Account........................................................ 45
Automatic Investment Plans................................................ 46
Automatic Reinvestment of Dividends and Capital Gain Distributions........ 46
Systematic Withdrawal Plans............................................... 47
Retirement Plans.......................................................... 47
Exchange Privilege........................................................ 47
Merrill Lynch Blueprint SM Program........................................ 48
Performance Data........................................................... 49
Additional Information..................................................... 50
Determination of Net Asset Value.......................................... 50
Organization of the Fund.................................................. 51
Independent Auditors...................................................... 52
Custodian................................................................. 52
Transfer Agency Services.................................................. 52
Legal Counsel............................................................. 52
Reports to Shareholders................................................... 52
Additional Information.................................................... 53
Appendix: Description of Corporate Bond Ratings............................ 54
Authorization Form......................................................... 57
</TABLE>
Code # 10046-0195
[LOGO]
Merrill Lynch
Corporate Bond
Fund, Inc.
[ART]
PROSPECTUS
January 31, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
JANUARY 31, 1995
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company consisting of three separate
portfolios, the High Income Portfolio, the Investment Grade Portfolio
(formerly the High Quality Portfolio) and the Intermediate Term Portfolio.
Pursuant to the Merrill Lynch Select Pricing SM System, each Portfolio of the
Fund offers four classes of shares of Common Stock, each with a different
combination of sales charges, ongoing fees and other features, except that
Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated January 31, 1995, which has been filed with the Securities
and Exchange Commission and is available upon oral or written request without
charge. Copies of the Prospectus can be obtained by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
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 14 of the
Prospectus for a discussion of the investment objectives and policies of the
Fund.
TRANSACTIONS IN FUTURES AND OPTIONS THEREON
As described in the Prospectus, each Portfolio of the Fund may purchase and
sell interest rate, bond and bond index futures contracts ("futures contracts")
for the purpose of hedging its portfolio of fixed-income securities against the
adverse effects of anticipated movements in interest rates. The Portfolios
currently trade futures contracts on U.S. Treasury bills, notes and bonds and
GNMA mortgage-backed certificates. The Portfolios may also purchase and sell
exchange-traded call and put options on such futures contracts. The Fund is
subject to the tax requirement that less than 30% of its gross income be
derived from the sale or other disposition of stocks, securities and certain
options, futures or forward contracts held for less than three months. This
requirement may limit the Fund's ability to engage in the hedging transactions
and strategies described below. Set forth below is information concerning
options and futures contracts. Reference is made to the Appendix for a more
complete description of options and futures transactions.
Call Options on Futures Contracts. As set forth in the Appendix, a call
option on a futures contract provides the purchaser with the right, but not the
obligation, to enter into a "long" position in the underlying futures contract
at any time up to the expiration of the option. The purchase of an option on a
futures contract presents more limited risk than the trading of the underlying
futures contract, although, depending on the price of the option compared to
either the futures contract upon which it is based, or the underlying debt
securities, exercise of the option may or may not be less risky than ownership
of the futures contract or underlying debt securities. Like the purchase of a
futures contract, a Portfolio will purchase a call option on a futures contract
to hedge against a market advance resulting from declining interest rates when
the Portfolio is not fully invested.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of fixed-income securities of the Portfolios, if
the futures price at expiration is below the exercise price of the option. In
such event, the Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in
the Portfolio's fixed-income investments. Conversely, if the futures price is
above the exercise price at any point prior to expiration, the option may be
exercised and the Portfolio would be required to enter into the underlying
futures contract at an unfavorable price.
Put Options on Futures Contracts. As set forth in the Appendix, a put option
on a futures contract provides the purchaser with the right, but not the
obligation, to enter into a "short" position in the futures
2
<PAGE>
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.
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
3
<PAGE>
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 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.
4
<PAGE>
The Fund may also purchase futures contracts or options theron to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in fixed-income securities. In such instances, it is
possible that the market may instead decline. If the Fund does not then invest
in such securities because of concern as to possible further market decline or
for other reasons, the Fund may realize a loss on the futures or option
contract that is not offset by a reduction in the price of securities
purchased.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the 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
5
<PAGE>
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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, including a majority of the shares of 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).
Under the fundamental investment restrictions, none of the Portfolios of the
Fund may:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, each Portfolio of the Fund may invest in securities
directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that each Portfolio of the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) each Portfolio of the Fund may borrow
from banks (as defined in the Investment Company Act) in amounts up to 33
1/3% of its total assets (including the amount borrowed), (ii) each
Portfolio of the Fund may borrow up to an additional 5% of its total assets
for temporary purposes, (iii) each Portfolio of the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) each Portfolio of the Fund may
purchase securities on margin to the extent permitted by applicable law.
The Fund may not pledge its assets other than to secure such borrowings or,
to the extent permitted by the Fund's
6
<PAGE>
investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a Portfolio
of the Fund technically may be deemed an underwriter under the Securities
Act of 1933, as amended (the "Securities Act") in selling portfolio
securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Portfolio of the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, none of the Portfolios of
the Fund may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (c).
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction (c), the State of Ohio does not recognize Rule 144A
securities as securities that are free of restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 5% of its
total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed without value.
7
<PAGE>
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers
and directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, the Fund
will not borrow amounts in any Portfolio in excess of 5% of the total
assets of such Portfolio, taken at market value, and then only from banks
as a temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. In addition, the Fund will not purchase
securities while borrowings are outstanding.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to an
exemptive order or otherwise in compliance with the provisions of the
Investment Company Act of 1940 and the rules and regulations thereunder.
Included among such restricted transactions are (i) purchases from or sales to
Merrill Lynch of securities in transactions in which Merrill Lynch acts as
principal, and (ii) purchases of securities from underwriting syndicates of
which Merrill Lynch is a member.
The Fund has undertaken to certain state securities administrators that as a
matter of operating policy it will not make short sales of securities or invest
in oil, gas or mineral leases or in real estate limited partnership interests.
Lending of Portfolio Securities. Subject to investment restriction (8) above,
a Portfolio of the Fund from time to time may lend securities from its
portfolio to brokers, dealers and financial institutions and receive as
collateral cash or United States Treasury securities which at all times while
the loan is outstanding will be maintained in amounts equal to at least 100% of
the current market value of the loaned securities. Any cash collateral will be
invested in short-term securities, which will increase the current income of
the Portfolio making the loan. Such loans, which will not have terms longer
than 30 days, will be terminable at any time. The Fund will have the right to
regain record ownership of loaned securities to exercise beneficial rights such
as voting rights, subscription rights and rights of dividends, interest or
other distributions. The Fund may pay reasonable fees to persons unaffiliated
with the Fund for services in arranging such loans. In the event of a default
by the borrower, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral.
8
<PAGE>
Forward Commitments. U.S. Government securities and corporate debt
obligations may be purchased on a forward commitment basis at fixed purchase
terms with periods of up to 45 days between the commitment and settlement
dates. The purchase will be recorded on the date the Fund enters into the
commitment and the value of the security will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the security on the
delivery date may be more or less than its purchase price. A separate account
of the Fund will be established with the Custodian consisting of cash or liquid
high grade debt obligations having a market value at all times until the
delivery date at least equal to the amount of the forward commitment. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio, the Fund may dispose of a commitment
prior to settlement if the Investment Adviser deems it appropriate to do so.
There can, of course, be no assurance that the judgments upon which these
techniques are based will be accurate or that such techniques when applied will
be effective. The Fund will enter into forward commitment arrangements only
with respect to securities in which it may otherwise invest as described under
"Investment Objectives and Policies".
Repurchase Agreements. As described in the Prospectus, the Fund may invest in
securities pursuant to repurchase agreements. Under such agreements, the seller
agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. The Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. Instead of the
contractual fixed rate of return, the rate of return to the Fund will be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. From time to time, the Fund also may invest in securities pursuant to
purchase and sale contracts. While the substance of purchase and sale contracts
is similar to repurchase agreements, because of the different treatment with
respect to accrued interest and additional collateral, management believes that
purchase and sale contracts are not repurchase agreements as such term is
understood in the banking and brokerage community. As a matter of operating
policy, the Fund will not enter into repurchase agreements or purchase and sale
contracts with greater than seven days to maturity if, at the time of such
investment, more than 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
9
<PAGE>
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 ages, principal occupations for
at least the last five years and the public companies for which they serve as
directors are set forth below. Unless otherwise stated, the address of each
director and officer is P.O. Box 9011, Princeton, New Jersey 08540-9011.
Arthur Zeikel (62)--President and Director(1)(2)--President since 1977 and
Chief Investment Officer since 1976 of Fund Asset Management, L.P. (referred to
below as the "Investment Adviser" (which term as used herein includes its
corporate predecessors) or "FAM") since 1977; President of Merrill Lynch
Investment Management L.P., doing business as Merrill Lynch Asset Management
L.P. ("MLAM"), (which term as used herein includes its corporate predecessors)
since 1977 and Director and Chief Investment Officer since 1976; Executive Vice
President of Merrill Lynch & Co., Inc. and of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") since 1990 and Senior Vice President of
Merrill Lynch from 1985 to 1990; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
Ronald W. Forbes (53)--Director--1400 Washington Avenue, Albany, New York
12222. Associate Professor of Finance, School of Business, State University of
New York at Albany; Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund; Consultant, Public Finance Banking, Shearson Lehman
Brothers, Inc.
Cynthia A. Montgomery (42)--Director--Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 02613. Professor, Harvard Business School, since
1989; Associate Professor, J.L. Kellog Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director of UNUM Corporation.
Charles C. Reilly (63)--Director--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Adjunct Professor, Columbia University Graduate School of Business
since 1990; Adjunct Professor, Wharton School, University of Pennsylvania,
1990; President and Chief Investment Officer of Verus Capital, Inc. from 1979
to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973
to 1990.
Kevin A. Ryan (61)--Director--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982,
Founder and current Director of the Boston
10
<PAGE>
University Center for Advancement of Ethics and Character. Formerly taught on
the faculties of the University of Chicago, Stanford University and Ohio State
University.
Richard R. West (56)--Director--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 Re Capital Corp. (reinsurance
holding company), Vornado Realty Trust (real estate holding company), Bowne &
Co., Inc. (printer), Alexander's Inc. (department stores), and Smith Corona
Corporation (manufacturer of typewriters and word processors).
Terry K. Glenn (54)--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 (60)--Senior Vice President (1)(2)--Senior Vice President of
the Investment Adviser since 1981.
Donald C. Burke (34)--Vice President (1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee at Deloitte & Touche llp from 1982 to
1990.
Vincent T. Lathbury, III (54)--Vice President (1)(2)--Vice President of MLAM
and Portfolio Manager of the Investment Adviser and MLAM since 1982.
Jay C. Harbeck (60)--Vice President (1)(2)--Vice President of MLAM since
1986.
Gerald M. Richard (45)--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 (42)--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) 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").
Set forth below is a chart showing the aggregate compensation paid by the
Fund to each of its Directors, as well as the total compensation paid to each
director of the Fund by the Fund and by other investment companies advised by
the Investment Adviser or MLAM (collectively, the "Fund Complex") for their
services as Directors or Trustees of such investment companies.
11
<PAGE>
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT BENEFITS TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION ACCRUED AS PART FUND AND FUND COMPLEX
NAME OF DIRECTOR FROM THE FUND OF FUND EXPENSES PAID TO DIRECTORS
- ---------------- ---------------------- ------------------- -----------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)..... $10,000 None $159,700
Cynthia A. Montgom-
ery(1)................. 500 None 125,533
Charles C. Reilly(1).... 10,000 None 273,200
Kevin A. Ryan(1)........ 10,000 None 159,700
Richard R. West(1)...... 11,000 None 291,800
</TABLE>
- --------
(1) The Directors serve on the boards of other FAM/MLAM Advisory Funds as
follows: Ronald W. Forbes (23 boards), Cynthia A. Montgomery (23 boards),
Charles C. Reilly (40 boards), Kevin A. Ryan (23 boards) and Richard R.
West (40 boards).
On January 1, 1995, 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 January 1, 1995, the officers and
directors of the Fund owned less than one percent of the outstanding shares of
each Portfolio of the Fund.
The Fund has an Audit Committee and a Nominating Committee, each of which
consists of all of the directors of the Fund who are not interested persons of
the Fund.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all directors of the Fund who are affiliated persons of Merrill
Lynch & Co., Inc. or its subsidiaries. The Fund will pay each director who is
not an affiliated person of Merrill Lynch & Co., Inc. or its subsidiaries an
annual fee of $4,000 plus a fee of $800 per meeting of the Board of Directors
attended and a fee at the annual rate of $2,000 for serving on the Fund's Audit
Committee. In addition, the Fund pays all directors' actual out-of-pocket
expenses related to attendance at meetings. The Chairman of the Audit Committee
is paid an additional annual fee of $1,000. For the fiscal year ended September
30, 1994, fees and expenses paid to the unaffiliated directors of the Fund
aggregated $41,683.
INVESTMENT ADVISORY ARRANGEMENTS
The Investment Adviser, acts as the investment adviser for the Fund and
provides the Fund with management services. FAM (the general partner of which
is Princeton Services Inc., a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc.) is itself a wholly-owned affiliate of Merrill Lynch & Co., Inc. and has
its principal place of business at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536. Merrill Lynch & Co., Inc. has its principal place of business at
250 Vesey Street, New York, New York 10281.
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
12
<PAGE>
administrative and management services for the Fund and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Agreement.
Securities held by any Portfolio may also be held by other funds for which
the Investment Adviser or MLAM acts as an adviser or by investment advisory
clients of MLAM. Because of different investment objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
any Portfolio or for other funds for which the Investment Adviser or MLAM acts
as investment adviser or for their advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Investment Adviser or MLAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The principal executive officers and directors of the Investment Adviser are
Arthur Zeikel, President, Chief Investment Officer and Director; Terry K.
Glenn, Executive Vice President and Director; Philip L. Kirstein, Senior Vice
President, Secretary, General Counsel, and Director; Gerald M. Richard, Senior
Vice President and Treasurer; Robert W. Crook; Bernard J. Durnin, Vincent R.
Giordano, Elizabeth Griffin, Norman R. Harvey, N. John Hewitt, Joseph T.
Monagle, Stephen M. M. Miller, Richard L. Rufener, Ronald L. Welburn, Anthony
Wiseman, Senior Vice Presidents; and Ronald M. Kloss, Senior Vice President
and Comptroller.
Advisory Fee. As compensation for its services to the Fund, the Investment
Adviser receives monthly compensation with respect to each Portfolio at the
rates set forth below, which are based on the average daily value of the
Fund's net assets. These rates are subject to reduction to the extent that the
aggregate of the average daily net assets of the Portfolio exceeds $250
million. The reductions will be applicable to each Portfolio regardless of
size on a "uniform percentage" basis. Determination of the portion of the net
assets of each Portfolio to which a reduced rate is applicable is made by
multiplying the net assets of that Portfolio by the "uniform percentage,"
which is derived by dividing the amount of the portion of the aggregate assets
of all Portfolios to which such rate applies by the total amount of such
aggregate assets.
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
---------------------------------
HIGH INVESTMENT INTERMEDIATE
INCOME GRADE TERM
PORTFOLIO PORTFOLIO* PORTFOLIO
--------- ---------- ------------
<S> <C> <C> <C>
Not exceeding $250 million................... 0.55% 0.50% 0.50%
In excess of $250 million but not more than
$500 million................................ 0.50 0.45 0.45
In excess of $500 million but not more than
$750 million................................ 0.45 0.40 0.40
In excess of $750 million.................... 0.40 0.35 0.35
</TABLE>
- --------
* As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
13
<PAGE>
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations applicable to the Fund require that the Investment Adviser
reimburse the Fund for advisory fees received by it from the Fund to the extent
that the Fund's aggregate ordinary operating expenses (excluding interest,
taxes, brokerage fees, distribution fees and commissions and extraordinary
charges such as litigation costs) exceed in any fiscal year 2.5% of the Fund's
first $30,000,000 of average daily net assets, 2.0% of average daily net assets
in excess of $30,000,000 but not exceeding $100,000,000 and 1.5% of average
daily net assets above $100,000,000 for such year. No fee payment will be made
to the Investment Adviser during any fiscal year which will cause such expenses
to exceed the pro rata expense limitation at the time of such payment.
For the fiscal years ended September 30, 1992, 1993 and 1994, the advisory
fees paid by the Fund to the Investment Adviser totaled $7,557,650, $12,680,843
and $17,493,674, respectively. The Investment Adviser did not reimburse any
portion of its advisory fee for the fiscal years ended September 30, 1992,
1993, and 1994.
Payment of Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with economic research, investment research, trading and investment
management of the Portfolios, as well as the fees of all directors of the Fund
who are affiliated persons of Merrill Lynch & Co., Inc. or any of its
subsidiaries. Each Portfolio pays all other expenses incurred in its operation
and a portion of the Fund's general administrative expenses allocated on the
basis of the asset size of the respective Portfolios. Expenses that will be
borne directly by the Portfolios include redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, expenses of registering
the shares under federal and state securities laws, pricing costs (including
the daily calculation of net asset value), interest, certain taxes, charges of
the Custodian and Transfer Agent and other expenses attributable to a
particular Portfolio. Expenses which will be allocated on the basis of size of
the respective Portfolios include directors' fees, legal expenses, state
franchise taxes, auditing services, costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of additional
information (except to the extent paid by the Distributor), Securities and
Exchange Commission fees, accounting costs and other expenses properly payable
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, 1994, the amount of such
reimbursement was $463,715. Depending upon the nature of the lawsuit,
litigation costs may be directly applicable to a Portfolio or allocated on the
basis of the size of the respective Portfolios. The Board of Directors of the
Fund has determined that this is an appropriate method of allocation of
expenses. As required by the Distribution Agreement, the Distributor will pay
certain of the expenses of each Portfolio incurred in connection with the
offering of shares of each Portfolio, including the expenses of printing the
prospectuses and statements of additional information used in connection with
the continuous offering of shares by each Portfolio. See "Distributor".
Merrill Lynch & Co., Inc. and Princeton Services, Inc. are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management policies.
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DURATION AND TERMINATION
Continuation of the Investment Advisory Agreement for the period March 1,
1995 to March 1, 1996 was approved by the Board of Directors, including a
majority of the disinterested directors, on December 7, 1994. Unless earlier
terminated as described below, the agreement will remain in effect until March
1, 1996 and thereafter will continue in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the directors who are
not parties to such contract or interested persons (as defined in the
Investment Company Act of 1940) of any such party. The agreement is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party or by the vote of the shareholders of the Fund.
TRANSFER AGENCY SERVICES ARRANGEMENTS
Financial Data Services, Inc. ("FDS"), which is a wholly owned subsidiary of
Merrill Lynch & Co., Inc., serves as transfer agent to the Fund pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). FDS receives a fee of $11.00 per
shareholder account for Class A or Class D shares of the Portfolios and a fee
of $14.00 per shareholder account for Class B or Class C shares of the
Portfolios. For the year ended September 30, 1994, the Fund paid FDS a fee of
$3,862,491.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 50 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 as of 15 minutes after the close of business on the New York Stock
Exchange (generally 4:00 p.m. New York City time) 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, Presidents' Day, 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 any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked
prices. Securities traded in the over-the-counter market are valued at the most
recent bid prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Options on debt securities,
which are traded on exchanges, are valued at the last asked price for
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<PAGE>
options written and the last bid price for options purchased. Interest rate
futures contracts and options thereon, which are traded on exchanges, are
valued at their closing price at the close of such exchanges. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by a pricing service
retained by the Fund which may use a matrix system for valuations. These
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Directors.
PORTFOLIO TRANSACTIONS
Under the Investment Company Act of 1940, persons affiliated with the Fund
are prohibited from dealing with the Fund as a principal in the purchase or
sale of the Fund's portfolio securities unless a permissive order allowing such
transactions is obtained from the SEC. Since over-the-counter transactions are
usually principal transactions, affiliated persons of the Fund, including
Merrill Lynch, may not serve as dealers in connection with such transactions
with the Fund. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis. Certain court
decisions have in the past raised questions as to whether investment companies
should seek to "recapture" brokerage commissions and underwriting and dealer
spreads by effecting their purchases and sale through affiliated entities. In
order to effect such an arrangement, the Fund would be required to seek an
exemption from the Investment Company Act so that it could engage in principal
transactions with affiliates. The directors have considered the possibilities
of seeking to recapture spreads for the benefit of the Fund and, after
reviewing all factors deemed relevant, have made a determination not to seek
such recapture at this time. The Board will reconsider this matter from time to
time. The Fund will take such steps as may be necessary to effect recapture,
including the filing of applications for exemption under the Investment Company
Act, if the directors should determine that recapture is in the best interests
of the Fund or otherwise required by developments in the law. The Investment
Adviser has arranged for the Fund's custodial bank to receive on behalf of the
Fund any tender offer solicitation fees payable with respect to portfolio
securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Securities and Exchange Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply
to Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
The securities in which each Portfolio invests are traded primarily in the
over-the-counter market. Where possible, each Portfolio will deal directly with
the dealers who make a market in the securities involved unless better prices
and execution are available elsewhere. Such dealers usually act as principals
for their own account. On occasion, securities may be purchased directly from
the issuer. Bonds and money market
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<PAGE>
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, 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. For the fiscal year
ended September 30, 1994, the Fund paid total brokerage commissions of $77,122,
$5,313 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, 1993 and
September 30, 1994, the portfolio turnover rates of the High Income Portfolio
were 34.85% and 32.52%, respectively, of the Investment Grade Portfolio were
121.34% and 159.05%, respectively, and of the Intermediate Term Portfolio were
180.52% and 155.42%, respectively. The calculation of the rate of portfolio
turnover does not include the purchase or sale of money market securities. High
portfolio turnover can be expected to result in the recognition of capital
gains and losses. To the extent the Fund distributes short-term capital gains,
such distributions will be taxable as dividends. The Fund's ability to enter
into certain short-term transactions will be limited by the requirement that
gains on certain securities held by the Fund for less than three months may not
exceed 30% of its annual gross income for Federal income tax purposes.
The Fund intends to continue to comply with the various requirements of the
Internal Revenue Code so as to qualify as a "regulated investment company"
thereunder. See "Dividends, Distributions and Taxes". Among such requirements
is a limitation to less than 30% on the amount of its gross income which the
Fund may derive from gain on the sale or other disposition of securities held
for less than three months. Accordingly, the Fund's ability to effect certain
portfolio transactions may be limited.
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<PAGE>
PURCHASE OF SHARES
Each Portfolio issues four classes of shares under the Merrill Lynch Select
Pricing SM System: Class A and Class D shares are sold to investors choosing
the initial sales charge alternatives and Class B and Class C shares are sold
to investors choosing the deferred sales charge alternative. Each Class A,
Class B, Class C and Class D share of each Portfolio represents an identical
interest in the same portfolio of investments of such Portfolio and has the
same rights except that Class B, Class C and Class D shares bear the expenses
of the Class B, Class C and Class D exclusive voting rights with respect to
the Rule 12b-1 distribution plan adopted with respect to such class pursuant
to which the account maintenance and distribution fees are paid. Each has
different exchange privileges. See "Shareholder Services--Exchange Privilege".
Class C shares of the Intermediate Term Portfolio are available only through
the Exchange Privilege.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the three Portfolios permit investors
to choose the method of purchasing shares that the investor believes is most
beneficial given the amount of their purchase, the length of time the investor
expects to hold his shares and other relevant circumstances. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge and not be subject to ongoing charges, as
discussed below, or to have the entire initial purchase price invested in one
of the Portfolios with the investment thereafter being subject to ongoing
charges.
The Merrill Lynch Select Pricing SM System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Investment Adviser. Funds advised
by MLAM or the Investment Adviser are referred to herein as "MLAM-advised
mutual funds".
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the
continuous offering of each class of shares of the three Portfolios. The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A AND CLASS D SHARES
For the fiscal years ended September 30, 1992, 1993 and 1994, the
Distributor received $3,920,517, $5,600,601 and $3,169,482, respectively, as
sales charges on shares sold, of which $3,605,119, $5,159,809 and $2,917,019,
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
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sold prior to November 12, 1992. For information as to brokerage commissions
received by Merrill Lynch, see "Portfolio Transactions".
REDUCED INITIAL SALES CHARGES--CLASS A AND CLASS D SHARES
Reduced Sales Charges. As described generally in the Prospectus, a reduced
sales charge is available for any purchase of Class A or Class D shares of the
High Income Portfolio or Investment Grade Portfolio in excess of $25,000 and
Class A or Class D shares of the Intermediate Term Portfolio in excess of
$100,000. The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a company
or non- qualified employee benefit plan will qualify for the quantity discounts
discussed above only if the Fund and the Distributor are able to realize
economies of scale in sales effort and sales related expense by means of the
company, employer or plan making the Fund's Prospectus available to individual
investors or employees and forwarding investments by such persons to the Fund
and by any such employer or plan bearing the expense of any payroll deduction
plan.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A or Class D shares of any of the three Portfolios subject to initial sales
charge at the offering price applicable to the total of (a) the public offering
price of the shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of all classes of shares of the Funds and of any other MLAM-
advised mutual fund. For any such right of accumulation to be made available
the Distributor must be provided at the time of purchase, by the purchaser or
the purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time. Shares held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
through any dealer aggregating $25,000 or more of Class A or Class D shares of
the High Income Portfolio or the Investment Grade Portfolio
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and $100,000 or more of Class A shares of the Intermediate Term Portfolio or
any other MLAM-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
by the Distributor. The Letter of Intention is available only to investors
whose accounts are maintained at the Fund's Transfer Agent. The Letter of
Intention is not a binding obligation to purchase any amount of Class A or
Class D shares, but its execution will result in the purchaser's paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter executed within 90 days of such purchase if the Distributor
is informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of any of the three Portfolios or of other MLAM-
advised mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward the completion of such Letter.
The reduced sales charge applicable to the amount covered by the Letter of
Intention will be applied only to new purchases. If the total amount of shares
purchased does not equal the amount stated in the Letter of Intention, the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on Class A or Class D
shares of the Portfolio purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or
Class D shares equal to five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of
the purchaser). The first purchase under the Letter of Intention must be five
percent of the dollar amount of such Letter. If during the term of such
Letter, a purchase brings the total amount invested to an amount equal to or
in excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares of the Portfolio then being
purchased under such Letter, but there will be no retroactive reduction of the
sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of
the Letter of Intention will be deducted from the total purchases made under
such Letter. An exchange from a MLAM-advised money market fund into any
Portfolio that creates a sales charge will count toward completing a new or
existing Letter of Intention in any Portfolio.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Merrill Lynch Blueprint SM Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint SM
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of the Fund may purchase additional Class A shares of the Fund through
Blueprint. Blueprint is directed to small investors, Group IRAs and
participants in certain affinity groups such as benefit plans, credit unions
and trade associations. Investors placing orders to purchase Class A or Class
D shares of the Portfolios through Blueprint will acquire such Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $5,000 at 3.5% for the
High Income and Investment Grade Portfolios and .80% for the Intermediate Term
Portfolios. Purchases of $5,000.01 or more will be at the standard sales
charge rate disclosed in the Prospectus). In addition, Class D shares of the
Portfolios are being offered at net asset value plus a sales charge of 1/2 of
1% for participants in corporate or group IRA programs placing orders to
purchase their shares through Blueprint. However, services (including the
exchange privilege) available to Class A and Class D shareholders through
Blueprint may differ from those available to other investors in Class A or
Class D shares. Class A and Class D shares
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are offered at net asset value to participants in the Merrill Lynch
Blueprint SM Program through the Merrill Lynch Directed IRA Rollover Program
("IRA Rollover Program") available from Merrill Lynch Business Financial
Services, a business unit of Merrill Lynch. The IRA Rollover Program is
available to custodian rollover assets from Employer Sponsored Retirement and
Savings Plans (see definition below) whose Trustee and/or Plan Sponsor offers
the Merrill Lynch Directed IRA Rollover Program. Orders for purchases and
redemptions of Class A or Class D shares of the Fund may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100 with a $50 minimum for subsequent
purchases through Blueprint. Minimum initial or subsequent purchase
requirements are waived in connection with automatic investment plans for
Blueprint participants. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint SM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Purchase Privileges of Certain Persons. Directors of the Fund, directors and
trustees of other MLAM-advised investment companies, Merrill Lynch & Co., Inc.
("ML & Co.") and its subsidiaries (the term "subsidiaries", when used herein
with respect to ML & Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.), and their
directors or employees, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class A shares of the Fund at net
asset value.
Class A shares of the Fund and other MLAM-advised funds are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund
("formerly known as the Merrill Lynch Prime Fund, Inc.") who wish to reinvest
the net proceeds from a sale of certain of their shares of common stock of
Merrill Lynch Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Merrill Lynch Senior Floating Rate Fund
shareholders must sell their Merrill Lynch Senior Floating Rate Fund shares to
the Merrill Lynch Senior Floating Rate Fund in connection with a tender offer
conducted by the Merrill Lynch Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only
with respect to the proceeds of Merrill Lynch Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Merrill Lynch Senior
Floating Rate Fund prospectus) is applicable. Purchase orders from Merrill
Lynch Senior Floating Rate Fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related Merrill
Lynch Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLAM who purchased such closed-end fund shares prior to October 21,
1994 and wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in Eligible Class A Shares of the Fund.
Alternatively, closed-end fund shareholders who purchased such shares on or
after October 21, 1994 (the date the Merrill Lynch Select Pricing SM System
commenced operations) and wish to reinvest the net proceeds from a sale of
their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares"). In order to exercise this investment
option, closed-end fund shareholders must (i) sell their closed-end fund
shares through Merrill Lynch and reinvest the proceeds immediately in the
Eligible Class A or Class D Shares of the Fund, (ii) either have acquired the
shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering,
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<PAGE>
(iii) have maintained their closed-end fund shares continuously in a Merrill
Lynch account, and (iv) purchase a minimum of $250 worth of Fund shares.
Class D shares of the Fund are offered at the net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that they will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the
redemption must have been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Portfolios are offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares with proceeds from a redemption of shares of a
mutual fund that was sponsored by the financial consultant's previous firm and
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, the investor also must establish that such redemption had been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market fund.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investors.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Portfolios may be reduced to the net asset value per
Class D share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may in appropriate cases be adjusted to reduce possible adverse tax
consequences to the Fund which might result from an acquisition of assets
having net unrealized appreciation which is disproportionately higher at the
time of acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid
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<PAGE>
securities, the value of which is readily ascertainable, which are not
restricted as to transfer either by law or liquidity of market (except that the
Fund may acquire through such transactions restricted or illiquid securities to
the extent the Fund does not exceed the applicable limits on acquisition of
such securities set forth under "Investment Objective and Policies" herein).
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Distribution Plan" in the
Prospectus for certain information with respect to the separate distribution
plans of the Fund for Class B and Class C shares pursuant to Rule 12b-1 under
the Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes. For the fiscal year ended September
30, 1994, the High Income Portfolio, Investment Grade Portfolio and
Intermediate Term Portfolio incurred distribution fees, with respect to Class B
shares, of $16,431,011, $3,845,744, and $733,272, respectively, all of which
was paid to Merrill Lynch. For the fiscal year ended September 30, 1993 the
High Income, Investment Grade and Intermediate Term Portfolios incurred
distribution fees, with respect to Class B shares, of $9,639,303, $3,147,933,
and $348,025, respectively, all of which was paid to Merrill Lynch. During the
fiscal year ended September 30, 1992, the High Income and Investment Grade
Portfolios incurred distribution fees, with respect to Class B shares, of
$3,738,255 and $1,734,391, respectively, all of which was paid to Merrill
Lynch. Merrill Lynch also received contingent deferred sales charges as
described below under "Redemption of Shares".
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act of 1940. Among
other things, each Distribution Plan provides that the Distributor shall
provide and the directors shall review quarterly reports of the disbursement of
the account maintenance fees and/or distribution fees paid to the Distributor.
In their consideration of each Distribution Plan, the directors must consider
all factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders of the
relevant Portfolio. Each Distribution Plan further provides that, so long as
the Distribution Plan remains in effect, the selection and nomination of
directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act of 1940 (the "Independent Directors"), shall be
committed to the discretion of the Independent Directors then in office. In
approving each Distribution Plan in accordance with Rule 12b-1, the Independent
Directors concluded that there is reasonable likelihood that such Distribution
Plan will benefit the Fund and its related class of shareholders of the
relevant Portfolio. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of
voting securities of any Portfolio. A Distribution Plan cannot be amended to
increase materially the amount to be spent by any Portfolio without the
approval of the related class of shareholders of that Portfolio, and all
material amendments are required to be approved by the vote of directors,
including a majority of the Independent Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
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REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Commission as a result of which disposal of portfolio securities or
determination of the net asset value of any Portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
Portfolio. Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by
each Portfolio at such time.
REPURCHASE
The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next computed
after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and is received by the Fund from such
dealer not later than 30 minutes after the close of business on the New York
Stock Exchange (generally 4:00 p.m., New York City time), on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the New York
Stock Exchange (generally 4:00 p.m., New York City time), in order to obtain
that day's closing price.
For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted in the Prospectus.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A or Class D shares of any Portfolio,
including redemption through repurchase by the Fund, have a one-time privilege
to reinstate their accounts by purchasing Class A or Class D shares, as the
case may be, of such Portfolio at the net asset value of such shares without a
sales charge up to the dollar amount redeemed. The reinstatement privilege may
be exercised as follows. A notice to exercise this privilege along with a check
for the amount to be reinstated must be received by the Transfer Agent within
30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the shareholder only
the first time such shareholder makes a redemption. A redemption resulting in a
gain is a taxable event whether or not the reinstatement privilege is
exercised. A redemption resulting in a loss will not be a taxable event to the
extent the reinstatement privilege is exercised, and an adjustment will be made
to the shareholder's tax basis in shares acquired pursuant to the reinstatement
to reflect the disallowed loss.
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If a shareholder disposes of shares within 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the reinstatement
privilege. Instead, such load charge will be treated as an amount paid for the
subsequently acquired shares and will be included in the shareholder's tax
basis for such shares.
DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B and Class C Shares,"
while Class B shares of the High Income Portfolio and the Investment Grade
Portfolio redeemed within four years of purchase and Class B shares of the
Intermediate Term Portfolio redeemed within one year of purchase are subject to
a contingent deferred sales charge under most circumstances, the charge is
waived on redemptions of Class B shares in connection with certain post-
retirement withdrawals from an Individual Retirement Account ("IRA") or other
retirement plan or following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are: (a) any partial or complete
redemption in connection with a distribution following retirement under a tax-
deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Internal Revenue Code) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability.
During the fiscal year ended September 30, 1992, Merrill Lynch received
contingent deferred sales charges of $1,135,756 with respect to Class B shares
of the High Income Portfolio and $741,419 with respect to Class B shares of the
Investment Grade Portfolio. During the fiscal year ended September 30, 1993,
Merrill Lynch received contingent deferred sales charges of $2,273,384 with
respect to Class B shares of the High Income Portfolio, $822,254 with respect
to Class B shares of the Investment Grade Portfolio and $63,434 with respect to
Class B Shares of the Intermediate Term Portfolio. During the fiscal year ended
September 30, 1994, Merrill Lynch received contingent deferred sales charges of
$3,919,228 with respect to Class B shares of the High Income Portfolio,
$1,034,183 with respect to Class B shares of the Investment Grade Portfolio and
$258,335 with respect to Class B shares of the Intermediate Term Portfolio.
Merrill Lynch Blueprint--Program Class B shares of all three Portfolios are
offered to certain participants in the Merrill Lynch BlueprintSM--Program
("Blueprint"). Blueprint is directed to small investors and participants in
certain affinity groups such as trade associations and credit unions. Class B
shares are offered through Blueprint only to members of certain affinity
groups. The contingent deferred sales charge is waived for shareholders who are
members of certain affinity groups at the time orders to purchase Class B
shares are placed through Blueprint. However, services (including the exchange
privilege) available to Class B shareholders through Blueprint may differ from
those available to other Class B investors. Orders for purchases and
redemptions of Class B shares may be grouped for execution purposes which, in
some circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100 with a $50 minimum for subsequent purchases through
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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
BlueprintSM--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 42 of the
Prospectus.
FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under
such provisions, the Fund will not be subject to federal income tax on such
part of its ordinary income and net realized capital gains which it distributes
to Class A, Class B, Class C and Class D shareholders. To qualify for treatment
as a regulated investment company, the Fund must, among other things, derive in
each taxable year at least 90% of its gross income from dividends, interest and
gains from the sale or other disposition of securities and derive less than 30%
of its gross income each taxable year from gains (without deduction for losses)
from the sale or other disposition of stocks, securities and certain options,
futures or forward contracts held for less than three months. If in any taxable
year the Fund does not qualify as a regulated investment company, all its
taxable income will be taxed to the Fund at corporate rates.
Dividends will be taxable to shareholders as ordinary income, except for (a)
such portion as may exceed a shareholder's ratable share of the Fund's earnings
and profits as determined for tax purposes (which may differ from net income
for book purposes), which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares and (b) amounts
representing distributions of realized net long-term capital gains, if any. If
the amount described in (a) above were to exceed the shareholder's tax basis
for his shares, the excess over basis would be treated as gain from the sale or
exchange of such shares. The excess of any net long-term capital gains over net
short-term capital losses realized by the Fund will, to the extent distributed
by the Fund, be taxable to shareholders as long-term capital gains regardless
of the length of time a particular shareholder may have held his shares in the
Fund. The maximum tax rate imposed on capital gains for individual taxpayers is
28 percent. Dividends and distributions are taxable as described, whether
received in cash or reinvested in additional shares of the Fund.
Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not on file with
the Fund or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalties of
perjury that such number is correct and that he is not otherwise subject to
backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's
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basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period of the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98 percent of the Fund's investment
company income, with certain adjustments, for such calendar year, plus 98
percent of the Fund's capital gain net income for the one-year period ending on
October 31, of such calendar year. In addition, an amount equal to any
undistributed investment company taxable income or capital gain net income from
the previous calendar year must also be distributed to avoid the excise tax.
While the Fund intends to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. The excise tax is
imposed on the amount by which the regulated investment company does not meet
the foregoing distribution requirements.
Only dividends paid by the Fund which are attributable to dividends received
by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares
in the Fund for more than 45 days to qualify for the deduction on dividends
paid by the Fund. Because most of the income of each Portfolio will be interest
income, rather than dividends on common or preferred stock, it is unlikely that
any substantial proportion of its distributions will be eligible for the
dividends-received deduction available for corporations under the Code.
At September 30, 1994, the Fund had an aggregate net capital loss carry-
forward in the High Income Portfolio of approximately $14,496,000, 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
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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.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder of any of the Portfolios may elect to
receive systematic withdrawal payments from an Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A or Class D
shares having a value, based upon the current net asset value, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A or
Class D shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the close
of business on the New York Stock Exchange (currently 4:15 pm, New York time)
on the 24th day of each month or the 24th day of the last month of each
calendar quarter, whichever is applicable. If the Exchange is not open for
business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for the withdrawal payment will
be made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are automatically reinvested in Class
A or Class D shares of the applicable Portfolio. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Fund's Transfer Agent or the Distributor.
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Withdrawal payments should not be considered as dividends, yields or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept additions to an Investment Account in which an election has been made to
receive systematic withdrawals unless such addition is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account from which the
shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100 and the minimum subsequent purchase
is $1.
Retirement Plan
Any Retirement Plan which does not meet the qualifications to purchase Class
A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption if the following qualifications are met. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares and is
also waived for Class B redemptions from a 401(a) plan qualified under the
Code, provided that each such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Class B shares ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) and 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch may also purchase Class B shares with a waiver of the
CDSC. The CDSC is also waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled
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over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held
in such account at the time of redemption. The Class B CDSC is also waived for
shares purchased by a Merrill Lynch rollover IRA that was funded by a rollover
from a terminated 401(k) plan managed by the MLAM Private Portfolio Group and
held in such account at the time of redemption. The minimum initial and
subsequent purchase requirements are waived in connection with all the above-
referenced Retirement Plans.
Employer Sponsored Retirement and Savings Plan
Class A shares and Class D shares are offered at net asset value to Employer
Sponsored Retirement or Savings Plans, such as tax qualified retirement plans
within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), deferred compensation plans within the meaning of Section
403(b) and 457 of the Code, other deferred compensation arrangements, Voluntary
Employee Benefits Association, ("VEBA") plans, and non-qualified After Tax
Savings and Investment programs, maintained on the Merrill Lynch Group Employee
Services system, herein referred to as "Employer Sponsored Retirement or
Savings Plans", provided the plan has accumulated at least $5 million in MLAM-
advised mutual funds for Class D shares or at least $20 million in MLAM-advised
mutual funds for Class A shares. Class D shares may be offered at net asset
value to new Employer Sponsored Retirement or Savings Plans, provided the plan
has $3 million initially invested in MLAM-advised mutual funds. Assets of
Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor or
an affiliated sponsor may be aggregated. Class A shares and Class D shares are
also offered at net asset value, provided the plan has between 500-999
employees eligible to participate in the plan for Class D shares or at least
1,000 employees eligible to participate in the plan for Class A shares.
Employees eligible to participate in Employer Sponsored Retirement or Savings
Plans of the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their plan
allocations among a wide range of investments including individual corporate
equities and other securities in addition to mutual fund shares) by the Merrill
Lynch BlueprintSM Program, are offered Class A shares at a price equal to net
asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares or Class D shares at net asset value
has the option of (i) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, or (ii) purchasing Class D
shares at the initial sales charge and possible CDSC schedule disclosed in the
Prospectus, if the Employer Sponsored Retirement or Savings Plan meets the
specified requirements, purchasing Class B shares with a waiver of the CDSC
upon redemption, or (iii) if the Employer Sponsored Retirement or Savings Plan
does not qualify to purchase Class B shares with a waiver of the CDSC upon
redemption, purchasing Class C shares at the CDSC schedule disclosed in the
Prospectus. The minimum initial and subsequent purchase requirements are waived
in connection with all the above referenced Employer Sponsored Retirement or
Savings Plan.
Shareholders considering transferring a tax-deferred retirement account such
as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares so that the cash proceeds can
be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
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Capital gains and income received in each of the plans referred to above are
exempt from federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of a Portfolio of the Fund have an
exchange privilege with other Portfolios of the Fund and with certain other
MLAM-advised mutual funds listed below. Under the Merrill Lynch Select
PricingSM System, Class A shareholders may exchange Class A shares of a
Portfolio for Class A shares of another Portfolio or a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the other Portfolio
or second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares of
the other Portfolio or a second MLAM-advised mutual fund, and the shareholder
does not hold Class A shares of the other Portfolio or second fund in his
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the other Portfolio or second fund, the shareholder will
receive Class D shares of the other Portfolio or the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of
another Portfolio or a second MLAM- advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the other Portfolio or second fund. Class B, Class C
and Class D of a Portfolio shares will be exchangeable with shares of the same
class of other MLAM-advised mutual funds. For purposes of computing the CDSC
that may be payable upon a disposition of the shares acquired in the exchange,
the holding period for the previously owned shares of the Portfolio is "tacked"
to the holding period of the newly acquired shares of the other Portfolio or
other Fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money
market funds specifically designated below as available for exchange by holders
of Class A, Class B, Class C or Class D shares. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid
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on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A and Class D shares of the Fund generally may be exchanged into
the Class A or Class D shares of the other funds or into shares of the Class A
and Class D money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of any of the other
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the fund exercising the exchange privilege will
continue to be subject to the fund's CDSC schedule if such schedule is higher
than the CDSC relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the fund acquired through
use of the exchange privilege will be subject to the higher of the fund's CDSC
schedule or the CDSC relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales load that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B shares of the High Income Portfolio of the Merrill Lynch
Corporate Bond Fund, Inc. ("High Income Portfolio") for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% sales load that generally would
apply to a redemption would not apply to the exchange. Two years later the
investor may decide to redeem the Class B shares of Merrill Lynch Special Value
Fund and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of High Income Portfolio Class
B shares to the two year holding period for the Merrill Lynch Special Value
Fund Class B shares, the investor will be deemed to have held the new Class B
shares for more than four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a Class B money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a fund may, in turn, be exchanged back into Class B or Class C shares of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the High Income Portfolio for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Class B shares
of the High Income Portfolio for two and a half years and two years later
decide to redeem the shares of Institutional Fund for cash. At the time of this
redemption, the 2% CDSC that would have been due had the Class B shares of the
High Income Portfolio been redeemed for cash rather than exchanged for shares
of Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
32
<PAGE>
The funds into which exchanges may be made and their respective investment
objectives are as follows:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ........ High current income, consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities
Merrill Lynch Americas Income
Fund, Inc. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Arkansas
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
Merrill Lynch Asset Growth
Fund, Inc..................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities, the combination of which
will be varied both with respect to types of
securities and markets in response to
changing market and economic trends.
Merrill Lynch Asset Income
Fund, Inc..................... A high level of current income through
investment primarily in United States fixed
income securities.
33
<PAGE>
Merrill Lynch Balanced Fund
for Investment and
Retirement, Inc. .............
As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks and
other types of securities, including fixed
income securities and convertible
securities.
Merrill Lynch Basic Value
Fund, Inc. ................... Capital appreciation and, secondarily, income
by investing in securities, primarily
equities, that management of the fund
believes are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Municipal Bond Fund........... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
Merrill Lynch California
Insured Municipal Bond Fund... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of insured California
Municipal Bonds.
Merrill Lynch California
Limited Maturity Municipal A portfolio of Merrill Lynch Multi-State
Bond Fund..................... Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade California Municipal Bonds.
Merrill Lynch Capital Fund, The highest total investment return
Inc........................... consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
34
<PAGE>
Merrill Lynch Connecticut
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
Merrill Lynch Developing
Capital Markets Fund, Inc..... Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund, Capital appreciation primarily through
Inc........................... investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
Merrill Lynch Euro Fund........ -
Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust.............. High current return through investments in
U.S. government and governmental agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
government securities.
Merrill Lynch Florida
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while seeking
to offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
35
<PAGE>
Merrill Lynch Fund For
Tomorrow, Inc................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc.............. Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
Merrill Lynch Global
Allocation Fund, Inc.......... High total return, consistent with prudent
risk, through a fully managed investment
policy utilizing United States and foreign
equity, debt, and money market securities,
the combination of which will be varied from
time to time, both with respect to types of
securities and markets in response to
changing market and economic trends.
Merrill Lynch Global Bond Fund
for Investment and High total investment return from investment
Retirement.................... in government and corporate bonds
denominated in various currencies and multi-
national currency units.
Merrill Lynch Global
Convertible Fund, Inc......... High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
Merrill Lynch Global Holdings,
Inc. (resident of Arizona
must meet investor
suitability standards)........ The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global Resources
Trust......................... Long-term growth and protection of capital
from investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
Merrill Lynch Global SmallCap
Fund, Inc..................... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
36
<PAGE>
Merrill Lynch Global Utility
Fund, Inc..................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Growth Fund For
Investment And Retirement..... Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the Fund believes to be
undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)........ Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
Merrill Lynch International
Equity Fund................... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc..................... Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from federal and Maryland
income taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
37
<PAGE>
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
Merrill Lynch Michigan
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Michigan Municipal Bonds.
Merrill Lynch Minnesota
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
income taxes as is consistent with prudent
investment management.
Merrill Lynch Municipal Bond
Fund, Inc..................... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund........ Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide a high level of
income exempt from Federal income taxes by
investing in investment grade obligations
with the maximum maturity not to exceed
twelve years and a dollar weighted average
maturity of five to ten years.
38
<PAGE>
Merrill Lynch New Jersey
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
Merrill Lynch New Jersey
Limited Maturity Municipal A portfolio of Merrill Lynch Multi-State
Bond Fund..................... Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New Mexico
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
Merrill Lynch New York
Municipal Bond Fund........... Currently a portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment
management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
Merrill Lynch North Carolina
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
39
<PAGE>
Merrill Lynch Ohio Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
Merrill Lynch Oregon Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent
investment management.
Merrill Lynch Pacific Fund, Capital appreciation by investing in equity
Inc. ......................... securities of corporations domiciled in Far
Eastern or Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
Merrill Lynch Pennsylvania
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
investment management.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc........................... equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Short-Term
Global Income Fund, Inc....... Current income at as high a level as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
40
<PAGE>
Merrill Lynch Special Value
Fund, Inc..................... Long-term growth of capital from investments
in securities, primarily common stocks, or
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund................. Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc........................... Long-term capital appreciation through
worldwide investment in equity securities of
companies that derive or are expected to
derive a substantial portion of their sales
from products and services in technology.
Merrill Lynch Texas Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income
Fund, Inc..................... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch World Income
Fund, Inc..................... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multi-national currencies.
Class A Shares Money Market
Funds:
Merrill Lynch Ready Assets Preservation of capital, liquidity and the
Trust......................... highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
41
<PAGE>
Merrill Lynch Retirement
Reserves Money Fund
(available only for exchanges
within certain retirement
plans)........................
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
Merrill Lynch U.S.A.
Government Reserves........... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
Merrill Lynch U.S. Treasury
Money Fund.................... Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Class B, Class C and Class D
Share Money Market Funds:
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Institutional A portfolio of Merrill Lynch Funds for
Fund.......................... Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund............... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch Treasury Fund.... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
42
<PAGE>
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant who will advise the Fund of the exchange. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege by
wire through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Securities and
Exchange Commission. The Fund reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
PERFORMANCE DATA
From time to time the Fund may include a Portfolio's average annual total
return and other total return data, as well as yield, in advertisements or
information furnished to present or prospective shareholders. Total return and
yield figures are based on a Portfolio's historical performance and are not
intended to indicate future performance. Average annual total return and yield
are determined separately for Class A, Class B, Class C and Class D shares of
each Portfolio in accordance with formulas specified by the Securities and
Exchange Commission and take into account the maximum sales charge.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
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.
43
<PAGE>
Set forth below is total return and yield information for the Class A and
Class B shares of the High Income Portfolio, the Investment Grade Portfolio and
the Intermediate Term Portfolio for the periods indicated. Since Class C and
Class D shares were not issued prior to September 30, 1994, performance
information concerning Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
---------------------------------------------- ----------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
------ ------------ ----------- ------------- -------------- -------------- ---------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
One Year Ended September
30, 1994
Class A................. (9.79)% (0.71)% (5.20)% $ 902.10 $ 992.90 $ 948.00
Class B................. (10.07) (1.10) (5.67) 895.40 986.60 943.30
Five Years Ended September
30, 1994
Class A................. 7.29 12.01 8.04 1,421.50 1,762.80 1,472.00
Class B................. 7.35 12.08 -- 1,425.80 1,768.70 --
Ten Years Ended September
30, 1994................. 9.85 12.18 9.88 2,559.50 3,155.60 2,566.10
Class A Shares 10/21/88-
9/30/94................ 7.77 11.16 -- 1,560.40 1,876.10 --
Class B Shares 11/13/92-
9/30/94................ -- -- 4.16 -- -- 1,079.70
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30,
1994
(Class A)................ (6.03)% 3.42% (4.25)% $ 939.70 $1,034.20 $ 957.50
(Class B)................ (6.73) 2.66 (4.72) 932.70 1,026.60 952.80
1993
(Class A)................ 12.78 14.35 11.40 1,127.80 1,143.50 1,114.00
(Class B)................ 11.92 13.35 15.27* 1,119.20 1,133.50 1,133.10
1992
(Class A)................ 14.30 25.22 13.71 1,143.00 1,252.20 1,137.10
(Class B)................ 13.44 24.44 -- 1,134.40 1,244.40 --
1991
(Class A)................ 16.18 26.46 13.97 1,161.80 1,264.60 1,139.70
(Class B)................ 15.30 25.32 -- 1,153.00 1,253.20 --
1990
(Class A)................ 5.22 (1.95) 7.55 1,052.20 980.50 1,075.50
(Class B)................ 4.42 (2.54) -- 1,044.20 974.60 --
1989
(Class A)................ 11.09 7.69 9.79 1,110.90 1,076.90 1,097.90
(Class B)................ 10.04* 6.46* -- 1,094.40 1,060.80 --
1988....................... 13.75 10.82 12.25 1,137.50 1,108.20 1,122.50
1987....................... (1.14) 8.82 (0.72) 988.60 1,088.20 992.80
1986....................... 17.66 14.30 18.09 1,176.60 1,143.00 1,180.90
1985....................... 22.50 20.60 20.66 1,225.00 1,206.00 1,206.60
1984....................... 8.60 5.88 8.20 1,086.00 1,058.80 1,082.00
1983....................... 17.38 28.58 15.95 1,173.80 1,285.80 1,159.50
1982....................... 27.75 22.43 27.12 1,277.50 1,224.30 1,271.20
1981....................... 3.76* (3.00) 4.74* 1,034.40 970.00 1,043.30
1980....................... -- (1.04) -- -- 989.60 --
</TABLE>
- --------
*Annualized
+As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
44
<PAGE>
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
------------------------------------------- ----------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH
GRADE INCOME TERM GRADE INCOME INTERMEDIATE
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO TERM PORTFOLIO
------ ----------- ----------- ------------- -------------- -------------- ---------------
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Commencement of
operations**
to September 30, 1994
Class A............... 331.15% 443.09% 326.98% $ 4,311.50 $ 5,430.90 $ 4,269.80
Class B............... 56.04 87.61 7.97 1,560.40 1,876.10 1,079.70
<CAPTION>
YIELD
INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM
PORTFOLIO+ PORTFOLIO PORTFOLIO
----------- ----------- -------------
<S> <C> <C> <C>
30 Days Ended September
30, 1994
Class A............... 6.89% 9.86% 6.90%
Class B............... 6.39 9.49 6.51
</TABLE>
- --------
** Commencement of operations for Investment Grade Portfolio Class A shares and
Intermediate Term Portfolio was October 31, 1980. Commencement of operations
for Class A shares of High Income Portfolio was November 10, 1978.
Commencement of operations for Class B shares of Investment Grade Portfolio
and High Income Portfolio was October 21, 1988. Commencement of operations
for Class B shares of Intermediate Term Portfolio was November 13, 1992.
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
Set forth below is total return and yield information for the Class A, Class
B, Class C and Class D shares of the High Income Portfolio, the Investment
Grade Portfolio and the Intermediate Term Portfolio for the periods indicated.
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
----------------------------------------------- ----------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
------ ------------ ------------ ------------- -------------- ------------- ---------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
One Year Ended December
31, 1994
Class A............... (8.86)% (6.59)% (4.82)% $ 911.40 $ 934.10 $ 951.80
Class B............... (9.32) (7.03) (5.24) 906.80 929.70 947.60
Class C++............. (1.29) (10.39) (3.12) 997.50 978.90 993.90
Class D++............. (15.71) (23.71) (3.01) 967.30 948.70 994.10
Five Years Ended Decem-
ber 31, 1994
Class A............... 6.66 12.02 7.42 1,380.70 1,763.60 1,430.40
Class B............... 6.72 12.09 -- 1,384.60 1,769.30 --
Ten Years Ended December
31, 1994............... 9.07 11.57 9.07 2,383.10 2,988.50 2,382.70
Class A Shares
10/21/88-12/31/94.... 7.46 10.39 -- 1,562.10 1,845.40 --
Class B Shares
11/13/92-12/31/94.... -- -- 3.61 -- -- 1,078.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended December
31, 1994*
(Class A)............. 0.32% (1.44)% 0.05% $ 1,003.20 $ 985.60 $ 1,000.50
(Class B)............. 0.11 (1.64) (0.10) 1,001.10 983.60 999.00
(Class C)++........... 0.74 (1.15) 0.38 1,007.40 988.50 1,003.80
(Class D)++........... 0.76 (1.17) 0.41 1,007.60 988.30 1,004.10
</TABLE>
- --------
* Annualized
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
++ Commencement of operations (October 21, 1994) to December 31, 1994.
45
<PAGE>
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED REDEEMABLE VALUE OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
------------------------------------------- ----------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH
GRADE INCOME TERM GRADE INCOME INTERMEDIATE
PERIOD PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO TERM PORTFOLIO
------ ----------- ----------- ------------- -------------- -------------- ---------------
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Commencement of
operations*
to December 31, 1994
Class A............... 332.54% 435.28% 327.18% $ 4,325.40 $ 5,352,80 $ 4,271.80
Class B............... 56.21 84.54 7.86 1,562.10 1,845.40 1,078.60
Class C............... (0.25) (2.11) (0.61) 997.50 978.90 993.90
Class D............... (3.27) (5.13) (0.59) 967.30 948.70 994.10
<CAPTION>
YIELD
INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM
PORTFOLIO+ PORTFOLIO PORTFOLIO
----------- ----------- -------------
<S> <C> <C> <C>
30 Days Ended December
31, 1994
Class A............... 7.45% 11.43% 7.75%
Class B............... 6.98 11.15 7.30
Class C**............. 6.91 11.83 7.54
Class D**............. 7.21 12.27 7.65
</TABLE>
- --------
+ As of January 27, 1994, the High Quality Portfolio does business under the
name Investment Grade Portfolio.
* Commencement of operations for Investment Grade Portfolio Class A shares and
Intermediate Term Portfolio was October 31, 1980. Commencement of operations
for Class A shares of High Income Portfolio was November 10, 1978.
Commencement of operations for Class B shares of Investment Grade Portfolio
and High Income Portfolio was October 21, 1988. Commencement of operations
for Class B shares of Intermediate Term Portfolio was November 13, 1992.
Commencement of operations for Class C shares and Class D shares of each
Portfolio was October 21, 1994.
** Commencement of operations (October 21, 1994) to December 31, 1994.
In order to reflect the reduced sales charges applicable to certain
investors, as described under "Purchase of Shares," the total return data
quoted by the Fund in advertisements directed to such investors whose purchases
are subject to reduced sales load, in the case of Class A and Class D shares,
or waiver of the contingent deferred sales charge in the case of Class B and
Class C shares, may take into account the reduced, and not the maximum, sales
charge or may not take into account the contingent deferred sales charge and
therefore may reflect greater total return since, due to the reduced sales
charge, a lower amount of expenses is deducted.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow
Jones Industrial Average, or performance data contained in publications such as
Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine or Fortune Magazine. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
46
<PAGE>
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The authorized capital stock of the Fund consists of two billion
(2,000,000,000) shares of Common Stock, having a par value $0.10 per share. The
shares of Common Stock are divided as follows: High Income Portfolio Series
Common Stock which is divided into four classes designated "Class A Common
Stock", "Class B Common Stock", "Class C Common Stock" and "Class D Common
Stock" which consist of 200,000,000 shares, 500,000,000 shares, 200,000,000
shares and 500,000,000 shares, respectively, High Quality Portfolio Series
Common Stock (which does business under the name "Investment Grade Portfolio")
which is divided into four classes designated "Class A Common Stock", "Class B
Common Stock", "Class C Common Stock" and "Class D Common Stock" each of which
consists of 100,000,000 shares and the Intermediate Term Portfolio Series
Common Stock, which is divided into four classes designated "Class A Common
Stock", "Class B Common Stock", "Class C Common Stock" and "Class D Common
Stock" each of which consists of 50,000,000 shares. Each of the Fund's shares
has equal dividend, distribution, liquidation and voting rights, except that
only shares of the respective Portfolios are entitled to vote on matters
concerning only that Portfolio and Class B, Class C and Class D Shares bear
certain account maintenance expenses and expenses related to the distribution
of such shares and have exclusive voting rights with respect to matters
relating to such account maintenance and distribution expenditures. Each issued
and outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the respective Portfolio and class and
in net assets of such Portfolio upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The shares of each Portfolio, when
issued, will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable. Stock
certificates will be issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any case. Holders of
shares of any Portfolio are entitled to redeem their shares as set forth under
"Redemption of Shares".
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,417 shares for $100,003. Such shares were acquired for investment
and can only be disposed of by redemption. The organizational expenses of the
Fund have been fully amortized.
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time, or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the High Income,
Investment Grade and Intermediate Term Portfolios, based on the value of each
Portfolio's net assets and number of shares outstanding as of September 30,
1994, is calculated as set forth below. Information is not provided for Class C
or Class D shares since no Class C or Class D shares were issued prior to
September 30, 1994.
47
<PAGE>
HIGH INCOME PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ --------------
<S> <C> <C>
Net Assets......................................... $876,572,591 $2,347,222,580
============ ==============
Number of Shares Outstanding....................... 114,501,635 306,516,876
============ ==============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)..................... $7.66 $7.66
Sales Charge* (for Class A shares: 4.00% of offer-
ing price (4.17% of net asset value))............. .32 **
------------ --------------
Offering Price..................................... $7.98 $7.66
============ ==============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
48
<PAGE>
APPENDIX
INTEREST RATE FUTURES, OPTIONS THEREON AND OPTIONS ON DEBT SECURITIES
The Fund may trade options on debt securities, purchase and sell interest
rate, bond and bond index futures contracts ("futures contracts") and purchase
and write call and put options on futures contracts. At the date hereof,
futures contracts (and options thereon) can be purchased and sold with respect
to U.S. Treasury notes and GNMA certificates on the Chicago Board of Trade and
with respect to U.S. Treasury bills on the International Monetary Market at the
Chicago Mercantile Exchange. Options directly on debt securities are currently
traded on the Chicago Board Options Exchange and the American Stock Exchange.
Futures Contracts. A futures contract creates a binding obligation on the
purchaser (the "long") to accept delivery, and the seller (the "short") to make
delivery, of the face amount of the security underlying the futures contract in
a stated delivery month, at a price fixed in the contract or to make a cash
settlement in lieu of actual delivery. A majority of transactions in futures
contracts, however, do not result in actual delivery of the underlying
security, but are settled through liquidation--i.e., by entering into an
offsetting transaction. Futures contracts are traded only on commodity
exchanges--known as "contract markets"--approved for such trading by the
Commodity Futures Trading Commission ("CFTC"). Transactions in futures
contracts must be executed through a futures commission merchant ("FCM"), or
brokerage firm, which is a member of the relevant contract market.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that the total cash value reflected by the futures contract is
not paid. Instead, an amount of cash or securities acceptable to the Fund's FCM
and the relevant contract market, which varies, but may be 5% or less of the
contract amount, must be deposited with the FCM. This amount is known as
"initial margin," and represents a "good faith" deposit assuring the
performance of both the purchaser and the seller under the futures contract.
Subsequent payments to and from the FCM, known as "maintenance" or "variation"
margin, are required to be made on a daily basis as the price of the futures
contract fluctuates, making the long or short positions in the futures contract
more or less valuable, a process known as "marking to the market". Prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the FCM, and the Fund
realizes a loss or gain. In addition, a commission is paid on each completed
purchase and sale transaction.
The Fund will deal only in standardized contracts on recognized exchanges.
The clearing members of an exchange's clearing corporation guarantee the
performance of their futures contracts through the clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (known as the "holder") the right, but not the obligation, to enter
into a long position in the underlying futures contract (i.e., purchase the
futures contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put" option, at a
fixed price (the "exercise" or "strike" price) up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium". The maximum amount of risk the purchaser of the option assumes is
equal to the premium, the
49
<PAGE>
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 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.
50
<PAGE>
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.
51
<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, Investment Grade
and Intermediate Term Portfolios of Merrill Lynch Corporate Bond Fund, Inc. as
of September 30, 1994, 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, 1994 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,
Investment Grade and Intermediate Term Portfolios of Merrill Lynch Corporate
Bond Fund, Inc. as of September 30, 1994 the results of their operations, the
changes in their net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 31, 1994
52
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Airlines--3.1% Delta Air Lines Inc.:
BB+ Baa3 $ 1,952,998 9.875% due 4/30/2008++++ $ 1,970,087 $ 1,885,405
BB+ Baa3 3,000,000 9.30% due 1/02/2010 2,963,100 2,709,522
BB+ Baa3 5,000,000 9.20% due 9/23/2014 4,839,050 4,358,675
BB+ Baa3 28,000,000 10.50% due 4/30/2016 28,481,900 27,363,000
Piedmont Aviation, Inc.:
BB- B1 200,000 Series C, 9.70% due 1/15/1999 201,676 186,303
BB- B1 100,000 Series C, 10.25% due 1/15/2007 103,706 88,336
BB- B1 1,985,000 Series E, 10.30% due 3/28/2007 1,855,291 1,793,577
BB- B1 1,950,000 Series F, 10.35% due 3/28/2011 1,999,719 1,796,057
BB- B1 50,000 Series G, 10.35% due 3/28/2011 51,425 46,053
BB- B1 450,000 Series H, 9.85% due 5/08/2005 454,617 397,159
BB- B1 1,500,000 Series H, 10% due 11/08/2012 1,493,250 1,312,320
BB- B1 536,000 Series I, 10% due 11/08/2012 545,048 468,936
United Air Lines Inc.:
BB+ Baa2 7,100,000 9.35% due 4/07/2016 7,215,446 6,272,850
BB Baa1 10,500,000 9.21% due 1/21/2017 10,480,125 8,922,689
USAir Inc.:
B- B2 28,000,000 9.625% due 2/01/2001 22,360,000 17,640,000
BB- B1 1,107,000 10.70% due 1/15/2007 1,159,472 1,008,997
BB- B1 1,432,000 Series A, 10.70% due 1/15/2007 1,525,137 1,305,225
BB- B1 1,815,000 Series C, 10.70% due 1/15/2007 1,933,048 1,654,318
BB- B1 5,476,405 Series 93A3, 10.375% due 3/01/2013 14,530,000 12,615,000
--------------- --------------
114,180,114 100,642,397
Automobile B B3 10,150,000 SPX Inc., 11.75% due 6/01/2002 10,175,000 10,543,313
Parts--0.3%
Broadcasting & B+ B2 10,550,000 Century Communications Corp., 11.875%
& Publishing--3.9% due 10/15/2003 10,550,000 11,130,250
BB Ba2 15,000,000 Continental Cablevision Inc., 9.50%
due 8/01/2013 15,000,000 13,500,000
BB- Ba3 13,150,000 Heritage Media Services Corporation, 11%
due 6/15/2002 13,158,750 13,741,750
BB- Ba3 9,200,000 K-III Communications Corp., 10.625%
due 5/01/2002 9,192,500 9,246,000
B B3 12,500,000 The Katz Corp., 12.75% due 11/15/2002 12,740,625 13,062,500
B Caa 22,000,000 NWCG Holding Corp., 13.82%
due 6/15/1999*** (a) 11,811,127 11,770,000
BB- B3 10,000,000 SCI Television Inc., 11% due 6/30/2005 10,350,000 10,175,000
B+ B3 12,500,000 Sinclair Broadcasting Group Inc.,
10% due 12/15/2003 12,530,000 12,156,250
BB+ Ba3 10,000,000 Videotron Groupe L'TEE, 10.25%
due 10/15/2002 10,097,500 10,125,000
BB- B1 22,750,000 World Color Press, Inc., 9.125%
due 3/15/2003 22,769,375 21,385,000
--------------- --------------
128,199,877 126,291,750
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Building CCC B3 $ 20,000,000 Nortek Inc., 9.875% due 3/01/2004 $ 19,834,240 $ 18,600,000
Materials--2.2% B+ B3 21,705,000 Pacific Lumber Co., 10.50% due 3/01/2003 21,745,538 20,294,175
US Gypsum Corp.:
BB- B1 7,000,000 10.25% due 12/15/2002 6,993,750 7,148,750
B B2 29,084,000 8.75% due 3/01/2017 25,890,006 25,157,660
--------------- --------------
74,463,534 71,200,585
Building American Standard Inc.:
Products--1.3% B B1 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 9,566,375
CCC- Caa 9,300,000 Amstar Corp., 11.375% due 2/15/1997 6,566,250 9,300,000
B Ba3 16,000,000 Inter-City Products Corp., 9.75%
due 3/01/2000 15,888,750 14,800,000
--------------- --------------
39,408,625 40,298,250
Capital Goods-- B+ B1 21,450,000 Essex Group Inc., 10% due 5/01/2003 21,546,500 20,978,158
1.3% B+ B3 22,935,000 Sequa Corp., 9.375% due 12/15/2003 22,556,800 21,329,550
44,103,300 42,307,708
Chemicals--2.5% B B2 17,000,000 Agriculture Minerals & Chemicals
Company, L.P., 10.75% due 9/30/2003 17,060,000 17,425,000
B+ Ba3 42,540,000 G-I Holdings, Inc., 13.40% due 10/01/1998 (a) 27,336,476 26,587,500
B+ B2 18,750,000 Harris Chemical North America Inc.,
10.25% due 7/15/2001 (a) 15,433,583 15,140,625
B- B3 20,000,000 UCC Investors Holding, Inc., 11%
due 5/01/2003 20,550,000 20,700,000
--------------- --------------
80,380,059 79,853,125
Communications-- CCC+ Caa 25,000,000 American Telecasting, Inc., 13.10%
6.3% due 6/15/2004 (a) 13,279,206 12,250,000
CCC Caa 13,000,000 Dial Page Inc., 12.25% due 2/15/2000 13,080,500 13,097,500
B- Caa 46,688,000 Echostar Communication Corp.,
13.01% due 6/01/2004 (a) 25,564,708 21,943,360
CCC+ Caa 20,235,000 Horizon Cellular Telephone Co.,
11.375% due 10/01/2000 (a) 13,849,890 14,872,725
CCC+ B3 17,000,000 Mobilemedia Communication, Inc.,
10.50% due 12/01/2003 (a) 10,636,607 9,945,000
CCC+ B3 40,000,000 Nextel Communications Inc., 9.75% due
8/15/2004 (a) 25,574,440 19,400,000
NR NR 12,400,000 Page Mart Inc., 12.50% due 11/01/2003 (a) (b) 7,079,703 7,750,000
B B2 20,000,000 Paging Network, Inc., 11.75% due 5/15/2002 20,387,500 21,100,000
Panamsat L.P.:
B+ Ba3 4,750,000 9.75% due 8/01/2000 4,750,000 4,785,625
B- B3 28,710,000 11.375% due 8/01/2003 (a) 17,922,168 19,522,800
BB- B2 20,925,000 Rogers Communication Inc., 10.875%
due 4/15/2004 21,384,219 21,448,125
NR NR 7,000,000 Telecom Argentina, S.A.; 8.375% due
10/18/2000*** 6,327,810 6,348,125
CCC+ B3 12,730,000 USA Mobile Communications Holdings, Inc.,
9.50% due 2/01/2004 12,547,875 11,202,400
B+ B3 33,850,000 Videotron Holdings PLC, 12.18% due
7/01/2004 (a) 18,347,840 18,744,438
--------------- --------------
210,732,466 202,410,098
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Conglomerates-- NR B3 $ 9,083,000 Astrum International Corp., 11.50% due
4.9% 6/08/2003 $ 9,137,780 $ 9,331,874
Colt Industries, Inc.:
B+ B1 20,000,000 10.25% due 4/01/2002 20,350,000 20,350,000
BB Ba2 2,531,000 11.25% due 12/01/2015 2,694,343 2,657,550
B+ B1 18,500,000 Foamex Capital Corp., 11.25% due 10/01/2002 18,495,000 18,685,000
NR NR 13,000,000 Gillette Holdings, Inc., 12.25% due 6/30/2002 13,346,250 13,812,500
CCC+ B3 23,250,000 The Interlake Corp., 12.125% due 3/01/2002 23,483,750 21,157,500
B B2 10,000,000 JB Poindexter & Co., Inc., 12.50% due
5/15/2004 10,000,000 9,650,000
B+ B3 20,000,000 Jordan Industries Inc., 10.375% due
8/01/2003 19,961,000 18,350,000
NR NR 8,500,000 MacAndrews & Forbes Group, Inc., 12.25%
due 7/01/1996 8,276,775 8,500,000
NR NR 9,100,000 MacAndrews & Forbes Holdings, Inc.,
13% due 3/01/1999 8,568,400 9,054,500
BB- Ba3 25,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 24,979,063 24,625,000
--------------- --------------
159,292,361 156,173,924
Consumer B NR 28,550,000 Coleman Holdings, Inc., 11.27% due
Products--3.8% 5/27/1998 (a) 19,021,035 19,235,563
Formica Corporation:
NR NR 23,500,00 14.14% due 10/01/2001 (a) 21,294,159 23,078,025
NR Caa 9,000,000 14.83% due 9/15/2005 9,000,000 10,237,500
Liggett Group Inc.:
NR NR 13,000,000 11.50% due 2/01/1999 12,261,016 8,677,500
NR NR 4,299,000 16.50% due 2/01/1999*** 3,909,000 3,277,988
B- Caa 13,000,000 Polymer Group, Inc., 12.25%
due 7/15/2002*** 13,000,000 13,000,000
B- B3 5,500,000 Revlon Consumer Products Corp., 10.50%
due 2/15/2003 5,624,375 4,743,750
B- B3 40,350,000 Revlon Worldwide Corp., 12% due
3/15/1998 (a) 26,446,187 18,762,750
B+ B1 19,620,000 Sealy Corp., 9.50% due 5/01/2003 19,721,800 18,737,100
--------------- --------------
130,277,572 119,750,176
Containers--3.3% B B2 20,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008 20,000,000 18,300,000
B- Caa 21,500,000 Ivex Packaging Corp., 13.25%
due 3/15/2005 (a) 9,850,038 10,642,500
BB Ba3 20,000,000 Owens-Illinois, Inc., 11% due 12/01/2003 20,446,250 21,250,000
B+ Ba3 10,000,000 Plastic Container Corp., 10.75% due
4/01/2001 10,022,500 10,100,000
B- B3 32,628,000 Silgan Holdings Inc., 12.24% due
12/15/2002 (a) 26,559,854 26,754,960
B+ Ba3 20,000,000 Sweetheart Cup Co., 9.625% due 9/01/2000 20,000,000 19,150,000
--------------- --------------
106,878,642 106,197,460
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Convertible B B2 $ 8,352,000 Builders Transport, Inc., 8% due
Bonds*--1.1% 8/15/2005 (4) $ 4,886,880 $ 7,821,068
B- B2 10,362,000 Lomas Financial Corp., 9% due
10/31/2003 (2) 9,653,775 8,704,080
B- B3 6,941,000 MEDIQ, Inc., 7.25% due 6/01/2006 (3) 4,539,685 4,702,528
B B2 6,000,000 Ohm Corp., 8% due 10/01/2006 (5) 4,160,000 5,265,000
B+ B2 5,909,000 UNC, Inc., 7.50% due 3/31/2006 (1) 3,442,530 4,926,629
--------------- --------------
26,682,870 31,419,305
Drug Stores--0.7% B B2 24,000,000 Thrifty Payless Holdings, Inc., 11.75% due
4/15/2003 24,000,000 23,880,000
Energy--7.8% B+ B1 49,500,000 Clark R&M Holdings, Inc., 11.02% due
2/15/2000 (a) 27,860,140 29,230,280
Consolidated Hydro, Inc., due
7/15/2003 (a) 10,965,286 10,822,500
B- B2 16,000,000 Falcon Drilling Company, Inc., 9.75% due
1/15/2001 16,000,000 15,600,000
B+ B1 20,000,000 Global Marine Inc., 12.75% due 12/15/1999 20,047,500 21,800,000
Gulf Canada Resources Ltd.:
BB B1 12,750,000 9% due 8/15/1999 11,735,938 12,558,750
B+ B2 8,700,000 9.25% due 1/15/2004 8,488,355 8,112,750
Maxus Energy Corp.:
BB- B1 9,750,000 9.875% due 10/15/2002 9,067,500 9,360,000
BB- B1 2,550,000 11.50% due 11/15/2015 2,534,500 2,562,750
Mesa Capital Corp. (a):
CCC B3 666,000 12.75% due 6/30/1996 494,490 609,390
CCC+ B3 4,341,000 12.75% due 6/30/1998 3,365,903 3,863,490
B Caa 7,610,000 National Propane Corp., 13.125% due
3/01/1999 5,405,665 7,667,075
BB- Ba3 8,750,000 Noble Drilling Corp., 9.25% due 10/01/2003 8,925,000 8,465,625
BB Ba3 18,000,000 Oryx Energy Co., 10.375% due 9/15/2018 17,823,010 18,108,810
B+ Ba3 15,000,000 Rowan Companies, Inc., 11.875%
due 12/01/2001 15,085,000 16,275,000
BB- Ba3 25,000,000 Seagull Energy Corp., 8.625%
due 8/01/2005 24,990,000 23,125,000
CCC+ Caa 8,650,000 Tesoro Petroleum Corp., 12.75%
due 3/15/2001 7,483,899 8,697,575
BB- B1 23,000,000 Trans Texas Gas Corp., 10.50%
due 9/01/2000 23,000,000 22,655,000
B+ B1 31,525,000 Triton Energy Corp., 12.816%
due 11/01/1997 (a) 22,839,361 23,092,063
BB- B1 10,000,000 Yacimientos Petroliferos Fiscales
S.A. (YPF) (Sponsored),
8% due 2/15/2004 (f) 8,650,000 8,625,000
--------------- --------------
244,761,547 251,231,058
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Entertainment-- B B2 $ 11,750,000 AMC Entertainment, Inc., 12.625%
3.2% due 8/01/2002 $ 11,696,095 $ 13,101,250
B+ B1 9,000,000 Cinemark USA Inc., 12% due 6/01/2002 9,058,750 9,675,000
Marvel Holdings Inc:
B Caa 12,000,000 9.125% due 2/15/1998 10,620,000 10,620,000
B B3 38,000,000 10.97% due 4/15/1998 (a) 25,640,195 24,035,000
B B3 10,000,000 Plitt Theatres, Inc., 10.875% due 6/15/2004 10,000,000 10,000,000
Spectravision Inc.:
B+ B2 39,250,000 11.50% due 10/01/2001 (a) 29,069,667 24,335,000
B- Caa 21,265,000 11.65% due 12/01/2002++ 20,964,181 10,218,472
--------------- --------------
117,048,888 101,984,722
Financial B- B2 7,400,000 American Annuity Group Inc,
Services--1.6% 11.125% due 2/01/2003 7,400,000 7,511,000
B+ B1 21,000,000 Lomas Mortgage USA, Inc., 10.25% due
10/01/2002 21,140,625 19,110,000
BB+ NR 3,000,000 Reliance Financial Services Corp., 10.36%
due 12/01/2000 2,380,000 3,022,500
Reliance Group Holdings, Inc.:
BB+ Ba3 17,425,000 9% due 11/15/2000 16,008,125 16,205,250
BB- B1 7,575,000 9.75% due 11/15/2003 7,537,500 6,893,250
--------------- --------------
54,466,250 52,742,000
Food & Beverage-- Chiquita Brands International Inc.:
6.5% B+ B3 5,745,000 11.50% due 6/01/2001 6,139,969 5,974,800
BB- B1 13,000,000 9.125% due 3/01/2004 12,990,000 12,155,000
NR NR 15,000,000 Cumberland Farms, 10.50% due 10/01/2003*** 14,681,250 13,162,500
B- B2 26,463,000 Envirodyne Industries, Inc., 10.25% due
12/01/2001 25,608,891 21,699,660
B- B3 10,520,000 Farm Fresh, Inc., 7.50% due 3/01/2010 5,488,575 6,562,418
BB- B1 25,000,000 Fresh Del Monte Corp., 10% due 5/01/2003 25,012,500 21,375,000
CCC+ Caa 29,500,000 Grand Union Corp., 12.25% due 7/15/2002 29,475,625 22,051,250
BB- Ba3 7,000,000 P&C Food Markets, Inc., 11.50% due 10/15/2001 7,100,000 7,350,000
B B2 25,000,000 Penn Traffic Co., 9.625% due 4/15/2005 24,781,750 22,875,000
B- B2 20,325,000 Pueblo Xtra International Inc., 9.50% due
8/01/2003 18,787,125 17,377,875
B- Caa 21,800,000 Seven-Up/RC Bottling Co. of Southern
California, Inc., 11.50% due 8/01/1999 21,967,500 21,146,000
Specialty Foods Corp.:
B B2 20,000,000 10.25% due 8/15/2001 19,618,750 17,900,000
B- B3 2,250,000 11.25% due 8/15/2003 2,261,250 1,912,500
B B3 20,000,000 Texas Bottling Group, Inc., 9% due
11/15/2003 20,002,500 18,300,000
--------------- --------------
233,915,685 209,842,003
Health Services-- B B2 11,500,000 Continental Medical Systems, Inc.,
1.5% 10.875% due 8/15/2002 11,523,750 10,982,500
B B2 10,000,000 Continental Medsystems, Inc., 10.375%
due 4/01/2003 9,991,250 9,250,000
HealthTrust Co. (The Hospital):
B+ B1 12,500,000 10.25% due 4/15/2004 12,500,000 12,937,500
B B1 5,000,000 8.75% due 3/15/2005 4,925,000 4,718,750
B+ B1 11,500,000 MEDIQ/PRN Life Support Services, Inc.,
11.125% due 7/01/1999 11,455,000 11,442,500
--------------- --------------
50,395,000 49,331,250
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
High Technology-- ComputerVision Corp.:
0.5% CCC+ B3 $ 10,000,000 11.375% due 8/15/1999 $ 9,706,250 $ 8,350,000
CCC NR 12,500,000 8% due 12/01/2009 (a) 6,802,473 7,468,750
-------------- --------------
16,508,723 15,818,750
Home Builders-- B- B2 20,000,000 Baldwin Homes Company, 10.375%
2.7% due 8/01/2003 19,879,500 16,300,000
Del E. Webb Corporation:
B+ Ba3 7,000,000 10.875% due 3/31/2000 7,002,795 7,105,000
B- B2 7,500,000 9.75% due 3/01/2003 7,440,975 6,862,500
B- B2 5,000,000 9% due 2/15/2006 4,993,750 4,150,000
B B3 14,000,000 Greystone Homes Inc., 10.750%
due 3/01/2004 14,000,000 13,230,000
B B1 10,250,000 K Hovnanian Enterprises Inc., 11.25%
due 4/15/2002 10,204,063 9,993,750
BB Ba2 12,000,000 Standard Pacific Corp., 10.50%
due 3/01/2000 11,995,000 11,820,000
B+ Ba3 20,000,000 U.S. Home Corp., 9.75% due 6/15/2003 20,000,000 18,000,000
-------------- --------------
95,516,083 87,461,250
Hotels & B B2 22,325,000 Aztar Corp., 11% due 10/01/2002 22,557,250 19,534,375
Casinos--7.2% BB B1 29,000,000 Bally's Park Place, Inc., 9.25% due 3/15/2004 27,651,450 24,360,000
NR Caa 12,000,000 Capital Gaming International, Inc.,
11.50% due 2/01/2001 (c)*** 9,426,041 8,280,000
B+ B2 28,000,000 GB Property Funding Corp., 10.875%
due 1/15/2004 27,235,000 21,280,000
BB- B2 24,750,000 GNS Finance Corp., 9.25% due 3/15/2003 24,610,371 23,388,750
NR NR 7,682,000 Gold River Hotel & Casino Corporation,
13.375% due 8/31/1999 (a) 8,609,882 7,105,850
BB- B1 20,158,000 Host Marriott Corp., 10.375% due 6/15/2011 20,527,995 20,246,191
BB- B1 11,000,000 JQ Hammons Hotel, Inc., 8.875%
due 2/15/2004 9,737,500 10,147,500
BB- B1 15,000,000 MGM Grand Hotel Finance Corp., 12%
due 5/01/2002 15,230,500 16,462,500
B- B3 10,000,000 Pioneer Finance Corp., 13.50% due 12/01/1998 10,542,500 9,250,000
Showboat, Inc.:
BB- Ba3 20,000,000 9.25% due 5/01/2008 19,920,000 16,600,000
B B2 15,000,000 13% due 8/01/2009 14,864,500 14,325,000
NR Caa 10,406,612 Trump Castle Funding, Inc., 11.75%
due 11/15/2003 9,278,493 5,931,769
B B3 35,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 33,810,770 25,112,500
NR Caa 16,239,043 Trump Taj Mahal Funding, Inc., 11.35%
due 11/15/1999++ 12,146,376 10,072,465
-------------- --------------
266,148,628 232,096,900
Industrial BB- B2 25,000,000 ADT Operations Inc., 9.25% due 8/01/2003 25,094,187 23,875,000
Services--2.3% B- B3 10,000,000 Bell & Howell Co., 10.75% due 10/01/2002 10,040,000 10,153,786
B+ B1 22,000,000 Repap Wisconsin Inc., 9.25% due 2/01/2002 20,882,500 19,470,000
B- Caa 7,720,000 Southeastern Public Service Co., 11.875%
due 2/01/1998 5,699,947 7,893,700
Thermadyne Industries, Inc.:
CCC NR 5,706,000 10.25% due 5/01/2002 5,711,822 5,492,025
CCC NR 7,912,000 10.75% due 11/01/2003 7,914,802 7,595,520
-------------- --------------
75,343,258 74,480,031
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Metals & B- B2 $ 26,750,000 Kaiser Aluminum & Chemical Corp.,
Mining--1.7% 12.75% due 2/01/2003 $ 26,660,625 $ 26,148,125
Maxxam Group, Inc.:
B- B3 5,000,000 11.25% due 8/01/2003 4,918,750 4,775,000
B- B3 41,155,000 12.10% due 8/01/2003 (a) 24,272,992 24,281,450
-------------- --------------
55,852,367 55,204,575
Paper--6.3% B+ B2 15,420,000 Container Corporation of America:
9.75% due 4/01/2003 15,433,400 14,938,125
B+ B2 13,000,000 11.25% due 5/01/2004 13,000,000 13,585,000
BB- Ba3 15,000,000 Doman Industries Ltd., 8.75% due 3/15/2004 15,000,000 13,462,500
Fort Howard Corp.:
B+ B1 11,000,000 9.25% due 3/15/2001 11,000,000 10,615,000
B B2 31,000,000 9% due 2/01/2006 28,380,625 26,582,500
B B3 25,000,000 Gaylord Container Corp., 11.50%
due 5/15/2001 25,001,250 25,656,250
BB Ba3 10,000,000 PT Indah Kiat Pulp & Paper Corporation,
11.875% due 6/15/2002 10,000,000 10,150,000
BB- Ba3 8,000,000 Rainy River Forest Products, 10.75%
due 10/15/2001 7,980,560 7,980,560
B B1 25,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 25,767,500 26,250,000
B+ B1 11,500,000 Stone-Consolidated Corp., 10.25%
due 12/15/2000 11,520,000 11,385,000
Stone Container Corp.:
B- B2 6,500,000 11.50% due 9/01/1999 6,264,562 6,516,250
B B1 30,000,000 9.875% due 2/01/2001 28,071,172 28,237,500
BB B1 8,500,000 Tjiwa Kimia, Tjiwi Kimia International
Fin., 13.25% due 8/01/2001 8,500,000 8,967,500
-------------- --------------
205,919,069 204,326,185
Pollution Control-- B B3 22,950,000 Mid-American Waste Systems, Inc.,
0.7% 12.25% due 2/15/2003 22,891,000 22,318,875
Railroads--0.2% B+ Ba3 8,000,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005 8,000,000 7,800,000
Restaurants/ Family Restaurants Inc.:
Food Services-- B B1 13,000,000 9.75% due 2/01/2002 13,000,000 11,505,000
2.4% B- B3 13,500,000 10.875% due 2/01/2004 (a) 10,029,584 8,066,250
CCC+ B2 30,000,000 Flagstar Corp., 11.375% due 9/15/2003 30,092,500 25,875,000
Foodmaker, Inc:
B- B2 16,000,000 9.75% due 6/01/2002 15,455,000 13,460,000
B+ Ba3 23,000,000 Series 1993A, 9.75% due 11/01/2003 22,641,200 19,435,000
-------------- --------------
91,218,284 78,341,250
Retail B- B3 10,000,000 Pamida Holdings, Inc., 11.75%
Speciality--1.1% due 3/15/2003 9,997,500 10,050,000
Specialty Retailers Group, Inc.:
B+ B1 21,000,000 10% due 8/15/2000 21,000,000 20,160,000
B- B3 3,670,000 11% due 8/15/2003 3,673,350 3,523,200
-------------- --------------
34,670,850 33,733,200
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Steel--2.1% B B2 $ 21,000,000 A.K. Steel Holding Corp., 10.75%
due 4/01/2004 $ 21,000,000 $ 21,236,250
B B2 15,000,000 Republic Engineered Steel Inc., 9.875%
due 12/15/2001 15,000,000 13,950,000
B+ B1 17,500,000 WCI Steel, Inc., 10.50% due 3/01/2002 17,500,000 17,325,000
BB B1 15,000,000 Wheeling-Pittsburg Steel Corp.,
9.375% due 11/15/2003 14,390,000 13,612,500
-------------- --------------
67,890,000 66,123,750
Textiles--0.9% B+ B3 30,000,000 Westpoint Stevens Inc., 9.375% due 12/15/2005 30,100,000 27,225,000
Transport BB- Ba2 10,000,000 Transportacion Maritima Mexicana, S.A.
Services--0.3% de C.V., 9.25% due 5/15/2003 8,841,375 8,812,500
Transportation B+ B2 4,371,000 ACF Industries, Inc., 11.60% due 5/15/2000 4,174,305 4,388,763
Services--1.8% BB Ba2 9,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 9,000,000 8,640,000
BB- B1 6,000,000 International Shipholding Corp., 9%
due 7/01/2003 5,998,750 5,617,500
NR NR 36,106,000 Transtar Holdings, L.P., 12.67%
due 12/15/2003 (a) 18,806,881 19,768,035
B+ Ba3 20,000,000 Viking Star Shipping Co., Inc., 9.625%
due 7/15/2003 20,045,000 19,300,000
-------------- --------------
58,024,936 57,714,298
Utilities--4.6% Beaver Valley Funding Corp.:
B+ B1 5,299,000 8.625% due 6/01/2007 5,047,297 4,888,327
B+ B1 35,000,000 9% due 6/01/2017 31,579,000 27,106,273
CTC Mansfield Funding Corp.:
B+ Ba3 6,000,000 10.25% due 3/30/2003 5,850,000 5,640,000
B+ Ba3 20,000,000 11.125% due 9/30/2016 21,488,750 19,175,300
Midland Cogeneration Venture
Limited Partnership:
BB Ba3 4,733,392 10.33% due 7/23/2002++++*** 4,638,724 4,757,059
B- B2 11,250,000 11.75% due 7/23/2005 11,310,000 10,628,606
B- B2 5,500,000 13.25% due 7/23/2006 6,002,565 5,579,530
NR NR 16,028,687 Sunflower Electric Power Corp., 8%
due 12/31/2016++++*** (a) 10,484,876 13,183,595
B+ B1 20,000,000 Texas-New Mexico Power Corp., 10.75%
due 9/15/2003 20,065,000 20,100,000
B+ Ba3 5,000,000 Transco Energy Co., 9.875% due 6/15/2020 4,687,500 4,975,000
Tucson Electric & Power Co.:
NR NR 17,323,082 10.21% due 1/01/2009*** 16,029,025 15,171,555
NR NR 17,426,207 10.732% due 1/01/2013*** 16,252,461 15,622,246
-------------- --------------
153,435,198 146,827,491
Total Investments in Bonds--90.1% 3,039,721,561 2,894,383,179
<CAPTION>
Shares Held
Preferred Stocks
<S> <C> <S> <C> <C>
Broadcasting & 114,793 K-III Communications Corp.++ 11,676,526 11,221,007
Publishing--0.7% 421,000 K-III Communications Corp. 10,562,750 10,840,750
-------------- --------------
22,239,276 22,061,757
Energy--0.5% 29,517 Consolidated Hydro, Inc. 14,891,917 15,230,772
Steel--0.4% 600,000 USX Capital LLC 15,000,000 13,875,000
Total Investments in Preferred Stocks--1.6% 52,131,193 51,167,529
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value
Industries Held Issue Cost (Note 1a)
Common Stocks High Income Portfolio
<S> <C> <S> <C> <C>
Conglomerates--0.1% 200,369 Astrum International Corp. $ 4,085,240 $ 4,771,287
Energy--0.1% 57,237 Mesa Inc. 325,690 314,803
122,500 Petrolane Inc. 1,424,062 1,692,031
-------------- --------------
1,749,752 2,006,834
Financial Services--0.0% 132,527 Lomas Financial Corporation 1,689,719 646,069
Food & 120,194 Abco Markets Inc. (g)*** 4,054,875 1,584,759
Beverage--0.1% 142,807 Doskocil Companies, Inc. 5,716,757 1,267,412
-------------- --------------
9,771,632 2,852,171
Hospital Supplies--0.0% 51,400 Ply-Gem Industries, Inc. 977,018 1,188,625
Hotels & 74,302 Buckhead Corporation of America (g)*** 185,755 185,755
Casinos--0.1% 320,040 Capital Gaming International Inc.*** 2,882,508 2,100,262
75,500 Goldriver Hotel & Casino Corporation
(Class B) (d) (g) 540,045 224,141
23,000 Trump Taj Mahal Holding Corp. (Class A) 11,500 230,000
-------------- --------------
3,619,808 2,740,158
Industrial Services--0.0% 11,400 Thermadyne Industries 165,300 133,950
Total Investments in Common
Stocks--0.4% 22,058,469 14,339,094
<CAPTION>
Trusts, Rights & Warrants
<S> <C> <S> <C> <C>
Cellular Telephones--0.0% 57,040 Page Mart Inc. (Warrants) (e) 340,242 128,340
Energy--0.0% 18,000 Consolidated Hydro Inc. (Warrants) (e) 390,123 432,000
20,833 UGI Corp. (Warrants) (e) 91,057 29,947
-------------- --------------
481,180 461,947
Financial Services--0.0% 7,194 Reliance Group Holdings, Inc. (Warrants) (e) 0 0
Food & Beverage--0.0% 97,108 Doskocil Companies, Inc. (Rights) (f) 0 18,208
High Technology--0.0% 394,563 Anacomp, Inc. (Warrants) (e)*** 495,400 690,485
Hotels & 273,000 Capital Gaming International Inc.
Casinos--0.0% (Warrants) (e)*** 1,344,151 887,250
7,550 Goldriver Hotel & Casino Corp.
Liquidating Trust*** (g) 192,320 137,028
-------------- --------------
1,536,471 1,024,278
Paper--0.1% 613,584 Gaylord Container Corp. (Warrants) (e) $ 1,291,315 $ 4,295,088
Telecommunications--0.0% 302,500 ALC Communications Corp. (Warrants) (e) 831,875 0
Total Investments in Trusts, Rights &
Warrants--0.1% 4,976,483 6,618,346
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Issue Cost (Note 1a)
Short-Term Securities High Income Portfolio
<S> <C> <S> <C> <C>
Commercial $134,419,000 General Electric Capital Corp., 4.95%
Paper**--6.8% due 10/03/1994 $ 134,419,000 $ 134,419,000
ONYX Inc.:
20,000,000 5.20% due 10/11/1994 19,976,888 19,976,888
30,000,000 5.20% due 10/20/1994 29,926,333 29,926,333
Vons Supermarket:
20,000,000 5.05% due 10/11/1994 19,977,555 19,977,555
20,000,000 5.15% due 10/28/1994 19,928,472 19,928,472
-------------- --------------
224,228,248 224,228,248
Promissory Notes--0.0% 120,000 Capital Gaming International, Inc.,
5% due 8/01/1995 120,000 120,000
Total Investments in Short-Term
Securities--6.8% 224,348,248 224,348,248
Total Investments--99.0% $3,343,235,954 3,190,856,396
==============
Other Assets Less Liabilities--1.0% 32,938,775
--------------
Net Assets--100.0% $3,223,795,171
==============
<FN>
++Represents a pay-in-kind security which may pay interest/dividend in additional face/shares.
++++Subject to principal paydowns.
(a)Represents a zero coupon or step bond, the interest rate shown is the effective yield at the
time of purchase.
(b)Represents units. Each unit consists of 10,000 Par Notes and 46 Warrants.
(c)Represents units. Each unit consists of one 11.50% Note due 2001, 20.25 Warrants and 26.67
shares of Common Stock.
(d)Each share of Series B Stock contains a right which entitles the Portfolio to purchase a
predetermined number of shares of preferred stock. The purchase price and number of shares
are subject to adjustment.
(e)Warrants entitle the portfolio to purchase a predetermined number of shares of common
stock/face amount of bonds. The purchase price and number of shares/face amount are
subject to adjustment under certain conditions until the expiration date.
(f)The rights may be exercised until October 19, 1994.
(g)Non-income producing securities.
*Industry classifications for convertible bonds are:
(1)Conglomerates; (2)Financial Services;
(3)Health Services; (4)Transportation Services;
(5)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.
See Notes to Financial Statements.
***Restricted securities. The value of the Fund's investments in restricted securities was
approximately $107,171,095, representing 3.3% net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Abco Markets Inc. 11/19/1992 $ 4,054,875 $ 1,584,759
Anacomp, Inc. (Warrants) 10/23/1990-3/14/1991 495,400 690,485
Buckhead Corporation of America 12/29/1992-3/21/1994 185,755 185,755
Capital Gaming International, Inc.,
11.50% due 2/01/2001 1/10/1994 9,426,041 8,280,000
Cumberland Farms, 10.50% due
10/01/2003 2/18/1994 14,681,250 13,162,500
Goldriver Hotel & Casino Corp.
Liquidating Trust 8/31/1992 192,320 137,028
Liggett Group Inc., 16.50%
due 2/01/1999 1/26/1994-1/31/1994 3,909,000 3,277,988
Midland Cogeneration Venture Limited
Partnership, 10.33% due 7/23/2002 7/13/1994 4,638,724 4,757,059
NWCG Holdings Corp., 13.82%
due 6/15/1999 6/28/1994 11,811,127 11,770,000
Polymer Group, Inc., 12.25%
due 7/15/2002 6/17/1994 13,000,000 13,000,000
Sunflower Electric Power Corp.,
8% due 12/31/2016 11/29/1991-7/15/1994 10,484,876 13,183,595
Telecom Argentina, S.A., 8.375%
due 10/18/2000 7/18/1994-7/26/1994 6,327,810 6,348,125
Tucson Electric & Power Co.:
10.21% due 1/01/2009 6/04/1993-7/19/1994 16,029,025 15,171,555
10.732% due 1/01/2013 3/01/1993-7/16/1993 16,252,461 15,622,246
------------ ------------
$111,488,664 $107,171,095
============ ============
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes Investment Grade Portfolio
<S> <S> <S> <C> <S> <C> <C>
US Government United States Treasury Notes & Bonds:
Obligations--5.9% AAA Aaa $ 4,500,000 8.25% due 7/15/1998 $ 4,928,906 $ 4,665,251
AAA Aaa 6,000,000 6.875% due 7/31/1999 6,029,063 5,903,437
AAA Aaa 14,000,000 7.50% due 5/15/2002 14,213,281 14,013,055
AAA Aaa 8,000,000 6.375% due 8/15/2002 8,515,469 7,457,460
AAA Aaa 5,000,000 7.50% due 11/15/2016 5,538,531 4,737,512
AAA Aaa 4,000,000 8.875% due 8/15/2017 4,363,750 4,353,730
AAA Aaa 8,000,000 7.50% due 11/15/2024 8,098,240 7,707,490
------------- -------------
51,687,240 48,837,935
Banking--8.2% A- A2 12,000,000 Comerica Inc., 8.375% due 7/15/2024 11,412,360 11,299,800
First Interstate Bancorp. (a):
A- A3 3,000,000 11% due 3/05/1998 3,603,060 3,286,485
BBB+ Baa1 3,000,000 9.90% due 11/15/2001 3,642,840 3,263,004
First Union Corp.:
A- A3 1,000,000 8.125% due 6/24/2002 1,109,750 996,010
A- A3 8,300,000 8% due 11/15/2002 8,810,850 8,222,312
Golden West Financial Corp.:
A- A3 5,000,000 9.15% due 5/23/1998 5,678,700 5,257,000
A- A3 5,000,000 8.375% due 4/15/2002 5,035,950 5,036,475
A- A3 8,000,000 Huntington Bancshares, Inc., 7.625%
due 1/15/2003 8,405,600 7,716,400
A+ A1 3,500,000 Norwest Corp., 6.625% due 3/15/2003 3,553,235 3,190,092
AA- A1 5,000,000 Republic Bank of NY Corp.,
9.125% due 5/15/2021 5,676,450 5,293,525
AA+ Aa2 9,000,000 Wachovia Bank of North Carolina,
6.55% due 6/09/1997 (a) 8,993,430 8,886,730
A A2 7,000,000 World Savings and Loan Association,
9.90% due 7/01/2000 7,430,130 7,541,240
------------- -------------
73,352,355 69,989,073
Federal Federal National Mortgage Association:
Agencies--4.4% AAA Aaa 18,000,000 8.05% due 7/14/2004 17,985,938 17,617,410
NR NR 15,000,000 7.85% due 9/10/2004 14,978,906 14,662,425
AAA Aaa 5,000,000 Private Export Funding Corp.,
8.35% due 1/31/2001 5,786,950 5,200,050
------------- -------------
38,751,794 37,479,885
Financial Services-- Chrysler Financial Corp.:
Captive--2.4% BBB+ A3 2,000,000 9.50% due 12/15/1999 2,263,120 2,135,180
BBB+ A3 8,000,000 10.95% due 8/01/2017 9,701,900 9,025,760
A A2 1,000,000 Ford Motor Credit Corp., 7.75%
due 11/15/2002 1,040,130 979,490
BBB+ Baa1 7,575,000 General Motors Acceptance Corp.,
8% due 10/01/1996 7,761,648 7,688,965
------------- -------------
20,766,798 19,829,395
Financial Services-- American General Finance Corp.:
Consumer--5.1% A+ A1 2,500,000 8.50% due 8/15/1998 2,848,650 2,575,050
A+ A1 9,000,000 7.45% due 7/01/2002 9,131,640 8,675,010
Associates Corp. of North America:
AA- A1 2,000,000 8.80% due 8/01/1998 2,253,820 2,077,020
AA- A1 1,550,000 6.75% due 10/15/1999 1,612,945 1,483,978
AA- A1 6,000,000 5.75% due 10/15/2003 5,223,540 5,097,180
A+ A1 8,000,000 CIT Group Holdings, Inc.,
5.64% due 5/02/1997 8,000,000 8,062,871
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (concluded) Investment Grade Portfolio
<S> <S> <S> <C> <S> <C> <C>
Financial Services-- Commercial Credit Co.:
Consumer A+ A2 $ 6,000,000 6.70% due 8/01/1999 $ 6,001,800 $ 5,758,530
(concluded) A+ A2 3,000,000 7.875% due 7/15/2004 2,990,730 2,939,430
A+ A2 7,000,000 Transamerica Finance Corp., 7.50%
due 3/15/2004 7,000,000 6,648,635
------------- -------------
45,063,125 43,317,704
Financial Services-- Dean Witter & Discover Co.:
Other--9.4% A A2 5,000,000 6.50% due 11/01/2005 4,942,250 4,360,750
A A2 6,000,000 6.75% due 10/15/2013 5,880,540 4,898,970
General Electric Capital Corp.:
AAA Aaa 6,000,000 14% due 7/01/1996 (a) 6,811,140 6,715,140
AAA Aaa 19,000,000 5.56% due 7/21/1997 19,000,000 19,081,506
AAA Aaa 6,200,000 8.125% due 5/15/2012 6,301,726 6,090,260
A A3 10,000,000 Lehman Brothers Inc., 7.375% due 8/15/1997 9,987,000 9,908,149
A+ A1 6,000,000 Morgan Stanley Group Inc., 8.875%
due 10/15/2001 6,900,840 6,220,950
PaineWebber Group Inc.:
BBB+ A3 3,000,000 6.25% due 6/15/1998 3,078,060 2,815,125
BBB+ A3 7,000,000 9.25% due 12/15/2001 8,185,100 7,231,525
A+ A3 8,000,000 Torchmark Corp., 9.625% due 5/01/1998 7,941,440 8,432,960
A+ A2 4,000,000 The Travelers Corp., 9.50% due 3/01/2002 4,336,800 4,285,420
------------- -------------
83,364,896 80,040,755
Foreign*--9.7% AA- A1 10,000,000 Aegon N.V., 8% due 8/15/2006 (2) 9,908,700 9,713,600
CRA Finance Ltd. (2):
A+ A2 4,000,000 6.50% due 12/01/2003 4,005,890 3,542,760
A+ A2 3,500,000 7.125% due 12/01/2013 3,479,700 2,982,227
AAA Aaa 4,000,000 Export-Import Bank of Japan, 8.35%
due 12/01/1999 (2) 4,226,640 4,127,580
AAA Aaa 4,500,000 Japan Finance Corp. for Municipal
Enterprises, 9.125% due 3/13/2000 (2) 4,963,995 4,809,240
Metropolis of Tokyo (Japan) (3):
AAA Aaa 3,550,000 9.25% due 10/11/1998 4,134,756 3,772,851
AAA Aaa 3,000,000 8.70% due 10/05/1999 3,469,410 3,136,845
AAA Aaa 4,000,000 9.25% due 11/08/2000 4,219,660 4,284,540
Petro-Canada (4):
BBB Baa1 3,000,000 8.60% due 10/15/2001 3,292,470 3,075,075
BBB Baa1 5,000,000 9.25% due 10/15/2021 5,300,650 5,219,025
Province of Ontario (Canada) (5):
AA- Aa3 7,000,000 8% due 10/17/2001 7,564,970 6,999,230
AA- Aa3 14,000,000 7.75% due 6/04/2002 14,274,490 13,801,129
Province of Quebec (Canada) (5):
A+ A1 3,000,000 13% due 10/01/2013 3,918,120 3,629,505
A+ A1 5,000,000 7.125% due 2/09/2024 4,203,800 4,069,275
AA A1 6,000,000 Republic of Italy, 6.875% due 9/27/2023 (6) 5,774,220 4,750,920
A A2 5,000,000 Western Mining Corporation Holdings, Ltd.,
7.25% due 11/15/2013 (1) 5,036,900 4,318,775
------------- -------------
87,774,371 82,232,577
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (continued) Investment Grade Portfolio
<S> <S> <S> <C> <S> <C> <C>
Industrial-- AA- A1 $ 3,000,000 Anheuser-Busch Cos., Inc., 8.75% due
Consumer 12/01/1999 $ 3,367,590 $ 3,140,655
Goods--12.6% A+ A1 10,000,000 Bass America, Inc., 8.125% due 3/31/2002 10,250,610 10,045,499
Dillard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,254,860 3,950,740
A+ A2 5,000,000 9.125% due 8/01/2011 6,054,000 5,265,900
Grand Metropolitan Investment Corp.:
A+ A2 4,000,000 6.50% due 9/15/1999 4,000,000 3,799,240
A+ A2 9,000,000 8.625% due 8/15/2001 9,412,690 9,272,295
AAA Aaa 4,000,000 Johnson & Johnson Co., 6.73% due 11/15/2023 3,352,760 3,283,540
AA Aa2 7,000,000 McDonald's Corp., 7.80% due 10/01/2004 7,000,000 6,931,190
Penney (J.C.) Co., Inc.:
A+ A2 3,000,000 6.875% due 6/15/1999 2,989,380 2,910,465
A+ A2 7,000,000 7.375% due 6/15/2004 6,963,600 6,690,390
BBB- Baa3 8,000,000 RJR Nabisco, Inc., 10.50% due 4/15/1998 8,513,840 8,488,800
Sears Roebuck & Co.:
BBB+ Baa1 5,000,000 9.25% due 4/15/1998 5,712,125 5,261,350
BBB+ Baa1 8,785,000 8.45% due 11/01/1998 9,709,797 9,012,004
BBB+ Baa1 9,000,000 10% due 2/03/2012 10,470,870 9,996,760
AA Aa1 16,810,000 Wal-Mart Stores, Inc., 8.625% due 4/01/2001 18,401,637 17,519,130
------------- -------------
110,453,759 105,567,958
Industrial-- A+ A1 5,000,000 Atlantic Richfield Company, 10.375%
Energy--4.8% due 7/15/1995 5,266,660 5,153,625
AA- A1 3,250,000 BP America Inc., 9.375% due 11/01/2000 3,544,190 3,500,201
AA- A1 9,000,000 BP America Inc., 7.875% due 5/15/2002 9,519,510 8,982,225
Burlington Resources, Inc.:
A- A3 8,500,000 9.625% due 6/15/2000 9,720,390 9,106,135
A- A3 1,000,000 8.50% due 10/01/2001 1,165,780 1,025,015
Texaco Capital Inc.:
A+ A1 5,500,000 9% due 12/15/1999 6,215,190 5,805,332
A+ A1 2,000,000 8.875% due 9/01/2021 2,440,280 2,076,030
A+ A1 5,000,000 8.625% due 11/15/2031 5,226,950 4,990,075
------------- -------------
43,098,950 40,638,638
Industrial-- BBB- Baa3 12,000,000 Applied Materials Inc., 8% due 9/01/2004 11,912,280 11,677,200
Other--12.5% AA- Aa2 10,100,000 Archer-Daniels-Midland Co., 8.875%
due 4/15/2011 10,888,935 10,550,207
AA- A1 4,000,000 Capital Cities/ABC, Inc., 8.875%
due 12/15/2000 4,305,360 4,204,980
Carnival Corp.:
A- A3 1,000,000 6.15% due 10/01/2003 891,530 872,063
A- A3 8,000,000 7.70% due 7/15/2004 7,872,580 7,740,320
A A2 6,000,000 Comsat Corp., 8.125% due 4/01/2004 6,376,270 5,949,750
Ford Capital B.V.:
A A2 2,500,000 9.375% due 5/15/2001 2,762,725 2,653,212
A A2 13,000,000 9.875% due 5/15/2002 13,570,410 14,213,939
A A2 3,995,000 9.50% due 6/01/2010 4,430,215 4,304,412
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (continued) Investment Grade Portfolio
<S> <S> <S> <C> <S> <C> <C>
Industrial-- International Paper Co.:
Other A- A3 $ 7,710,000 9.70% due 3/15/2000 $ 9,293,944 $ 8,347,270
(concluded) A- A3 5,000,000 9.40% due 6/01/2002 5,503,450 5,395,325
AA Aa2 8,500,000 Kaiser Foundation Hospital, 9.55%
due 7/15/2005 9,561,225 9,312,175
Telecommunications, Inc.:
BBB- Baa3 10,000,000 8.25% due 1/15/2003 9,713,200 9,627,700
BBB- Baa3 2,500,000 9.80% due 2/01/2012 2,631,150 2,565,300
Time Warner Entertainment Co.:
BBB- Baa3 5,000,000 10.15% due 5/01/2012 5,308,050 5,198,775
BBB- Baa3 5,000,000 8.375% due 3/15/2023 5,281,450 4,353,400
------------- -------------
110,302,774 106,966,028
Supranational-- Asian Development Bank:
7.5% AAA Aaa 3,000,000 10.75% due 6/01/1997 3,302,730 3,258,885
AAA Aaa 9,000,000 9.125% due 6/01/2000 9,455,080 9,634,725
AAA Aaa 4,000,000 8.50% due 5/02/2001 4,299,200 4,155,200
European Investment Bank:
AAA Aaa 2,000,000 8.875% due 3/01/2001 2,380,320 2,112,520
AAA Aaa 4,000,000 9.125% due 6/01/2002 4,890,870 4,284,360
Inter-American Development Bank Co.:
AAA Aaa 8,000,000 8.875% due 6/01/2009 10,115,250 8,687,560
AAA Aaa 5,000,000 8.50% due 3/15/2011 5,955,170 5,100,250
AAA Aaa 5,000,000 7.125% due 3/15/2023 4,546,550 4,290,475
AAA Aaa 17,500,000 International Bank for Reconstruction &
Development, 12.375% due 10/15/2002 22,022,410 22,131,900
------------- -------------
66,967,580 63,655,875
Transportation-- Southwest Airlines, Inc.:
1.8% A- Baa1 10,000,000 9.40% due 7/01/2001 11,326,040 10,641,549
A- Baa1 2,000,000 8.75% due 10/15/2003 2,138,860 2,062,520
A- Baa1 3,000,000 7.875% due 9/01/2007 2,983,950 2,864,850
------------- -------------
16,448,850 15,568,919
Utilities-- BBB+ Baa1 4,000,000 GTE Corp., 9.10% due 6/01/2003 4,242,720 4,207,380
Communications-- A+ A1 5,000,000 General Telephone of California, Inc., 6.75%
4.8% due 3/15/2004 4,864,250 4,592,250
AA- Aa2 2,000,000 New England Telephone & Telegraph Co.,
8.625% due 8/01/2001 2,233,620 2,081,420
Pacific Bell, Inc.:
AA- Aa3 6,500,000 8.70% due 6/15/2001 6,582,540 6,781,352
AA- Aa3 3,000,000 7.25% due 7/01/2002 2,985,420 2,882,580
AA- Aa3 4,500,000 7.375% due 6/15/2025 4,602,510 3,893,490
A+ A1 2,000,000 Southwestern Bell Telecommunications
Corp., 6.125% due 3/01/2000 2,011,250 1,858,280
Sprint Corp.:
BBB Baa3 6,000,000 8.125% due 7/15/2002 6,104,220 5,978,760
BBB Baa3 8,736,000 9.25% due 4/15/2022 9,575,704 9,309,999
------------- -------------
43,202,234 41,585,511
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (concluded) Investment Grade Portfolio
<S> <S> <S> <C> <S> <C> <C>
Utilities-- Central Power & Light Co.:
Electric--4.2% A A2 $ 5,000,000 6% due 10/01/1997 $ 4,973,400 $ 4,815,450
A A2 5,000,000 7.50% due 4/01/2023 5,118,750 4,346,775
A A2 2,000,000 Georgia Power Co., 6.125% due 9/01/1999 1,961,420 1,880,980
BBB+ Baa1 3,425,000 PECO Energy Co., 8% due 4/01/2002 3,459,387 3,366,175
A- A2 8,000,000 Pennsylvania Power & Light Co.,
7.75% due 5/01/2002 8,388,270 7,890,840
AA- Aa3 5,000,000 TECO Energy, Inc., 9.27% due 6/12/2000 (a) 5,000,000 5,352,512
BBB Baa2 5,000,000 Texas Utilities Electric Co., 8.75%
due 11/01/2023 4,856,200 4,867,175
A A2 4,000,000 Virginia Electric & Power Co.,
6.75% due 10/01/2023 3,409,200 3,239,340
------------- -------------
37,166,627 35,759,247
Utilities-- Consolidated Natural Gas Co.:
Gas--1.0% AA- A1 1,000,000 9.375% due 2/01/1997 1,031,440 1,046,685
AA- A1 7,500,000 8.75% due 6/01/1999 7,450,660 7,792,500
------------- -------------
8,482,100 8,839,185
Total Investments in Bonds
& Notes--94.3% 836,883,453 800,308,685
<CAPTION>
Short-Term Securities
<S> <C> <S> <C> <C>
Repurchase 39,035,000 Bankers Trust Securities Co., purchased on
Agreements** 9/30/1994 to yield 4.80% to 10/03/1994 39,035,000 39,035,000
Total Investments in Short-Term
Securities--4.5% 39,035,000 39,035,000
Total Investments--98.8% $875,918,453 839,343,685
============
Other Assets Less Liabilities--1.2% 10,501,572
------------
Net Assets--100.0% $849,845,257
============
<FN>
*Corresponding industry groups for foreign securities, which are denominated in US dollars:
(1)Industrial Mining.
(2)Financial Institution; Government-Owned & Guaranteed.
(3)Government Entity; Guaranteed by Japan.
(4)Energy Company; not Guaranteed by Canada.
(5)Government Entity; Guaranteed by the Province.
(6)Government Entity; Guaranteed by Italy.
**Repurchase Agreements are fully collateralized by US Government Obligations.
(a)Medium-Term Note.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes Intermediate Term Portfolio
<S> <S> <S> <C> <S> <C> <C>
US Government United States Treasury Notes:
Obligations--7.8% AAA Aaa $ 1,500,000 8.50% due 11/15/2000 $ 1,615,625 $ 1,582,729
AAA Aaa 11,000,000 7.50% due 5/15/2002 11,037,344 11,010,257
AAA Aaa 12,000,000 7.25% due 8/15/2004 11,970,325 11,711,235
------------- -------------
24,623,294 24,304,221
Banking--10.5% First Interstate Bancorp.:
A- A3 4,500,000 11% due 3/05/1998 5,404,590 4,929,727
BBB+ Baa1 7,000,000 9.90% due 11/15/2001 8,552,250 7,613,677
A- A3 5,000,000 First Union Corp., 8% due 11/15/2002 5,002,240 4,953,200
Golden West Financial Corp.:
A- A3 4,000,000 9.15% due 5/23/1998 4,542,960 4,205,600
A- A3 1,000,000 8.375% due 4/15/2002 987,040 1,007,295
A- A3 2,000,000 Huntington Bancshares, Inc., 7.625%
due 1/15/2003 1,974,640 1,929,100
A+ A1 1,000,000 Norwest Corp., 6.625% due 3/15/2003 1,003,060 911,455
AA+ Aa2 5,000,000 Wachovia Corporation, 6.55% due 6/09/1997 4,996,350 4,937,072
A A2 2,000,000 World Savings and Loan Association,
9.90% due 7/01/2000 2,072,740 2,154,640
------------- -------------
34,535,870 32,641,766
Federal Federal National Mortgage Association:
Agencies--2.1% AAA Aaa 4,000,000 8.05% due 7/14/2004 3,996,875 3,914,980
NR NR 2,500,000 7.85% due 9/10/2004 2,496,484 2,443,737
------------- -------------
6,493,359 6,358,717
Financial Services-- BBB+ A3 8,000,000 Chrysler Financial Corp., 9.50% due 12/15/1999 9,275,380 8,540,720
Captive--4.2% Ford Motor Credit Co.:
A A2 2,000,000 7.25% due 5/15/1999 1,964,280 1,962,590
A A2 3,000,000 7.75% due 11/15/2002 3,032,570 2,938,470
------------- -------------
14,272,230 13,441,780
Financial Services-- American General Finance Corp.:
Consumer--5.2% A+ A1 1,500,000 8.50% due 8/15/1998 1,680,255 1,545,030
A+ A1 1,000,000 7.45% due 7/01/2002 997,800 963,890
A+ A1 3,500,000 6.375% due 3/01/2003 3,457,190 3,128,142
Associates Corp. of North America:
AA- A1 3,000,000 8.80% due 8/01/1998 3,380,730 3,115,530
AA- A1 1,500,000 7.50% due 5/15/1999 1,645,950 1,486,222
A+ A1 3,000,000 CIT Group Holdings, Inc., 5.162%
due 2/28/1997 2,998,020 3,009,870
A+ A1 3,000,000 Commercial Credit Co., 7.875%
due 7/15/2004 2,990,730 2,939,430
------------- -------------
17,150,675 16,188,114
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (continued) Intermediate Term Portfolio
<S> <S> <S> <C> <S> <C> <C>
Financial Services-- AAA Aaa $ 7,000,000 General Electric Capital Corp., 5.56%
Other--9.0% due 7/21/1997 $ 7,000,000 $ 7,030,028
A A3 3,000,000 Lehman Brothers, Inc., 7.375%
due 8/15/1997 2,996,100 2,972,445
Morgan Stanley Group Inc.:
A+ A1 2,500,000 9.375% due 6/15/2001 2,952,975 2,647,925
A+ A1 1,000,000 8.875% due 10/15/2001 1,159,640 1,036,825
PaineWebber Group Inc.:
BBB+ A3 2,000,000 6.25% due 6/15/1998 2,052,040 1,876,750
BBB+ A3 7,000,000 9.25% due 12/15/2001 8,174,550 7,231,525
2,000,000 Smith Barney Holdings, Inc., 7.875%
due 10/01/1999 1,993,080 1,991,240
A+ A3 1,000,000 Torchmark Corp., 9.625% due 5/01/1998 1,139,040 1,054,120
A+ A2 2,000,000 The Travelers Corp., 9.50% due 3/01/2002 2,168,400 2,142,710
------------- -------------
29,635,825 27,983,568
Foreign*--5.2% A+ A2 4,000,000 CRA Finance Ltd., 6.50% due 12/01/2003 (2) 4,006,020 3,542,760
AAA Aaa 1,500,000 Japan Finance Corp. for Municipal
Enterprises, 9.125% due 3/13/2000 (2) 1,654,665 1,603,080
AAA Aaa 2,000,000 Metropolis of Tokyo (Japan),
8.70% due 10/05/1999 (2) 2,312,940 2,091,230
BBB Baa1 5,000,000 Petro Canada, 8.60% due 10/15/2001 (4) 5,194,980 5,125,125
AA- Aa3 1,000,000 Province of Ontario (Canada) (5),
8% due 10/17/2001 1,080,710 999,890
A+ A1 3,000,000 Province of Quebec (Canada),
8.80% due 4/15/2003 (5) 3,114,060 3,063,420
------------- -------------
17,363,375 16,425,505
Industrial-- AA- A1 5,481,000 Anheuser-Busch Cos., Inc., 8.75%
Consumer due 12/01/1999 6,189,909 5,737,977
Goods--16.0% A+ A1 3,000,000 Bass America, Inc., 8.125% due 3/31/2002 3,095,170 3,013,650
Dillard Departent Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,191,980 3,950,740
A+ A2 1,000,000 7.15% due 9/01/2002 1,046,710 948,920
Grand Metropolitan Investment Corp.:
A+ A2 3,000,000 6.50% due 9/15/1999 3,040,120 2,849,430
A+ A2 3,000,000 8.625% due 8/15/2001 3,069,700 3,090,765
AA Aa2 3,000,000 McDonalds Corp., 7.80% due 10/01/2004 3,000,000 2,970,510
A+ A2 1,000,000 Penney (J.C.) Co., Inc., 6.875% due 6/15/1999 996,460 970,155
A A1 4,000,000 PepsiCo, Inc., 6.125% due 1/15/1998 3,972,240 3,859,520
BBB- Baa3 10,000,000 RJR Nabisco, Inc., 10.50% due 4/15/1998 10,656,900 10,611,000
Sears, Roebuck & Co.:
BBB+ Baa1 2,500,000 9.25% due 4/15/1998 2,837,275 2,630,675
BBB+ Baa1 7,000,000 8.45% due 11/01/1998 7,762,380 7,180,880
AA Aa1 2,000,000 Wal-Mart Stores, Inc., 8.625% due 4/01/2001 2,101,960 2,084,370
------------- -------------
51,960,804 49,898,592
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (continued) Intermediate Term Portfolio
<S> <S> <S> <C> <S> <C> <C>
Industrial-- A+ A1 $ 2,000,000 Atlantic Richfield Company, 10.375%
Energy--5.4% due 7/15/1995 $ 2,176,960 $ 2,061,450
AA- A1 1,000,000 BP America Inc., 7.875% due 5/15/2002 1,055,380 998,025
Burlington Resources, Inc.:
A- A3 5,000,000 7.15% due 5/01/1999 4,986,850 4,840,125
A- A3 3,500,000 9.625% due 6/15/2000 4,186,510 3,749,585
A- A3 1,000,000 8.50% due 10/01/2001 1,165,780 1,025,015
Texaco Capital Inc.:
A+ A1 2,000,000 6.875% due 7/15/1999 1,996,120 1,933,840
A+ A1 2,000,000 9% due 12/15/1999 2,342,460 2,111,030
------------ ------------
17,910,060 16,719,070
Industrial-- BBB- Baa3 4,000,000 Applied Materials Inc., 8% due 9/01/2004 3,970,760 3,892,400
Other--11.5% AA- A1 2,000,000 Capital Cities/ABC, Inc., 8.875%
due 12/15/2000 2,343,040 2,102,490
Carnival Cruise Lines, Inc.:
A- A3 1,000,000 6.15% due 10/01/2003 891,530 872,063
A- A3 1,000,000 7.70% due 7/15/2004 983,560 967,540
A- A3 2,000,000 International Paper Co., 9.40%
due 6/01/2002 2,201,380 2,158,130
AA Aa2 3,500,000 Kaiser Foundation Hospital, 9%
due 11/01/2001 3,881,070 3,681,072
BBB- Ba1 12,250,000 News America Holdings Inc., 7.50%
due 3/01/2000 12,173,963 11,740,032
BBB- Baa3 10,000,000 Telecommunications, Inc., 9.25%
due 4/15/2002 11,126,050 10,291,799
------------ ------------
37,571,353 35,705,526
Supranational-- Asian Development Bank:
3.8% AAA Aaa 2,000,000 9.125% due 6/01/2000 2,234,280 2,141,050
AAA Aaa 2,500,000 8.50% due 5/02/2001 2,687,000 2,597,000
AAA Aaa 4,800,000 European Investment Bank, 9.125%
due 6/01/2002 5,819,666 5,141,232
AAA Aaa 1,500,000 International Bank for Reconstruction &
Development, 12.375% due 10/15/2002 1,954,980 1,897,020
------------ ------------
12,695,926 11,776,302
Transportation Southwest Airlines, Inc.:
Services-- A- Baa1 6,500,000 9.40% due 7/01/2001 7,564,180 6,917,007
2.5% A- Baa1 1,000,000 8.75% due 10/15/2003 1,069,430 1,031,260
------------ ------------
8,633,610 7,948,267
Utilities-- A+ A1 6,000,000 General Telephone of California, Inc.,
Communications-- 6.75% due 3/15/2004 5,837,100 5,510,700
4.8% AA- Aa3 2,000,000 Pacific Bell, Inc., 8.70% due 6/15/2001 2,163,420 2,086,570
BBB Baa3 7,100,000 Sprint Corp., 8.125% due 7/15/2002 7,222,335 7,074,866
------------ ------------
15,222,855 14,672,136
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (concluded) Intermediate Term Portfolio
<S> <S> <S> <C> <S> <C> <C>
Utilities-- BBB+ Baa1 $ 4,000,000 Peco Energy Co., 8% due 4/01/2002 $ 4,040,160 $ 3,931,300
Electric--2.8% Pennsylvania Power & Light Co.:
A- A2 4,000,000 5.50% due 4/01/1998 3,991,280 3,762,340
A- A2 1,000,000 7.75% due 5/01/2002 1,043,980 986,355
------------ ------------
9,075,420 8,679,995
Utilities-- Consolidated Natural Gas Co.:
Gas--2.0% AA- A1 4,000,000 9.375% due 2/01/1997 4,125,760 4,186,740
AA- A1 2,000,000 8.75% due 6/01/1999 2,125,440 2,078,000
------------ ------------
6,251,200 6,264,740
Total Investments in Bonds
& Notes--92.8% 303,395,856 289,008,299
Short-Term Securities
Commercial 5,000,000 Prudential Funding Corp., 4.80%
Paper**--1.6% due 10/04/1994 4,999,333 4,999,333
Repurchase 11,951,000 Bankers Trust Securities Co., purchased
Agreements***--3.8% on 9/30/1994 to yield 4.80%
to 10/03/1994 11,951,000 11,951,000
Total Investments in Short-Term
Securities--5.4% 16,950,333 16,950,333
Total Investments--98.2% $320,346,189 305,958,632
============
Other Assets Less Liabilities--1.8% 5,474,826
------------
Net Assets--100.0% $311,433,458
============
<FN>
*Corresponding industry groups for foreign securities, which are denominated in US dollars:
(1)Industrial Mining.
(2)Financial Institution; Government-Owned & Guaranteed.
(3)Government Entity; Guaranteed by Japan.
(4)Energy Company; not Guaranteed by Canada.
(5)Government Entity; Guaranteed by Province.
See Notes to Financial Statements.
**Commercial Paper is traded on a discount basis; the interest rates shown are the discount rate paid at the time of
purchase by the Portfolio.
***Repurchase Agreements are fully collateralized by US Government Obligations.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statements of Assets and Liabilities as of September 30, 1994
<CAPTION>
High Income Investment Intermediate
Portfolio Grade Portfolio Term Portfolio
<S> <S> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $3,190,856,396 $839,343,685 $305,958,632
Cash -- 405,074 121,979
Receivables:
Interest 72,415,250 20,194,775 6,825,793
Securities sold 9,728,815 33,116,453 1,942,250
Capital shares sold 8,579,199 3,150,886 874,377
Loans -- 128,136 46,513
Paydowns 66,963 -- --
Prepaid registration fees and other assets (Note 1d) 1,089,245 58,450 70,435
-------------- ------------ ------------
Total assets 3,282,735,868 896,397,459 315,839,979
-------------- ------------ ------------
Liabilities: Payables:
Securities purchased 32,354,728 40,059,396 1,994,393
Capital shares redeemed 15,092,631 4,010,155 1,529,074
Dividends to shareholders (Note 1e) 7,919,680 1,628,140 607,468
Distributor (Note 2) 1,536,430 321,391 62,853
Investment adviser (Note 2) 1,177,054 277,136 101,803
Accrued expenses and other liabilities 860,174 255,984 110,930
-------------- ------------ ------------
Total liabilities 58,940,697 46,552,202 4,406,521
-------------- ------------ ------------
Net Assets: Net assets $3,223,795,171 $849,845,257 $311,433,458
============== ============ ============
Net Assets Class A Common Stock, $0.10 par value++ $11,450,163 $ 3,406,458 $ 1,562,326
Consist of: Class B Common Stock, $0.10 par value++++ 30,651,688 4,486,299 1,296,029
Paid-in capital in excess of par 3,346,281,234 911,532,433 332,363,694
Accumulated realized capital losses on investments--net (12,208,356) -- --
Accumulated distributions in excess of realized capital
losses on investment--net -- (33,005,165) (9,401,034)
Unrealized depreciation on investments--net (152,379,558) (36,574,768) (14,387,557)
-------------- ------------ ------------
Net assets $3,223,795,171 $849,845,257 $311,433,458
============== ============ ============
Net Asset Class A:
Value: Net assets $ 876,572,591 $366,791,802 $170,221,867
============== ============ ============
Shares outstanding 114,501,635 34,064,580 15,623,264
============== ============ ============
Net asset value and redemption price per share $ 7.66 $ 10.77 $ 10.90
============== ============ ============
Class B:
Net assets $2,347,222,580 $483,053,455 $141,211,591
============== ============ ============
Shares outstanding 306,516,876 44,862,991 12,960,285
============== ============ ============
Net asset value and redemption price per share $ 7.66 $ 10.77 $ 10.90
============== ============ ============
<FN>
*Identified cost $3,343,235,954 $875,918,453 $320,346,189
============== ============ ============
++Authorized shares--Class A 200,000,000 100,000,000 50,000,000
============== ============ ============
++++Authorized shares--Class B 500,000,000 100,000,000 50,000,000
============== ============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Operations for the Year Ended September 30, 1994
<CAPTION>
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C>
Investment Interest and discount earned $ 298,872,333 $ 64,292,316 $ 23,191,997
Income Dividends 3,461,781 -- --
(Note 1c): Loaned securities -- 212,602 82,200
Other 2,324,904 105 24
-------------- ------------ ------------
Total income 304,659,018 64,505,023 23,274,221
-------------- ------------ ------------
Expenses: Distribution fees--Class B (Note 2) 16,431,011 3,845,744 733,272
Investment advisory fees (Note 2) 12,959,206 3,316,386 1,218,082
Transfer agent fees--Class B (Note 2) 1,788,020 649,919 155,639
Transfer agent fees--Class A (Note 2) 648,149 443,994 176,770
Registration fees (Note 1d) 428,081 113,034 74,885
Accounting services (Note 2) 282,165 123,103 58,447
Printing and shareholder reports 291,533 90,968 31,526
Custodian fees 119,504 59,772 36,434
Professional fees 108,610 38,891 14,672
Pricing fees (Note 2) 25,428 16,808 10,084
Directors' fees and expenses 29,503 8,774 3,406
Amortization of organization expenses (Note 1d) 1,358 494 --
Other 28,395 7,938 2,414
-------------- ------------ ------------
Total expenses 33,140,963 8,715,825 2,515,631
-------------- ------------ ------------
Investment income--net 271,518,055 55,789,198 20,758,590
-------------- ------------ ------------
Realized & Realized gain (loss) on investments--net 13,337,857 (27,366,985) (8,401,311)
Unrealized Gain Change in unrealized appreciation/depreciation on
(Loss) on investments--net (218,088,489) (89,071,174) (27,976,092)
Investments--Net -------------- ------------ ------------
(Notes 1c & 3): Net Increase (Decrease) in Net Assets Resulting from
Operations $ 66,767,423 $(60,648,961) $(15,618,813)
============== ============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets High Income Portfolio
<CAPTION>
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 271,518,055 $ 191,944,836
Realized gain on investments--net 13,337,857 39,490,168
Change in unrealized appreciation/depreciation on investments--net (218,088,489) 30,800,724
-------------- --------------
Net increase in net assets resulting from operations 66,767,423 262,235,728
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (84,737,805) (77,067,944)
(Note 1e): Class B (186,780,250) (114,876,892)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (271,518,055) (191,944,836)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 718,487,003 1,108,612,505
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 513,736,371 1,178,903,397
Beginning of year 2,710,058,800 1,531,155,403
-------------- --------------
End of year $3,223,795,171 $2,710,058,800
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets Investment Grade Portfolio
<CAPTION>
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 55,789,198 $ 49,188,032
Realized gain (loss) on investments--net (27,366,985) 35,442,646
Change in unrealized appreciation/depreciation on investments--net (89,071,174) 12,048,232
-------------- --------------
Net increase (decrease) in net assets resulting from operations (60,648,961) 96,678,910
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (25,781,848) (24,831,019)
Shareholders Class B (30,007,350) (24,357,013)
(Note 1e): Realized gain on investments--net:
Class A (3,174,664) (4,865,108)
Class B (4,207,122) (5,004,106)
In excess of realized gain on investments--net:
Class A (14,194,438) --
Class B (18,810,727) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (96,176,149) (59,057,246)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 83,643,841 197,559,404
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (73,181,269) 235,181,068
Beginning of year 923,026,526 687,845,458
-------------- --------------
End of year $ 849,845,257 $ 923,026,526
============== ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets (concluded) Intermediate Term Portfolio
<CAPTION>
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C>
Operations: Investment income--net $ 20,758,590 $ 14,760,592
Realized gain on investments--net (8,401,311) 7,219,619
Change in unrealized appreciation/depreciation on investments--net (27,976,092) 6,890,072
-------------- --------------
Net increase (decrease) in net assets resulting from operations (15,618,813) 28,870,283
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (11,981,544) (10,854,121)
Shareholders Class B (8,777,046) (3,906,471)
(Note 1e): Realized gain on investments--net:
Class A -- (1,857,266)
Class B -- (293,192)
In excess of realized gain on investments--net:
Class A (4,476,067) --
Class B (3,477,851) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (28,712,508) (16,911,050)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 28,138,074 161,334,292
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (16,193,247) 173,293,525
Beginning of year 327,626,705 154,333,180
-------------- --------------
End of year $ 311,433,458 $ 327,626,705
============== ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights High Income Portfolio
<CAPTION>
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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52
Operating ---------- ---------- -------- -------- --------
Performance: Investment income--net .75 .79 .87 .92 1.00
Realized and unrealized gain (loss) on
investments--net (.47) .29 .82 .63 (1.13)
---------- ---------- -------- -------- --------
Total from investment operations .28 1.08 1.69 1.55 (.13)
---------- ---------- -------- -------- --------
Less dividends:
Investment income--net (.75) (.79) (.87) (.92) (1.00)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39
========== ========== ======== ======== ========
Total Based on net asset value per share 3.42% 14.35% 25.22% 26.46% (1.95%)
Investment ========== ========== ======== ======== ========
Return:*
Ratios to Expenses .53% .55% .59% .66% .68%
Average ========== ========== ======== ======== ========
Net Assets: Investment income--net 9.27% 9.78% 11.44% 14.13% 14.22%
========== ========== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 876,573 $ 886,784 $683,801 $522,703 $486,426
Data: ========== ========== ======== ======== ========
Portfolio turnover 32.52% 34.85% 40.52% 39.95% 47.60%
========== ========== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. Class B
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
Operating ---------- ---------- -------- -------- --------
Performance: Investment income--net .69 .72 .81 .87 .95
Realized and unrealized gain (loss) on
investments--net (.47) .28 .83 .62 (1.12)
---------- ---------- -------- -------- --------
Total from investment operations .22 1.00 1.64 1.49 (.17)
---------- ---------- -------- -------- --------
Less dividends:
Investment income--net (.69) (.72) (.81) (.87) (.95)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40
========== ========== ======== ======== ========
Total Based on net asset value per share 2.66% 13.35% 24.44% 25.32% (2.54%)
Investment ========== ========== ======== ======== ========
Return:*
Ratios to Expenses, excluding distribution fees .54% .56% .60% .67% .70%
Average ========== ========== ======== ======== ========
Net Assets: Expenses 1.29% 1.31% 1.35% 1.42% 1.45%
========== ========== ======== ======== ========
Investment income--net 8.53% 8.94% 10.42% 13.24% 13.69%
========== ========== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $2,347,223 $1,823,275 $847,354 $264,486 $157,979
Data: ========== ========== ======== ======== ========
Portfolio turnover 32.52% 34.85% 40.52% 39.95% 47.60%
========== ========== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued) Investment Grade Portfolio
<CAPTION>
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: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
Operating ---------- ---------- -------- -------- --------
Performance: Investment income--net .75 .81 .88 .92 .95
Realized and unrealized gain (loss) on
investments--net (1.49) .67 .71 .76 (.38)
---------- ---------- -------- -------- --------
Total from investment operations (.74) 1.48 1.59 1.68 .57
---------- ---------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.75) (.81) (.88) (.92) (.95)
Realized gain on investments--net (.10) (.16) -- -- --
In excess of realized gain on
investments--net (.45) - -- -- --
---------- ---------- -------- -------- --------
Total dividends and distributions (1.30) (.97) (.88) (.92) (.95)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83
========== ========== ======== ======== ========
Total Investment Based on net asset value per share (6.03%) 12.78% 14.30% 16.18% 5.22%
Return:* ========== ========== ======== ======== ========
Ratios to Expenses .53% .56% .58% .61% .64%
Average ========== ========== ======== ======== ========
Net Assets: Investment income--net 6.61% 6.94% 7.43% 8.26% 8.54%
========== ========== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 366,792 $ 407,625 $362,139 $324,818 $307,723
Data: ========== ========== ======== ======== ========
Portfolio turnover 159.05% 121.34% 65.43% 126.32% 126.39%
========== ========== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. Class B
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
Operating ---------- ---------- -------- -------- --------
Performance: Investment income--net .66 .72 .79 .84 .86
Realized and unrealized gain (loss) on
investments--net (1.49) .67 .71 .76 (.38)
---------- ---------- -------- -------- --------
Total from investment operations (.83) 1.39 1.50 1.60 .48
---------- ---------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.66) (.72) (.79) (.84) (.86)
Realized gain on investments--net (.10) (.16) -- -- --
In excess of realized gain on
investments--net (.45) -- -- -- --
---------- ---------- -------- -------- --------
Total dividends and distributions (1.21) (.88) (.79) (.84) (.86)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83
========== ========== ======== ======== ========
Total Investment Based on net asset value per share (6.73%) 11.92% 13.44% 15.30% 4.42%
Return:* ========== ========== ======== ======== ========
Ratios to Average Expenses, excluding distribution fees .54%* .54% .59% .62% .66%
Net Assets: ========== ========== ======== ======== ========
Expenses 1.29%* 1.29% 1.34% 1.37% 1.41%
========== ========== ======== ======== ========
Investment income--net 5.85%* 5.80% 6.65% 7.50% 7.77%
========== ========== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 483,053 $ 515,402 $325,706 $198,504 $174,914
Data: ========== ========== ======== ======== ========
Portfolio turnover 159.05% 121.34% 65.43% 126.32% 126.39%
========== ========== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded) Intermediate Term 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: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05
Operating ---------- ---------- -------- -------- --------
Performance: Investment income--net .75 .76 .88 .93 .97
Realized and unrealized gain (loss) on
investments--net (1.26) .55 .62 .53 (.17)
---------- ---------- -------- -------- --------
Total from investment operations (.51) 1.31 1.50 1.46 .80
---------- ---------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.75) (.76) (.88) (.93) (.97)
Realized gain on investments--net -- (.14) -- -- --
In excess of realized gain on
investments--net (.28) -- -- -- --
---------- ---------- -------- -------- --------
Total dividends and distributions (1.03) (.90) (.88) (.93) (.97)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88
========== ========== ======== ======== ========
Total Based on net asset value per share (4.25%) 11.40% 13.71% 13.97% 7.55%
Investment ========== ========== ======== ======== ========
Return:**
Ratios to Expenses .53% .58% .62% .67% .71%
Average ========== ========== ======== ======== ========
Net Assets: Investment income--net 6.48% 6.42% 7.54% 8.35% 8.86%
========== ========== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 170,222 $ 193,505 $154,333 $103,170 $ 88,248
Data: ========== ========== ======== ======== ========
Portfolio turnover 155.42% 180.52% 95.33% 132.56% 102.53%
========== ========== ======== ======== ========
<CAPTION>
Class B
The following per share data and ratios have been derived from For the For the Period
information provided in the financial statements. Year Ended Nov. 13, 1992++
September 30, to Sept. 30,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 12.44 $ 11.68
Operating -------- --------
Performance: Investment income--net .69 .61
Realized and unrealized gain (loss) on investments--net (1.26) .90
-------- --------
Total from investment operations (.57) 1.51
-------- --------
Less dividends and distributions:
Investment income--net (.69) (.61)
Realized gain on investments--net -- (.14)
In excess of realized gain on investments--net (.28) --
-------- --------
Total dividends and distributions (.97) (.75)
-------- --------
Net asset value, end of year $ 10.90 $ 12.44
======== ========
Total Investment Based on net asset value per share (4.72%) 13.31%+++
Return:** ======== ========
Ratios to Average Expenses, excluding distribution fees .54% .57%*
Net Assets: ======== ========
Expenses 1.04% 1.07%*
======== ========
Investment income--net 5.98% 5.61%*
======== ========
Supplemental Net assets, end of period (in thousands) $141,212 $134,122
Data: ======== ========
Portfolio turnover 155.42% 180.52%
======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<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 manage-
ment company consisting of three separate portfolios:
the High Income Portfolio, the Investment Grade Port-
folio (formerly known as the High Quality Portfolio)
and the Intermediate Term Portfolio. The Fund's
Portfolios offer Class A and Class B Shares. Class A
Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales
charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same
terms and conditions, except that Class B Shares bear
certain expenses related to the distribution of such
shares and have exclusive voting rights with respect
to matters relating to such distribution expenditures.
On September 27, 1994, shareholders approved
the implementation of the Merrill Lynch Select
Pricing SM System, which will offer two new classes of
shares, Class C and Class D. The following is a sum-
mary 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 equiva-
lent 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 value.
Options on debt securities, which are traded on
exchanges, are valued at the last asked price for options
written and last bid price for options purchased. Inter-
est 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 pric-
ing service retained by the Fund which may use a
matrix system for valuations. Written and purchased
options are non-income producing investments.
(b) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to
distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provi-
sion is required.
(c) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Divi-
dend income is recorded on the ex-dividend dates.
Interest income (including amortization of discount) is
recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the
identified cost basis.
(d) Deferred organization expenses and prepaid regis-
tration fees--Costs related to the organization of
the second class of shares for the Intermediate Term
Portfolio 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, L.P. ("FAM").
Effective January 1, 1994, the investment advisory busi-
ness of FAM was reorganized from a corporation to a
limited partnership. Both prior to and after the reor-
ganization, ultimate control of FAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The
limited partners are ML & Co. and Fund Asset Manage-
ment, Inc. ("FAMI"), which is also an indirect wholly-
owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribu-
tion Plan with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary
of FAMI.
FAM is responsible for the management of the Fund's
Portfolios and provides the necessary personnel, facili-
ties, equipment and certain other services necessary to
the operations of the Fund. For such services, FAM
receives at the end of each month a fee with respect to
each Portfolio at the annual rates set forth below which
are based upon the average daily value of the Fund's
net assets.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Rate of Advisory Fee
Aggregate of Average
Daily Net Assets of High Investment Intermediate
the Three Combined Income Grade Term
Portfolios Portfolio Portfolio Portfolio
Not exceeding $250 million 0.55% 0.50% 0.50%
In excess of $250 million but
not more than $500 million 0.50 0.45 0.45
In excess of $500 million but
not more than $750 million 0.45 0.40 0.40
In excess of $750 million 0.40 0.35 0.35
The Investment Advisory Agreement obligates FAM to
reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage
fees and commissions, and extraordinary items) exceed
2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the Fund's next $70 million of average
daily net assets, and 1.5% of the average daily net assets
in excess thereof. No fee payment will be made to the
Investment Adviser during any fiscal year which will
cause such expenses to exceed the pro rata expense
limitation at the time of such payment.
Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund in accordance with Rule 12b-1
under the Investment Company Act of 1940, the Fund
pays the Distributor 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 mainte-
nance 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, Pierce Fenner &
Smith Inc. ("MLPF&S") also provides account mainte-
nance and distribution services to the Fund. As author-
ized by the Plan, the Distributor has entered into an
agreement with MLPF&S, an affiliate of MLAM, which
provides for the compensation of MLPF&S for providing
distribution-related services to the Fund.
For the year ended September 30, 1994, MLFD earned
underwriting discounts and MLPF&S earned dealer
concessions on sales of the Fund's Class A Shares
as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
MLFD $ 189,125 $ 40,161 $ 23,177
MLPF&S $2,223,578 $455,743 $237,698
MLPF&S received contingent deferred sales charges of
$5,211,746 relating to transactions in Class B Shares,
amounting to $3,919,228, $1,034,183 and $258,335 in the
High Income, Investment Grade and Intermediate Term
Portfolios, respectively, and $5,313 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 ML & Co., is the Fund's transfer
agent.
During the period June 6, 1994 to September 30, 1994,
Merrill Lynch Security Pricing Service, an affiliate of
MLPF&S, provided security price quotations to the
Fund.
Accounting services are provided to the Fund by FAM
at cost.
Certain officers and/or directors of the Fund are
officers and/or directors of FAM, PSI, FAMI, MLFD,
FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the year ended September 30, 1994
were as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Purchases $1,538,635,304 $1,377,689,160 $491,164,365
============== ============== ============
Sales $ 930,099,692 $1,326,195,157 $471,900,439
============== ============== ============
Net realized and unrealized gains (losses) as of
September 30, 1994 were as follows:
Realized Unrealized
High Income Portfolio Gains Losses
Long-term investments $ 13,337,857 $ (152,379,558)
------------- --------------
Total $ 13,337,857 $ (152,379,558)
============= ==============
Realized Unrealized
Investment Grade Portfolio Losses Losses
Long-term investments $ (27,366,985) $ (36,574,768)
------------- --------------
Total $ (27,366,985) $ (36,574,768)
============= ==============
Realized Unrealized
Intermediate Term Portfolio Losses Losses
Long-term investments $ (8,401,005) $ (14,387,557)
Short-term investments (306) --
------------- --------------
Total $ (8,401,311) $ (14,387,557)
============= ==============
<PAGE>
As of September 30, 1994, net unrealized appreciation
(depreciation) for Federal income tax purposes was
as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Gross unrealized
appreciation $ 55,636,862 $ 2,660,665 $ 226,078
Gross unrealized
depreciation (208,294,118) (39,642,235) (14,745,966)
------------ ------------ ------------
Net unrealized
depreciation $152,657,256) $(36,981,570) $(14,519,888)
============ ============ ============
The aggregate cost of investments at September 30,
1994 for Federal income tax purposes was $3,343,513,652
for the High Income Portfolio, $876,325,255 for the
Investment Grade Portfolio, and $320,478,520 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, 1994,
was $718,487,003 for the High Income Portfolio,
$83,643,841 for the Investment Grade Portfolio and
$28,138,074 for the Intermediate Term Portfolio. Net
increase in net assets derived from capital share trans-
actions for the year ended September 30, 1993 was
$1,108,612,505 for the High Income Portfolio,
$197,559,404 for the Investment Grade Portfolio and
$161,334,292 for the Intermediate Term Portfolio.
Transactions in capital shares were as follows:
High Income Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 24,265,055 $ 196,408,023
Shares issued to shareholders in
reinvestment of dividends 5,410,880 43,484,905
------------ --------------
Total issued 29,675,935 239,892,928
Shares redeemed (24,265,005) (195,021,899)
------------ --------------
Net increase 5,410,930 $ 44,871,029
============ ==============
High Income Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 34,759,978 $ 277,722,778
Shares issued to shareholders in
reinvestment of dividends 4,969,045 39,803,859
------------ --------------
Total issued 39,729,023 317,526,637
Shares redeemed (17,827,332) (142,464,560)
------------ --------------
Net increase 21,901,691 $ 175,062,077
============ ==============
High Income Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 139,760,948 $1,132,873,066
Shares issued to shareholders in
reinvestment of dividends 10,902,859 87,436,254
------------ --------------
Total issued 150,663,807 1,220,309,320
Shares redeemed (68,376,686) (546,693,346)
------------ --------------
Net increase 82,287,121 $ 673,615,974
============ ==============
High Income Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1994 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
============ ==============
Investment Grade Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 8,030,423 $ 93,135,987
Shares issued to shareholders in
reinvestment of dividends
& distributions 2,562,146 29,991,889
------------ --------------
Total issued 10,592,569 123,127,876
Shares redeemed (8,336,799) (96,592,992)
------------ --------------
Net increase 2,255,770 $ 26,534,884
============ ==============
Investment Grade Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 7,448,640 $ 91,703,707
Shares issued to shareholders in
reinvestment of dividends
& distributions 1,704,681 20,844,343
------------ --------------
Total issued 9,153,321 112,548,050
Shares redeemed (6,795,967) (83,737,710)
------------ --------------
Net increase 2,357,354 $ 28,810,340
============ ==============
Investment Grade Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 15,835,177 $ 185,447,332
Shares issued to shareholders in
reinvestment of dividends
& distributions 2,940,143 34,360,112
------------ --------------
Total issued 18,775,320 219,807,444
Shares redeemed (14,132,989) (162,698,487)
------------ --------------
Net increase 4,642,331 $ 57,108,957
============ ==============
<PAGE>
Investment Grade Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 20,946,711 $ 257,900,677
Shares issued to shareholders in
reinvestment of dividends
& distributions 1,496,071 18,304,113
------------ --------------
Total issued 22,442,782 276,204,790
Shares redeemed (8,711,514) (107,455,726)
------------ --------------
Net increase 13,731,268 $ 168,749,064
============ ==============
Intermediate Term Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 3,674,523 43,208,064
Shares issued to shareholders in
reinvestment of dividends
& distributions 932,160 10,823,344
------------ --------------
Total issued 4,606,683 54,031,408
Shares redeemed (4,535,150) (52,574,546)
------------ --------------
Net increase 71,533 $ 1,456,862
============ ==============
Intermediate Term Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 5,149,248 $ 61,875,256
Shares issued to shareholders in
reinvestment of dividends
& distributions 707,534 8,452,204
------------ --------------
Total issued 5,856,782 70,327,460
Shares redeemed (3,139,330) (37,802,328)
------------ --------------
Net increase 2,717,452 $ 32,525,132
============ ==============
Intermediate Term Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 6,504,586 $ 75,947,813
Shares issued to shareholders in
reinvestment of dividends
& distributions 605,926 7,028,720
------------ --------------
Total issued 7,110,512 82,976,533
Shares redeemed (4,928,956) (56,295,321)
------------ --------------
Net increase 2,181,556 $ 26,681,212
============ ==============
Intermediate Term Portfolio
Class B Shares for the Period
Novermber 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
& 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, 1994, the Investment Grade Portfolio
held US Treasury Bonds/Notes having an aggregate
value of approximately $10,209,000 as collateral for
Portfolio securities loaned, having a market value of
approximately $9,817,000. The Intermediate Term
Portfolio held US Treasury Bonds/Notes having an aggre-
gate value of approximately $12,194,000 as collateral for
Portfolio securities loaned, having a market value of
approximately $11,711,000.
6. Capital Loss Carryforward:
At September 30, 1994, the Fund had a capital loss
carryforward of approximately $14,496,000 in the High
Income Portfolio, all of which expires in 1999. This
will be available to offset like amounts of any future
taxable gains.
<PAGE>
[This page intentionally left blank.]
83
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................ 2
Transactions in Futures and Options Thereon.............................. 2
Options on Debt Securities............................................... 3
Risk Factors in Transactions in Futures and Options Thereon.............. 4
Investment Restrictions................................................... 6
Management of the Fund.................................................... 10
Directors and Officers................................................... 10
Investment Advisory Arrangements......................................... 12
Duration and Termination................................................. 15
Transfer Agency Services Arrangements.................................... 15
Determination of Net Asset Value.......................................... 15
Portfolio Transactions.................................................... 16
Portfolio Turnover....................................................... 17
Purchase of Shares........................................................ 18
Alternative Sales Arrangements........................................... 18
Initial Sales Charge Alternative--Class A and Class D Shares............. 18
Reduced Initial Sales Charges--Class A and Class D Shares................ 19
Deferred Sales Charge Alternative--Class B Shares........................ 23
Redemption of Shares...................................................... 24
Repurchase............................................................... 24
Reinstatement Privilege.................................................. 24
Deferred Sales Charge--Class B Shares.................................... 25
Dividends, Distributions and Taxes........................................ 26
Dividends and Distributions.............................................. 26
Federal Income Taxes..................................................... 26
Tax Treatment of Transactions in Options on Debt Securities, Futures
Contracts and Options Thereon........................................... 27
Systematic Withdrawal Plans............................................... 28
Retirement Plans.......................................................... 29
Exchange Privilege........................................................ 31
Performance Data.......................................................... 43
Additional Information.................................................... 47
Organization of the Fund................................................. 47
Computation of Offering Price Per Share.................................. 47
Appendix................................................................. 49
Interest Rate Futures, Options Thereon and Options on Debt Securities.... 49
Independent Auditors' Report.............................................. 52
Financial Statements...................................................... 53
</TABLE>
Code #10210-0195
(LOGO)
Merrill Lynch Corporate Bond Fund, Inc.
(ART)
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
