<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1996.
FILE NO. 2-62329
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 22 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 20 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
FUND ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
CALCULATION OF REGISTRATION FEE
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF CLASS A SHARES, CLASS B
SHARES, CLASS C SHARES AND CLASS D SHARES OF INTERMEDIATE TERM PORTFOLIO COMMON
STOCK, HIGH INCOME PORTFOLIO COMMON STOCK AND HIGH QUALITY PORTFOLIO COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON NOVEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC.
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM LOCATION
---- --------
<C> <S> <C>
PART A
1. Cover Page.................... Cover Page
2. Synopsis...................... Fee Table
3. Financial Highlights.......... Financial Highlights; Performance Data
4. General Description of
Registrant................... Investment Objectives and Policies;
Investment Policies of the
Portfolios; Additional Information
5. Management of the Fund........ Fee Table; Investment Adviser;
Directors; Portfolio Transactions;
Additional Information
5A. Management's Discussion of
Fund Performance............. *
6. Capital Stock and Other
Securities................... Cover Page; Dividends, Distributions
and Taxes; Additional Information
7. Purchase of Securities Being
Offered...................... Fee Table; Purchase of Shares; Merrill
Lynch Select Pricing SM System;
Additional Information
8. Redemption or Repurchase...... Fee Table; Redemption of Shares;
Merrill Lynch Select Pricing SM
System; Shareholder Services
*9. Pending Legal Proceedings..... *
PART B
10. Cover Page.................... Cover Page
11. Table of Contents............. Table of Contents
12. General Information and
History...................... Additional Information
13. Investment Objectives and
Policies..................... Investment Objectives and Policies;
Investment Restrictions; Portfolio
Transactions
14. Management of the Fund........ Management of the Fund
*15. Control Persons and Principal
Holders of Securities........ *
16. Investment Advisory and Other
Services..................... Management of the Fund; Purchase of
Shares
17. Brokerage Allocation and Other
Practices.................... Portfolio Transactions
*18. Capital Stock and Other
Securities................... *
19. Purchase, Redemption and
Pricing of Securities Being
Offered...................... Purchase of Shares; Determination of
Net Asset Value; Redemption of
Shares; Systematic Withdrawal Plans;
Retirement Plans; Exchange Privilege;
Additional Information
20. Tax Status.................... Dividends, Distributions and Taxes
21. Underwriters.................. Distributor
22. Calculation of Performance
Data......................... Performance Data
23. Financial Statements.......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
- --------
* Item inapplicable or answer negative.
<PAGE>
PROSPECTUS
JANUARY 26, 1996
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:
The High Income Portfolio may invest substantially all of its assets 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 Ratings Group), or in unrated securities of
comparable quality. Lower rated securities, commonly known as "junk bonds,"
generally involve greater risks, including risk of default, volatility of price
and risks to principal and income, than securities in the higher rating
categories. Investors should consider these risks carefully before investing.
See "Investment Policies of the Portfolios," p. 17.
Investment Grade Portfolio invests primarily in long-term corporate bonds
rated A or better by either Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group. 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.
(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 26, 1996,
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)
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 Ratings Group) 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.
For more information on the Fund's investment objective and policies, please
see "Investment Objectives and Policies" on page 17.
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.
Shares of the Fund's Portfolios may be purchased directly from the
Distributor, P.O. Box 9081, Princeton, New Jersey 08543-9081, (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
----------------------------------------- -----------------------------------------
CLASS A(a) CLASS B(b) CLASS C CLASS D CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- ------- ---------- ---------- ------- -------
<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%(c) None None 4.00%(c) 4.00%(c) None None 4.00%(c)
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(e) 4.00%(j) 1.00%(k) None(e) None(e) 4.00%(j) 1.00%(k) None(e)
Exchange Fee..... None None None None None None None None
Annual Portfolio
Operating
Expenses(f):
Investment
Adviser Fees(g).. 0.41% 0.41% 0.41% 0.41% 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account
Maintenance Fees. None 0.25% 0.25% 0.25% None 0.25% 0.25% 0.25%
Distribution
Fees............. None 0.50%(l) 0.55% None None 0.50%(l) 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(i)......... 0.09% 0.11% 0.12% 0.10% 0.16% 0.18% 0.18% 0.16%
Other Fees....... 0.04% 0.04% 0.04% 0.04% 0.05% 0.05% 0.05% 0.05%
----- ----- ----- ----- ----- ----- ----- -----
Total Other
Expenses........ 0.14% 0.16% 0.17% 0.15% 0.22% 0.24% 0.24% 0.22%
----- ----- ----- ----- ----- ----- ----- -----
Total Portfolio
Operating
Expenses......... 0.55% 1.32% 1.38% 0.81% 0.58% 1.35% 1.40% 0.83%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
---------------------------------------------
CLASS A(a) CLASS B(b) CLASS C(m) CLASS D
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of
offering price).. 1.00%(d) None None 1.00%(d)
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(e) 1.00%(k) 1.00%(k) None(e)
Exchange Fee..... None None None None
Annual Portfolio
Operating
Expenses(f):
Investment
Adviser Fees(g).. 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account
Maintenance Fees. None 0.25% 0.25% 0.10%
Distribution
Fees............. None 0.25%(l) 0.25% None
Other Expenses:
Custodial Fees... 0.01% 0.01% 0.01% 0.01%
Shareholder
Servicing
Costs(i)......... 0.14% 0.16% 0.19% 0.15%
Other Fees....... 0.08% 0.08% 0.08% 0.08%
----- ----- ----- -----
Total Other
Expenses........ 0.23% 0.25% 0.28% 0.24%
----- ----- ----- -----
Total Portfolio
Operating
Expenses......... 0.59% 1.11% 1.14% 0.70%
===== ===== ===== =====
</TABLE>
- ----
(a) 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 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 36.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33.
(d) 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 but
instead may be subject to a .20% CDSC for one year. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 33.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more 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.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended September 30, 1995. Information for Class C and Class D shares is
stated for the period October 21, 1994 (commencement of operations) to
September 30, 1995.
(g) See "Investment Adviser"--page 28.
(h) See "Purchase of Shares--Distribution Plans"--page 41.
(i) See "Additional Information--Transfer Agency Services"--page 57.
(j) Decreasing 1.0% annually thereafter to 0.0% after the fourth year.
(k) Decreasing 1.0% annually thereafter to 0.0% after the first year.
(l) Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
(m) Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege. See page 51.
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 and
Class D shares of the
High Income Portfolio and
Investment Grade
Portfolio the maximum $40
front-end sales charge
and for shares of the
Intermediate Term
Portfolio the maximum $10
front-end sales charge
and assuming (i) the
operating expense ratio
set forth opposite the
Portfolio or Class
thereof, (ii) a 5% annual
return throughout the
periods indicated and
(iii) redemption at the
end of the period:
High Income Portfolio
Class A................. $45 $57 $70 $106
Class B................. $53 $62 $72 $159
Class C................. $24 $44 $76 $166
Class D................. $48 $65 $83 $136
Investment Grade Portfolio
Class A................. $46 $58 $71 $110
Class B................. $54 $63 $74 $162
Class C................. $24 $44 $77 $168
Class D................. $48 $65 $84 $138
Intermediate Term
Portfolio
Class A................. $16 $29 $43 $ 83
Class B................. $21 $35 $61 $135
Class C*................ $22 $36 $63 $139
Class D................. $17 $32 $49 $ 96
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
High Income Portfolio
Class A................. $45 $57 $70 $106
Class B................. $13 $42 $72 $159
Class C................. $14 $44 $76 $166
Class D................. $48 $65 $83 $136
Investment Grade Portfolio
Class A................. $46 $58 $71 $110
Class B................. $14 $43 $74 $162
Class C................. $14 $44 $77 $168
Class D................. $48 $65 $84 $138
Intermediate Term
Portfolio
Class A................. $16 $29 $43 $ 83
Class B................. $11 $35 $61 $135
Class C*................ $12 $36 $63 $139
Class D................. $17 $32 $49 $ 96
</TABLE>
- --------
* 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, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead may be
subject to a 1.0% CDSC for one year. See "Class A" and "Class D".
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was 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".
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was 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. 51.
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 of a
Portfolio in a shareholder account are entitled to purchase
additional Class A shares of that Portfolio 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, and
waived for purchases of Class A shares by certain retirement plans in
connection with certain investment programs, for the High Income and
Investment Grade Portfolios or $100,000 for the Intermediate Term
Portfolio. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived such
purchases will be subject to a contingent deferred sales charge
7
<PAGE>
("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 the
conversion and holding periods for certain retirement plans is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C: Class C shares of 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, except that there is no waiver for purchases by retirement plans
in connection with certain investment programs. Class D shares also will
be issued upon conversion of Class B shares as described above under
"Class B". See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing 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 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, 1995, and the independent
auditors' report thereon, are included in the Statement of Additional
Information. Financial information for Class C and D shares is for the period
October 21, 1994 (commencement of operations) to September 30, 1995. Further
information about the performance of each Portfolio is contained in the Fund's
Annual Report, which can be obtained, without charge, upon request.
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,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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 year...... $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28 $ 8.15
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .81 .75 .79 .87 .92 1.00 .95 .96 .95 .99
Realized and unrealized
gain (loss) on
investments--net....... .14 (.47) .29 .82 .63 (1.13) (.37) (.15) (.23) .13
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .95 .28 1.08 1.69 1.55 (.13) .58 .81 .72 1.12
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends
from investment
income--net............ (.81) (.75) (.79) (.87) (.92) (1.00) (.96) (.96) (.95) (.99)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 7.80 $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 13.26% 3.42% 14.35% 25.22% 26.46% (1.95%) 7.69% 10.82% 8.82% 14.30%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .55% .53% .55% .59% .66% .68% .66% .64% .65% .71%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 10.70% 9.27% 9.78% 11.44% 14.13% 14.22% 12.30% 12.33% 11.31% 11.68%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $902,321 $876,573 $886,784 $683,801 $522,703 $486,426 $641,619 $759,403 $811,558 $597,379
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 24.58% 32.52% 34.85% 40.52% 39.95% 47.60% 56.00% 38.99% 56.95% 32.97%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
11
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
HIGH INCOME PORTFOLIO
THE FOLLOWING
PER SHARE
DATA AND
RATIOS HAVE
BEEN DERIVED
FROM
INFORMATION
PROVIDED IN
THE FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
--------------------------------------------------------------------------- -------- --------
FOR THE
PERIOD FOR THE PERIOD
OCT. 21, OCTOBER 21,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO 1994+ TO
---------------------------------------------------------------- SEPT. 30, SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1995
---------- ---------- ---------- -------- -------- -------- --------- ------------------
<S> <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.... $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92 $ 7.59 $ 7.59
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Investment income--net.. .75 .69 .72 .81 .87 .95 .86 .71 .75
Realized and unrealized
gain (loss) on
investments--net....... .14 (.47) .28 .83 .62 (1.12) (.40) .22 .21
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .89 .22 1.00 1.64 1.49 (.17) .46 .93 .96
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Less dividends from
investment
income--net............. (.75) (.69) (.72) (.81) (.87) (.95) (.86) (.71) (.75)
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.80 $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.81 $ 7.80
========== ========== ========== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 12.42% 2.66% 13.35% 24.44% 25.32% (2.54%) 6.08%# 12.93%# 13.37%#
========== ========== ========== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... .57% .54% .56% .60% .67% .70% .70%* .58%* .56%*
========== ========== ========== ======== ======== ======== ======== ======== ========
Expenses................ 1.32% 1.29% 1.31% 1.35% 1.42% 1.45% 1.45%* 1.38%* .81%*
========== ========== ========== ======== ======== ======== ======== ======== ========
Investment income--net.. 9.81% 8.53% 8.94% 10.42% 13.24% 13.69% 11.75%* 9.06%* 9.70%*
========== ========== ========== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $3,220,767 $2,347,223 $1,823,275 $847,354 $264,486 $157,979 $120,969 $135,019 $102,676
========== ========== ========== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 24.58% 32.52% 34.85% 40.52% 39.95% 47.60% 56.00% 24.58% 24.58%
========== ========== ========== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
12
<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,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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 year...... $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69 $ 10.93
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .80 .75 .81 .88 .92 .95 1.00 .99 .99 1.11
Realized and unrealized
gain (loss) on
investments--net....... .74 (1.49) .67 .71 .76 (.38) .17 .43 (1.08) .76
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 1.54 (.74) 1.48 1.59 1.68 .57 1.17 1.42 (.09) 1.87
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.80) (.75) (.81) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11)
Realized gain on
investments--net....... -- (.10) (.16) -- -- -- -- -- -- --
In excess of realized
gain on investments--
net.................... -- (.45) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (.80) (1.30) (.97) (.88) (.92) (.95) (1.00) (.99) (.99) (1.11)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 14.92% (6.03%) 12.76% 14.30% 16.18% 5.22% 11.11% 13.75% (1.14%) 17.66%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .58% .53% .56% .58% .61% .64% .66% .60% .59% .66%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 7.30% 6.61% 6.94% 7.43% 8.26% 8.54% 9.04% 9.02% 8.52% 9.51%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $472,388 $366,792 $407,625 $362,139 $324,818 $307,723 $289,804 $258,435 $238,637 $224,820
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 108.07% 159.05% 121.34% 65.43% 126.32% 126.39% 212.85% 174.99% 126.19% 93.76%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
13
<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 B CLASS C CLASS D
------------------------------------------------------------------------- ------- -------
FOR THE
PERIOD FOR THE PERIOD
OCTOBER 21, OCTOBER 21,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO 1994+ TO
---------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1995
-------- -------- -------- -------- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08 $ 10.67 $ 10.67
-------- -------- -------- -------- -------- -------- ------- ------- -------
Investment income--net.. .72 .66 .72 .79 .84 .86 .87 .67 .73
Realized and unrealized
gain (loss) on
investments--net....... .74 (1.49) .67 .71 .76 (.38) .13 .84 .84
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total from investment
operations............. 1.46 (.83) 1.39 1.50 1.60 .48 1.00 1.51 1.57
-------- -------- -------- -------- -------- -------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. (.72) (.66) (.72) (.79) (.84) (.86) (.87) (.67) (.73)
Realized gain on
investments--net....... -- (.10) (.16) -- -- -- -- -- --
In excess of realized
gain on investments--
net.................... -- (.45) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total dividends and
distributions.......... (.72) (1.21) (.88) (.79) (.84) (.86) (.87) (.67) (.73)
-------- -------- -------- -------- -------- -------- ------- ------- -------
Net asset value, end of
year................... $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.51 $ 11.51
======== ======== ======== ======== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 14.05% (6.73%) 11.91% 13.44% 15.30% 4.42% 9.44%# 14.61%# 15.21%#
======== ======== ======== ======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... .60% .54% .54% .59% .62% .66% .70%* .60%* .58%*
======== ======== ======== ======== ======== ======== ======= ======= =======
Expenses................ 1.35% 1.29% 1.29% 1.34% 1.37% 1.41% 1.45%* 1.40%* .83%*
======== ======== ======== ======== ======== ======== ======= ======= =======
Investment income--net.. 6.52% 5.85% 5.80% 6.65% 7.50% 7.77% 8.17%* 6.27%* 6.91%*
======== ======== ======== ======== ======== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $631,517 $483,053 $515,402 $325,706 $198,504 $174,914 $91,914 $25,778 $25,153
======== ======== ======== ======== ======== ======== ======= ======= =======
Portfolio turnover...... 108.07% 159.05% 121.34% 65.43% 126.32% 126.39% 212.85% 108.07% 108.07%
======== ======== ======== ======== ======== ======== ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
14
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
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,
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
<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 year...... $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69 $ 10.86
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
Investment income--net.. .79 .75 .76 .88 .93 .97 .98 .96 .94 1.07
Realized and unrealized
gain (loss) on
investments--net....... .60 (1.26) .55 .62 .53 (.17) .05 .31 (.99) .83
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
Total from investment
operations............. 1.39 (.51) 1.31 1.50 1.46 .80 1.03 1.27 (.05) 1.90
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.79) (.75) (.76) (.88) (.93) (.97) (.99) (.96) (.94) (1.07)
Realized gain on
investments--net....... -- -- (.14) -- -- -- -- -- -- --
In excess of realized
gain on investments--
net.................... -- (.28) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
Total dividends and
distributions.......... (.79) (1.03) (.90) (.88) (.93) (.97) (.99) (.96) (.94) (1.07)
-------- -------- -------- -------- -------- ------- ------- ------- -------- --------
Net asset value, end of
year................... $ 11.50 $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 13.32% (4.25%) 11.39% 13.71% 13.97% 7.55% 9.79% 12.25% (0.72%) 18.09%
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .59% .53% .58% .62% .67% .71% .72% .62% .61% .62%
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
Investment income--net.. 7.14% 6.48% 6.42% 7.54% 8.35% 8.86% 8.97% 8.83% 8.09% 9.12%
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $217,714 $170,222 $193,505 $154,333 $103,170 $88,248 $87,001 $97,577 $111,207 $105,919
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
Portfolio turnover...... 142.84% 155.42% 180.52% 95.33% 132.56% 102.53% 148.75% 152.41% 152.53% 67.12%
======== ======== ======== ======== ======== ======= ======= ======= ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
15
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
INTERMEDIATE TERM PORTFOLIO
THE FOLLOWING
PER SHARE
DATA AND
RATIOS HAVE
BEEN DERIVED
FROM
INFORMATION
PROVIDED IN
THE FINANCIAL
STATEMENTS:
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
----------------------------- ------- -------
FOR THE
FOR THE YEAR PERIOD FOR THE PERIOD
ENDED NOV. 13, OCTOBER 21,
SEPTEMBER 30, 1992+ TO 1994+ TO
------------------ SEPT. 30, SEPTEMBER 30,
1995 1994 1993 1995
-------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET AS-
SET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 10.90 $ 12.44 $ 11.68 $ 10.81 $ 10.81
-------- -------- -------- ------- -------
Investment income--net......... .74 .69 .61 .70 .74
Realized and unrealized gain
(loss) on investments--net.... .60 (1.26) .90 .69 .69
-------- -------- -------- ------- -------
Total from investment
operations.................... 1.34 (.57) 1.51 1.39 1.43
-------- -------- -------- ------- -------
Less dividends and
distributions:
Investment income--net......... (.74) (.69) (.61) (.70) (.74)
Realized gain on investments--
net........................... -- -- (.14) -- --
In excess of realized gain on
investments--net.............. -- (.28) -- -- --
-------- -------- -------- ------- -------
Total dividends and
distributions................. (.74) (.97) (.75) (.70) (.74)
-------- -------- -------- ------- -------
Net asset value, end of period. $ 11.50 $ 10.90 $ 12.44 $ 11.50 $ 11.50
======== ======== ======== ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 12.74% (4.72%) 13.30%# 13.26%# 13.65%#
======== ======== ======== ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account
maintenance and
distribution fees............. .61% .54% .57%* .64%* .60%*
======== ======== ======== ======= =======
Expenses....................... 1.11% 1.04% 1.07%* 1.14%* .70%*
======== ======== ======== ======= =======
Investment income--net......... 6.61% 5.98% 5.61%* 6.24%* 6.81%*
======== ======== ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $212,146 $141,212 $134,122 $ 6,806 $16,349
======== ======== ======== ======= =======
Portfolio turnover............. 142.84% 155.42% 180.52% 142.84% 142.84%
======== ======== ======== ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
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.
16
<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. These investment objectives are a
fundamental policy of each Portfolio of the Fund and may not be changed without
a vote of the majority of the outstanding voting securities of such Portfolio.
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. 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 may 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: The 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
17
<PAGE>
expected to provide higher yields, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than lower-
yielding, higher-rated fixed-income securities. See "Risk Factors in
Transactions in Junk Bonds". Because investment in such junk bonds entails
relatively greater 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".
18
<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: The Investment Grade Portfolio invests primarily
in securities rated in the three highest 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: The Intermediate Term Portfolio invests
primarily in bonds rated in the four highest rating 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 of which the Portfolio has the
option to demand repayment 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
19
<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
20
<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.
21
<PAGE>
The table below shows the average monthly dollar-weighted market value, by
S&P's rating category, of the bonds held by the High Income Portfolio during
the fiscal year ended September 30, 1995.
<TABLE>
<CAPTION>
% MARKET VALUE
DOLLAR-
WEIGHTED
% NET CORPORATE
RATING ASSETS BONDS
------ ------ --------------
<S> <C> <C>
AAA -- --
AA -- --
A 0.15 0.17
BBB 0.47 0.53
BB 20.04 22.57
B 55.46 62.37
CCC 5.78 6.51
CC -- --
C -- --
D 0.20 0.23
NR* 6.76 7.62
----- ------
88.86% 100.00%
===== ======
</TABLE>
- --------
* Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any of such organizations. With respect to the
percentage of the Fund's assets invested in such securities, the Fund's
Investment Adviser believes that 6.23% are of comparable quality to bonds
rated B, 1.29% are of comparable quality to bonds rated CCC, and 0.10% are of
comparable quality to bonds rated D. This determination is based on the
Investment Adviser's own internal evaluation and does not necessarily reflect
how such securities would be rated by Standard & Poor's if it were to rate the
securities.
INVESTMENTS IN FOREIGN SECURITIES
Each Portfolio of the Fund may invest in securities issued by foreign
governments (or political subdivisions or instrumentalities thereof) or foreign
companies (collectively, "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.
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 security than
about a comparable United States instrument issued by a U.S. entity, 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 securities may be subject to non-U.S.
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
22
<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 selling and
closing out futures positions (which is done by taking an opposite position-in
this case purchasing
23
<PAGE>
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 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)
24
<PAGE>
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 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 a
Portfolio of margin deposits in the event of bankruptcy of a broker with whom a
Portfolio has an open position in a futures contract or related option, or the
exchange or clearing organization on which those contracts are traded.
25
<PAGE>
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
Each Portfolio of 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. Each Portfolio may invest in repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering into
the contract, to repurchase the security from the Portfolio at a mutually
agreed upon time and price, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return for the Portfolio
insulated from market fluctuations during such period. In the event of default
by the seller under a repurchase agreement, a Portfolio will continue to hold
the seller's securities as collateral but may suffer time delays and incur
costs or possible losses in connection with such transactions.
Forward Commitments. The Fund may purchase 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. A Portfolio will maintain a segregated account with
its custodian of cash or liquid high grade debt obligations in an aggregate
amount equal to the amount of its commitments in connection with such purchase
transactions.
Restricted Securities. From time to time a Portfolio of the Fund may invest
in securities the disposition of which is subject to legal restrictions, such
as restrictions imposed by the Securities Act of 1933 on the resale of
securities acquired in private placements. If registration of such securities
under the Securities Act is required, such registration may not be readily
accomplished, and if such securities may be resold without registration, such
resale may be permissible only in limited quantities. In either event, a
Portfolio of the Fund may not be able to sell its restricted securities at a
time which, in the judgment of the Investment Adviser, would be most opportune.
26
<PAGE>
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 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,
27
<PAGE>
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.
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 130 other registered investment companies. FAM
or MLAM also offers portfolio management and portfolio analysis services to
individuals and institutions. As of December 31, 1995, FAM and MLAM had a total
of approximately $196.4 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,
28
<PAGE>
1995, FAM received advisory fees from the Fund in the amount of $19,482,874 of
which $14,910,211 was received with respect to the High Income Portfolio
(representing .41% of its average net assets), $3,378,301 was received with
respect to the Investment Grade Portfolio (representing .36% of its average net
assets) and $1,194,362 was received with respect to the Intermediate Term
Portfolio (representing .36% of its average net assets).
The Investment Advisory Agreement obligates each Portfolio to pay certain
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. The Fund's total expenses for the year ended September
30, 1995 were $52,626,201 of which $40,509,159 was attributable to the High
Income Portfolio, $9,401,177 was attributable to the Investment Grade
Portfolio, and $2,715,865 was attributable to the Intermediate Term Portfolio,
respectively.
For the year ended September 30, 1995 with respect to the High Income
Portfolio, the ratio of total expenses to average net assets was .55% and 1.32%
of average net assets represented by Class A and Class B shares, respectively.
With respect to the High Income Portfolio, for the period October 21, 1994
(commencement of operations) to September 30, 1995, the annualized ratio of
total expenses to average net assets was 1.38% and .81% of average net assets
represented by Class C and Class D shares, respectively.
For the year ended September 30, 1995 with respect to the Investment Grade
Portfolio, the ratio of total expenses to average net assets was .58% and 1.35%
of average net assets represented by Class A and Class B shares, respectively.
With respect to the Investment Grade Portfolio, for the period October 21, 1994
(commencement of operations) to September 30, 1995, the annualized ratio of
total expenses to average net assets was 1.40% and .83% of average net assets
represented by Class C and Class D shares, respectively.
For the year ended September 30, 1995 with respect to the Intermediate Term
Portfolio, the ratio of total expenses to average net assets was .59% and 1.11%
of average net assets represented by Class A and Class B shares, respectively.
With respect to the Intermediate Term Portfolio, for the period October 21,
1994 (commencement of operations) to September 30, 1995, the annualized ratio
of total expenses to average net assets was 1.14% and .70% of average net
assets represented by Class C and Class D 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
29
<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 of the Investment Adviser; President and Director
of Princeton Services, Inc.; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML&Co"); Director of the Distributor.
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--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc; former Senior Vice President
of Arnhold and S. Bleichroeder Inc.; Adjunct Professor, Colombia 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, and Dean from 1984 to 1993, 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.
30
<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
31
<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".
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was 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.
32
<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
- ---------------------------------------------------------------------------------------------
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 was 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. 51.
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:
33
<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% 4.17% 3.75%
$25,000 but less than
$50,000................... 3.75 3.90 3.50
$50,000 but less than
$100,000.................. 3.25 3.36 3.00
$100,000 but less than
$250,000.................. 2.50 2.56 2.25
$250,000 but less than
$1,000,000................ 1.50 1.52 1.25
$1,000,000 and more**...... .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, and on Class A purchases by certain retirement plan
investors in connection with certain investment programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, 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.
During the year ended September 30, 1995, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 17,000,487,
14,319,272 and 6,450,433 Class A shares, respectively, for aggregate net
proceeds of $129,792,483, $159,951,974 and $73,291,315, respectively. The
gross sales charges for the sale of Class A shares of the High Income
Portfolio, Investment Grade Portfolio and Intermediate Term Portfolio were
$593,511, $87,279 and $15,198, respectively, of which $52,365, $7,682 and
$785, respectively, were received by the Distributor and $541,146, $79,597 and
$14,413, respectively, were received by Merrill Lynch. For the year ended
September 30, 1995, the Distributor received CDSC's of $16,548.80 for the High
Income Portfolio, all of which were paid to Merrill Lynch. For the year ended
September 30, 1995, the Distributor did not receive any CDSC's for Class A
shares of the Investment Grade Portfolio or the Intermediate Term Portfolio.
34
<PAGE>
With respect to Class D shares, for the period October 21, 1994
(commencement of operations) to September 30, 1995, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 21,574,941,
2,756,661 and 1,674,458 Class D shares, respectively, for aggregate net
proceeds of $165,091,505, $30,609,293 and $18,850,195, respectively. The gross
sales charges for the sales of Class D shares of the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio were $1,242,380,
$163,044 and $28,276, respectively, of which $109,429, $14,085 and $2,252 were
received by the Distributor, respectively, and $1,132,951, $148,959 and
$26,024 were received by Merrill Lynch, respectively. For the year ended
September 30, 1995, the Distributor did not receive any CDSCs for Class D
shares of the High Income Portfolio, the Investment Grade Portfolio or the
Intermediate Term Portfolio.
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 A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
Accounts SM available through employers which provide such plans.
35
<PAGE>
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.
Class D shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and of Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of such funds in shares of the Fund.
Similarly, Class A shares of the Fund 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 such fund in shares of the Fund.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the High Income and Investment
Grade Portfolios are subject to a four year CDSC and Class B shares of the
Intermediate Term Portfolio are subject to a one year CDSC, while Class C
shares are subject only to a one year 1.0% CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B shares,
together with shares issued upon dividend reinvestment with respect to those
shares, are automatically converted into Class D shares of the Portfolio and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares of each
Portfolio are subject to an account maintenance fee of 0.25% of net assets.
Class B and Class C shares of the High Income and Investment Grade Portfolios
are subject to distribution fees of 0.50% and 0.55%, respectively, of net
assets. Both Class B and Class C shares of the Intermediate Term Portfolio are
subject to distribution fees of 0.25% of net assets. See "Distribution Plans".
The proceeds from the account maintenance fees are used to compensate Merrill
Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below. Class C shares of the Intermediate Term Portfolio are available
only through the Exchange Privilege.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing
36
<PAGE>
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 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:
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>
During the fiscal year ended September 30, 1995 for Class B shares of the
High Income Portfolio and the Investment Grade Portfolio, the Distributor
received CDSCs with respect to redemptions of $5,011,339 and $1,112,592,
respectively, all of which were paid to Merrill Lynch.
37
<PAGE>
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>
During the fiscal year ended September 30, 1995 for Class B shares of the
Intermediate Term Portfolio, the Distributor received CDSC's with respect to
redemptions of $291,980, all of which was paid to Merrill Lynch.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest possible applicable rate being charged. Therefore, with respect to
the High Income and Investment Grade Portfolios, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. It will be assumed, with respect to the
Intermediate Term Portfolio, that the redemption is of shares held for over
one year or shares acquired pursuant to reinvestment of dividends or
distributions and then of shares held longest during the one-year period. The
CDSC will not be applied to dollar amounts representing an increase in the net
asset value since the time of purchase. A transfer of shares from a
shareholder's account to another account will be assumed to be made in the
same order as a redemption.
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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are
held in the MFA program will be included in determining the holding period of
Class B shares reacquired upon termination of participation in the MFA program
(see "Shareholder Services--Exchange Privilege").
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
38
<PAGE>
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 and for any Class B shares that were acquired and held at
the time of the redemption in an Employee Access Account available through
employers providing eligible 401(k) plans. Additional information concerning
the waiver of the Class B contingent deferred sales charge is set forth in the
Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge on Class C shares of the High Income, Investment Grade and Intermediate
Term Portfolios:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -------------------
<S> <C>
0-1.................................................... 1.0%
Thereafter............................................. None
</TABLE>
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
For the period October 21, 1994 (commencement of operations) to September 30,
1995, the Distributor received CDSCs with respect to redemptions of Class C
shares of $43,196 for the High Income Portfolio, $8,956 for the Investment
Grade Portfolio and $410 for the Intermediate Term Portfolio, all of which were
paid to Merrill Lynch.
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.
39
<PAGE>
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Plan was
established), all Class B shares of all MLAM-advised mutual funds held in that
Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that retirement plan will be
sold Class D shares of the appropriate funds at net asset value per share.
In the event that all Class B shares of a Portfolio held in a single account
are converted to Class D shares on a Conversion Date, shares representing
reinvestment of declared but unpaid dividends on those Class B shares also will
be converted to Class D shares; otherwise, only Class B shares purchased
through reinvestment of dividends paid will convert to Class D shares on the
Conversion Date.
The minimum value of Class B shares of a Portfolio held in a single account
that will be converted on any Conversion Date is $50; however, if at a
Conversion Date the conversion of Class B shares to Class D shares of a
Portfolio in a single account will result in less than $50 worth of Class B
shares being left in the account, all of the Class B shares of that Portfolio
held in the account on the Conversion Date will be converted to Class D shares
of the Portfolio.
Class B shareholders holding share certificates must deliver such
certificates to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. Shares evidenced by certificates that are not
received by the Transfer Agent at least one week prior to the Conversion Date
will be converted into Class D shares on the next scheduled Conversion Date
after such certificates are delivered.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination
of participation in the MFA program.
40
<PAGE>
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% of average daily net assets of the relevant class and
Portfolio for Class B, Class C and Class D shares of the High Income and
Investment Grade Portfolios, and for Class B and Class C shares of the
Intermediate Term Portfolio, and 0.10% of average daily net assets attributable
to the relevant class and Portfolio for Class D shares of the Intermediate Term
Portfolio in order to compensate the Distributor and Merrill Lynch (pursuant to
a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% and
0.55%, respectively, of average daily net assets attributable to the relevant
class and Portfolio for Class B and Class C shares of the High Income and
Investment Grade Portfolios, and 0.25% of average daily net assets attributable
to the relevant class and Portfolio for Class B and Class C shares of the
Intermediate Term Portfolio, in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Portfolio. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% (in the case
of the High Income Portfolio and Investment Grade Portfolio) and 0.50% (in the
case of the Intermediate Term Portfolio) of the average daily net assets for
the Class B shares of the respective Portfolios (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are identical
to the aggregate fee rate payable and the services provided under the
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For Class B Shares for the fiscal year ended September 30, 1995 the High
Income, Investment Grade and Intermediate Term Portfolios paid the Distributor
$19,752,109, $3,862,733 and $751,159, respectively, pursuant to the
Distribution Plan, all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related services. For Class C shares of the High
Income Portfolio, the Investment Grade
41
<PAGE>
Portfolio and the Intermediate Term Portfolio, the Distributor received, for
the fiscal period October 21, 1994 (commencement of operations) to September
30, 1995, $392,368, $58,465 and $4,675, respectively, pursuant to the
Distribution Plan all of which were paid to Merrill Lynch for providing account
maintenance and distribution-related services. For Class D shares of the High
Income Portfolio, the Investment Grade Portfolio and the Intermediate Term
Portfolio, the Distributor received, for the period October 21, 1994
(commencement of operations) to September 30, 1995, $105,669, $26,207 and
$5,229, respectively, pursuant to the Distribution Plan, all of which were paid
to Merrill Lynch for providing account maintenance 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, 1994, 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 $36,162,000 (1.61% of Class B
net assets at that date) with respect to the High Income Portfolio and
approximately $5,719,000 (1.21% of Class B net assets at that date) with
respect to the Investment Grade Portfolio and approximately $566,000 (0.43% of
Class B net assets at that date) with respect to the Intermediate Term
Portfolio. Similar fully allocated accrual data is not yet available with
respect to Class C shares of the High Income Portfolio, Investment Grade
Portfolio and Intermediate Term Portfolio. As of September 30, 1995, direct
cash revenues for the period since commencement of the offering of Class B
shares exceeded direct cash expenses by $17,654,087 (0.55% of Class B net
assets at that date) with respect to the High Income Portfolio. As of September
30, 1995, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $9,483,109 (1.50%
of Class B net assets at that date) with respect to the Investment Grade
Portfolio. As of September 30, 1995, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$1,333,197 (0.63% of Class B net assets at that date) with respect to the
Intermediate Term Portfolio. For the period October 21, 1994 (commencement of
operations) to September 30, 1995 direct cash expenses exceeded direct cash
revenues by $222,009 (0.16% of Class C net assets at that date) for Class C
shares of the High Income Portfolio and $39,968 (0.16% of Class C net assets at
that date) for Class C shares of the Investment Grade Portfolio. Direct cash
revenues for Class C shares of the Intermediate Term Portfolio for the period
October 21, 1994 (commencement of operations) to September 30, 1995 exceeded
direct cash expenses by $1,839 (0.03% of Class C net assets at that date).
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,
42
<PAGE>
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.
43
<PAGE>
The following tables set forth comparative information as of September 30,
1995 with respect to the Class B and Class C 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, 1995 for the High Income
and Investment Grade Portfolios, for the period November 12, 1992 (commencement
of Class B operations) to September 30, 1995 for the Intermediate Term
Portfolio, and for the period October 21, 1994 (commencement of operations) to
September 30, 1995 for Class C shares of each Portfolio.
DATA CALCULATED AS OF SEPTEMBER 30, 1995
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
CLASS B 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................ $ 3,097,648 $ 193,603 $ 31,877 $ 225,480 $ 48,989 $ 176,491 $ 16,104
Under Distributor's
Voluntary Waiver....... $ 3,097,648 $ 193,603 $ 15,488 $ 209,091 $ 48,989 $ 160,102 $ 16,104
<CAPTION>
CLASS C
- ------- (NOT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $138,594,833 $8,662,177 $298,993 $8,961,170 $312,949 $8,648,221 $742,604
Under Distributor's
Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A
</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
CLASS B 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................ $ 691,542 $ 43,221 $ 9,531 $ 52,752 $15,455 $ 37,297 $ 3,158
Under Distributor's
Voluntary Waiver....... $ 691,542 $ 43,221 $ 3,458 $ 46,679 $15,455 $ 31,224 $ 3,158
<CAPTION>
CLASS C
- ------- (NOT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $19,413,737 $1,213,359 $42,846 $1,256,205 $49,151 $1,207,054 $141,778
Under Distributor's
Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
44
<PAGE>
INTERMEDIATE TERM PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
CLASS B 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................ $120,442 $ 7,528 $ 919 $ 8,447 $1,530 $ 6,917 $ 530
Under Distributor's
Voluntary Waiver....... $120,442 $ 7,528 $ 602 $ 8,130 $1,530 $ 6,600 $ 530
<CAPTION>
CLASS C
- ------- (NOT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $953,786 $59,612 $1,766 $61,378 $2,727 $58,651 $17,016
Under Distributor's
Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis based upon the
prime rate, as reported in The Wall Street Journal, plus 1.0%, as
permitted under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payment and accruals. Of these
distribution fee payments made prior to July 3, 1993 under the Prior Plan
at the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
(5) Purchase price of all eligible Class B shares sold since November 13, 1992
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and 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.
45
<PAGE>
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, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signature(s)
of all persons in whose name(s) the shares are registered, signed exactly as
their name(s) appears on the Transfer Agent's register or on the certificate,
as the case may be. The signature(s) on the redemption request must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, the existence and validity
of which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. Examples of "eligible
guarantor institutions" include most commercial banks and broker dealers
(including, for example, Merrill Lynch branch offices). Information regarding
other financial institutions 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.
46
<PAGE>
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. As described in the Statement of
Additional Information, the repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities dealers may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. The Fund reserves the right
to reject any order for repurchase, which right of rejection might adversely
affect shareholders seeking redemption through the repurchase procedure.
Merrill Lynch may charge its customers a processing fee (currently $4.85) to
confirm a repurchase of shares to such customers. Redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
As described in further detail in the Statement of Additional Information,
holders of Class A or Class D shares of any of the three Portfolios who have
redeemed their shares have a one-time privilege to reinstate their accounts by
purchasing shares of the same class at net asset value without a sales charge
up to the dollar amount redeemed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of the net
investment income of each Portfolio, if any. The net investment income of each
Portfolio is declared as dividends daily immediately prior to the determination
of the net asset value of each Portfolio on that day and reinvested monthly in
additional full and fractional shares of each Portfolio at net asset value
unless the shareholder elects to receive such dividends in cash. The net
investment income of each Portfolio for dividend purposes consists of interest
and dividends earned on portfolio securities, less expenses, in each case
computed since the most recent determination of net asset value. Expenses of
each Portfolio, including the advisory fee and any account maintenance and/or
distribution fees (if applicable), are accrued daily. Shares will accrue
dividends as long as they are issued and outstanding. The per share dividends
and distributions on Class B and Class C shares will be lower than the per
share dividends and distributions on Class A and Class D shares as a result of
the account maintenance, distribution and higher transfer agency fees
applicable to the Class B and Class C shares. Similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See "Additional
Information--Determination of Net Asset Value". Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order.
In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. All net realized long-or short-term capital gains of the Fund,
if any, including gains from option and futures contract transactions, are
declared and distributed to the shareholders of the Portfolio or Portfolios to
which such gains are attributable annually after the close of the Fund's fiscal
year.
47
<PAGE>
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 each Portfolio has
qualified for such treatment and intends to continue to qualify therefor. If it
so qualifies, a Portfolio (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 Portfolio 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 a Portfolio's investment income and distributions of a Portfolio'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.
Merrill Lynch Financial Data Services, Inc., the Fund's transfer agent, will
send each shareholder a monthly dividend statement which will include the
amount of dividends paid and identify whether such dividends represent ordinary
income or capital gains.
Upon sale or exchange of shares of a Portfolio, a shareholder will realize
short-or long-term capital gain or loss, depending upon the shareholder's
holding period in the Portfolio 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.
A Portfolio may recognize interest attributable to it from holding zero
coupon securities. Current federal law requires that, for most zero coupon
securities, the Portfolio must accrue a portion of the discount at which the
security was purchased as income each year even though the Portfolio 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, each Portfolio must
pay out substantially all of its net investment income each year. Accordingly,
a Portfolio 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
48
<PAGE>
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.
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.
49
<PAGE>
PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Board of Directors, the Investment Adviser is primarily
responsible for the portfolio decisions of each Portfolio and the placing of
its portfolio transactions. In placing orders, it is the policy of each
Portfolio to obtain the best price and execution for its transactions.
Affiliated persons of the Fund, including Merrill Lynch, may serve as its
broker in over-the-counter transactions conducted on an agency basis.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of its Portfolios. Full details as
to each of such services and copies of the various plans described below can be
obtained from the Fund, the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchase and the reinvestment of ordinary income and long-
term capital gain distributions. These statements will also show any other
activity in the account since the previous statement. Shareholders will receive
separate transaction confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestments of ordinary income
dividends and long-term capital gain distributions. A shareholder may make
additions to his Investment Account at any time by purchasing shares at the
applicable public offering price either through a securities dealer which has
entered into a selected dealers agreement with the Distributor or by mail
directly to the Transfer Agent, acting as agent for the Distributor.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of a
Portfolio, a shareholder either must redeem the Class A or Class D shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of a Portfolio, a shareholder must either
redeem the shares (paying any applicable CDSC) so that the
50
<PAGE>
cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his regular bank account. Investors who maintain CMA (R) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA (R) or CBA (R) accounts or in certain related accounts in amounts of $100
or more through the CMA (R)/CBA (R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share
next determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or by telephone (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
51
<PAGE>
shareholder holds any Class A shares of the other Portfolio or second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of the other
Portfolio or a second MLAM-advised mutual fund, and the shareholder does not
hold Class A shares of the other Portfolio or the second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A
shares of the other Portfolio or second fund, the shareholder will receive
Class D shares of the other Portfolio or second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of another
Portfolio or a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the other Portfolio or second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares of a Portfolio will be exchangeable with
shares of the same class of other MLAM-advised mutual funds. Class C shares of
the Intermediate Term Portfolio are available only through the Exchange
Privilege.
Shares of a Portfolio which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Portfolio. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of a Portfolio is "tacked" to the holding period of the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of a Portfolio exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to that Portfolio if
such schedule is higher than the CDSC schedule relating to the new Class B
shares. In addition, Class B shares of a Portfolio acquired through use of the
exchange privilege will be subject to the Portfolio's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same Fund on the basis of relative net asset values in
connection with
52
<PAGE>
the commencement of participation in the MFA program, i.e., no CDSC will
apply. The one-year holding period does not apply to shares acquired through
reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be reexchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption
of Class B or Class C shares so reacquired, or the Conversion Period for Class
B shares so acquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held.
Each Portfolio's exchange privilege is also modified with respect to
purchases of Class A and Class D shares by non-retirement plan investors 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 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").
53
<PAGE>
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 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 ended September 30, 1995 was:
<TABLE>
<CAPTION>
INTERMEDIATE
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO TERM PORTFOLIO
--------------------- -------------------------- --------------
<S> <C> <C> <C>
Class A........ 9.53% 6.20% 6.13%
Class B........ 9.17% 5.68% 5.66%
Class C........ 9.12% 5.62% 5.62%
Class D........ 9.31% 5.96% 6.03%
</TABLE>
54
<PAGE>
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 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,
1995, the Fund paid MLPF&S $21,589 for securities price quotations to compute
the net asset value of the Portfolios.
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.
55
<PAGE>
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 four hundred million (2,400,000,000) 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 400,000,000 shares, 700,000,000 shares,
200,000,000 shares and 500,000,000 shares, respectively, High Quality Portfolio
Series Common Stock (which does business under the name "Investment Grade
Portfolio") which is divided into four classes designated "Class A Common
Stock", "Class B Common Stock", "Class C Common Stock" and "Class D Common
Stock", each of which consist of 100,000,000 shares and the Intermediate Term
Portfolio Series Common Stock, which is divided into four classes designated
"Class A Common Stock", "Class B Common Stock", "Class C Common Stock" and
"Class D Common Stock", each of which consists of 50,000,000 shares. Each Class
A, Class B, Class C and Class D share of Common Stock of each Portfolio
represents an interest in the same assets of such Portfolio and is identical in
all respects to shares of the other classes, except that the Class B, Class C
and Class D shares bear certain expenses related to the account maintenance
fees associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to such account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The Fund
has received an order from the Securities and Exchange Commission permitting
the issuance and sale of multiple classes of Common Stock of each of the Fund's
Portfolios. The Directors of the Fund may classify and reclassify the shares of
the Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders unless under the Investment Company Act of 1940
shareholders are required to act on any of the following matters: (i) election
of Directors; (ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Voting rights for Directors are not cumulative. Shares issued are
fully paid and nonassessable and have no preemptive rights. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except that, as noted above, Class B,
Class C and Class D shares bear certain additional expenses.
For further information concerning the organization of the Fund, see the
Statement of Additional Information.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, independent auditors, has been selected as the
independent auditors of the Fund.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, acts as Custodian
of the Fund's assets.
56
<PAGE>
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, MLFDS 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 to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act 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 26, 1996, 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.
57
<PAGE>
[This page is intentionally left blank.]
58
<PAGE>
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.
59
<PAGE>
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.
60
<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)
[_] High Income Portfolio Class A Shares
[_] High Income Portfolio Class B Shares
[_] High Income Portfolio Class C Shares
[_] High Income Portfolio Class D Shares
[_] Investment Grade Portfolio Class A Shares
[_] Investment Grade Portfolio Class B Shares
[_] Investment Grade Portfolio Class C Shares
[_] Investment Grade Portfolio Class D Shares
[_] Intermediate Term Portfolio Class A Shares
[_] Intermediate Term Portfolio Class B Shares
[_] Intermediate Term Portfolio Class D Shares
of Merrill Lynch Corporate Bond Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A share, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Corporate 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.
- -------------------------------------------------------------------------------
61
<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:
(2) Name.............................
(1) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
We hereby authorize Merrill Lynch
Branch Office, Address, Stamp. Funds Distributor, Inc. to act as
our agent in connection with
- - - transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the Shareholder's
signature.
.....................................
Dealer Name and Address
- - - By ..................................
This form when completed should be Authorized Signature of Dealer
mailed to:
[ ][ ][ ] [ ][ ][ ][ ]
Merrill Lynch Corporate Bond Branch-Code F/C No. ...............
Fund, Inc. F/C Last Name
c/o Merrill Lynch Financial [ ][ ][ ] [ ][ ][ ][ ][ ]
Data Services, Inc. Dealer's Customer A/C No.
P.O. Box 45289
Jacksonville, Florida 32232-5289
62
<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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
63
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of the [_] 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.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
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
......(month) or as soon thereafter as charge to my account ACH debits
possible. drawn on my account by and payable
to Merrill Lynch Financial Data
I agree that you are drawing these Services, Inc., I agree that your
ACH debits voluntarily at my request rights in respect of each such debit
and that you shall not be liable for shall be the same as if it were a
any loss arising from any delay in check drawn on you and signed per-
preparing or failure to prepare any sonally by me. This authority is to
such debit. If I change banks or de- remain in effect until revoked by me
sire to terminate or suspend this in writing. Until you receive such
program, I agree to notify you notice, you shall be fully protected
promptly in writing. I hereby autho- in honoring any such debit. I fur-
rize you to take any action to cor- ther agree that if any such debit be
rect erroneous ACH debits of my bank dishonored, whether with or without
account or purchases of fund shares cause and whether intentionally or
including liquidating shares of the inadvertently, you shall be under no
Fund and crediting my bank account. I liability.
further agree that if a debit is not
honored upon presentation, Merrill ............ ......................
Lynch Financial Data Services, Inc. Date Signature of
is authorized to discontinue immedi- Depositor
ately the Automatic Investment Plan
and to liquidate sufficient shares ............ ......................
held in my account to offset the pur- Bank Signature of Depositor
chase made with the dishonored debit. Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
..................... NOTE: IF AUTOMATIC INVESTMENT PLAN
Signature of Depositor IS ELECTED, YOUR BLANK, UNSIGNED
(If joint account, CHECK MARKED "VOID" SHOULD ACCOMPANY
both must sign) THIS APPLICATION.
64
<PAGE>
[This page is intentionally left blank.]
65
<PAGE>
[This page is intentionally left blank.]
66
<PAGE>
INVESTMENT ADVISER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351 [/R]
Boston, Massachusetts 02101
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
<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......................................... 17
Investment Policies of the Portfolios...................................... 17
Risk Factors in Transactions in Junk Bonds................................ 20
Investments in Foreign Securities......................................... 22
Interest Rate Futures and Options Thereon................................. 22
Other Portfolio Strategies................................................ 26
Investment Restrictions................................................... 28
Investment Adviser......................................................... 28
Code of Ethics............................................................ 29
Directors.................................................................. 30
Purchase of Shares......................................................... 30
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 33
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 36
Distribution Plans........................................................ 41
Limitations on the Payment of Deferred Sales Charges...................... 43
Redemption of Shares....................................................... 46
Redemption................................................................ 46
Repurchase................................................................ 47
Reinstatement Privilege--
Class A and Class D Shares............................................... 47
Dividends, Distributions and Taxes......................................... 47
Dividends and Distributions............................................... 47
Federal Income Taxes...................................................... 48
Portfolio Transactions..................................................... 50
Shareholder Services....................................................... 50
Investment Account........................................................ 50
Automatic Investment Plans................................................ 51
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 51
Systematic Withdrawal Plans............................................... 51
Retirement Plans.......................................................... 51
Exchange Privilege........................................................ 51
Merrill Lynch Blueprint SM Program........................................ 53
Performance Data........................................................... 53
Additional Information..................................................... 55
Determination of Net Asset Value.......................................... 55
Organization of the Fund.................................................. 56
Independent Auditors...................................................... 56
Custodian................................................................. 56
Transfer Agency Services.................................................. 57
Legal Counsel............................................................. 57
Reports to Shareholders................................................... 57
Additional Information.................................................... 57
Appendix: Description of Corporate Bond Ratings............................ 59
Authorization Form......................................................... 61
</TABLE>
Code # 10046-0196
[LOGO] MERRILL LYNCH
MERRILL LYNCH
Corporate Bond Fund, Inc.
[ART]
PROSPECTUS
January 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 26, 1996
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 26, 1996, 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 17 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 50% 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 (63)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of the
Distributor.
Ronald W. Forbes (55)--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 (43)--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; Director of Newell Co. (manufacturer of
housewares and other consumer products).
Charles C. Reilly (64)--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 (63)--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 (57)--Director--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance and Dean at New York University Business School of
Administration since 1993; Director of, Vornado Realty Trust (real estate
holding company), Bowne & Co., Inc. (printer), Alexander's Inc. (department
stores), and Smith Corona Corporation (manufacturer of typewriters and word
processors).
Terry K. Glenn (55)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; 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 (61)--Senior Vice President (1)(2)--Senior Vice President of
the Investment Adviser since 1981.
Donald C. Burke (37)--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 (55)--Vice President (1)(2)--Vice President of MLAM
and Portfolio Manager of the Investment Adviser and MLAM since 1982.
Jay C. Harbeck (61)--Vice President (1)(2)--Vice President of MLAM since
1986.
Gerald M. Richard (46)--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 (43)--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)..... $ 9,200 None $154,400
Cynthia A. Montgom-
ery(1)................. 9,200 None 133,817
Charles C. Reilly(1).... 9,200 None 276,900
Kevin A. Ryan(1)........ 9,200 None 154,400
Richard R. West(1)...... 10,200 None 300,900
</TABLE>
- --------
(1) The Directors serve on the boards of other FAM/MLAM Advisory Funds as
follows: Ronald W. Forbes (37 funds), Cynthia A. Montgomery (37 funds),
Charles C. Reilly (54 funds), Kevin A. Ryan (37 funds) and Richard R. West
(54 funds).
At December 31, 1995, Messrs. Zeikel, Glenn, Hewitt, Lathbury, Harbeck,
Burke, Richard and Hennewinkel owned in the aggregate less than 1/4 of 1% of
the outstanding Common Stock of Merrill Lynch & Co., Inc. At December 31,
1995, the officers and directors of the Fund owned less than one percent of
the outstanding shares 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, 1995, fees and expenses paid to the unaffiliated directors
of the Fund aggregated $47,921.
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; 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 Portfolios, the
Investment Adviser receives at the end of each month a fee with respect to
each Portfolio. The fee for each Portfolio is determined based on the annual
advisory fee rates for that Portfolio set forth in the table below. These fee
rates are applied to the average daily net assets of each Portfolio, with the
reduced rates shown below applicable to portions of the assets of each
Portfolio to the extent that the aggregate of the average daily net assets of
the three combined Portfolios exceed $250 million, $500 million and $750
million (each such amount being a "breakpoint level"). The portion of the
assets of a Portfolio to which the rate at each breakpoint level applies will
be determined on a "uniform percentage" basis. The uniform percentage
applicable to a breakpoint level is determined by dividing the amount of the
aggregate of the average daily net assets of the three combined Portfolios
that falls within that breakpoint level by the aggregate of the average daily
net assets of the three combined Portfolios. The amount of the fee for a
Portfolio at each breakpoint level is determined by multiplying the average
daily net assets of that Portfolio by the uniform percentage applicable to
that breakpoint level and multiplying the product by the advisory fee rate.
<TABLE>
<CAPTION>
RATES OF ADVISORY FEE
---------------------------------
HIGH INVESTMENT INTERMEDIATE
AGGREGATE OF AVERAGE DAILY NET ASSETS INCOME GRADE TERM
OF THE THREE COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- --------- ---------- ------------
<S> <C> <C> <C>
Up to $250 million............................ 0.55% 0.50% 0.50%
Over $250 million up to $500 million.......... 0.50 0.45 0.45
Over $500 million up to $750 million.......... 0.45 0.40 0.40
Over $750 million............................. 0.40 0.35 0.35
</TABLE>
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.
13
<PAGE>
For the fiscal years ended September 30, 1993, 1994 and 1995, the advisory
fees paid by the Fund to the Investment Adviser totaled $12,680,843,
$17,493,674 and $19,482,874, respectively. The Investment Adviser did not
reimburse any portion of its advisory fee for the fiscal years ended September
30, 1993, 1994 and 1995.
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, 1995, the amount of such
reimbursement for accounting services was $383,639, of which $215,484 was
attributable to the High Income Portfolio, $118,390 was received with respect
to the Investment Grade Portfolio and $49,765 was received with respect to the
Intermediate Term Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be directly applicable to a Portfolio or allocated on the
basis of the size of the respective Portfolios. The Board of Directors of the
Fund has determined that this is an appropriate method of allocation of
expenses. As required by the Distribution Agreement, the Distributor will pay
certain of the expenses of each Portfolio incurred in connection with the
offering of shares of each Portfolio, including the expenses of printing the
prospectuses and statements of additional information used in connection with
the continuous offering of shares by each Portfolio. See "Distributor".
Merrill Lynch & Co., Inc. and Princeton Services, Inc. are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management policies.
DURATION AND TERMINATION
Continuation of the Investment Advisory Agreement for the period March 1,
1996 to March 1, 1997 was approved by the Board of Directors, including a
majority of the disinterested directors, on December 6, 1995. Unless earlier
terminated as described below, the agreement will remain in effect until March
1, 1997 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.
14
<PAGE>
TRANSFER AGENCY SERVICES ARRANGEMENTS
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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"). MLFDS 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, 1995, the Fund paid
MLFDS a fee of $5,826,676 pursuant to the Transfer Agency Agreement.
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.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
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 (in the case of the Investment Grade and Intermediate Term
Portfolios) or at the mean of the most recent bid and ask prices (in the case
of the High Income Portfolio) 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
15
<PAGE>
for debt securities this ordinarily will be the over-the-counter market.
Options on debt securities, which are traded on exchanges, are valued at the
last asked price for options written and the last bid price for options
purchased. Interest rate futures contracts and options thereon, which are
traded on exchanges, are valued at their closing price at the close of such
exchanges. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including valuations furnished
by a pricing service retained by the Fund which may use a matrix system for
valuations. These procedures of the pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the
Directors.
PORTFOLIO TRANSACTIONS
Under the Investment Company Act of 1940, persons affiliated with the Fund
are prohibited from dealing with the Fund as a principal in the purchase or
sale of the Fund's portfolio securities unless a permissive order allowing such
transactions is obtained from the SEC. Since over-the-counter transactions are
usually principal transactions, affiliated persons of the Fund, including
Merrill Lynch, may not serve as dealers in connection with such transactions
with the Fund. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis. Certain court
decisions have in the past raised questions as to whether investment companies
should seek to "recapture" brokerage commissions and underwriting and dealer
spreads by effecting their purchases and sale through affiliated entities. In
order to effect such an arrangement, the Fund would be required to seek an
exemption from the Investment Company Act so that it could engage in principal
transactions with affiliates. The directors have considered the possibilities
of seeking to recapture spreads for the benefit of the Fund and, after
reviewing all factors deemed relevant, have made a determination not to seek
such recapture at this time. The Board will reconsider this matter from time to
time. The Fund will take such steps as may be necessary to effect recapture,
including the filing of applications for exemption under the Investment Company
Act, if the directors should determine that recapture is in the best interests
of the Fund or otherwise required by developments in the law. The Investment
Adviser has arranged for the Fund's custodial bank to receive on behalf of the
Fund any tender offer solicitation fees payable with respect to portfolio
securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any 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
16
<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, 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. For the fiscal year
ended September 30, 1995, the Fund paid total brokerage commissions of $33,471,
$27,528 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, 1994 and
September 30, 1995, the portfolio turnover rates of the High Income Portfolio
were 32.52% and 24.58%, respectively, of the Investment Grade Portfolio were
159.05% and 108.07%, respectively, and of the Intermediate Term Portfolio were
155.42% and 142.84%, 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.
17
<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, 1993 and 1994, the Distributor
received $5,600,601 and $3,169,482, respectively, as sales charges on shares
sold, of which $5,159,809 and $2,917,019, respectively, was paid to Merrill
Lynch with respect to Class A shares. For the fiscal year ended September 30,
1995, the Distributor received $695,988, of which $635,156 was paid to Merrill
Lynch. All of such sales charges were attributable to payments of initial
sales charges in connection with purchases of Class A shares of the
Portfolios. With respect to Class D shares, for the period October 21, 1994
(commencement of operations) to September 30, 1995, the Distributor received
$1,433,700, of which $1,307,934 was paid to Merrill Lynch. For information as
to brokerage commissions received by Merrill Lynch, see "Portfolio
Transactions".
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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 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
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<PAGE>
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.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
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,
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<PAGE>
services (including the exchange privilege) available to Class A and Class D
shareholders through Blueprint may differ from those available to other
investors in Class A or Class D shares. Class A and Class D shares are offered
at net asset value to participants in the Merrill Lynch Blueprint SM Program
through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover
Program") available from Merrill Lynch Business Financial Services, a business
unit of Merrill Lynch. The IRA Rollover Program is available to custodian
rollover assets from Employer Sponsored Retirement and Savings Plans (see
definition below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch
Directed IRA Rollover Program. Orders for purchases and redemptions of Class A
or Class D shares of the Fund may be grouped for execution purposes which, in
some circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price
is $100 with a $50 minimum for subsequent purchases through Blueprint. Minimum
initial or subsequent purchase requirements are waived in connection with
automatic investment plans for Blueprint participants. Additional information
concerning purchases through Blueprint, including any annual fees and
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint SM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
Purchase Privileges of Certain Persons. Directors of the Fund, directors and
trustees of other MLAM-advised investment companies, Merrill Lynch & Co., Inc.
("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
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<PAGE>
the Eligible Class A or Class D Shares of the Fund, (ii) either have acquired
the shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering, (iii)
have maintained their closed-end fund shares continuously in a Merrill Lynch
account, and (iv) purchase a minimum of $250 worth of Fund shares. Similarly,
Class D shares of the Portfolio are offered at a net asset value to
shareholders of Merrill Lynch Municipal Strategy Fund Inc. ("Municipal Strategy
Fund") and Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income
Fund") who wish to purchase shares of the Fund with the net proceeds from a
sale of certain of their shares of common stock of Municipal Strategy Fund and
High Income Fund pursuant to a tender offer by Municipal Strategy Fund or High
Income Fund. This investment option is available only with respect to the
proceeds of Municipal Strategy Fund shares as to which no CDSC (as defined in
the Municipal Strategy Fund prospectus) is applicable, or with respect to the
proceeds of High Income Fund shares as to which no Early Withdrawal Charge (as
defined in the High Income Fund prospectus) is applicable.
Class D shares of the Fund are offered at the net asset value, without 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 a Portfolio 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 Portfolio 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 Portfolio
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 a Portfolio of 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
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<PAGE>
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 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).
DISTRIBUTION PLAN
Reference is made to "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Distribution Plan" in the Prospectus
for certain information with respect to the separate distribution plans of the
Fund for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes. For the fiscal year ended September 30, 1995, the High
Income, Investment Grade and Intermediate Term Portfolios paid the Distributor
$19,752,109, $3,862,733 and $751,159, respectively, pursuant to the Class B
Distribution Plan (based on average net assets subject to the Class B
Distribution Plan of approximately $2.6 billion, $516.4 million and $150.6
million, respectively) all of which was paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. For the fiscal period October 21, 1994
(commencement of operations) to September 30, 1995, the High Income, Investment
Grade and Intermediate Term Portfolios paid the Distributor $392,368, $58,465
and $4,675, respectively, pursuant to the Class C Distribution Plan (based on
average net assets subject to the Class C Distribution Plan of approximately
$52.2 million, $7.8 million and $1.0 million, respectively) all of which was
paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class C shares. For the
period October 21, 1994 (commencement of operations) to September 30, 1995, the
High Income, Investment Grade and Intermediate Term Portfolios paid the
Distributor $105,669, $26,207 and $5,229, respectively, pursuant to the Class D
Distribution Plan (based on average net assets subject to the Class D
Distribution Plan of approximately $45.0 million, $11.2 million and $5.6
million, respectively) all of which was paid to Merrill Lynch for providing
account maintenance services in connection with Class D 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.
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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.
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.
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<PAGE>
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A or Class D shares of any Portfolio,
including redemption through repurchase by the Fund, have a one-time privilege
to reinstate their accounts by purchasing Class A or Class D shares, as the
case may be, of such Portfolio at the net asset value of such shares without a
sales charge up to the dollar amount redeemed. The reinstatement privilege may
be exercised as follows. A notice to exercise this privilege along with a check
for the amount to be reinstated must be received by the Transfer Agent within
30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the shareholder only
the first time such shareholder makes a redemption. A redemption resulting in a
gain is a taxable event whether or not the reinstatement privilege is
exercised. A redemption resulting in a loss will not be a taxable event to the
extent the reinstatement privilege is exercised, and an adjustment will be made
to the shareholder's tax basis in shares acquired pursuant to the reinstatement
to reflect the disallowed loss.
If a shareholder disposes of shares within 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the reinstatement
privilege. Instead, such load charge will be treated as an amount paid for the
subsequently acquired shares and will be included in the shareholder's tax
basis for such shares.
DEFERRED SALES CHARGE--CLASS B AND CLASS C SHARES.
As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B and Class C Shares,"
while Class B shares of the 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. The CDSC is also waived for any Class B
shares that were acquired and held at the time of redemption by Employee Access
Accounts available through employers that provide Eligible 401(k) Plans. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment Program
is $50.
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
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<PAGE>
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. During the fiscal year ended September 30, 1995, Merrill Lynch
received contingent deferred sales charges of $5,011,339 with respect to Class
B shares of the High Income Portfolio, $1,112,592 with respect to Class B
shares of the Investment Grade Portfolio and $291,980 with respect to Class B
shares of the Intermediate Term Portfolio.
With respect to Class C shares of the High Income Portfolio, the Investment
Grade Portfolio and the Intermediate Term Portfolio, for the period October
21, 1994 (commencement of operations) to September 30, 1995, Merrill Lynch
received contingent deferred sales charges of $43,196, $8,956 and $410,
respectively,
Merrill Lynch Blueprint SM 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 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 47 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
26
<PAGE>
company, the Fund must, among other things, derive in each taxable year at
least 90% of its gross income from dividends, interest and gains from the sale
or other disposition of securities and derive less than 30% of its gross income
each taxable year from gains (without deduction for losses) from the sale or
other disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. If in any taxable year the Fund does
not qualify as a regulated investment company, all its taxable income will be
taxed to the Fund at corporate rates.
Dividends will be taxable to shareholders as ordinary income, except for (a)
such portion as may exceed a shareholder's ratable share of the Fund's earnings
and profits as determined for tax purposes (which may differ from net income
for book purposes), which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares and (b) amounts
representing distributions of realized net long-term capital gains, if any. If
the amount described in (a) above were to exceed the shareholder's tax basis
for his shares, the excess over basis would be treated as gain from the sale or
exchange of such shares. The excess of any net long-term capital gains over net
short-term capital losses realized by the Fund will, to the extent distributed
by the Fund, be taxable to shareholders as long-term capital gains regardless
of the length of time a particular shareholder may have held his shares in the
Fund. The maximum tax rate imposed on capital gains for individual taxpayers is
28 percent. Dividends and distributions are taxable as described, whether
received in cash or reinvested in additional shares of the Fund.
Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not on file with
the Fund or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalties of
perjury that such number is correct and that he is not otherwise subject to
backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
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
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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, 1995, the Fund had a capital loss carryforward of
approximately $11,795,000 in the High Income Portfolio, all of which expires in
1999; approximately $35,299,000 in the Investment Grade Portfolio, all of which
expires in 2003; and approximately $12,447,000 in the Intermediate Term
Portfolio, all of which expires in 2003. These amounts will be available to
offset like amounts of any future taxable gains.
Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided under an applicable tax
treaty. Shareholders who are nonresident aliens or foreign entities are urged
to consult their own tax advisers concerning the applicability of the United
States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action.
TAX TREATMENT OF TRANSACTIONS IN OPTIONS ON DEBT SECURITIES, FUTURES CONTRACTS
AND OPTIONS THEREON
Each Portfolio of the Fund may purchase and sell interest rate futures
contracts and may write and purchase call and put options on such futures
contracts and on certain debt securities. The Portfolios may write or purchase
options which will be classified as "nonequity options" under the Code.
Generally, gain and loss resulting from transactions in options on debt
securities, as well as gain and loss from transactions in futures contracts and
options thereon, will be treated as long-term capital gain or loss to the
extent of 60 percent thereof and short-term capital gain or loss to the extent
of 40 percent thereof (hereinafter "blended gain or loss"). In the case of the
exercise or assignment of an option on a debt security, the premium paid or
received by the Fund generally will adjust the gain or loss on disposition of
the underlying security.
Any option or futures contract held by a Portfolio on the last day of a
fiscal year will be treated as sold for market value on that date, and gain or
loss recognized as a result of such deemed sale will be blended gain or loss.
The capital gains and losses of each Portfolio will be combined in each fiscal
year to determine the capital gains and losses of the Fund, as described above.
In addition, the Portfolio's trading strategies may constitute "straddle"
transactions with futures contracts, options thereon and options on debt
securities. "Straddles" may affect the taxation of futures contracts and
options, and may cause the postponement of recognition of losses incurred in
certain closing transactions.
The requirements for classification as a regulated investment company may
restrict the Fund's ability to engage in certain options and futures contract
transactions. The Fund has obtained a private letter ruling from the Internal
Revenue Service providing the Fund with relief from certain provisions of the
Code which might otherwise affect its ability to engage in such transactions.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the transfer agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his shares, and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account with Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account (as described in
the Prospectus under "Shareholder Services--Investment Account" on p. 50) at
any time by purchasing Class A shares (if he or she is an eligible Class A
investor as described in the Prospectus) or Class B, Class C or Class D shares
at the
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<PAGE>
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Fund's transfer agent, acting as agent for
such securities dealer. Voluntary accumulation also can be made through a
service known as the Fund's Automatic Investment Plan whereby the Fund is
authorized through pre-authorized checks or automated clearing house debits of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. For investors who buy shares of the fund through Blueprint no
minimum charge to the investors' bank accounts is required. An investor whose
shares of the Fund are held within a CMA (R) or CBA (R) account may arrange to
have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA (R)/CBA (R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
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 once 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 the 24th day of each month or the 24th day of the last month of each
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
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terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Fund's Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yields or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept additions to an Investment Account in which an election has been made to
receive systematic withdrawals unless such addition is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account from which the
shareholder has elected to make systematic withdrawals.
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
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Merrill Lynch may also purchase Class B shares with a waiver of the CDSC. The
CDSC is also waived for any Class B shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC is also waived for shares purchased by a
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such
account at the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-referenced Retirement
Plans.
Employer-Sponsored Retirement and Savings Plans
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived for such
plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
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
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exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with a reduced or without
a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of any of the other
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the fund exercising the exchange privilege will
continue to be subject to the fund's CDSC schedule if such schedule is higher
than the CDSC relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the fund acquired through
use of the exchange privilege will be subject to the higher of the fund's CDSC
schedule or the CDSC relating to the Class B shares of the fund from which the
exchange has been made. For purposes of 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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same Fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one-year
holding period does not apply to shares acquired through reinvestment
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of dividends. Upon termination of participation in the MFA program, Class A
shares will be reexchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, the holding period for the Class A shares will
be "tacked" to the holding period for the Class B or Class C shares originally
held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a Class B money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a fund may, in turn, be exchanged back into Class B or Class C shares of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the High Income Portfolio for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Class B shares
of the High Income Portfolio for two and a half years and two years later
decide to redeem the shares of Institutional Fund for cash. At the time of this
redemption, the 2% CDSC that would have been due had the Class B shares of the
High Income Portfolio been redeemed for cash rather than exchanged for shares
of Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
The funds into which exchanges may be made and their respective investment
objectives are as follows:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ........ High current income, consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities
Merrill Lynch Americas Income
Fund, Inc. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
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Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Arkansas
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
Merrill Lynch Asset Growth
Fund, Inc..................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities, the combination of which
will be varied both with respect to types of
securities and markets in response to
changing market and economic trends.
Merrill Lynch Asset Income
Fund, Inc..................... A high level of current income through
investment primarily in United States fixed
income securities.
Merrill Lynch Balanced Fund
for Investment and
Retirement, Inc. .............
As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks and
other types of securities, including fixed
income securities and convertible
securities.
Merrill Lynch Basic Value
Fund, Inc. ................... Capital appreciation and, secondarily, income
by investing in securities, primarily
equities, that management of the fund
believes are undervalued and therefore
represent basic investment value.
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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.
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.
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Merrill Lynch Dragon Fund,
Inc........................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
Merrill Lynch Euro Fund........ -
Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust.............. High current return through investments in
U.S. government and governmental agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
government securities.
Merrill Lynch Florida
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while seeking
to offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
Merrill Lynch Fund For
Tomorrow, Inc................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc.............. Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
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<PAGE>
Merrill Lynch Fundamental
Value Portfolio (Available
only for exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian)...... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide capital appreciation
and income by investing in securities, with
at least 65% of the portfolio's assets being
invested in equities.
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
Opportunity Portfolio
(Available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)............... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide a high total
investment return through an investment
policy utilizing United States and foreign
equity, debt and money market securities,
the combination of which will vary depending
upon changing market and economic trends.
38
<PAGE>
Merrill Lynch Global Resources
Trust......................... Long-term growth and protection of capital
from investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
Merrill Lynch Global SmallCap
Fund, Inc..................... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
Merrill Lynch Global Utility Capital appreciation and current income
Fund, Inc..................... 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 Capital appreciation and, secondarily, income
Equity Fund................... 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.
39
<PAGE>
Merrill Lynch Massachusetts
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
Merrill Lynch Michigan
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as 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 Tax-exempt income from three separate
Fund, Inc..................... 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.
40
<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 A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Limited Maturity Municipal Series Trust, a
Bond Fund..................... 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.
41
<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 A portfolio of Merrill Lynch Multi-State
Bond Fund..................... 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 Quality Bond
Portfolio (Available only for
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian)...... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide a high level of
current income through investment in a
diversified portfolio of debt obligations,
such as corporate bonds and notes,
convertible securities, preferred stocks and
governmental obligations.
42
<PAGE>
Merrill Lynch Short-Term
Global Income Fund, Inc....... Current income at as high a level as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
Merrill Lynch Special Value Long-term growth of capital from investments
Fund, Inc..................... 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 U.S. Government
Securities Portfolio
(Available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)............... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide a high current
return through investments in U.S.
Government and government agency securities,
including GNMA mortgage-backed certificates
and other mortgage-backed government
securities.
43
<PAGE>
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 High current income by investing in a global
Fund, Inc..................... 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.
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.
44
<PAGE>
Merrill Lynch Institutional
Fund.......................... A portfolio of Merrill Lynch Funds for
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 A portfolio of Merrill Lynch Funds for
Tax-Exempt Fund............... Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch Treasury Fund.... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant who will advise the Fund of the exchange. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege by
wire through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Securities and
Exchange Commission. The Fund reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
PERFORMANCE DATA
From time to time the Fund may include a Portfolio's average annual total
return and other total return data, as well as yield, in advertisements or
information furnished to present or prospective shareholders. Total return and
yield figures are based on a Portfolio's historical performance and are not
intended to indicate future performance. Average annual total return and yield
are determined separately for Class A, Class B, Class C and Class D shares of
each Portfolio in accordance with formulas specified by the Securities and
Exchange Commission and take into account the maximum sales charge.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed
45
<PAGE>
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.
46
<PAGE>
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 September
30, 1995
Class A............... 10.32% 8.73% 12.19% $ 1,103.20 $ 1,087.30 $ 1,121.90
Class B............... 10.05 8.42 11.74 1,100.50 1,084.20 1,117.40
Class C#.............. 14.50 12.70 13.06 1,136.10 1,119.30 1,122.60
Class D#.............. 11.29 9.40 13.32 1,106.10 1,088.30 1,125.10
Five Years Ended Septem-
ber 30, 1995
Class A............... 9.19 15.28 9.17 1,552.40 2,036.40 1,550.80
Class B............... 9.26 15.33 -- 1,557.10 2,040.20 --
Ten Years Ended Septem-
ber 30, 1995
Class A Shares........ 9.16 11.48 9.19 2,401.30 2,963.70 2,409.90
Class B Shares
10/21/88 - 9/30/95... 8.65 11.34 -- 1,779.40 2,109.10 --
Class B Shares
11/13/92 - 9/30/95... -- -- 7.06 -- -- 1,217.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30,
1995
(Class A)............. 14.92% 13.26% 13.32% $ 1,149.20 $ 1,132.60 $ 1,133.20
(Class B)............. 14.05 12.42 12.74 1,140.50 1,124.20 1,127.40
(Class C)#............ 14.61 12.93 13.26 1,146.10 1,129.30 1,132.60
(Class D)#............ 15.21 13.37 13.65 1,152.10 1,133.70 1,136.50
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)............. 12.76 14.35 11.39 1,127.60 1,143.50 1,113.90
(Class B)............. 11.91 13.35 13.31 1,119.10 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)............. 11.11 7.69 9.79 1,111.10 1,076.90 1,097.90
(Class B)............. 9.44 6.08 -- 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.................... 3.44 (3.00) 4.33 1,034.40 970.00 1,043.30
1980.................... -- (1.04) -- -- 989.60 --
</TABLE>
- --------
*Annualized.
#Commencement of operations October 21, 1994.
47
<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, 1995
Class A............... 395.52% 515.11% 383.83% $ 4,955.20 $ 6,151.10 $ 4,838.30
Class B............... 77.94 110.91 21.72 1,779.40 2,109.10 1,217.20
Class C............... 13.61 11.93 12.26 1,136.10 1,119.30 1,122.60
Class D............... 10.61 8.83 12.51 1,106.10 1,088.30 1,125.10
YIELD
<CAPTION>
INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
30 Days Ended September
30, 1995
Class A............... 6.20% 9.53% 6.13%
Class B............... 5.68 9.17 5.66
Class C............... 5.62 9.12 5.62
Class D............... 5.96 9.31 6.03
</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.
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.
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.
48
<PAGE>
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The authorized capital stock of the Fund consists of two billion four hundred
million (2,400,000,000) 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 400,000,000 shares, 700,000,000 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, Class B, Class C and Class D 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, 1995, is calculated as set forth below.
49
<PAGE>
HIGH INCOME PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets............... $902,321,267 $3,220,766,637 $135,018,928 $102,675,796
============ ============== ============ ============
Number of Shares Out-
standing................ 115,693,946 412,837,687 17,295,752 13,157,731
============ ============== ============ ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............ $ 7.80 $ 7.80 $ 7.81 $ 7.80
Sales Charge* (for Class
A and Class D shares:
4.00% of offering price
(4.17% of net asset
value per share))....... .33 ** ** .33
------------ -------------- ------------ ------------
Offering Price........... $ 8.13 $ 7.80 $ 7.81 $ 8.13
============ ============== ============ ============
</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.
INVESTMENT GRADE PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $472,388,101 $631,517,399 $25,777,792 $25,152,850
============ ============ =========== ===========
Number of Shares Outstanding. 41,053,869 54,884,140 2,239,580 2,184,726
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 11.51 $ 11.51 $ 11.51 $ 11.51
Sales Charge* (for Class A
and Class D shares: 4.00% of
offering price (4.17% of net
asset value per share))..... .48 ** ** .48
------------ ------------ ----------- -----------
Offering Price............... $ 11.99 $ 11.51 $ 11.51 $ 11.99
============ ============ =========== ===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
INTERMEDIATE GRADE PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... $217,713,602 $212,146,426 $6,806,202 $16,349,292
============ ============ ========== ===========
Number of Shares Outstanding.. 18,928,003 18,443,916 591,728 1,421,349
============ ============ ========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).......... $ 11.50 $ 11.50 $ 11.50 $ 11.50
Sales Charge* (for Class A and
Class D shares: 1.00% of
offering price (1.01% of net
asset value per share))...... .12 ** ** .12
------------ ------------ ---------- -----------
Offering Price................ $ 11.62 $ 11.50 $ 11.50 $ 11.62
============ ============ ========== ===========
</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.
50
<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
51
<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.
52
<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.
53
<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 schedule of investments, of the High Income, Investment Grade and
Intermediate Term Portfolios of Merrill Lynch Corporate Bond Fund, Inc. as of
September 30, 1995, 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 on 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, 1995 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, 1995, 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
November 8, 1995
54
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH CORPORATE BOND FUND, INC. SEPTEMBER 30, 1995
SCHEDULE OF INVESTMENTS
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--2.8% Delta Air Lines Inc.:
BB+ Baa3 $ 3,000,000 9.30% due 1/02/2010 $ 2,963,100 $ 3,307,632
BB+ Baa3 5,000,000 9.20% due 9/23/2014 4,839,050 5,387,525
BB+ Baa3 20,000,000 10.50% due 4/30/2016 20,481,900 23,863,599
Piedmont Aviation, Inc.:
BB- B1 200,000 Series C, 9.70% due 1/15/1999 201,676 195,849
BB- B1 100,000 Series C, 10.25% due 1/15/2007 103,706 97,585
BB- B1 1,985,000 Series E, 10.30% due 3/28/2007 1,855,291 1,943,940
BB- B1 1,950,000 Series F, 10.35% due 3/28/2011 1,999,719 1,983,657
BB- B1 50,000 Series G, 10.35% due 3/28/2011 51,425 50,863
BB- B1 450,000 Series H, 9.85% due 5/08/2005 454,617 428,850
BB- B1 1,500,000 Series H, 10% due 11/08/2012 1,493,250 1,454,963
BB- B1 536,000 Series I, 10% due 11/08/2012 545,048 519,907
United Air Lines Inc.:
BB+ Baa2 4,000,000 10.02% due 3/22/2014 4,050,000 4,533,320
BB+ Baa2 2,000,000 9.08% due 10/26/2015 1,847,200 2,111,580
BB+ Baa2 7,100,000 9.35% due 4/07/2016 7,215,446 7,649,185
BB+ Ba2 10,500,000 9.21% due 1/21/2017 10,480,125 11,189,693
USAir Inc.:
B B1 30,000,000 9.625% due 2/01/2001 24,109,906 25,050,000
BB- B1 18,500,000 10.375% due 3/01/2013 18,290,000 17,390,000
BB B1 1,432,000 Series A, 10.70% due 1/15/2007 1,525,137 1,439,582
BB B1 1,815,000 Series C, 10.70% due 1/15/2007 1,933,048 1,824,365
B+ B2 421,000 Series E, 10.70% due 1/01/2002 382,895 421,979
B+ B1 1,107,000 Series E, 10.70% due 1/15/2007 1,159,472 1,112,712
B+ B2 1,092,000 Series F, 10.70% due 1/01/2003 984,165 1,094,856
B+ B2 1,092,000 Series G, 10.70% due 1/01/2003 984,165 1,094,856
B+ B2 1,092,000 Series H, 10.70% due 1/01/2003 984,165 1,094,856
B+ B2 1,092,000 Series I, 10.70% due 1/01/2003 984,165 1,094,856
BB- B1 5,249,759 Series 89A1, 9.33% due 1/01/2006++++ 4,966,118 4,956,823
-------------- --------------
114,884,789 121,293,033
Automobile NR* B1 10,000,000 Exide Corp., 10% due 4/15/2005 (k) 10,071,250 10,600,000
Parts--0.5% B B3 10,150,000 SPX Inc., 11.75% due 6/01/2002 10,175,000 10,860,500
-------------- --------------
20,246,250 21,460,500
Broadcasting & American Telecasting, Inc. (a):
Publishing--6.7% CCC+ Caa 38,190,545 14.86% due 6/15/2004 21,986,825 22,914,327
CCC+ Caa 10,100,000 14.50% due 8/15/2005 (b) 5,106,639 5,050,000
CCC B3 29,117,000 Australis Media Ltd., 14.07% due
5/15/2003 (a) (g) 15,525,401 17,615,785
BB- Ba3 22,500,000 Century Communications Corporation,
9.75% due 2/15/2002 22,112,500 22,893,750
B B1 10,000,000 Comcast Corporation, 9.50% due 1/15/2008 9,350,000 10,162,500
BB+ Ba2 10,000,000 Continental Cablevision Inc., 9.50%
due 8/01/2013 10,000,000 10,400,000
BB- Ba3 13,150,000 Heritage Media Services Corporation, 11%
due 6/15/2002 13,158,750 14,136,250
BB- Ba3 4,200,000 K-III Communications Corp., 10.625%
due 5/01/2002 4,192,500 4,473,000
B B3 14,000,000 The Katz Corp., 12.75% due 11/15/2002 14,313,750 15,190,000
B Caa 25,000,000 NWCG Holding Corp., 13.79%
due 6/15/1999 (a) 15,251,243 16,593,750
CCC+ Caa 20,000,000 Peoples Choice T.V. Corporation, 13.48%
due 6/01/2004 (a) (h) 10,776,609 10,550,000
BB- B3 10,000,000 SCI Television Inc., 11% due 6/30/2005 10,350,000 10,612,500
</TABLE>
55
<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>
Broadcasting & Sinclair Broadcasting Group Inc.:
Publishing B+ B1 $ 26,500,000 10% due 9/30/2003 $ 26,612,500 $ 27,096,250
(concluded) B+ B3 15,000,000 10% due 12/15/2003 15,036,250 15,262,500
United International Holdings, Inc. (a):
B- B3 10,000,000 12.18% due 11/15/1999 6,143,300 6,150,000
B- B3 50,000,000 13.99% due 11/15/1999 (i) 28,634,902 31,875,000
Videotron Groupe L'TEE:
BB+ Ba3 11,250,000 10.25% due 10/15/2002 11,322,500 11,756,250
BB+ Baa3 3,300,000 10.625% due 2/15/2005 3,279,375 3,481,500
BB- B1 20,000,000 World Color Press, Inc., 9.125%
due 3/15/2003 20,019,375 20,150,000
NR* NR* 13,000,000 Young Broadcasting Inc., 10.125%
due 2/15/2005 (k) 13,000,000 13,715,000
-------------- --------------
276,172,419 290,078,362
Building CCC B3 20,000,000 Nortek Inc., 9.875% due 3/01/2004 19,834,240 18,250,000
Materials--1.7% B+ B3 26,720,000 Pacific Lumber Co., 10.50% due 3/01/2003 26,420,738 25,517,600
B+ B2 29,084,000 US Gypsum Corp., 8.75% due 3/01/2017 25,890,006 28,647,740
-------------- --------------
72,144,984 72,415,340
Building American Standard Inc.:
Products--0.6% B+ Ba3 3,000,000 11.375% due 5/15/2004 3,120,000 3,315,000
B B1 6,000,000 11.52% due 6/01/2005 (a) 4,244,972 4,890,000
B Ba3 20,000,000 Inter-City Products Corp., 9.75%
due 3/01/2000 19,508,750 17,300,000
-------------- --------------
26,873,722 25,505,000
Capital Goods-- B+ B1 21,450,000 Essex Group Inc., 10% due 5/01/2003 21,546,500 20,914,992
1.5% B- B3 22,000,000 International Wire Group, 11.75%
due 6/01/2005 (k) 22,012,500 22,055,000
B+ B3 26,000,000 Sequa Corp., 9.375% due 12/15/2003 25,146,563 24,050,000
-------------- --------------
68,705,563 67,019,992
Cellular NR* NR* 21,000,000 Page Mart Inc., 12.74%
Telephones--0.3% due 11/01/2003 (a) 14,060,598 13,965,000
Chemicals--1.6% B B2 15,000,000 Agriculture Minerals & Chemicals
Company, L.P., 10.75% due 9/30/2003 15,060,000 15,787,500
B+ Ba3 45,000,000 G-I Holdings, Inc., 11.44% due
10/01/1998 (a) 32,231,632 32,793,750
B+ B2 25,000,000 Harris Chemical North America Inc.,
10.65% due 7/15/2001 (a) 24,123,108 22,218,750
-------------- --------------
71,414,740 70,800,000
Communications-- BB- B2 47,294,000 Bell Cablemedia PLC, 11.50%
9.6% due 9/15/2005 (a) (k) 26,766,422 27,844,343
BB- B3 13,500,000 Cai Wireless Systems Inc., 12.25%
due 9/15/2002 13,500,000 14,040,000
CCC+ B3 23,000,000 Cellular Communications, Inc., 13.25%
due 8/15/2000 (a) (c) 12,310,557 12,765,000
B- Caa 46,688,000 Echostar Communication Corp.,
12.88% due 6/01/2004 (a) (j) 29,531,776 26,612,160
CCC+ Caa 29,547,000 Horizon Cellular Telephone Co., 11.48%
due 10/01/2000 (a) 23,588,062 24,893,348
CCC+ B3 25,000,000 Mobilemedia Communication, Inc.,
11.32% due 12/01/2003 (a) 17,126,368 18,437,500
CCC+ B3 55,000,000 Nextel Communications Inc., 10.80% due
8/15/2004 (a) 36,838,808 27,225,000
</TABLE>
56
<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>
Communications Paging Network, Inc.:
(concluded) B B2 $ 20,000,000 11.75% due 5/15/2002 $ 20,387,500 $ 22,100,000
B B2 15,000,000 10.125% due 8/01/2007 15,000,000 15,675,000
B- B3 36,710,000 PanAmSat L.P., 11.35% due 8/01/2003 (a) 26,778,911 28,817,350
BB Ba2 12,000,000 Philippine Long Distance Telephone Co.,
9.875% due 8/01/2005 11,998,440 12,299,400
BB- B2 35,925,000 Rogers Communications Inc., 10.875%
due 4/15/2004 36,431,094 37,496,719
NR* NR* 31,000,000 Telecom Argentina S.A., 8.375%
due 10/18/2000 (k) 25,952,625 27,667,500
Telefonica de Argentina S.A.:
NR* NR* 2,690,000 8.375% due 10/01/2000 2,051,125 2,414,275
NR* B1 7,000,000 8.375% due 10/01/2000 5,385,000 6,300,000
BB- B1 40,000,000 11.875% due 11/01/2004 38,763,075 39,948,000
BB B1 50,000,000 Telewest Communications PLC, 11%
due 10/01/2007 (a) 29,289,000 29,289,000
CCC+ B3 14,730,000 USA Mobile Communications Holdings, Inc.,
9.50% due 2/01/2004 14,135,375 13,772,550
B+ B3 47,850,000 Videotron Holdings PLC, 12.08% due
7/01/2004 (a) 29,762,274 31,700,625
-------------- --------------
415,596,412 419,297,770
Conglomerates-- BB- B1 21,200,000 Coltec Industries, Inc., 10.25% due
3.3% 4/01/2002 21,560,075 22,048,000
B+ B1 25,000,000 Foamex Capital Corp., 11.25% due 10/01/2002 24,964,375 25,750,000
CCC+ B3 20,000,000 The Interlake Corp., 12.125% due 3/01/2002 20,147,500 19,700,000
B+ B2 10,000,000 JB Poindexter & Co., Inc., 12.50% due
5/15/2004 10,000,000 9,750,000
B+ B3 20,000,000 Jordan Industries Inc., 10.375% due
8/01/2003 19,961,000 18,800,000
NR* NR* 8,500,000 MacAndrews & Forbes Group, Inc., 12.25%
due 7/01/1996 8,276,775 8,542,500
NR* NR* 9,100,000 MacAndrews & Forbes Holdings, Inc.,
13% due 3/01/1999 8,568,400 9,179,625
BB- B1 30,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 29,829,688 30,750,000
-------------- --------------
143,307,813 144,520,125
Consumer NR* B3 10,000,000 Cabot Corporation, 12.50% due
Products--4.2% 7/15/2005 (k) 10,000,000 10,412,500
B NR* 39,760,000 Coleman Holdings, Inc., 11.57% due
5/27/1998 (a) 29,420,454 31,062,500
B+ Ba3 15,000,000 Coty Inc., 10.25% due 5/01/2005 15,000,000 15,675,000
NR* NR* 650,000 Liggett Group, Inc., 19.75% due 2/01/1999 596,375 614,250
B- Caa 16,750,000 Polymer Group, Inc., 12.75% due
7/15/2002 (k) 16,680,000 17,336,250
Revlon Consumer Products Corp.:
B B2 3,500,000 9.50% due 6/01/1999 3,187,415 3,517,500
B B2 22,000,000 9.375% due 4/01/2001 19,961,775 21,835,000
B- B3 9,500,000 10.50% due 2/15/2003 8,795,000 9,630,625
NR* B2 22,500,000 Samsonite Corporation, 11.125% due
7/15/2005 (k) 22,418,750 21,937,500
B+ B1 22,800,000 Sealy Corp., 9.50% due 5/01/2003 22,707,775 22,686,000
NR* B3 13,000,000 Selmer Co. Inc., 11% due 5/15/2005 (k) 12,985,000 12,675,000
BB NR* 15,000,000 Terra Holdings, Inc., 10.75% due 7/01/2005 15,000,000 16,012,500
-------------- --------------
176,752,544 183,394,625
</TABLE>
57
<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>
Containers--2.3% B B2 $ 30,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008 $ 28,437,500 $ 24,600,000
B- Caa 21,500,000 Ivex Packaging Corp., 13.22% due
3/15/2005 (a) 12,153,312 12,631,250
Owens-Illinois, Inc.:
BB Ba3 20,000,000 11% due 12/01/2003 20,810,000 22,000,000
A A3 6,000,000 9.95% due 10/15/2004 5,931,250 6,187,500
B+ Ba3 6,000,000 Plastic Container Corp., 10.75% due
4/01/2001 6,022,500 6,270,000
B- B3 32,628,000 Silgan Holdings Inc., 12.91%
due 12/15/2002 (a) 29,953,444 30,670,320
-------------- --------------
103,308,006 102,359,070
Convertible B B2 8,352,000 Builders Transport, Inc., 8% due
Bonds**--0.6% 8/15/2005 (4) 4,886,880 7,903,235
B+ Ba3 10,363,000 Lomas Financial Corp., 9% due
10/31/2003 (2) 9,654,393 1,787,618
B- B3 6,941,000 MEDIQ, Inc., 7.25% due 6/01/2006 (3) 4,539,685 5,934,555
B B2 6,000,000 Ohm Corp., 8% due 10/01/2006 (5) 4,160,000 5,535,000
B B2 5,909,000 UNC, Inc., 7.50% due 3/31/2006 (1) 3,442,530 5,236,851
-------------- --------------
26,683,488 26,397,259
Drug Stores--0.5% B B2 20,000,000 Thrifty Payless Holdings, Inc., 11.75% due
4/15/2003 20,000,000 21,125,000
Energy--8.5% BB- Ba3 24,000,000 California Energy Company, Inc., 9.875%
due 6/30/2003 24,122,500 24,600,000
B+ B1 49,500,000 Clark R&M Holdings, Inc., 11% due
2/15/2000 (a) 30,998,537 31,803,750
NR* NR* 18,500,000 Consolidated Hydro, Inc., 12.19% due
7/15/2003 (a) 13,178,908 8,972,500
Falcon Drilling Company, Inc.:
B- B2 16,000,000 9.75% due 1/15/2001 16,000,000 15,760,000
B- B3 8,500,000 12.50% due 3/15/2005 8,500,000 8,967,500
B+ B1 20,000,000 Global Marine Inc., 12.75% due 12/15/1999 20,047,500 22,200,000
Gulf Canada Resources Ltd.:
BB B1 12,750,000 9% due 8/15/1999 11,735,938 13,005,000
B+ B2 10,000,000 9.25% due 1/15/2004 9,726,605 9,950,000
Maxus Energy Corp.:
BB- B1 17,750,000 9.875% due 10/15/2002 16,726,250 17,727,813
BB- B1 5,300,000 11.50% due 11/15/2015 4,987,000 5,485,500
BB- Ba3 8,750,000 Noble Drilling Corp., 9.25% due 10/01/2003 8,925,000 9,023,438
BBB- NR* 28,000,000 Oleoducts Central S.A., 9.35% due
9/01/2005 (k) 27,967,500 28,140,000
B+ Ba3 15,000,000 Rowan Companies, Inc., 11.875% due
12/01/2001 15,085,000 16,312,500
BB- B1 25,000,000 Seagull Energy Corp., 8.625% due 8/01/2005 24,990,000 23,875,000
NR* B3 8,650,000 Tesoro Petroleum Corp., 12.75% due 3/15/2001 7,691,491 8,823,000
B- Caa 50,000,000 Transamerican Refining Corp., 18.83%
due 2/15/2002 (a) 31,989,188 35,250,000
BB+ B2 30,000,000 TransTexas Gas Corp., 11.50% due 6/15/2002 30,000,000 31,462,500
B+ B1 31,525,000 Triton Energy Corp., 10.61% due
11/01/1997 (a) 25,295,277 26,520,406
BB- B1 40,000,000 Yacimientos Petroliferos Fiscales S.A.
(YPF) (Sponsored), 8% due 2/15/2004 31,966,750 34,400,000
-------------- --------------
359,933,444 372,278,907
</TABLE>
58
<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 B3 $ 11,750,000 AMC Entertainment, Inc., 12.625%
2.5% due 8/01/2002 $ 11,696,095 $ 13,042,500
B+ B1 9,000,000 Cinemark USA Inc., 12% due 6/01/2002 9,058,750 9,855,000
Marvel Holdings Inc:
B Caa 28,000,000 9.125% due 2/15/1998 24,810,750 26,180,000
B B3 14,500,000 11.69% due 4/15/1998 (a) 10,847,202 10,512,500
B B3 5,500,000 15.97% due 4/15/1998 (a) 3,677,684 3,932,500
NR* B2 40,000,000 Six Flags Theme Parks, 12.18% due
6/15/2005 (a) (k) 29,125,369 30,200,000
Spectravision Inc. (f):
D Caa 39,250,000 11.74% due 10/01/2001 (a) 33,732,587 13,737,500
CCC- B3 24,040,000 11.65% due 12/01/2002 21,422,831 2,404,000
-------------- --------------
144,371,268 109,864,000
Financial B+ B1 21,000,000 Lomas Mortgage USA, Inc., 10.25% due
Services--1.6% 10/01/2002 21,140,625 14,805,000
NR* B3 20,000,000 Olympic Financial Ltd., 13% due 5/01/2000 20,000,000 21,500,000
BBB NR* 1,500,000 Reliance Financial Services Corp., 10.36%
due 12/01/2000 1,200,000 1,522,500
Reliance Group Holdings, Inc.:
BB+ Ba3 7,425,000 9% due 11/15/2000 6,798,125 7,415,719
BB- B1 22,575,000 9.75% due 11/15/2003 21,362,500 22,518,563
-------------- --------------
70,501,250 67,761,782
Food & Chiquita Brands International Inc.:
Beverage--4.4% B+ B3 9,655,000 11.50% due 6/01/2001 9,966,881 10,065,337
B+ B1 13,000,000 9.125% due 3/01/2004 12,990,000 12,837,500
B B3 20,000,000 Curtice Burns Food, Inc., 12.25% due
2/01/2005 (k) 20,000,000 21,250,000
B- B2 26,463,000 Envirodyne Industries, Inc., 10.25% due
12/01/2001 25,608,891 21,567,345
B B3 10,520,000 Farm Fresh, Inc., 7.50% due 3/01/2010 5,488,575 5,949,197
B B3 25,000,000 Fresh Del Monte Corp., 10% due 5/01/2003 25,012,500 20,250,000
B B2 25,000,000 Penn Traffic Co., 9.625% due 4/15/2005 24,781,750 20,375,000
B- B2 20,325,000 Pueblo Xtra International Inc., 9.50% due
8/01/2003 18,787,125 19,613,625
B- Caa 21,800,000 Seven-Up/RC Bottling Co. of Southern
California, Inc., 11.50% due 8/01/1999 (f) 21,967,500 9,592,000
Specialty Foods Corp.:
B B3 19,250,000 10.25% due 8/15/2001 18,784,375 18,431,875
NR* B3 12,000,000 11.125% due 10/01/2002 (k) 11,970,000 11,820,000
B B3 20,000,000 Texas Bottling Group, Inc., 9% due
11/15/2003 20,002,500 19,775,000
-------------- --------------
215,360,097 191,526,879
Foreign Government BB- B1 5,000,000 Republic of Argentina, 8.375% due
Obligations--0.1% 12/20/2003 3,750,000 3,731,250
Health Services-- B+ B1 11,500,000 MEDIQ, Inc., 11.125% due 7/01/1999 11,455,000 10,867,500
1.0% B+ Ba3 30,000,000 Tenet Healthcare Corp., 10.125%
due 3/01/2005 30,062,500 31,762,500
-------------- --------------
41,517,500 42,630,000
High Technology-- ComputerVision Corp.:
0.6% CCC+ B3 15,000,000 11.375% due 8/15/1999 14,473,750 15,375,000
CCC+ NR* 12,500,000 8% due 12/01/2009 6,802,472 9,437,500
-------------- --------------
21,276,222 24,812,500
</TABLE>
59
<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>
Home Builders-- Del E. Webb Corporation:
1.6% B+ Ba3 $ 3,500,000 10.875% due 3/31/2000 $ 3,524,375 $ 3,605,000
B- B2 7,000,000 9.75% due 3/01/2003 6,944,910 6,895,000
B- B2 4,000,000 9% due 2/15/2006 3,140,000 3,730,000
B B3 20,000,000 Greystone Homes Inc., 10.75% due 3/01/2004 19,115,000 17,650,000
B B1 10,250,000 K Hovnanian Enterprises Inc., 11.25%
due 4/15/2002 10,204,062 9,327,500
BB Ba2 12,000,000 Standard Pacific Corp., 10.50% due 3/01/2000 11,995,000 12,420,000
B+ Ba3 15,000,000 U.S. Home Corp., 9.75% due 6/15/2003 15,000,000 15,000,000
-------------- --------------
69,923,347 68,627,500
Hotels & B B2 17,325,000 Aztar Corp., 11% due 10/01/2002 17,557,250 16,632,000
Casinos--8.0% BB B1 30,000,000 Bally's Park Place, Inc., 9.25% due
3/15/2004 28,485,200 29,212,500
NR* Caa 12,000,000 Capital Gaming International, Inc.,
11.50% due 2/01/2001 (f) 9,426,041 6,750,000
B+ B2 35,000,000 GB Property Funding Corp., 10.875%
due 1/15/2004 33,402,500 29,618,750
NR* NR* 7,682,000 Goldriver Hotel & Casino Corp., 13.375%
due 8/31/1999 (f) 8,609,882 5,646,270
BB- B1 50,000,000 HMH Properties, Inc., 9.50% due
5/15/2005 (k) 48,464,602 49,312,500
B+ B1 40,000,000 Harrah's Jazz Company, 14.25% due
11/15/2001 39,947,500 37,500,000
BB- B1 12,000,000 John Q. Hammons Hotel, Inc., 8.875%
due 2/15/2004 10,610,000 11,385,000
BB- B1 15,000,000 MGM Grand Hotel Finance Corp., 12%
due 5/01/2002 15,230,500 16,537,500
NR* NR* 10,000,000 Monhegan Tribal, 13.50% due 11/15/2002 10,000,000 10,000,000
B- B3 10,000,000 Pioneer Finance Corp., 13.50% due
12/01/1998 10,542,500 8,550,000
Showboat, Inc.:
BB- Ba3 8,450,000 9.25% due 5/01/2008 8,233,475 8,016,937
B B2 26,550,000 13% due 8/01/2009 25,863,625 28,806,750
B B2 10,000,000 Station Casinos, Inc., 9.625% due 6/01/2003 8,817,732 9,550,000
NR* Caa 10,406,612 Trump Castle Funding, Inc., 11.75%
due 11/15/2003 9,308,474 8,078,133
B- B3 20,000,000 Trump Holdings, Inc., 15.50% due 6/15/2005 19,891,250 19,900,000
B+ B3 42,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 39,780,770 38,561,250
NR* Caa 20,434,814 Trump Taj Mahal Funding, Inc., 11.35%
due 11/15/1999++ 15,432,690 17,279,079
-------------- --------------
359,603,991 351,336,669
Industrial BB+ Ba3 25,000,000 ADT Operations Inc., 9.25% due 8/01/2003 25,094,187 26,156,250
Services--1.7% B- B3 20,000,000 Dictaphone Corp., 11.75% due 8/01/2005 20,000,000 19,800,000
B- Caa 15,230,000 Southeastern Public Service Co., 11.875%
due 2/01/1998 13,547,667 15,230,000
Thermadyne Industries, Inc.:
NR* Caa 5,706,000 10.25% due 5/01/2002 5,711,822 5,734,530
NR* Caa 7,912,000 10.75% due 11/01/2003 7,914,802 7,872,440
-------------- --------------
72,268,478 74,793,220
</TABLE>
60
<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--1.4% 12.75% due 2/01/2003 $ 26,660,625 $ 29,057,187
Maxxam Group, Inc.:
B- B3 5,000,000 11.25% due 8/01/2003 4,918,750 4,912,500
B- B3 41,155,000 12.37% due 8/01/2003 (a) 29,201,106 27,059,412
-------------- --------------
60,780,481 61,029,099
Paper--7.0% BB Ba3 15,500,000 APP International Finance, 11.75% due
10/01/2005 15,550,000 15,693,750
Container Corporation of America:
B+ B2 15,420,000 9.75% due 4/01/2003 15,433,400 15,574,200
B+ B2 13,000,000 11.25% due 5/01/2004 13,000,000 13,796,250
BB- Ba3 15,000,000 Doman Industries Ltd., 8.75% due 3/15/2004 15,000,000 14,531,250
Fort Howard Corp.:
B+ B1 10,000,000 9.25% due 3/15/2001 10,000,000 9,937,500
B B2 31,000,000 9% due 2/01/2006 28,380,625 29,295,000
B B3 25,000,000 Gaylord Container Corp., 11.50%
due 5/15/2001 25,001,250 26,125,000
BB Ba3 7,500,000 PT Indah Kiat International Finance,
12.50% due 6/15/2006 7,462,500 7,800,000
BB Ba3 10,000,000 PT Indah Kiat Pulp & Paper Corporation,
11.875% due 6/15/2002 10,000,000 10,350,000
BB NR* 5,000,000 PT International Indoray, 9.125%
due 10/15/2000 4,100,000 4,725,000
BB- Ba3 10,000,000 Rainy River Forest Products, 10.75%
due 10/15/2001 9,971,810 10,750,000
Repap New Brunswick:
BB- Ba3 7,000,000 9.875% due 7/15/2000 7,000,000 7,052,500
B+ B2 10,000,000 10.625% due 4/15/2005 10,000,000 10,150,000
B+ B1 25,000,000 Repap Wisconsin Inc., 9.25% due 2/01/2002 23,537,500 24,156,250
B B1 25,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 25,767,500 26,875,000
B+ B1 16,000,000 S.D. Warren Co., 12% due 12/15/2004 16,000,000 17,780,000
B+ B1 11,500,000 Stone Consolidated Corp., 10.25%
due 12/15/2000 11,520,000 12,161,250
Stone Container Corp.:
B- B2 6,500,000 11% due 8/15/1999 6,418,750 6,792,500
B B1 15,000,000 9.875% due 2/01/2001 13,948,672 14,831,250
B+ B1 15,000,000 10.75% due 10/01/2002 14,825,000 15,581,250
BB B1 10,000,000 Tjiwa Kimia, Tjiwi Kimia International
Finance, 13.25% due 8/01/2001 10,021,775 10,850,000
-------------- --------------
292,938,782 304,807,950
Pollution B B3 22,950,000 Mid-American Waste Systems, Inc.,
Control--0.5% 12.25% due 2/15/2003 22,891,000 23,294,250
Restaurants/ CCC+ Caa 25,000,000 Flagstar Corp., 11.375% due 9/15/2003 25,092,500 19,406,250
Food Services B+ Ba3 25,000,000 Foodmaker, Inc., 9.75% due 11/01/2003 24,296,200 21,125,000
- --0.9% -------------- --------------
49,388,700 40,531,250
</TABLE>
61
<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>
Retail NR* NR* $ 15,000,000 Cumberland Farms, 10.50% due
Specialty--0.9% 10/01/2003 (k) $ 14,681,250 $ 13,012,500
B- B3 10,000,000 Pamida Holdings, Inc., 11.75% due
3/15/2003 9,997,500 8,450,000
B+ B1 20,000,000 Specialty Retailers Group, Inc., 10% due
8/15/2000 20,000,000 19,400,000
-------------- --------------
44,678,750 40,862,500
Steel--2.9% B B2 20,000,000 A.K. Steel Holding Corp., 10.75%
due 4/01/2004 20,000,000 21,437,500
NR* B1 25,000,000 Gulf States Steel, 13.50% due 4/15/2003 (k) 24,760,851 23,250,000
B B2 20,000,000 Republic Engineered Steel Inc., 9.875%
due 12/15/2001 19,455,000 18,700,000
B+ B1 22,550,000 WCI Steel, Inc., 10.50% due 3/01/2002 22,399,875 21,760,750
B B2 23,000,000 Weirton Steel Corporation, 10.75%
due 6/01/2005 (k) 22,413,750 21,332,500
BB B1 20,000,000 Wheeling-Pittsburg Steel Corp., 9.375% due
11/15/2003 18,670,000 18,350,000
-------------- --------------
127,699,476 124,830,750
Textiles--0.7% B+ B3 30,000,000 Westpoint Stevens Inc., 9.375%
due 12/15/2005 30,100,000 29,287,500
Transportation BB- Ba2 15,000,000 Eletson Holdings, Inc., 9.25% due
Services--2.3% 11/15/2003 14,372,500 14,707,219
BB Ba2 20,000,000 Gearbulk Holdings, Ltd., 11.25% due
12/01/2004 20,518,750 21,100,000
Transportacion Maritima Mexicana,
S.A. de C.V.:
BB- Ba2 5,475,000 8.50% due 10/15/2000 3,175,500 4,927,500
BB- Ba2 16,950,000 9.25% due 5/15/2003 14,263,875 14,936,340
NR* NR* 38,106,000 Transtar Holdings, L.P., 12.42% due
12/15/2003 (a) 23,092,701 24,197,310
B+ Ba3 20,000,000 Viking Star Shipping Co., Inc., 9.625%
due 7/15/2003 20,045,000 20,450,000
-------------- --------------
95,468,326 100,318,369
Utilities--5.6% Beaver Valley Funding Corp.:
B+ B1 10,051,000 8.625% due 6/01/2007 8,986,077 9,260,087
B+ B1 34,469,000 9% due 6/01/2017 31,081,506 28,784,717
CTC Mansfield Funding Corp.:
B+ Ba3 16,000,000 10.25% due 3/30/2003 15,952,640 16,240,000
B+ Ba3 25,000,000 11.125% due 9/30/2016 26,416,875 25,793,500
BB Ba2 15,000,000 Cleveland Electric Illuminating Co.,
9.50% due 5/15/2005 14,971,200 15,077,250
BB- B1 38,500,000 Metrogas Inc., 12% due 8/15/2000 (k) 38,492,500 37,826,250
Midland Cogeneration Venture
Limited Partnership:
BB Ba3 4,329,158 10.33% due 7/23/2002++++ 4,242,575 4,515,957
B- B2 11,250,000 11.75% due 7/23/2005 11,310,000 11,845,631
B- B2 5,500,000 13.25% due 7/23/2006 6,002,565 5,681,142
NR* NR* 16,272,122 Sunflower Electric Power Corp., 8%
due 12/31/2016 (k)++++ 10,673,917 12,895,656
B+ B1 20,000,000 Texas-New Mexico Power Corp., 10.75%
due 9/15/2003 20,065,000 21,300,000
</TABLE>
62
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (concluded) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Utilities NR* NR* $ 20,950,000 Transportadora de Gas del Sur, 7.75%
(concluded) due 12/23/1998 $ 18,253,500 $ 18,959,750
Tucson Electric & Power Co. (k):
NR* NR* 19,023,082 10.21% due 1/01/2009 17,593,025 18,706,728
NR* NR* 17,426,207 10.732% due 1/01/2013 16,252,461 16,931,826
-------------- --------------
240,293,841 243,818,494
Total Investments in Bonds--88.4% 3,872,896,281 3,855,773,945
<CAPTION>
Shares Held
Preferred Stocks
<S> <C> <S> <C> <C>
Broadcasting & 128,730 K--III Communications Corp. 12,997,276 12,631,605
Publishing--0.6% 421,000 K--III Communications Corp. 10,562,750 11,340,687
-------------- --------------
23,560,026 23,972,292
Capital Goods--0.2% 325,775 BCP/Essex Holdings, Inc. (k) 8,255,060 8,347,984
Energy--0.3% 29,517 Consolidated Hydro, Inc. 14,891,917 14,765,879
250 Transamerican Energy 25,000 25,062
-------------- --------------
14,916,917 14,790,941
Paper--0.6% 830,000 S.D. Warren Co. 23,405,940 25,937,500
Steel--0.3% 550,000 USX Capital LLC 13,750,000 13,612,500
Total Investments in Preferred
Stocks--2.0% 83,887,943 86,661,217
Common Stocks
Consumer 200,369 Culligan Water Technologies 1,686,248 3,005,535
Products--0.2% 200,369 Samsonite Corp. 2,398,992 2,366,859
-------------- --------------
4,085,240 5,372,394
Energy--0.0% 57,237 Mesa Inc. 325,690 271,876
Financial Services--0.0% 132,585 Lomas Financial Corporation 1,689,807 74,579
Food & 120,194 Abco Markets Inc. (k) 4,054,875 1,584,759
Beverage--0.2% 144,250 Foodbrands America 5,728,121 2,046,547
521,389 Grand Union Co. (f) 29,475,625 6,745,470
-------------- --------------
39,258,621 10,376,776
Hotels & 320,040 Capital Gaming International Inc. 2,882,508 89,386
Casinos--0.0% 75,500 Goldriver Hotel & Casino Corporation
(Class B) (d) 540,045 94,375
23,000 Trump Taj Mahal Holding Corp. (Class A) 11,500 293,250
-------------- --------------
3,434,053 477,011
Industrial Services--0.0% 11,400 Thermadyne Industries, Inc. 165,300 205,912
Total Investments in
Common Stocks--0.4% 48,958,711 16,778,548
</TABLE>
63
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value
Industries Held Issue Cost (Note 1a)
Trusts & Warrants High Income Portfolio
<S> <C> <S> <C> <C>
Broadcasting & 177,500 American Telecasting Inc. (Warrants) (e) $ 413,723 $ 576,875
Publishing--0.0%
Cellular Telephones--0.0% 57,040 Page Mart Inc. (Warrants) (e) 236,127 313,720
Energy--0.0% 18,000 Consolidated Hydro Inc. (Warrants) (e) 390,123 258,750
407,678 Transamerican Refining Corp. (Warrants) (e) 950,408 1,477,833
20,833 UGI Corp. (Warrants) (e) 91,057 3,437
-------------- --------------
1,431,588 1,740,020
Financial Services--0.0% 7,194 Reliance Group Holdings, Inc. (Warrants) (e) 0 0
High Technology--0.0% 394,563 Anacomp, Inc. (Warrants) (e) (k) 495,400 36,990
Hotels & 273,000 Capital Gaming International Inc.
Casinos--0.0% (Warrants) (e) 1,344,151 12,967
7,550 Goldriver Hotel & Casino Corp.
Liquidating Trust (k) 192,320 68,514
113,386 Trump Castle Funding, Inc. (Warrants) (e) 0 0
-------------- --------------
1,536,471 81,481
Paper--0.0% 60,000 S.D. Warren Co. (Warrants) (e) 165,310 405,000
Steel--0.0% 25,000 Gulf States Steel (Warrants) (e) 275,399 21,875
Telecommunications--0.0% 302,500 ALC Communications Corp. (Warrants) (e) 831,875 0
Total Investments in Trusts &
Warrants--0.0% 5,385,893 3,175,961
Face
Amount
Short-Term Securities
Commercial $ 30,000,000 ANZ (Delaware), Inc:
Paper***--9.0% 5.71% due 10/11/1995 29,957,175 29,957,175
10,000,000 Federal Home Loan Banks, Discount Note,
5.62% due 10/26/1995 9,962,533 9,962,533
100,000,000 Ford Motor Credit Co., 5.74%
due 10/02/1995 100,000,000 100,000,000
69,769,000 General Electric Capital Corp.,
6.45% due 10/02/1995 69,769,000 69,769,000
30,000,000 JC Penney Funding Corp., 5.75% due
11/16/1995 29,784,375 29,784,375
Navistar Financial Corporation:
20,000,000 6.125% due 10/19/1995 19,942,153 19,942,153
25,000,000 6.125% due 10/23/1995 24,910,677 24,910,677
Onyx Corp.:
20,000,000 6.45% due 10/02/1995 20,000,000 20,000,000
30,000,000 6.45% due 10/06/1995 29,978,500 29,978,500
Vons Supermarket:
15,000,000 6% due 10/16/1995 14,965,000 14,965,000
20,000,000 6% due 10/19/1995 19,943,333 19,943,333
20,000,000 6.05% due 10/26/1995 19,919,333 19,919,333
-------------- --------------
389,132,079 389,132,079
</TABLE>
64
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Issue Cost (Note 1a)
Short-Term Securities (concluded) High Income Portfolio
<S> <C> <S> <C> <C>
US Government Agency
Obligations***--0.0% $ 780,000 Federal Home Loan Banks, 5.62% due
10/16/1995 $ 778,295 $ 778,295
Total Investments in Short-Term
Securities--9.0% 389,910,374 389,910,374
Total Investments--99.8% $4,401,039,202 4,352,300,045
==============
Other Assets Less Liabilities--0.2% 8,482,583
--------------
Net Assets--100.0% $4,360,782,628
==============
<FN>
++Represents a pay-in-kind security which may pay interest/dividend in
additional face/shares.
++++Subject to principal paydowns.
*Not Rated.
**Industry classifications for convertible bonds are: (1) Conglomerates;
(2) Financial Services; (3) Health Services; (4) Transportation Services;
(5) Waste Management.
***Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Portfolio.
(a)Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Portfolio.
(b)Each $1,000 face amount contains one warrant of American Telecasting, Inc.
(c)Each $1,000 face amount contains one warrant of Cellular Communications Corp.
(d)Each share of Series B Stock contains a right which entitles the Portfolio
to purchase a predetermined number of shares of preferred stock. The
purchase price and number of shares are subject to adjustment.
(e)Warrants entitle the portfolio to purchase a predetermined number of shares
of common stock/face amount of bonds. The purchase price and number of
shares/face amount are subject to adjustment under certain conditions until
the expiration date.
(f)Non-income producing security.
(g)Each $1,000 face amount contains one warrant of Australis Media Ltd.
(h)Each $1,000 face amount contains one warrant of Peoples Choice T.V.
Corporation.
(i)Each $1,000 face amount contains one warrant of United International
Holdings, Inc.
(j)Each $1,000 face amount contains six warrants of Echostar Communications,
Corp.
(k)Restricted securities. The value of the Portfolio's investments in
restricted securities was approximately $437,709,000, representing
10.0% of 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 36,990
BCP/Essex Holdings, Inc. 5/26/1995--6/20/1995 8,255,060 8,347,984
Bell Cablemedia PLC, 11.50%
due 9/15/2005 9/13/1995--9/27/1995 26,766,422 27,844,343
Cabot Corporation, 12.50%
due 7/15/2005 6/29/1995 10,000,000 10,412,500
Cumberland Farms,
10.50% due 10/01/2003 2/18/1994 14,681,250 13,012,500
Exide Corp., 10% due 4/15/2005 4/21/1995--6/28/1995 10,071,250 10,600,000
Goldriver Hotel & Casino
Corp. Liquidating Trust 8/31/1992 192,320 68,514
Gulf State Steel, 13.50%
due 4/15/2003 4/12/1995--6/08/1995 24,760,851 23,250,000
HMH Properties, Inc.,
9.50% due 5/15/2005 5/18/1995--9/06/1995 48,464,602 49,312,500
International Wire Group,
11.75% due 6/01/2005 6/07/1995--8/30/1995 22,012,500 22,055,000
Metrogas Inc., 12% due 8/15/2000 8/07/1995--9/29/1995 38,492,500 37,826,250
Oleoducto Central S.A.,
9.35% due 9/01/2005 9/21/1995 27,967,500 28,140,000
Polymer Group, Inc.,
12.75% due 7/15/2002 6/17/1994 16,680,000 17,336,250
Samsonite Corporation,
11.125% due 7/15/2005 7/07/1995--10/03/1995 22,418,750 21,937,500
Selmer Inc., 11% due 5/15/2005 5/18/1995--9/06/1995 12,985,000 12,675,000
Six Flags Theme Parks,
12.18% due 6/01/2005 6/16/1995--9/06/1995 29,125,369 30,200,000
Specialty Foods Corp.,
11.125% due 10/01/2002 7/12/1995--9/08/1995 11,970,000 11,820,000
Sunflower Electric Power
Corp., 8% due 12/31/2016 11/29/1991--7/15/1994 10,673,917 12,895,656
Telecom Argentina S.A.,
8.375% due 10/18/2000 7/18/1994--7/26/1994 25,952,625 27,667,500
Tucson Electric & Power Co.:
10.21% due 1/01/2009 6/04/1993--7/19/1994 17,593,025 18,706,728
10.732% due 1/01/2013 3/01/1993--7/16/1993 16,252,461 16,931,826
Weirton Steel Corporation,
10.75% due 6/01/2005 6/05/1995--9/22/1995 22,413,750 21,332,500
Young Broadcasting Inc.,
10.125% due 2/15/2005 6/07/1995 13,000,000 13,715,000
$435,279,427 $437,709,300
============ ============
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
65
<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--8.8% AAA Aaa $11,000,000 8.875% due 11/15/1997 $ 11,354,063 $ 11,644,559
AAA Aaa 5,000,000 9.25% due 8/15/1998 5,289,844 5,433,581
AAA Aaa 10,000,000 6.875% due 8/31/1999 10,301,562 10,301,525
AAA Aaa 7,000,000 5.875% due 6/30/2000 7,005,670 6,963,897
AAA Aaa 5,000,000 6.25% due 8/31/2000 5,048,437 5,048,431
AAA Aaa 3,000,000 7.50% due 11/15/2001 3,200,625 3,213,757
AAA Aaa 8,000,000 6.375% due 8/15/2002 7,982,882 8,121,220
AAA Aaa 6,000,000 6.50% due 5/15/2005 6,088,125 6,139,695
AAA Aaa 7,500,000 6.50% due 8/15/2005 7,616,016 7,685,147
AAA Aaa 9,500,000 8.875% due 8/15/2017 10,806,250 11,915,114
AAA Aaa 12,000,000 7.50% due 11/15/2024 13,037,969 13,357,515
AAA Aaa 10,000,000 7.625% due 2/15/2025 11,221,875 11,324,962
-------------- --------------
98,953,318 101,149,403
Banking--6.0% A A2 6,000,000 BankAmerica Corp., 7.125% due 5/12/2005 5,913,000 6,125,520
A A2 7,000,000 Citicorp, 8.80% due 2/01/2000 7,000,000 7,568,282
A+ A1 6,000,000 Fifth Third Bank, 6.75% due 7/15/2005 5,960,400 6,022,470
A- A3 8,500,000 First Bank System, Inc., 6.875% due
9/15/2007 8,421,290 8,471,865
A- A3 7,500,000 First Union Corp., 7.05% due 8/01/2005 7,417,500 7,596,825
A- A3 5,000,000 Golden West Financial Corp., 9.15%
due 5/23/1998 5,678,700 5,337,400
A- A2 7,650,000 Maybank New York, 7.125% due 9/15/2005 7,600,887 7,682,359
NationsBank Corporation:
A A2 5,000,000 7.50% due 2/15/1997 4,995,700 5,088,575
A- A3 6,000,000 7.75% due 8/15/2015 6,000,000 6,186,750
A+ A1 3,500,000 Norwest Corp., 6.625% due 3/15/2003 3,553,235 3,481,957
AA+ Aa2 6,000,000 Wachovia Bank of North Carolina,
6.55% due 6/09/1997 (a) 5,995,620 6,053,860
-------------- --------------
68,536,332 69,615,863
Federal AAA Aaa 15,000,000 Federal National Mortgage Association,
Agencies--1.4% 7.85% due 9/10/2004 14,817,437 15,653,925
Financial Chrysler Financial Corp.:
Services-- A- A3 2,000,000 9.50% due 12/15/1999 2,263,120 2,192,770
Captive--4.1% A- A3 14,000,000 10.95% due 8/01/2017 16,298,000 15,684,899
A+ A1 1,000,000 Ford Motor Credit Co., 7.75% due
3/15/2005 999,090 1,059,215
General Motors Acceptance Corp.:
BBB+ A3 7,630,000 5% due 1/27/1997 7,501,587 7,522,704
BBB+ A3 8,000,000 7.60% due 1/20/1998 7,829,600 8,210,755
BBB+ A3 6,100,000 7.125% due 5/11/1998 6,168,808 6,206,365
BBB+ A3 7,000,000 7.40% due 9/01/2025 6,943,580 7,010,570
-------------- --------------
48,003,785 47,887,278
Financial BBB- Baa2 15,000,000 Advanta Corp., 6.26% due 9/01/1997 14,991,450 14,962,050
Services-- A+ A1 2,500,000 American General Finance Corp., 8.50%
Consumer--4.7% due 8/15/1998 2,848,650 2,644,300
Associates Corp. of North America:
AA- Aa3 6,000,000 8.375% due 1/15/1998 6,019,320 6,273,720
AA- Aa3 2,000,000 5.25% due 9/01/1998 1,939,180 1,947,620
AA- Aa3 1,500,000 7.25% due 9/01/1999 1,481,430 1,545,900
A A2 19,000,000 Beneficial Corporation, 5.65% due
10/14/1997 (b) 19,000,000 18,912,049
A+ Aa3 8,000,000 CIT Group Holdings, Inc., 5.70%
due 5/02/1997 (b) 8,000,000 7,974,840
-------------- --------------
54,280,030 54,260,479
</TABLE>
66
<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>
Financial Bear Stearns Companies, Inc.:
Services-- A A2 $ 9,900,000 6.70% due 8/01/2003 $ 8,945,640 $ 9,685,368
Other--7.7% A A2 3,000,000 8.75% due 3/15/2004 3,224,430 3,327,285
Dean Witter, Discover & Co.:
A A2 3,500,000 6.75% due 8/15/2000 3,486,805 3,539,165
A A2 3,000,000 6.50% due 11/01/2005 2,965,350 2,915,145
A A2 6,000,000 6.75% due 10/15/2013 5,880,540 5,616,540
General Electric Capital Corp.:
AAA Aaa 6,000,000 14% due 7/01/1996 (a) 6,811,140 6,348,282
AAA Aaa 6,200,000 8.125% due 5/15/2012 6,301,726 6,859,246
A A3 5,000,000 Lehman Brothers Inc., 7.375% due
8/15/1997 4,993,500 5,069,075
A+ A1 5,000,000 Morgan Stanley Group Inc., 8.875% due
10/15/2001 5,755,450 5,539,450
BBB+ Baa1 10,000,000 PaineWebber Group Inc., 8.875% due
3/15/2005 9,997,850 11,015,500
Smith Barney Holdings, Inc.:
A- A3 3,000,000 7.50% due 5/01/2002 3,046,590 3,110,895
A- A3 6,000,000 6.875% due 6/15/2005 5,957,580 5,936,940
The Travelers Corp.:
A+ A2 9,000,000 9.50% due 3/01/2002 9,610,100 10,291,275
A+ A2 9,000,000 7.875% due 5/15/2025 8,994,780 9,390,015
-------------- --------------
85,971,481 88,644,181
Foreign*--10.5% A+ Aa2 15,000,000 ABN AMRO Bank, N.V., 7.25% due
5/31/2005 (2) 15,028,410 15,446,250
AA- A1 10,000,000 Aegon N.V., 8% due 8/15/2006 (2) 9,908,700 10,879,299
BBB+ A3 8,885,000 Bangkok Bank Public Company Limited,
7.25% due 9/15/2005 (c) 8,799,674 8,887,576
CRA Finance Ltd. (1):
A+ A2 4,000,000 6.50% due 12/01/2003 4,005,890 3,921,600
A+ A2 3,500,000 7.125% due 12/01/2013 3,479,700 3,405,570
AAA Aaa 4,000,000 Export-Import Bank of Japan, 8.35%
due 12/01/1999 (3) 4,226,640 4,319,000
Metropolis of Tokyo (Japan) (3):
AAA Aaa 3,550,000 9.25% due 10/11/1998 4,134,756 3,842,289
AAA Aaa 3,000,000 8.70% due 10/05/1999 3,469,410 3,254,865
AAA Aaa 4,000,000 9.25% due 11/08/2000 4,219,660 4,507,280
BBB Baa1 5,000,000 Petro-Canada, 9.25% due 10/15/2021 (4) 5,300,650 5,943,875
A+ A2 12,000,000 Pohang Iron & Steel Industries,
7.375% due 5/15/2005 (7) 12,217,645 12,242,580
AA- Aa3 11,000,000 Province of Ontario (Canada), 7.75%
due 6/04/2002 (5) 10,910,730 11,725,285
Province of Quebec (Canada) (5):
A+ A2 4,000,000 8.80% due 4/15/2003 4,048,000 4,452,740
A+ A2 4,500,000 13% due 10/01/2013 5,706,285 5,462,122
AA A1 13,803,000 Republic of Italy, 6.875% due 9/27/2023 (6) 11,896,625 12,602,415
A+ A1 5,500,000 Telekom Malaysia Berhad, 7.125% due
8/01/2005 (6) (c) 5,463,480 5,612,997
A A2 5,000,000 WMC (Western Mining Corp.) Finance,
7.25% due 11/15/2013 (1) 5,036,900 5,000,850
-------------- --------------
117,853,155 121,506,593
</TABLE>
67
<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-- A- A2 $ 6,000,000 American Home Products Corporation,
Consumer 7.90% due 2/15/2005 $ 5,988,300 $ 6,497,070
Goods--12.5% AA- A1 3,000,000 Anheuser-Busch Cos., Inc., 8.75% due
12/01/1999 3,367,590 3,270,705
A+ A1 10,000,000 Bass America, Inc., 8.125% due 3/31/2002 10,250,610 10,768,950
Dillard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,254,860 4,136,100
A+ A2 5,000,000 9.125% due 8/01/2011 6,054,000 5,964,650
Grand Metropolitan Investment Corp.:
A+ A2 4,000,000 6.50% due 9/15/1999 4,000,000 4,009,840
A+ A2 9,000,000 8.625% due 8/15/2001 9,412,690 9,833,490
A+ A1 5,000,000 JC Penney & Co., 6.375% due 9/15/2000 4,991,900 4,988,155
AAA Aaa 7,000,000 Johnson & Johnson Co., 8.72% due
11/01/2024 7,057,420 7,954,835
AA Aa2 5,000,000 Kimberly-Clark Corporation, 7.875%
due 2/01/2023 5,084,900 5,252,900
BBB Baa1 10,000,000 Kmart Corporation, 7.24% due 7/06/1999 9,734,500 10,039,237
A A2 9,500,000 Philip Morris Cos., Inc., 9% due
1/01/2001 9,698,815 10,404,305
RJR Nabisco, Inc.:
BBB- Baa3 7,000,000 8.75% due 4/15/2004 6,794,580 7,106,330
BBB- Baa3 13,000,000 8.75% due 8/15/2005 12,570,510 13,157,235
BBB Baa2 9,000,000 7.55% due 6/15/2015 8,981,960 8,978,130
Sears, Roebuck & Co.:
BBB A2 5,000,000 9.25% due 4/15/1998 5,712,125 5,333,550
BBB A2 8,785,000 8.45% due 11/01/1998 9,709,797 9,277,443
AA Aa1 7,000,000 Wal-Mart Stores, Inc., 8.50% due 9/15/2024 6,872,720 7,779,800
A A2 9,000,000 Weyerhaeuser Company, 7.95% due
3/15/2025 8,901,360 9,882,630
-------------- --------------
139,438,637 144,635,355
Industrial- BP America Inc.:
Energy--5.0% AA- A1 11,000,000 10% due 7/01/2018 11,869,080 12,360,095
AA- A1 4,075,000 9.375% due 11/01/2000 4,488,287 4,603,731
AA- A1 9,000,000 7.875% due 5/15/2002 9,519,510 9,692,505
A+ A1 12,000,000 Petroliam Nasional Berhad, 6.875%
due 7/01/2003 (c) 11,929,530 12,060,780
AA- Aa3 5,000,000 Repsol International Finance, 7%
due 8/01/2005 4,997,450 5,087,000
Texaco Capital Inc.:
A+ A1 5,500,000 9% due 12/15/1999 6,215,190 6,018,540
A+ A1 2,000,000 8.875% due 2/15/2021 1,999,720 2,451,182
A+ A1 4,500,000 8.625% due 4/01/2032 4,792,770 5,296,500
-------------- --------------
55,811,537 57,570,333
Industrial-- BBB Baa2 12,000,000 Applied Materials Inc., 8% due 9/01/2004 11,912,280 12,841,740
Other--17.9% Archer-Daniels-Midland Co.:
AA- Aa2 8,100,000 8.875% due 4/15/2011 8,733,635 9,464,283
AA- Aa2 2,000,000 8.125% due 6/01/2012 2,125,020 2,208,400
AA- Aa3 7,800,000 Capital Cities/ABC, Inc., 8.75% due
8/15/2021 8,800,114 9,149,595
A- A3 11,000,000 Carnival Cruise Lines, Inc., 7.70%
due 7/15/2004 11,028,940 11,546,149
Columbia/HCA Healthcare Corp.:
BBB+ A3 5,000,000 6.87% due 9/15/2003 5,000,000 5,008,830
BBB+ A3 6,000,000 9% due 12/15/2014 6,651,540 7,029,397
</TABLE>
68
<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-- BBB Baa3 $ 15,000,000 Developers Diversified Realty Corporation,
Other 6.717% due 12/27/1995 (b) $ 14,978,550 $ 15,020,745
(concluded) AA- Aa3 12,000,000 Du Pont (E.I.) de Nemours & Co., 8.25%
due 1/15/2022 12,481,570 12,869,519
A A1 2,000,000 Electronic Data Systems Corp.,
6.85% due 5/15/2000 (c) 1,998,420 2,027,500
BBB Baa2 9,000,000 Federal Express Corporation, 9.65% due
6/15/2012 10,137,590 10,753,740
Ford Capital B.V.:
A+ A1 10,000,000 9.875% due 5/15/2002 10,531,200 11,651,599
A+ A1 3,995,000 9.50% due 6/01/2010 4,430,215 4,832,212
AA- A2 6,500,000 Hubbell Incorporated, 6.625% due 10/01/2005 6,459,700 6,459,700
BBB- Baa3 9,000,000 James River Corp. of Virginia, 6.70% due
11/15/2003 8,350,380 8,854,110
AA Aa2 8,500,000 Kaiser Foundation Hospital, 9.55% due
7/15/2005 9,561,225 10,170,547
BBB Baa2 6,000,000 Loral Corporation, 8.375% due 6/15/2024 5,493,240 6,518,580
News American Holdings, Inc.:
BBB- Baa3 4,000,000 9.125% due 10/15/1999 4,298,640 4,348,260
A A3 6,000,000 9.25% due 2/01/2013 6,786,960 6,785,820
BBB Baa2 8,000,000 Placer Dome Inc., 7.75% due 6/15/2015 7,922,480 7,903,960
AA- Aa3 9,000,000 Reed Elsevier Capital, 7.50% due 5/15/2025 8,899,380 9,286,766
Telecommunications, Inc.:
BBB- Baa3 7,059,000 9.25% due 4/15/2002 7,780,924 7,811,277
BBB- Baa3 10,000,000 8.25% due 1/15/2003 9,713,200 10,448,100
BBB- Baa3 2,500,000 9.80% due 2/01/2012 2,631,150 2,849,000
Time Warner Entertainment Co.:
BBB- Baa3 5,000,000 10.15% due 5/01/2012 5,036,200 5,999,225
BBB- Baa3 5,000,000 8.375% due 3/15/2023 5,281,450 5,131,650
-------------- --------------
197,024,003 206,970,704
Supranational-- AAA Aaa 3,000,000 Asian Development Bank, 10.75% due
3.3% 6/01/1997 3,302,730 3,216,015
AAA Aaa 8,000,000 Inter-American Development Bank Co.,
8.875% due 6/01/2009 10,115,250 9,748,960
AAA Aaa 19,000,000 International Bank for Reconstruction &
Development, 12.375% due 10/15/2002 24,032,800 25,324,720
-------------- --------------
37,450,780 38,289,695
Transportation-- Southwest Airlines, Inc.:
1.9% A- Baa1 10,000,000 9.40% due 7/01/2001 11,326,040 11,238,749
A- Baa1 2,000,000 8% due 3/01/2005 1,989,220 2,151,200
A- Baa1 3,000,000 7.875% due 9/01/2007 2,983,950 3,213,135
A- A3 5,000,000 Union Pacific Corp., 7.375% due 5/15/2001 5,000,000 5,183,600
-------------- --------------
21,299,210 21,786,684
Utilities-- AA Aa3 6,000,000 AT&T Corporation, 8.35% due 1/15/2025 5,893,620 6,438,840
Communications-- GTE Corp.:
2.2% BBB+ Baa1 4,000,000 9.10% due 6/01/2003 4,242,720 4,537,660
BBB+ Baa1 9,500,000 8.75% due 11/01/2021 9,904,225 10,930,462
A+ A1 2,000,000 Southwestern Bell Telecommunications
Corp., 6.125% due 3/01/2000 2,011,250 1,984,500
AA- Aa3 1,000,000 US West Communications, 7.25%
due 9/15/2025 998,300 1,007,635
-------------- --------------
23,050,115 24,899,097
</TABLE>
69
<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-- A A2 $ 5,000,000 Central Power & Light Co., 6%
Electric--3.0% due 10/01/1997 $ 4,973,400 $ 4,971,350
AA- Aa2 6,000,000 Duke Power Co., 8% due 11/01/1999 5,964,660 6,356,160
A A2 2,000,000 Georgia Power Co., 6.125% due 9/01/1999 1,961,420 1,980,310
AA- A1 3,000,000 Northern States Power Company, 7.125%
due 7/01/2025 2,972,040 2,957,421
BBB+ Baa1 3,425,000 PECO Energy Co., 8% due 4/01/2002 3,459,387 3,650,331
AA- Aa3 5,000,000 TECO Energy, Inc., 9.27% due 6/12/2000 (a) 5,000,000 5,566,736
A A2 8,500,000 Virginia Electric & Power Co., 8.625%
due 10/01/2024 8,377,160 9,451,447
-------------- --------------
32,708,067 34,933,755
Utilities-- Consolidated Natural Gas Co.:
Gas--0.8% AA- A1 7,500,000 8.75% due 6/01/1999 7,450,660 8,070,750
AA- A1 1,000,000 7.375% due 4/01/2005 993,380 1,048,045
-------------- --------------
8,444,040 9,118,795
Total Investments in Bonds &
Notes--89.8% 1,003,641,927 1,036,922,140
Short-Term Securities
Commercial 50,000,000 American Express Credit Corp.,
Paper**--5.3% 5.65% due 10/02/1995 50,000,000 50,000,000
12,000,000 General Electric Capital Corp.,
5.72% due 10/02/1995 12,000,000 12,000,000
-------------- --------------
62,000,000 62,000,000
Repurchase 51,715,000 UBS Securities Funding, Inc., purchased
Agreements***--4.5% on 9/29/1995 to yield 6.42%
due 10/02/1995 51,715,000 51,715,000
Total Investments in Short-Term
Securities--9.8% 113,715,000 113,715,000
Total Investments--99.6% $1,117,356,927 1,150,637,140
==============
Other Assets Less Liabilities--0.4% 4,199,002
--------------
Net Assets--100.0% $1,154,836,142
==============
<FN>
*Corresponding industry groups for foreign securities which are denominated in
US dollars: (1) Industrial Mining. (2) Financial Institution. (3) Government
Entity; Guaranteed by Japan. (4) Energy Company; not Guaranteed by Canada.
(5) Government Entity; Guaranteed by the Province. (6) Government Entity.
(7) Industrial; Metals.
**Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Portfolio.
***Repurchase Agreements are fully collateralized by US Government Obligations.
(a)Medium-Term Note.
(b)Floating Rate Note.
(c)Restricted securities as to resale. The value of the Portfolio's investment
in restricted securities was approximately $28,509,000, representing 2.5% of
net assets.
<CAPTION>
Acquisition Value
Issue Dates Cost (Note 1a)
<S> <C> <C> <C>
Bangkok Bank Public Company Limited,
7.25% due 9/15/2005 9/22/1995 $ 8,799,674 $ 8,887,576
Electronic Data Systems Corp.,
6.85% due 5/15/2000 5/19/1995 1,998,420 2,027,500
Petroliam Nasional Berhad,
6.875% due 7/01/2003 7/14/1995--8/07/1995 11,929,530 12,060,780
Telekom Malaysia Berhad,
7.125% due 8/01/2005 8/04/1995 5,463,480 5,612,997
$28,191,104 $28,588,853
=========== ===========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
70
<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--12.1% AAA Aaa $ 1,000,000 8.875% due 11/15/1997 $ 1,032,188 $ 1,058,596
AAA Aaa 2,000,000 6.875% due 8/31/1999 2,060,312 2,060,305
AAA Aaa 5,500,000 5.875% due 6/30/2000 5,512,465 5,471,634
AAA Aaa 7,000,000 6.25% due 8/31/2000 7,067,812 7,067,804
AAA Aaa 2,000,000 7.875% due 8/15/2001 2,076,563 2,175,005
AAA Aaa 2,000,000 7.50% due 11/15/2001 2,133,750 2,142,505
AAA Aaa 5,000,000 6.375% due 8/15/2002 5,125,000 5,075,762
AAA Aaa 5,000,000 7.25% due 5/15/2004 5,026,563 5,342,962
AAA Aaa 5,000,000 7.875% due 11/15/2004 5,246,875 5,561,712
AAA Aaa 11,500,000 6.50% due 5/15/2005 11,739,219 11,767,749
AAA Aaa 7,000,000 6.50% due 8/15/2005 7,146,719 7,172,804
-------------- --------------
54,167,466 54,896,838
Banking--8.2% A A2 3,000,000 BankAmerica Corp., 7.125% due 5/12/2005 2,956,500 3,062,760
A+ A2 2,000,000 Citicorp, 8.80% due 2/01/2000 2,000,000 2,162,366
A+ A1 4,000,000 Fifth Third Bank, 6.75% due 7/15/2005 3,973,600 4,014,980
A- A3 2,500,000 First Union Corp., 7.05% due 8/01/2005 2,472,500 2,532,275
A- A3 4,000,000 Golden West Financial Corp., 9.15%
due 5/23/1998 4,542,960 4,269,920
A- A3 6,000,000 Mellon Financial, 6.875% due 3/01/2003 5,483,220 6,014,190
A+ A1 1,000,000 Norwest Corp., 6.625% due 3/15/2003 1,003,060 994,845
AA+ Aa2 5,000,000 Wachovia Corporation, 6% due 3/15/1999 4,890,950 4,957,652
BBB Baa1 9,000,000 Washington Mutual Inc., 7.25%
due 8/15/2005 8,930,520 9,200,700
-------------- --------------
36,253,310 37,209,688
Federal AAA Aaa 2,500,000 Federal National Mortgage Association,
Agencies--0.6% 7.85% due 9/10/2004 2,496,484 2,608,987
Financial A- A3 8,000,000 Chrysler Financial Corp., 9.50% due 9,275,380 8,771,080
Services-- 12/15/1999
Captive--6.6% Ford Motor Credit Co.:
A+ A1 2,000,000 9.875% due 5/15/2002 2,300,380 2,330,320
A+ A1 5,000,000 7.75% due 3/15/2005 4,995,450 5,296,075
General Motors Acceptance Corp.:
BBB+ A3 6,000,000 7.85% due 3/05/1997 5,977,380 6,135,899
BBB+ A3 2,000,000 7.60% due 1/20/1998 1,957,400 2,052,689
BBB+ A3 5,000,000 7.125% due 5/11/1998 5,056,400 5,087,185
-------------- --------------
29,562,390 29,673,248
Financial BBB- Baa2 10,000,000 Advanta Corp., 6.26% due 9/01/1997 (a) 9,994,300 9,974,700
Services-- Associates Corp. of North America:
Consumer--6.3% AA- Aa3 1,500,000 8.375% due 1/15/1998 1,504,830 1,568,430
AA- Aa3 3,000,000 5.25% due 9/01/1998 2,908,770 2,921,430
A A2 7,000,000 Beneficial Corp., 5.65% due 10/14/1997 (a) 7,000,000 6,967,597
CIT Group Holdings, Inc.:
A+ Aa3 4,000,000 7.625% due 12/05/1996 3,987,120 4,065,420
A+ Aa3 3,000,000 5.971% due 2/28/1997 2,998,020 3,006,681
-------------- --------------
28,393,040 28,504,258
</TABLE>
71
<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 BBB Baa2 $ 6,000,000 Alex Brown Inc., 7.625% due 8/15/2005 $ 5,966,820 $ 6,149,550
Services-- A A2 3,000,000 Bear Stearns Companies, Inc., 8.75%
Other--6.6% due 3/15/2004 3,224,430 3,327,285
BBB Baa2 4,000,000 Comdisco, Inc., 7.25% due 4/15/1998 3,990,720 4,072,940
A A2 6,250,000 Dean Witter, Discover & Co., 6.75%
due 8/15/2000 6,226,437 6,319,937
BBB+ Baa1 4,000,000 PaineWebber Group Inc., 8.875% due 3/15/2005 4,025,080 4,406,200
Smith Barney Holdings, Inc.:
A- A3 2,000,000 7.98% due 3/01/2000 2,000,000 2,102,970
A- A3 1,000,000 6.875% due 6/15/2005 992,930 989,490
A+ A2 2,000,000 The Travelers Corp., 9.50% due 3/01/2002 2,168,400 2,286,950
-------------- --------------
28,594,817 29,655,322
Foreign*--9.5% A+ Aa2 3,500,000 ABN AMRO Bank, N.V., 7.25% due 5/31/2005 (2) 3,497,025 3,604,125
BBB+ A3 5,000,000 Bangkok Bank Public Company Limited,
7.25% due 9/15/2005 (2)(b) 4,949,950 5,001,450
A+ A2 4,000,000 CRA Finance Ltd., 6.50% due
12/01/2003 (4) 4,006,020 3,921,600
AAA Aaa 1,500,000 Japan Finance Corp. for Municipal
Enterprises, 9.125% due 3/13/2000 (2) 1,654,665 1,642,897
AAA Aaa 2,000,000 Metropolis of Tokyo (Japan), 8.70%
due 10/05/1999 (5) 2,312,940 2,169,910
A+ A2 1,000,000 Pohang Iron & Steel Co., 7.375% due
5/15/2005 (6) 1,018,160 1,020,215
A+ A2 9,000,000 Province of Quebec (Canada), 8.80%
due 4/15/2003 (3) 9,288,960 10,018,664
BB Baa3 10,000,000 Republic of South Africa, 9.625%
due 12/15/1999 (1) 9,839,025 10,487,000
A+ A1 5,000,000 Telekom Malaysia Berhad, 7.125%
due 8/01/2005 (1) (b) 4,966,800 5,102,725
-------------- --------------
41,533,545 42,968,586
Industrial-- A- A2 2,000,000 American Home Products Corporation,
Consumer--12.4% 7.90% due 2/15/2005 1,996,100 2,165,690
AA- A1 5,481,000 Anheuser-Busch Cos., Inc., 8.75%
due 12/01/1999 6,189,909 5,975,578
A+ A1 3,000,000 Bass America, Inc., 6.625% due 3/01/2003 2,825,520 3,002,160
Grand Metropolitan Investment Corp.:
A+ A2 3,000,000 6.50% due 9/15/1999 3,040,120 3,007,380
A+ A2 3,000,000 8.625% due 8/15/2001 3,069,700 3,277,830
A+ A1 5,000,000 JC Penney & Co., 6.375% due 9/15/2000 4,991,900 4,988,155
A A1 4,000,000 PepsiCo., Inc., 6.125% due 1/15/1998 3,972,240 3,989,740
A A2 3,500,000 Philip Morris Cos., Inc., 9% due 1/01/2001 3,576,195 3,833,165
RJR Nabisco, Inc.:
BBB- Baa2 5,000,000 6.70% due 6/15/2002 4,997,050 4,936,650
BBB- Baa3 8,000,000 8.75% due 4/15/2004 7,785,920 8,121,520
BBB- Baa2 3,000,000 6.85% due 6/15/2005 2,994,300 2,952,735
Sears, Roebuck & Co.:
BBB A2 2,500,000 9.25% due 4/15/1998 2,837,275 2,666,775
BBB A2 7,000,000 8.45% due 11/01/1998 7,762,380 7,392,385
-------------- --------------
56,038,609 56,309,763
</TABLE>
72
<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-- AA- A1 $ 1,000,000 BP America Inc., 7.875% due 5/15/2002 $ 1,055,380 $ 1,076,945
Energy--3.8% A+ A1 2,000,000 Petroliam Nasional Berhad,
6.875% due 7/01/2003 (b) 1,972,960 2,010,130
AA- Aa3 4,500,000 Repsol International Finance,
7% due 8/01/2005 4,497,705 4,578,300
BBB- Baa2 5,000,000 Tenneco, Inc., 7.875% due 10/01/2002 5,250,000 5,308,625
Texaco Capital Inc.:
A+ A1 2,000,000 6.875% due 7/15/1999 1,996,120 2,029,560
A+ A1 2,000,000 9% due 12/15/1999 2,342,460 2,188,560
-------------- --------------
17,114,625 17,192,120
Industrial-- Applied Materials Inc.:
Other--12.3% BBB- Baa2 4,000,000 6.65% due 9/05/2000 4,000,000 3,968,659
BBB Baa2 4,000,000 8% due 9/01/2004 3,970,760 4,280,580
A- A3 9,000,000 Carnival Cruise Lines, Inc.,
7.70% due 7/15/2004 8,799,420 9,446,849
BBB+ A3 5,000,000 Columbia/HCA Healthcare Corp.,
6.87% due 9/15/2003 5,000,000 5,008,830
BBB Baa3 5,000,000 Developers Diversified Realty Corporation,
6.717% due 12/27/1995 (a) 4,992,500 5,006,915
A A1 3,500,000 Electronic Data Systems Corp.,
6.85% due 5/15/2000 (b) 3,497,235 3,548,125
BBB- Ba1 14,500,000 News America Holdings Inc., 8.50%
due 2/15/2005 14,789,005 15,803,984
BBB- Baa3 8,000,000 Telecommunications, Inc., 9.25%
due 4/15/2002 8,496,110 8,818,160
-------------- --------------
53,545,030 55,882,102
Supranational-- AAA Aaa 1,500,000 International Bank for Reconstruction &
0.4% Development, 12.375% due 10/15/2002 1,954,980 1,999,320
Transportation BB+ Baa3 4,310,000 AMR Corporation, 9.50% due 7/15/1998 4,606,528 4,606,528
Services--4.6% AA A1 4,000,000 Boeing Co. (The), 6.35% due 6/15/2003 3,599,960 3,942,840
Southwest Airlines, Inc.:
A- Baa1 6,500,000 9.40% due 7/01/2001 7,564,180 7,305,187
A- Baa1 1,000,000 8% due 3/01/2005 994,610 1,075,600
A- A3 4,000,000 Union Pacific Corporation, 7.375%
due 5/15/2001 4,000,000 4,146,880
-------------- --------------
20,765,278 21,077,035
Utilities-- BBB+ Baa2 3,000,000 National Rural Utilities Cooperative
Electric--3.7% Finance Corp., 6.50% due 9/15/2002 2,993,280 2,998,860
BBB+ Baa1 7,000,000 PECO Energy Co., 8% due 4/01/2002 7,000,440 7,460,530
A- A2 4,000,000 Pennsylvania Power & Light Co., 5.50%
due 4/01/1998 3,991,280 3,927,580
BBB+ Baa2 2,000,000 Texas Utilities Electric Co., 8%
due 6/01/2002 1,972,080 2,141,250
-------------- --------------
15,957,080 16,528,220
</TABLE>
73
<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-- Consolidated Natural Gas Co.:
Gas--1.5% AA- A1 $ 2,000,000 8.75% due 6/01/1999 $ 2,125,440 $ 2,152,200
AA- A1 4,500,000 7.375% due 4/01/2005 4,470,210 4,716,202
-------------- --------------
6,595,650 6,868,402
Total Investments in Bonds &
Notes--88.6% 392,972,304 401,373,889
Short-Term Securities
Commercial 14,000,000 General Electric Capital Corp.,
Paper**--3.1% 5.70% due 10/02/1995 14,000,000 14,000,000
Repurchase 19,773,000 UBS Securities Funding, Inc., purchased on
Agreements***--4.4% 9/29/1995 to yield 6.42% to 10/02/1995 19,773,000 19,773,000
Total Investments in Short-Term
Securities--7.5% 33,773,000 33,773,000
Total Investments--96.1% $ 426,745,304 435,146,889
==============
Other Assets Less Liabilities--3.9% 17,868,633
--------------
Net Assets--100.0% $ 453,015,522
==============
<FN>
*Corresponding industry groups for foreign securities, which are denominated
in US dollars: (1) Government Entity. (2) Financial Institution;
Government-Owned & Guaranteed. (3) Government Entity; Guaranteed by Province.
(4) Industrial Mining. (5) Government Entity; Guaranteed by Japan.
(6) Industrial; Metals.
**Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Portfolio.
***Repurchase Agreements are fully collateralized by US Government Obligations.
(a)Floating Rate Note.
(b)Restricted security as to resale. The value of the Portfolio's investments
in restricted securities was approximately $15,662,000, representing 3.5% of
net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Bangkok Bank Public Company Limited,
7.25% due 9/15/2005 9/22/1995 $ 4,949,950 $ 5,001,450
Electronic Data Systems Corp.,
6.85% due 5/15/2000 5/15/1995 3,497,235 3,548,125
Petroliam Nasional Berhad,
6.875% due 7/01/2003 8/07/1995 1,972,960 2,010,130
Telekom Malaysia Berhad,
7.125% due 8/01/2005 8/04/1995 4,966,800 5,102,725
$15,386,945 $15,662,430
=========== ===========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
74
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statements of Assets and Liabilities as of September 30, 1995
<CAPTION>
High Income Investment Intermediate
Portfolio Grade Portfolio Term Portfolio
<S> <S> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $4,352,300,045 $1,150,637,140 $435,146,889
Receivables: Interest 92,858,745 20,786,194 7,523,975
Capital shares sold 17,063,314 5,822,222 27,454,416
Securities sold 891,000 8,159,022 3,059,633
Loans -- 81,353 30,548
Dividends 100,260 -- --
Prepaid registration fees and other assets (Note 1e) 77,987 27,628 32,630
-------------- -------------- ------------
Total assets 4,463,291,351 1,185,513,559 473,248,091
-------------- -------------- ------------
Liabilities: Payables: Securities purchased 55,889,628 26,399,690 18,349,478
Dividends to shareholders (Note 1f) 10,854,613 1,925,248 712,080
Capital shares redeemed 4,748,608 1,263,731 821,080
Distributor (Note 2) 2,128,296 388,133 83,226
Investment adviser (Note 2) 1,509,157 327,320 126,002
Accrued expenses and other liabilities 27,378,421 373,295 140,703
-------------- -------------- ------------
Total liabilities 102,508,723 30,677,417 20,232,569
-------------- -------------- ------------
Net Assets: Net assets $4,360,782,628 $1,154,836,142 $453,015,522
============== ============== ============
Net Assets Class A Common Stock, $.10 par value++ $ 11,569,395 $ 4,105,387 $ 1,892,800
Consist of: Class B Common Stock, $.10 par value++++ 41,283,769 5,488,414 1,844,392
Class C Common Stock, $.10 par value++++++ 1,729,575 223,958 59,173
Class D Common Stock, $.10 par value++++++++ 1,315,773 218,473 142,135
Paid-in capital in excess of par 4,387,414,022 1,151,204,980 455,439,394
Undistributed investment income--net 2,875,853 -- --
Accumulated realized capital losses on
investments--net (36,666,602) (6,680,118) (5,362,923)
Accumulated distributions in excess of realized
capital gains on investments--net -- (33,005,165) (9,401,034)
Unrealized appreciation (depreciation) on
investments--net (48,739,157) 33,280,213 8,401,585
-------------- -------------- ------------
Net assets $4,360,782,628 $1,154,836,142 $453,015,522
============== ============== ============
Net Asset Class A: Net assets $ 902,321,267 $ 472,388,101 $217,713,602
Value: ============== ============== ============
Shares outstanding 115,693,946 41,053,869 18,928,003
============== ============== ============
Net asset value and redemption price per
share $ 7.80 $ 11.51 $ 11.50
============== ============== ============
Class B: Net assets $3,220,766,637 $ 631,517,399 $212,146,426
============== ============== ============
Shares outstanding 412,837,687 54,884,140 18,443,916
============== ============== ============
Net asset value and redemption price per
share $ 7.80 $ 11.51 $ 11.50
============== ============== ============
Class C: Net assets $ 135,018,928 $ 25,777,792 $ 6,806,202
============== ============== ============
Shares outstanding 17,295,752 2,239,580 591,728
============== ============== ============
Net asset value and redemption price per
share $ 7.81 $ 11.51 $ 11.50
============== ============== ============
Class D: Net assets $ 102,675,796 $ 25,152,850 $ 16,349,292
============== ============== ============
Shares outstanding 13,157,731 2,184,726 1,421,349
============== ============== ============
Net asset value and redemption price per
share $ 7.80 $ 11.51 $ 11.50
============== ============== ============
<FN>
*Identified cost $4,401,039,202 $1,117,356,927 $426,745,304
============== ============== ============
++Authorized shares--Class A 200,000,000 100,000,000 50,000,000
============== ============== ============
++++Authorized shares--Class B 700,000,000 100,000,000 50,000,000
============== ============== ============
++++++Authorized shares--Class C 200,000,000 100,000,000 50,000,000
============== ============== ============
++++++++Authorized shares--Class D 500,000,000 100,000,000 50,000,000
============== ============== ============
See Notes to Financial Statements.
</TABLE>
75
<PAGE>
FINANCIAL INFORMATION (Continued)
<TABLE>
Statements of Operations for the Year Ended September 30, 1995
<CAPTION>
High Income Investment Intermediate
Portfolio Grade Portfolio Term Portfolio
<S> <S> <C> <C> <C>
Investment Income Interest and discount earned $393,314,590 $ 72,190,599 $25,026,588
(Note 1d): Dividends 3,743,363 -- --
Loaned securities -- 170,706 135,007
Other 3,607,693 382,572 140,024
------------ ------------ -----------
Total income 400,665,646 72,743,877 25,301,619
------------ ------------ -----------
Expenses: Account maintenance and distribution fees--Class B
(Note 2) 19,752,109 3,862,733 751,159
Investment advisory fees (Note 2) 14,910,211 3,378,301 1,194,362
Transfer agent fees--Class B (Note 2) 2,851,365 927,076 240,605
Transfer agent fees--Class A (Note 2) 800,739 628,878 241,585
Registration fees (Note 1e) 557,957 134,105 112,919
Printing and shareholder reports 492,456 123,671 37,528
Account maintenance and distribution fees--Class C
(Note 2) 392,368 58,465 4,675
Accounting services (Note 2) 215,484 118,390 49,765
Custodian fees 138,725 57,818 32,518
Professional fees 102,151 30,683 19,128
Account maintenance fees--Class D (Note 2) 105,669 26,207 5,229
Transfer agent fees--Class C (Note 2) 56,316 13,365 1,812
Transfer agent fees--Class D (Note 2) 40,291 16,710 7,934
Directors' fees and expenses 34,846 9,198 3,877
Pricing fees (Note 2) 16,336 9,158 4,530
Other 67,144 16,233 8,996
------------ ------------ -----------
Total expenses 40,534,167 9,410,991 2,716,622
Fees paid indirectly (25,008) (9,814) (757)
------------ ------------ -----------
Net expenses 40,509,159 9,401,177 2,715,865
------------ ------------ -----------
Investment income--net 360,156,487 63,342,700 22,585,754
------------ ------------ -----------
Realized & Realized loss on investments--net (21,583,485) (6,680,118) (5,362,923)
Unrealized Gain Change in unrealized appreciation/depreciation on
(Loss) on investments--net 103,640,401 69,854,981 22,789,142
Investments--Net ------------ ------------ -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from
Operations $442,213,403 $126,517,563 $40,011,973
============ ============ ===========
See Notes to Financial Statements.
</TABLE>
76
<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: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 360,156,487 $ 271,518,055
Realized gain (loss) on investments--net (21,583,485) 13,337,857
Change in unrealized appreciation/depreciation on investments--net 103,640,401 (218,088,489)
-------------- --------------
Net increase in net assets resulting from operations 442,213,403 66,767,423
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (92,450,302) (84,737,805)
(Note 1f): Class B (259,162,896) (186,780,250)
Class C (4,442,179) --
Class D (4,101,110) --
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (360,156,487) (271,518,055)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 1,054,930,541 718,487,003
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 1,136,987,457 513,736,371
Beginning of year 3,223,795,171 2,710,058,800
-------------- --------------
End of year* $4,360,782,628 $3,223,795,171
============== ==============
<FN>
*Undistributed investment income--net (Note 1g) $ 2,875,853 --
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets (continued) Investment Grade Portfolio
<CAPTION>
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 63,342,700 $ 55,789,198
Realized loss on investments--net (6,680,118) (27,366,985)
Change in unrealized appreciation/depreciation on investments--net 69,854,981 (89,071,174)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 126,517,563 (60,648,961)
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (28,557,399) (25,781,848)
Shareholders Class B (33,602,341) (30,007,350)
(Note 1f): Class C (458,421) --
Class D (724,539) --
Realized gain on investments--net:
Class A -- (3,174,664)
Class B -- (4,207,122)
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 (63,342,700) (96,176,149)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 241,816,022 83,643,841
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 304,990,885 (73,181,269)
Beginning of year 849,845,257 923,026,526
-------------- --------------
End of year $1,154,836,142 $ 849,845,257
============== ==============
See Notes to Financial Statements.
</TABLE>
77
<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: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 22,585,754 $ 20,758,590
Realized loss on investments--net (5,362,923) (8,401,311)
Change in unrealized appreciation/depreciation on investments--net 22,789,142 (27,976,092)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 40,011,973 (15,618,813)
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (12,207,578) (11,981,544)
Shareholders Class B (9,963,391) (8,777,046)
(Note 1f): Class C (58,841) --
Class D (355,944) --
In excess of realized gain on investments:
Class A -- (4,476,067)
Class B -- (3,477,851)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (22,585,754) (28,712,508)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 124,155,845 28,138,074
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 141,582,064 (16,193,247)
Beginning of year 311,433,458 327,626,705
-------------- --------------
End of year $ 453,015,522 $ 311,433,458
============== ==============
<CAPTION>
Financial Highlights High Income Portfolio
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of year $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39
Performance: -------- -------- -------- -------- --------
Investment income--net .81 .75 .79 .87 .92
Realized and unrealized gain (loss) on
investments--net .14 (.47) .29 .82 .63
-------- -------- -------- -------- --------
Total from investment operations .95 .28 1.08 1.69 1.55
-------- -------- -------- -------- --------
Less dividends from investment income--net (.81) (.75) (.79) (.87) (.92)
-------- -------- -------- -------- --------
Net asset value, end of year $ 7.80 $ 7.66 $ 8.13 $ 7.84 $ 7.02
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.26% 3.42% 14.35% 25.22% 26.46%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .55% .53% .55% .59% .66%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 10.70% 9.27% 9.78% 11.44% 14.13%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $902,321 $876,573 $886,784 $683,801 $522,703
Data: ======== ======== ======== ======== ========
Portfolio turnover 24.58% 32.52% 34.85% 40.52% 39.95%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
78
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued) High Income Portfolio
<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: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of year $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40
Performance: ---------- ---------- ---------- -------- --------
Investment income--net .75 .69 .72 .81 .87
Realized and unrealized gain (loss) on
investments--net .14 (.47) .28 .83 .62
---------- ---------- ---------- -------- --------
Total from investment operations .89 .22 1.00 1.64 1.49
---------- ---------- ---------- -------- --------
Less dividends from investment
income--net (.75) (.69) (.72) (.81) (.87)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 7.80 $ 7.66 $ 8.13 $ 7.85 $ 7.02
========== ========== ========== ======== ========
Total Investment Based on net asset value per share 12.42% 2.66% 13.35% 24.44% 25.32%
Return:** ========== ========== ========== ======== ========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees .57% .54% .56% .60% .67%
========== ========== ========== ======== ========
Expenses 1.32% 1.29% 1.31% 1.35% 1.42%
========== ========== ========== ======== ========
Investment income--net 9.81% 8.53% 8.94% 10.42% 13.24%
========== ========== ========== ======== ========
Supplemental Net assets, end of year (in thousands) $3,220,767 $2,347,223 $1,823,275 $847,354 $264,486
Data: ========== ========== ========== ======== ========
Portfolio turnover 24.58% 32.52% 34.85% 40.52% 39.95%
========== ========== ========== ======== ========
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
September 30, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Operating Net asset value, beginning of period $ 7.59 $ 7.59
Performance: -------- --------
Investment income--net .71 .75
Realized and unrealized gain on investments--net .22 .21
-------- --------
Total from investment operations .93 .96
-------- --------
Less dividends from investment income--net (.71) (.75)
-------- --------
Net asset value, end of period $ 7.81 $ 7.80
======== ========
Total Investment Based on net asset value per share 12.93%+++ 13.37%+++
Return:** ======== ========
Ratios to Average Expenses, excluding account maintenance and distribution fees .58%* .56%*
Net Assets: ======== ========
Expenses 1.38%* .81%*
======== ========
Investment income--net 9.06%* 9.70%*
======== ========
Supplemental Net assets, end of period (in thousands) $135,019 $102,676
Data: ======== ========
Portfolio turnover 24.58% 24.58%
======== ========
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
79
<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: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of year $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83
Performance: -------- -------- -------- -------- --------
Investment income--net .80 .75 .81 .88 .92
Realized and unrealized gain (loss) on
investments--net .74 (1.49) .67 .71 .76
-------- -------- -------- -------- --------
Total from investment operations 1.54 (.74) 1.48 1.59 1.68
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.80) (.75) (.81) (.88) (.92)
Realized gain on investments--net -- (.10) (.16) -- --
In excess of realized gain on
investments--net -- (.45) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.80) (1.30) (.97) (.88) (.92)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 14.92% (6.03%) 12.76% 14.30% 16.18%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .58% .53% .56% .58% .61%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 7.30% 6.61% 6.94% 7.43% 8.26%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $472,388 $366,792 $407,625 $362,139 $324,818
Data: ======== ======== ======== ======== ========
Portfolio turnover 108.07% 159.05% 121.34% 65.43% 126.32%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
80
<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 B
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of year $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83
Performance: -------- -------- -------- -------- --------
Investment income--net .72 .66 .72 .79 .84
Realized and unrealized gain (loss) on
investments--net .74 (1.49) .67 .71 .76
-------- -------- -------- -------- --------
Total from investment operations 1.46 (.83) 1.39 1.50 1.60
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.72) (.66) (.72) (.79) (.84)
Realized gain on investments--net -- (.10) (.16) -- --
In excess of realized gain on
investments--net -- (.45) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.72) (1.21) (.88) (.79) (.84)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 14.05% (6.73%) 11.91% 13.44% 15.30%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .60% .54% .54% .59% .62%
======== ======== ======== ======== ========
Expenses 1.35% 1.29% 1.29% 1.34% 1.37%
======== ======== ======== ======== ========
Investment income--net 6.52% 5.85% 5.80% 6.65% 7.50%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $631,517 $483,053 $515,402 $325,706 $198,504
Data: ======== ======== ======== ======== ========
Portfolio turnover 108.07% 159.05% 121.34% 65.43% 126.32%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++
to September 30, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Operating Net asset value, beginning of period $ 10.67 $ 10.67
Performance: -------- --------
Investment income--net .67 .73
Realized and unrealized gain on investments--net .84 .84
-------- --------
Total from investment operations 1.51 1.57
-------- --------
Less dividends from investment income--net (.67) (.73)
-------- --------
Net asset value, end of period $ 11.51 $ 11.51
======== ========
Total Investment Based on net asset value per share 14.61%+++ 15.21%+++
Return:** ======== ========
Ratios to Average Expenses, excluding account maintenance and distribution fees .60%* .58%*
Net Assets: ======== ========
Expenses 1.40%* .83%*
======== ========
Investment income--net 6.27%* 6.91%*
======== ========
Supplemental Net assets, end of period (in thousands) $25,778 $25,153
Data: ======== ========
Portfolio turnover 108.07% 108.07%
======== ========
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
81
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued) Intermediate Term 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: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of year $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88
Performance: -------- -------- -------- -------- --------
Investment income--net .79 .75 .76 .88 .93
Realized and unrealized gain (loss) on
investments--net .60 (1.26) .55 .62 .53
-------- -------- -------- -------- --------
Total from investment operations 1.39 (.51) 1.31 1.50 1.46
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.79) (.75) (.76) (.88) (.93)
Realized gain on investments--net -- -- (.14) -- --
In excess of realized gain on
investments--net -- (.28) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.79) (1.03) (.90) (.88) (.93)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.50 $ 10.90 $ 12.44 $ 12.03 $ 11.41
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.32% (4.25%) 11.39% 13.71% 13.97%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .59% .53% .58% .62% .67%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 7.14% 6.48% 6.42% 7.54% 8.35%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $217,714 $170,222 $193,505 $154,333 $103,170
Data: ======== ======== ======== ======== ========
Portfolio turnover 142.84% 155.42% 180.52% 95.33% 132.56%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
82
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded) Intermediate Term Portfolio
<CAPTION>
Class B Class C Class D
For the For the For the
Period Period Period
The following per share data and ratios have been derived Nov. 13, Oct. 21, Oct. 21,
from information provided in the financial statements. For the Year Ended 1992++ to 1994++ to 1994++ to
September 30, Sept. 30, Sept. 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1995 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of period $ 10.90 $ 12.44 $ 11.68 $ 10.81 $ 10.81
Performance: -------- -------- -------- -------- --------
Investment income--net .74 .69 .61 .70 .74
Realized and unrealized gain (loss) on
investments--net .60 (1.26) .90 .69 .69
-------- -------- -------- -------- --------
Total from investment operations 1.34 (.57) 1.51 1.39 1.43
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.74) (.69) (.61) (.70) (.74)
Realized gain on investments--net -- -- (.14) -- --
In excess of realized gain on
investments--net -- (.28) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.74) (.97) (.75) (.70) (.74)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.50 $ 10.90 $ 12.44 $ 11.50 $ 11.50
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 12.74% (4.72%) 13.30%+++ 13.26%+++ 13.65%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .61% .54% .57%* .64%* .60%*
======== ======== ======== ======== ========
Expenses 1.11% 1.04% 1.07%* 1.14%* .70%*
======== ======== ======== ======== ========
Investment income--net 6.61% 5.98% 5.61%* 6.24%* 6.81%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $212,146 $141,212 $134,122 $ 6,806 $ 16,349
Data: ======== ======== ======== ======== ========
Portfolio turnover 142.84% 155.42% 180.52% 142.84% 142.84%
======== ======== ======== ======== ========
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
83
<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 management invest-
ment company consisting of three separate portfolios:
the High Income Portfolio, the Investment Grade Port-
folio and the Intermediate Term Portfolio. The Fund
offers four classes of shares under the Merrill Lynch
Select Pricing SM System. Shares of Class A and Class D
are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same
terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its
account maintenance and distribution expenditures.
The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which
are traded on stock exchanges are valued at the last
sale price as of the close of business on the day the
securities are being valued, or lacking any sales, at the
mean between closing bid and asked prices. Securities
traded in the over-the-counter market are valued at
the mean between the bid and asked prices or yield equivalent
as obtained from one or more dealers that make markets
in the securities. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange
are valued according to the broadest and most representative
market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Short-term
securities are valued at amortized cost, which approximates
market 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.
(b) Derivative financial instruments--The Fund may
engage in various portfolio strategies to seek to increase
its return by hedging its portfolio against adverse move-
ments in the equity, debt and currency markets. Losses
may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase
or sell interest rate futures contracts and options on
such futures contracts for the purpose of hedging the
market risk on existing securities or the intended pur-
chase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral
such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the con-
tract, the Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation
in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract
is closed, the Fund records a realized gain or loss
equal to the difference between the value of the con-
tract at the time it was opened and the value at the
time it was closed.
* Options--The Fund is authorized to purchase and
write call and put options. When the Fund writes an
option, an amount equal to the premium received by
the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently
marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exer-
cise of an option, the related premium paid (or received)
is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the
Fund enters into a closing transaction), the Fund real-
izes a gain or loss on the option to the extent of the
premiums received or paid (or loss or gain to the extent
the cost of the closing transaction exceeds the pre-
mium paid or received).
Written and purchased options are non-income produc-
ing investments.
(c) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to
distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provi-
sion is required.
(d) 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.
(e) Prepaid registration fees--Prepaid registration fees
are charged to expense as the related shares are issued.
84
<PAGE>
(f) Dividends and distributions--Dividends from net
investment income are declared daily and paid monthly.
Distributions of capital gains are recorded on the
ex-dividend dates. Distributions in excess of realized
capital gains are due primarily to differing tax treat-
ments for futures transactions and post-October losses.
(g) Reclassification--Generally accepted accounting
principles require that certain differences between
accumulated net realized capital losses for financial
reporting and tax purposes, if permanent, be
reclassified to undistributed net investment income.
Accordingly, current year's permanent book/tax differences
of $2,875,853 on the High Income Portfolio have been
reclassified from accumulated net realized capital
losses to undistributed net investment income. These
reclassifications have no effect on net assets or
net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with Fund Asset Management, L.P. ("FAM").
The general partner of FAM is Princeton Services,
Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" of
"Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
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.
Aggregate of Average Rate of Advisory Fee
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 FAM
during any fiscal year which will cause such expenses
to exceed the pro rata expense limitation at the time of
such payment.
Pursuant to the distribution plans (the "Distribution
Plan") adopted by the Fund in accordance with
Rule 12b-1 under the Investment Company Act of
1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued
daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Maintenance Fees Distribution Fees
Class B Class C Class D Class B Class C
High Income
Portfolio 0.25% 0.25% 0.25% 0.50% 0.55%
Investment Grade
Portfolio 0.25% 0.25% 0.25% 0.50% 0.55%
Intermediate Term
Portfolio 0.25% 0.25% 0.10% 0.25% 0.25%
Pursuant to a sub-agreement with the Distributor,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
a subsidiary of ML & Co., also provides account main-
tenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account main-
tenance services to Class B, Class C and Class D share-
holders. The Distributor voluntarily did not collect any
Class C distribution fees until January 10, 1995 for the
Intermediate Term Portfolio. The ongoing distribution
fee compensates the Distributor and MLPF&S for pro-
viding shareholder and distribution-related services to
Class B and Class C shareholders.
For the year ended September 30, 1995, MLFD earned
underwriting discounts and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D
Shares as follows:
MLFD MLPF&S
Portfolio Class A Class D Class A Class D
High Income $ 52,365 $ 109,429 $541,146 $1,132,951
Investment Grade 7,682 14,085 79,597 148,959
Intermediate Term 785 2,252 14,413 26,024
For the year ended September 30, 1995, MLPF&S re-
ceived contingent deferred sales charges of $6,415,911
relating to transactions in Class B Shares, amounting to
$5,011,339, $1,112,592, and $291,880 in the High Income,
Investment Grade, and Intermediate Term Portfolios,
respectively, and $52,562 relating to transactions in
85
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Class C Shares, amounting to $43,196, $8,956 and
$410 in the High Income, Investment Grade, and
Intermediate Term Portfolios, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
a wholly-owned subsidiary of ML & Co., is the Fund's
transfer agent.
During the year ended September 30, 1995, the Fund
paid Merrill Lynch Security Pricing Service, an affiliate
of MLPF&S, $17,826 for security price quotations to
compute the net asset value of 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, MLPF&S, MLFD, MLFDS,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the year ended September 30, 1995,
were as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Purchases $1,639,815,538 $1,112,459,005 $540,453,284
============== ============== ============
Sales $ 808,534,177 $ 939,157,923 $445,577,524
============== ============== ============
Net realized and unrealized gains (losses) as of
September 30, 1995 were as follows:
Realized Unrealized
High Income Portfolio Gains (Losses) Losses
Long-term investments $(21,583,848) $(48,739,157)
Short-term investments 363 --
------------ ------------
Total $(21,583,485) $(48,739,157)
============ ============
Realized Unrealized
Investment Grade Portfolio Losses Gains
Long-term investments $ (6,680,118) $ 33,280,213
------------ ------------
Total $ (6,680,118) $ 33,280,213
============ ============
Realized Unrealized
Intermediate Term Portfolio Losses Gains
Long-term investments $ (5,362,921) $ 8,401,585
Short-term investments (2) --
------------ ------------
Total $ (5,362,923) $ 8,401,585
============ ============
As of September 30, 1995, net unrealized appreciation
(depreciation) for Federal income tax purposes was
as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Gross unrealized
appreciation $ 147,422,143 $38,363,701 $10,911,673
Gross unrealized
depreciation (203,039,359) (5,517,377) (2,711,700)
------------- ----------- -----------
Net unrealized
appreciation
(depreciation) $ (55,617,216) $32,846,324 $ 8,199,973
============= =========== ===========
The aggregate cost of investments at September 30,
1995 for Federal income tax purposes was $4,407,917,261
for the High Income Portfolio, $1,117,790,816 for the
Investment Grade Portfolio, and $426,946,916 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, 1995,
was $1,054,930,541 for the High Income Portfolio,
$241,816,022 for the Investment Grade Portfolio and
$124,155,845 for the Intermediate Term Portfolio. Net
increase in net assets derived from capital share trans-
actions 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.
Transactions in capital shares for each class were
as follows:
High Income Portfolio
Class A Shares for the
Year Ended Dollar
September 30, 1995 Shares Amount
Shares sold 17,000,487 $ 129,792,483
Shares issued to shareholders in
reinvestment of dividends 6,278,026 47,543,088
-------------- --------------
Total issued 23,278,513 177,335,571
Shares redeemed (22,086,202) (167,868,415)
-------------- --------------
Net increase 1,192,311 $ 9,467,156
============== ==============
High Income Portfolio
Class A Shares for the
Year Ended Dollar
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
============== ==============
86
<PAGE>
High Income Portfolio
Class B Shares for the Year Dollar
Ended September 30, 1995 Shares Amount
Shares sold 159,617,311 $1,217,867,803
Shares issued to shareholders in
reinvestment of dividends 15,892,010 120,624,151
-------------- --------------
Total issued 175,509,321 1,338,491,954
Automatic conversion of shares (128,848) (985,692)
Shares redeemed (69,059,662) (524,845,954)
-------------- --------------
Net increase 106,320,811 $ 812,660,308
============== ==============
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 C Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 19,648,421 $ 150,754,337
Shares issued to shareholders in
reinvestment of dividends 304,333 2,351,332
-------------- --------------
Total issued 19,952,754 153,105,669
Shares redeemed (2,657,002) (20,513,998)
-------------- --------------
Net increase 17,295,752 $ 132,591,671
============== ==============
[FN]
++Commencement of Operations.
High Income Portfolio
Class D Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 21,574,941 $ 165,091,505
Automatic conversion of shares 128,848 985,692
Shares issued to shareholders in
reinvestment of dividends 257,744 1,984,388
-------------- --------------
Total issued 21,961,533 168,061,585
Shares redeemed (8,803,802) (67,850,179)
-------------- --------------
Net increase 13,157,731 $ 100,211,406
============== ==============
[FN]
++Commencement of Operations.
Investment Grade Portfolio
Class A Shares for the
Year Ended Dollar
September 30, 1995 Shares Amount
Shares sold 14,319,272 $ 159,951,974
Shares issued to shareholders in
reinvestment of dividends 1,399,551 15,395,612
-------------- --------------
Total issued 15,718,823 175,347,586
Shares redeemed (8,729,534) (96,092,634)
-------------- --------------
Net increase 6,989,289 $ 79,254,952
============== ==============
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 B Shares for the Year Dollar
Ended September 30, 1995 Shares Amount
Shares sold 23,189,348 $ 258,078,382
Shares issued to shareholders in
reinvestment of dividends 1,854,252 20,437,623
-------------- --------------
Total issued 25,043,600 278,516,005
Automatic conversion of shares (35,738) (395,466)
Shares redeemed (14,986,713) (164,956,465)
-------------- --------------
Net increase 10,021,149 $ 113,164,074
============== ==============
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
============== ==============
Investment Grade Portfolio
Class C Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 2,612,510 $ 29,346,737
Shares issued to shareholders in
reinvestment of dividends 25,192 284,361
-------------- --------------
Total issued 2,637,702 29,631,098
Shares redeemed (398,122) (4,456,879)
-------------- --------------
Net increase 2,239,580 $ 25,174,219
============== ==============
[FN]
++Commencement of Operations.
Investment Grade Portfolio
Class D Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 2,756,661 $ 30,609,293
Automatic conversion of shares 35,721 395,466
Shares issued to shareholders in
reinvestment of dividends 45,859 515,048
-------------- --------------
Total issued 2,838,241 31,519,807
Shares redeemed (653,515) (7,297,030)
-------------- --------------
Net increase 2,184,726 $ 24,222,777
============== ==============
[FN]
++Commencement of Operations.
NOTES TO FINANCIAL STATEMENTS (concluded)
87
<PAGE>
Intermediate Term Portfolio
Class A Shares for the
Year Ended Dollar
September 30, 1995 Shares Amount
Shares sold 6,450,433 $ 73,291,315
Shares issued to shareholders in
reinvestment of dividends 649,107 7,173,693
-------------- --------------
Total issued 7,099,540 80,465,008
Shares redeemed (3,794,801) (41,909,273)
-------------- --------------
Net increase 3,304,739 $ 38,555,735
============== ==============
Intermediate Term Portfolio
Class A Shares for the
Year Ended Dollar
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 B Shares for the
Year Ended Dollar
September 30, 1995 Shares Amount
Shares sold 10,542,654 $ 118,768,676
Shares issued to shareholders in
reinvestment of dividends 517,191 5,742,084
-------------- --------------
Total issued 11,059,845 124,510,760
Automatic conversion of shares (832) (17,252)
Shares redeemed (5,575,382) (61,692,334)
-------------- --------------
Net increase 5,483,631 $ 62,801,174
============== ==============
Intermediate Term Portfolio
Class B Shares for the
Year Ended Dollar
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 C Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 663,716 $ 7,580,309
Shares issued to shareholders in
reinvestment of dividends 2,521 28,709
-------------- --------------
Total issued 666,237 7,609,018
Shares redeemed (74,509) (852,210)
-------------- --------------
Net increase 591,728 $ 6,756,808
============== ==============
[FN]
++Commencement of Operations.
Intermediate Term Portfolio
Class D Shares for the Period
October 21, 1994++ to Dollar
September 30, 1995 Shares Amount
Shares sold 1,674,458 $ 18,850,195
Automatic conversion of shares 832 17,252
Shares issued to shareholders in
reinvestment of dividends 15,083 170,456
-------------- --------------
Total issued 1,690,373 19,037,903
Shares redeemed (269,024) (2,995,775)
-------------- --------------
Net increase 1,421,349 $ 16,042,128
============== ==============
[FN]
++Commencement of Operations.
5. Loaned Securities:
At September 30, 1995, the Investment Grade Portfolio
held US Treasury Bonds/Notes having an aggregate
value of approximately $38,200,000 as collateral for
Portfolio securities loaned, having a market value of
approximately $37,162,000. The Intermediate Term
Portfolio held US Treasury Bonds/Notes having an aggre-
gate value of approximately $28,500,000 as collateral for
Portfolio securities loaned, having a market value of
approximately $27,501,000.
6. Capital Loss Carryforward:
At September 30, 1995, the Fund had a capital loss
carryforward of approximately $11,795,000 in the High
Income Portfolio, all of which expires in 1999;
approximately $35,299,000 in the Investment Grade Portfolio,
all of which expires in 2003; and approximately $12,447,000
in the Intermediate Term Portfolio, all of which expires
in 2003. These amounts will be available to offset like amounts
of any future taxable gains.
88
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89
<PAGE>
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90
<PAGE>
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91
<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................................................. 14
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
Distribution Plan........................................................ 23
Redemption of Shares...................................................... 24
Repurchase............................................................... 24
Reinstatement Privilege.................................................. 25
Deferred Sales Charge--Class B and Class C 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........................................... 28
Shareholder Services...................................................... 29
Investment Account....................................................... 29
Automatic Investment Plans............................................... 29
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 30
Systematic Withdrawal Plans.............................................. 30
Retirement Plans.......................................................... 31
Exchange Privilege........................................................ 32
Performance Data.......................................................... 45
Additional Information.................................................... 49
Organization of the Fund................................................. 49
Computation of Offering Price Per Share.................................. 49
Appendix................................................................. 51
Interest Rate Futures, Options Thereon and Options on Debt Securities.... 51
Independent Auditors' Report.............................................. 54
Financial Statements...................................................... 55
</TABLE>
Code #10210-0196
[LOGO] MERRILL LYNCH
MERRILL LYNCH
Corporate Bond Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
January 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights:
For each of the years in the ten-year period ended September 30, 1995,
Contained in Part B:
Schedules of Investments as of September 30, 1995.
Statements of Assets and Liabilities as of September 30, 1995.
Statements of Operations for the year ended September 30, 1995.
Statements of Changes in Net Assets for each of the years in the two-year
period ended September 30, 1995 and 1994.
Financial Highlights:
For each of the years in the five-year period ended September 30, 1995.
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation (incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 5 to Registrant's Registration Statement
on Form N-1) ("Post-Effective Amendment No. 5").
(b) --Articles of Amendment (incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement on Form N-1) ("Post-Effective Amendment No. 13").
(c) --Articles Supplementary reclassifying shares of Intermediate Term
Portfolio Series Common Stock (incorporated by reference to Exhibit
1(c) to Post-Effective Amendment No. 16).
2 --By-Laws (incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-
1A).
3 --Inapplicable.
4(a) --Specimen certificates for Class A shares of High Quality Portfolio
Series and High Income Portfolio Series Common Stock of Registrant
(incorporated by reference to Exhibit 4(a) filed with Post-Effective
Amendment No. 13).
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(b) --Specimen certificates for Class B shares of High Quality Portfolio
Series and High Income Portfolio Series Common Stock of Registrant
(incorporated by reference to Exhibit 4(b) filed with Post-Effective
Amendment No. 13).
5 --Form of Investment Advisory Agreement between Registrant and Fund
Asset Management, Inc. (incorporated by reference to Exhibit 5 filed
with Post-Effective Amendment No. 5).
6(a) --Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (incorporated by reference to
Exhibit 6(a) filed with Post-Effective Amendment No. 20).
(b) --Form of Selected Dealers Agreement between Registrant and selected
dealers (incorporated by reference to Exhibit 6(b) filed with Post-
Effective Amendment No. 20).
(c) --Form of Class B Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(c) filed
with Post-Effective Amendment No. 13).
(d) --Form of Amended Class B Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(d) filed
with Post-Effective Amendment No. 20).
(e) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(e) filed
with Post-Effective Amendment No. 20).
(f) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(f) filed
with Post-Effective Amendment No. 20).
7 --Inapplicable.
8 --Form of Custodian Agreement between Registrant and State Street Bank
and Trust Company (incorporated by reference to Exhibit A.8 filed
with Amendment No. 2 to Registrant's Registration Statement on Form
S-5) ("Post-Effective Amendment No. 2").
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (incorporated by reference to Exhibit 9(a) to Post-
Effective Amendment No. 12).
(b) --Form of Agreement relating to the use of the "Merrill Lynch" name
(incorporated by reference to Exhibit A.9(c) filed with Amendment No.
2).
10 --Inapplicable (filed with Rule 24f-2 Notice).
11 --Consent of Deloitte & Touche LLP, independent accountants for the
Registrant (filed herewith).
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
12 --Inapplicable.
13(a) --Investment Letter--High Income Portfolio--Class C and Class D shares
(incorporated by reference to Exhibit 13(a) filed with Post-Effective
Amendment No. 20).
(b) --Investment Letter--Investment Grade Portfolio Class C and Class D
shares (incorporated by reference to Exhibit 13(b) filed with Post-
Effective Amendment No. 20).
(c) --Investment Letter--Intermediate Term Portfolio Class C and Class D
shares (incorporated by reference to Exhibit 13(c) filed with Post-
Effective Amendment No. 20).
14(a) --Prototype Individual Retirement Account Plan and Keogh Plan
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated
(incorporated by reference to Exhibit 14 to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1 (File No. 2-74584) of
Merrill Lynch Retirement Series Trust, filed on January 26, 1982).
(b) --Prototype Merrill Lynch Basic Retirement Plan available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference
to Exhibit 14 to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No.2-74584) of Merrill Lynch Retirement
Series Trust, filed on December 29, 1983).
15(a) --Class B Distribution Plan of Registrant (incorporated by reference
to Exhibit 15 filed with Post-Effective Amendment No. 13).
(b) --Class B Amended Distribution Plan of Registrant (including
Distribution Plan Sub-Agreement) (incorporated by reference to
Exhibit 15(b) filed with Post-Effective Amendment No. 18).
(c) --Form of Class C Distribution Plan of Registrant (including Class C
Distribution Plan Sub-Agreement) (incorporated by reference to
Exhibit 15(c) filed with Post-Effective Amendment No. 20).
(d) --Form of Class D Distribution Plan of Registrant (including Class D
Distribution Plan Sub-Agreement) (incorporated by reference to
Exhibit 15(d) filed with Post-Effective Amendment No. 20).
16 --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 (for Class A shares
and Class B shares--incorporated by reference to Exhibit 15 filed
with Post-Effective Amendment No. 13) and (for Class C shares and
Class D shares--filed herewith).
17(a) --Financial Data Schedule--Class A shares (filed herewith).
(b) --Financial Data Schedule--Class B shares (filed herewith).
(c) --Financial Data Schedule--Class C shares (filed herewith).
(d) --Financial Data Schedule--Class D shares (filed herewith).
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
C-3
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS DECEMBER 29, 1995
-------------- -----------------
<S> <C>
High Income Portfolio Class A common stock, par value
$0.10 per share....................................... 48,955
High Income Portfolio Class B common stock, par value
$0.10 per share....................................... 159,616
High Income Portfolio Class C common stock, par value
$0.10 per share....................................... 10,990
High Income Portfolio Class D common stock, par value
$0.10 per share....................................... 5,150
Investment Grade Portfolio Class A common stock, par
value $0.10 per share................................. 50,612
Investment Grade Portfolio Class B common stock, par
value $0.10 per share................................. 38,912
Investment Grade Portfolio Class C common stock, par
value $0.10 per share................................. 2,688
Investment Grade Portfolio Class D common stock, par
value $0.10 per share................................. 1,531
Intermediate Term Portfolio Class A common stock, par
value $0.10 per share................................. 24,868
Intermediate Term Portfolio Class B common stock, par
value $0.10 per share................................. 17,363
Intermediate Term Portfolio Class C common stock, par
value $0.10 per share................................. 1,384
Intermediate Term Portfolio Class D common stock, par
value $0.10 per share................................. 806
</TABLE>
--------
Note: The number of holders shown above includes holders of
record plus beneficial owners, whose shares are held of
record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
ITEM 27. INDEMNIFICATION
Under Section 2-418 of the Maryland General Corporation Law, with respect to
any proceeding against a present or former director, officer, agent, or
employee of the Registrant (a "corporate representative"), except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by the corporate representative in connection with the proceeding, if:
(i) he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant; and (ii) with respect to
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a
suit or action by or in the right of the Registrant. Under the Distribution
Agreements, the Registrant has agreed to indemnify the Distributor against any
loss, liability, claim, damage or expense arising out of any untrue statement
of a material fact, or an omission to state a material fact, in any
registration statement, prospectus or report to shareholders of the Registrant.
C-4
<PAGE>
Reference is made to Article VI of Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Fund Asset Management, L.P. (the "Investment Adviser") acts as the investment
adviser for the following investment companies: Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds
For Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., MuniAssets Fund, Inc., MuniYield California Fund,
Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured
Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., MuniInsured Fund, Inc., MuniYield Insured Fund II, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Income Opportunities Fund 1999, Inc., CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Tax-Exempt Fund,
Financial Institutions Series Trust, The Corporate Fund Accumulation Program,
Inc., The Municipal Fund Accumulation Program, Inc., Corporate High Yield Fund,
Inc., CMA Multi-State Municipal Series Trust, MuniEnhanced Fund, Inc., CMA
Treasury Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., Apex
Municipal Fund Inc., Merrill Lynch World Income Fund, Inc., Taurus
MuniCalifornia Holdings, Inc., Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc., Taurus MuniNew York Holdings, Inc. and WorldWide
DollarVest, Inc, Merrill Lynch Asset Management, acts as investment adviser for
the following registered investment companies: Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Convertible Holdings, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Small Cap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Global Holdings, Inc., Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Global Resources Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Balanced
Fund for Investment and Retirement, Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Merrill Lynch Variable Series Funds, Inc., Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch U.S. Treasury Money Fund and Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin
C-5
<PAGE>
must meet suitability requirements). The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the
address of Merrill Lynch Funds for Institutions and Merrill Lynch Institutional
Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2665. The address of the Investment Adviser and of Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), and their parent corporation, Merrill
Lynch Asset Management ("MLAM"), is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9011, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. is Merrill Lynch World Headquarters, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services is
4800 Deer Lake Drive, East Jacksonville, Florida 32246-6484.
Set forth below is a list of each officer and director of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since December 1,
1989 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Glenn and Richard hold the same positions
with substantially all of the investment companies described in the preceding
paragraph. Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors
or officers of one or more of such companies. Mr. Zeikel is president and a
director, and Mr. Richard is treasurer of the Investment Adviser and MLAM as
well as all or substantially all of the investment companies advised by the
Investment Adviser or MLAM.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
---- ------------------ ------------------------------------------------
<S> <C> <C>
Arthur Zeikel........... President and President and Director of MLAM;
Director Executive Vice President of
Merrill Lynch & Co.; Director of
MLFD.
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President and President and Director of MLFD;
Director Director of Financial Data
Services, Inc.
Robert W. Crook......... Senior Vice President Senior Vice President of MLFD
since 1990; Vice President of
MLFD from 1978 to 1990 and Vice
President of Investment Adviser
from 1981 to 1990.
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM.
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
since 1990; Vice President of
MLAM from 1978 to 1990.
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM.
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM.
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, General Counsel, Director and Secretary
Counsel, Director of MLAM.
and Secretary
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
---- ------------------ ------------------------------------------------
<S> <C> <C>
Ronald M. Kloss......... Senior Vice Senior Vice President; Comptroller
President of MLAM.
Stephen M. Miller....... Senior Vice Executive Vice President of
President Princeton Administrators, Inc.
since 1989; Vice President and
Secretary of Merrill Lynch from
1982 to 1989; Secretary of
Merrill Lynch & Co. from 1982 to
1989.
Joseph T. Monagle....... Senior Vice Senior Vice President of MLAM
President since 1990; Vice President of
MLAM from 1978-1990.
Gerald M. Richard....... Senior Vice Senior Vice President and
President and Treasurer of MLAM; Vice President
Treasurer of MLFD since 1981 and Treasurer
since 1984.
Richard L. Rufener...... Senior Vice Senior Vice President of MLAM
President since 1986; Vice President of
MLFD.
Ronald L. Welburn....... Senior Vice Senior Vice President of MLAM
President since 1988; Investment Fund
Manager Glickenhaus & Co. from
1983 to 1988.
Anthony Wiseman......... Senior Vice Senior Vice President of MLAM
President since 1991; Vice President from
1990 to 1991.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Merrill Lynch Funds Distributor, Inc. ("MLFD") acts as the principal
underwriter for the Registrant, for each of the investment companies referred
to in Item 28 (except MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona
Fund, Inc., Apex Municipal Fund Inc., CMA Money Fund, CMA Government Securities
Fund, CMA Tax-Exempt Fund, CMA Treasury Fund, CBA Money Fund, The Corporate
Fund Accumulation Program, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., CMA Multi-State Municipal Series Trust, Taurus MuniNew
York Holdings, Inc., Taurus MuniCalifornia Holdings, Inc., Convertible
Holdings, Inc., MuniYield California Fund, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., Senior High Income
Portfolio, Inc., Senior High Income Portfolio II, Inc., MuniYield Quality Fund,
II, Inc. and Worldwide DollarVest Fund, Inc.).
C-7
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Fatseas, Graczyk, Maguire and Wasel and Ms. Schena is
One Financial Center, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn..................... President Executive Vice
President
Arthur Zeikel...................... Director President, Director
Philip Kirstein.................... Director None
Robert W. Crook.................... Senior Vice None
President
William E. Aldrich................. Senior Vice None
President
Gerald M. Richard.................. Vice President and Treasurer
Treasurer
Michael J. Brady................... Vice President None
Richard L. Rufener................. Vice President None
Michelle T. Lau.................... Vice President None
Salvatore Venezia.................. Vice President None
Sharon Creveling................... Vice President and None
Assistant
Treasurer
William M. Breen................... Vice President None
Mark A. DeSario.................... Vice President None
James T. Fatseas................... Vice President None
Stanley Graczyk.................... Vice President None
William Wasel...................... Vice President None
Debra W. Landsman-Yaros............ Vice President None
Kevin P. Boman..................... Vice President None
Robert Harris...................... Secretary None
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at the offices of the Registrant and Financial Data Service Inc.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro and State of New Jersey on the 26th day of January, 1996.
MERRILL LYNCH CORPORATE BOND FUND,
INC. (Registrant)
/s/ Arthur Zeikel
By: _________________________________
Arthur Zeikel, President
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and Director
- ---------------------------- (Principal Executive Officer) January 26,
Arthur Zeikel 1996
/s/ Gerald M. Richard Treasurer (Principal
- ---------------------------- Financial and Accounting January 26,
Gerald M. Richard Officer) 1996
* Director
- ----------------------------
Ronald W. Forbes
* Director
- ----------------------------
Cynthia A. Montgomery
* Director
- ----------------------------
Charles C. Reilly
* Director
- ----------------------------
Kevin A. Ryan
* Director
- ----------------------------
Richard R. West
/s/ Arthur Zeikel
*By: _______________________ January 26,
Arthur Zeikel (Attorney-in- 1996
Fact)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<C> <S> <C>
11 --Consent of Deloitte & Touche LLP, independent accountants
for the Registrant..........................................
16 --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item
22 for Class C shares and Class D shares....................
17(a) --Financial Data Schedule--Class A shares....................
17(b) --Financial Data Schedule--Class B shares....................
17(c) --Financial Data Schedule--Class C shares....................
17(d) --Financial Data Schedule--Class D shares....................
</TABLE>
<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
<PAGE>
EXHIBIT 99.1(a)
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH HIGH INCOME FUND, INC.,
* * * * *
ARTICLE I
THE UNDERSIGNED, PETER J. WALLISON, whose post office address is 1666 K
Street, N.W., Washington, D.C. 20006, being at least eighteen years of age, does
hereby act as an incorporator, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations and with the
intention of forming a corporation.
ARTICLE II
NAME
----
The name of the Corporation is
MERRILL LYNCH HIGH INCOME FUND, INC.
ARTICLE III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed and the business
or objects to be transacted, carried on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment company of the
management type.
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in connection
therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles, of Incorporation.
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
2
<PAGE>
The Corporation shall be authorized to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the General
Laws of the State of Maryland now or hereafter in force, and the enumeration of
the foregoing shall not be deemed to exclude any powers, rights or privileges so
granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, First Maryland
Building, 25 South Charles Street Baltimore, Maryland 21201. The name of the
resident agent of the Corporation in this State is The Corporation Trust
Incorporated, a corporation of this State, and the post office address of the
resident agent is First Maryland Building, 25 South Charles Street, Baltimore,
Maryland 21201.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is One Hundred Million (100, 000, 000) shares, all of
one class called Common Stock, of the par value of Ten Cents ($0. 10) per share
and of the aggregate par value of Ten Million Dollars ($10,000,000).
3
<PAGE>
(2) Any fractional share shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(3) All persons who shall acquire stock in the Corporation shall acquire the
same subject to the provisions of these Articles of Incorporation and the by-
laws of the Corporation.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMIITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
--------------------------------------------
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the by-laws of the Corporation but shall
never be less than three (3). The names of the directors who shall act until the
first annual meeting or until their successors are duly elected and qualify are:
Joel J. Matcovsky
William W. Hewitt, Jr.
Stephen M. M. Miller
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of
4
<PAGE>
Incorporation or in the by-laws of the Corporation or in the General Laws of the
State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland.
(5) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the by-laws of the Corporation except any particular
by-law which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940, as
amended.
ARTICLE VII
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be entitled
to require the Corporation to redeem all or any part of the shares of capital
stock of the Corporation standing in
5
<PAGE>
the name of such holder on the books of the Corporationp and all shares of
capital stock issued by the Corporation shall be subject to redemption by the
Corporation, at the redemption price of such shares as in effect from time to
time as may be determined by the Board of Directors of the Corporation in
accordance with the Provisions hereof, subject to the right of the Board of
Directors of the Corporation to suspend the right of redemption of shares of
capital stock of the Corporation or postpone the date of payment of such
redemption price in accordance with provisions of applicable law. The redemp-
tion price of shares of capital stock of the Corporation shall be the net asset
value thereof as determined by the Board of Directors of the Corporation from
time to time in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be fixed by resolution of the
Board of Directors of the Corporation. Payment of the redemption price shall
be made in cash by the Corporation at such time and in such manner as may be
determined from time to time by the Board of Directors of the Corporation.,
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith., so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to
the direction of the Board of Directors, as to the amount of assets, obligations
or liabilities of the Corporation,
6
<PAGE>
as to the amount of net income of the Corporation from dividends and interest
for any period or amounts at any time legally available for the payment of
dividends, as to the amount of any reserves or charges set up and the propriety
thereof, as to the time of or purpose for creating reserves or as to the use,
alteration or cancellation of any reserves or charges (whether or not any
obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the price of any security owned by the
Corporation or as to any other matters relating to the issuance, sale,
redemption or other acquisition or disposition of securities or shares of
capital stock of the Corporation, and any reasonable determination made in good
faith by the Board of Directors as to whether any transaction constitutes a
purchase of securities on "margin", a sale of securities "short", or an
underwriting of the sale of, or a participation in any underwriting or selling
group in connection with the public distribution of, any securities, shall be
final and conclusive, and shall be binding upon the Corporation and all holders
of its capital stock, past, present and future, and shares of the capital stock
of the Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding as
aforesaid. No provision of
7
<PAGE>
these Articles of Incorporation shall be effective to (a) require a
waiver of compliance, with any provision of the Securities Act of 1922,
as amended, or the Investment Company Act of 1940, as amended, or of
any valid rule, regulation or order of the Securities and Exchange
Commission thereunder or (b) protect or purport to protect any director
or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his
office.
ARTICLE IX
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right from time to time to make any
amendment of its charter, now or hereafter authorized by law, including
any amendment which alters the contract rights, as expressly set forth
in its charter, of any outstanding stock.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH HIGH
INCOME FUND, INC. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to
8
<PAGE>
be his act and further acknowledges that, to be best of his knowledge, the
matters and facts set forth therein are true in all material respects under the
penalties of perjury.
Dated the 4th day of August, 1978.
-------------------------------
Peter J. Wallison
9
<PAGE>
EXHIBIT 99.1(b)
MERRILL LYNCH HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH HIGH INCOME FUND, INC., a Maryland corporation having its
principal office in the City of Baltimore, Maryland (hereinafter called the
Corporation), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by striking out
in its entirety ARTICLE II of the Articles of Incorporation and inserting in
lieu thereof the following:
ARTICLE II
Name
The name of the Corporation is MERRILL LYNCH CORPORATE BOND FUND, INC.,
SECOND: The charter of the Corporation is hereby amended by striking out
in its entirety ARTICLE V of the Articles of Incorporation and inserting in lieu
thereof the following:
ARTICLE V
Capital Stock
The total number of shares of all classes of stock, including those
previously authorized, which the Corporation shall have authority to
issue is Three Hundred Million (300,000,000) shares of a par value of
Ten Cents ($0.10) per share and an aggregate par value of Thirty Million
Dollars ($30,000,000). The shares shall be divided into three classes of
Common Stock, each of which is to consist of One Hundred Million
(100,000,000) shares, which are hereby designated as High Income
Portfolio Common Stock, High Quality Portfolio Common
<PAGE>
Stock, and Intermediate Term Portfolio Common Stock. Each share of
outstanding stock of the Corporation is hereby changed into one share of
High Income Portfolio Common Stock.
(a) The holders of each share of stock of the Corporation
shall be entitled to one vote for each full share, and a
fractional vote for each fractional share of stock, irrespective
of the class then standing in his name on the books of the
Corporation. On any matter submitted to a vote of stockholders,
all shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by
class, except that (1) when otherwise expressly required by the
Maryland General Corporation Law or the Investment Company Act
of 1940, as amended, shares shall be voted by individual
class; and (2) when the matter does not affect any interest of a
particular class, then only stockholders of the affected class
or classes shall be entitled to vote thereon.
(b) Each class of stock of the Corporation shall have the
following powers, preferences and voting or other special
rights, and the qualifications, restrictions, and limitations
thereof shall be as follows:
(1) All consideration received by the Corporation for
the issue or sale of stock of each class, together with all
income, earnings, profits, and proceeds received thereon,
including any proceeds derived from the sale, exchange or
liquidation thereof, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same
may be, shall irrevocably belong to the class of shares of
stock with respect to which such assets, payments or
funds were received by
2
<PAGE>
the Corporation for all purposes, subject only to the
rights of creditors, and shall be so handled upon the
books of account of the Corporation. Such assets,
payments and funds, including any proceeds derived from
the sale, exchange or liquidation thereof and any asset
derived from any reinvestment of such proceeds in whatever
form the same may be, are herein referred to as "assets
belonging to" such class.
(2) The Board of Directors may from time to time
declare and pay dividends or distributions, in stock or in
cash, on any or all classes of stock, the amount of such
dividends and the payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distributions on shares of any
class of stock shall be paid only out of earned surplus
or other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is to
qualify as a regulated investment company under the
Internal Revenue Code of 1954, as amended, or any suc-
cessor or comparable statute thereto, and Regulations
promulgated thereunder, and inasmuch as the computation
of net income and gains for Federal income tax pur-
poses may vary from the computation thereof on the
books of the Corporation, the Board of Directors shall
have the power in its discretion to distribute in any
fiscal year as dividends, including dividends
designated in whole or in part as capital gains
distributions, amounts
3
<PAGE>
sufficient, in the opinion of the Board of Directors, to
enable the Corporation to qualify as a regulated
investment company and to avoid liability for the
Corporation for Federal income tax in respect of that
year. In furtherance, and not in limitation of the
foregoing, in the event that a class of shares has a net
capital loss for a fiscal year, and to the extent that
the net capital loss offsets net capital gains from one
or both of the other classes, the amount to be deemed
available for distribution to the class or classes
with the net capital gain may be reduced by the amount
offset.
(3) In event of the liquidation or dissolution of the
Corporation, holders of each class of stock shall be
entitled to receive, as a class, out of the assets of the
Corporation available for distribution to stockholders,
but other than general assets not belonging to any
particular class of stock,, the assets belonging to such
class; and the assets so distributable to the holders of
any class shall be distributed among such stockholders in
proportion to the number of shares of such class held by
them and recorded on the books of the Corporation. In the
event that there are any general assets not belonging to
any particular class of stock and available for dis-
tribution, such distribution shall be made to the holders
of stock of all classes in proportion to the asset value of
the respective classes determined in accordance with the
charter of the Corporation.
(4) The assets belonging to any class of stock shall be
charged with the liabilities in respect to such
4
<PAGE>
class, and shall also be charged with its share of the
general liabilities of the Corporation, in proportion to
the asset value of the respective classes determined in
accordance with the charter of the Corporation. The
determination of the Board of Directors shall be conclusive
as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the same as
to a given class, and as to whether the same or general
assets of the Corporation are allocable to one or more
classes.
THIRD: The Board of Directors of the Corporation on June 19, 1980, duly
adopted a resolution in which was set forth the foregoing amendments to the
charter of the Corporation, declaring that the said amendments of the charter as
proposed were advisable and directing that they be submitted for action thereon
by the stockholders of the Corporation at a Special Meeting to be held on
September 8, 1980.
FOURTH: Notice setting forth the said amendments of the charter and of
the Corporation stating that a purpose of the meeting of the stockholders
would be to take action thereon, was given, as required by law, to all stock-
holders entitled to vote thereon. The amendments of the charter of the
Corporation as hereinabove set forth were approved by the stockholders of the
Corporation at said meeting by the affirmative vote of all the votes entitled to
be cast thereon.
FIFTH: The amendments of the charter of the Corporation as hereinabove
set forth have been duly advised by the :Board of Directors and approved by the
stockholders of the Corporation.
SIXTH: (a) The total number of shares of stock which the Corporation was
heretofore authorized to issue is one Hundred Million (100,000,000) shares, all
of one class, of the par value of Ten Cents ($0.10) each and of the aggregate
par value of Ten Million Dollars ($10,000,000).
(b) The total number of shares of all classes of stock is
increased by this amendment to Three Hundred Million (300,000,000) shares of
Common Stock of
5
<PAGE>
the par value of Ten Cents ($0.10) each and of the aggregate par value of
Thirty Million Dollars ($30,000,000).
(c) The stock of the Corporation shall be divided into three
classes of Common Stock each of which is to consist of One Hundred Million
(100,000,000) shares, which are designated as High Income Portfolio Common
Stock, High Quality Portfolio Common Stock and Intermediate Term Portfolio
Common Stock.
(d) A description of each class of stock of the Corporation with
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of each class of the authorized capital stock as increased, is as
follows;
(1) The holders of each share of stock of the
Corporation shall be entitled to one vote for each full
share, and a fractional vote for each fractional share of
stock, irrespective of the class then standing in his
name on the books of the Corporation. On any matter
submitted to a vote of stockholders, all shares of the
Corporation then issued and outstanding and entitled to
vote shall be voted in the aggregate and not by class,
except that (A) when otherwise expressly required by the
Maryland General Corporation Law or the Investment
Company Act of 1940, as amended, shares shall be voted by
individual class; and (B) when the matter does not affect
any interest of a particular class, then only stock-
holders of the affected class or classes shall be entitled
to vote thereon.
(2) Each class of stock of the Corporation shall have
the following powers, preferences and voting or other
special rights, and the qualifications, restrictions, and
limitations thereof shall be as follows:
6
<PAGE>
(A) All consideration received by the Corporation
for the issue or sale of stock of each class, together
with all income, earnings, profits, and proceeds
received thereon, including any proceeds derived from
the sale, exchange or liquidation thereof, and any funds
or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall
irrevocably belong to the class of shares of stock with
respect to which such assets, payments or funds were
received by the Corporation for all purposes, subject
only to the rights of creditors, and shall be so handled
upon the books of account of the Corporation. Such
assets, payments and funds, including any proceeds
derived from the sale, exchange or liquidation thereof
and any asset derived from any reinvestment of such pro-
ceeds in whatever form the same may be, are herein
referred to as "assets belonging to" such class.
(B) The Board of Directors may from time to time
declare and pay dividends or distributions, in stock or
in cash, on any or all classes of stock, the amount of
such dividends and the payment of them being wholly in
the discretion of the Board of Directors;
(i) Dividends or distributions of any class of
stock shall be paid only out of earned surplus or
other lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of the Corporation is
to qualify as a "regulated investment company" under
the Internal Revenue Code of 1954, as amended, or
any successor or comparable statute
7
<PAGE>
thereto, and Regulations promulgated thereunder,
and inasmuch as the computation of net income and
gains for Federal income tax purposes may vary from
the computation thereof on the books of the
Corporation, the Board of Directors shall have the
power in its discretion to distribute in any fiscal
year as dividends, including dividends designated in
whole or in part as capital gains distributions,
amounts sufficient, in the opinion of the Board of
Directors, to enable the Corporation to qualify as a
regulated investment company and to avoid lia-
bility for the Corporation for Federal income tax in
respect of that year. In furtherance, and not in
limitation of the foregoing, in the event that a
class of shares has a net capital loss for a fiscal
year, and to the extent that the net capital loss
offsets net capital gains from one or both of the
other classes, the amount to be deemed available for
distribution to the class or classes with the net
capital gain may be reduced by the amount offset.
(C) In event of the liquidation or dissolution of
the Corporation, holders of each class of stock shall be
entitled to receive, as a class, out of the assets of
the Corporation available for distribution to stock-
holders, but other than general assets not belonging to
any particular class of stock, the assets belonging to
such class; and the assets so distributable to the
holders of any class shall be distributed among such
stockholders in proportion to the number of shares of
such class held by them and recorded on the
8
<PAGE>
books of the Corporation. In the event that there are
any general assets not belonging to any particular
class of stock and available for distribution, such
distribution shall be made to the holders of stock of
all classes in proportion to the asset value of the
respective classes determined in accordance with the
charter of the Corporation.
(D) The assets belonging to any class of stock shall
be charged with the liabilities in respect to such
class, and shall also be charged with its share of the
general liabilities of the Corporation, in proportion
to the asset value of the respective classes determined
in accordance with the charter of the Corporation. The
determination of the Board of Directors shall be
conclusive as to the amount of liabilities, including
accrued expenses and reserves, as to the allocation of
the same as to a given class, and as to whether the same
or general assets of the Corporation are allocable to
one or more classes.
9
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH HIGH INCOME FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on September 8, 1980.
MERRILL LYNCH HIGH INCOME FUND, INC.
By /s/ Arthur Zeikel
------------------------------
Arthur Zeikel, President
Witness: (attest)
/s/ Stephen M. M. Miller
- -----------------------------
Secretary
Stephen M. M. Miller
THE UNDERSIGNED, President of MERRILL LYNCH HIGH INCOME FUND, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ Arthur Zeikel
-------------------------------
Arthur Zeikel
10
<PAGE>
EXHIBIT 99.1(c)
Merrill Lynch Corporate Bond Fund, Inc.
--------------------------------------
Articles Supplementary
----------------------
Merrill Lynch Corporate Bond Fund, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation as follows:
First: The corporation is an open-end company registered as such under the
Investment Company Act of 1940 with authority to issue capital stock as follows:
<TABLE>
<CAPTION>
Number of
Series Authorized Shares
------ -----------------
<S> <C>
High Income Portfolio Series Common Stock
Class A 150,000,000
Class B 150,000,000
High Quality Portfolio Series Common Stock
Class A 50,000,000
Class B 50,000,000
Intermediate Term Portfolio Series Common Stock 100,000,000
</TABLE>
Second: The Board of Directors of the Corporation, acting pursuant to authority
contained in the Corporation's Charter, hereby classifies 50,000,000 shares of
the unissued shares of Intermediate Term Portfolio Series Common Stock as "Class
B Limited Maturity Portfolio Series Common Stock" which shall have the powers,
preferences, and voting or other special rights, and the qualifications,
restrictions and limitations set forth in the Corporation's Charter, as amended,
and as required by the Investment Company Act of 1940.
Third: To avoid confusion, all other shares of the Inter-mediate Term Portfolio
Series Common Stock other than those described in Article Second hereof, shall
be referred to as "Class A Intermediate Term Portfolio Series Common Stock."
This is intended for purposes of identification and effects no substantive
change, and shall apply both to issued and unissued shares of said Class A
Limited Maturity Portfolio Series Common Stock.
Fourth: No other change is intended or effected.
In Witness Whereof, the Corporation has caused these Articles
Supplementary to be executed in its name and on its
<PAGE>
-2-
behalf by its Vice President and attested by its Secretary as of the 21 day of
June, 1991.
MERRILL LYNCH CORPORATE BOND
Attest: FUND, INC.
/s/ Michael Hennewinkel /s/ Edgar C. Geiger, Jr.
- -------------------------------- ------------------------------
Secretary Vice President
The undersigned, Vice President of Merrill Lynch Corporate Bond Fund,
Inc., who executed on behalf of said Corporate Articles Supplementary, of which
this certificate made a hereby acknowledges, in the name and on behalf of said
Corporationn, the foregoing Articles Supplementary to be the corporate act of
said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Edgar C. Geiger, Jr.
------------------------------
Vice President
<PAGE>
EXHIBIT 99.5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 8th day of September, 1980, by and between MERRILL
LYNCH CORPORATE BOND FUND, INC., a Maryland corporation (the "Fund"), and FUND
ASSET MANAGEMENT, INC., a Delaware corporation (the "Adviser");
W I T N E S S E T H :
WHEREAS, the Fund is engaged in business as a diversified open-end
management investment company and is registered as such under the Investment
Company Act of 1940 (the "Investment Company Act");
WHEREAS, the Fund is comprised of three separate Portfolios, each of
which pursues its investment objective through separate investment policies;
WHEREAS, the Adviser is engaged principally in rendering advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940; and
WHEREAS, the Fund desires to retain the Adviser to render investment
supervisory and corporate administrative services to the Fund in the manner and
on the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Adviser hereby agree as follows:
<PAGE>
ARTICLE 1.
Duties of the Adviser.
----------------------
The Fund hereby employs the Adviser to act as the investment adviser
to and manager of the Fund and to manage the investment and reinvestment of the
assets of each of its Portfolios and to administer its affairs, subject to the
supervision of the Board of Directors of the Fund, for the period and on the
terms and conditions set forth in, this Agreement. The Adviser hereby accepts
such employment and agrees during such period, at its own expense, to render
the services and to assume the obligations herein set forth for the compensation
provided for herein. The Adviser shall for all purposes herein be deemed to be
an independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
(a) Investment Advisory Services. In acting as investment adviser to
----------------------------
the Fund, the Adviser shall regularly provide the Fund with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of its Portfolios and shall furnish
continuously an investment program and shall determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the
assets
2
<PAGE>
of each Portfolio shall be held in the various securities in which it may
invest, subject always to the restrictions of the Fund's Articles of
Incorporation and By-Laws, as,amended from time to time, the provisions of the
InvestmentCompany Act, and the statements relating to the Fund's, investment
objectives, investment policies and investment restrictions as the same are set
forth in the currently effective prospectus of the Fund under the Securities Act
of 1933 (the "Prospectus"). Should the Board of Directors of the Fund at any
time, however, make any definite determination as to investment policy and
notify the Adviser thereof, the Adviser shall be bound by such determination
for the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Adviser shall take, on behalf of
the Fund, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders for
the purchase or sale of portfolio securities for each Portfolio with brokers or
dealers selected by it. In, connection with the selection of such brokers or
dealers and the placing of such orders, the Adviser is directed at all, times to
seek to obtain for the Fund the most favorable net results for the Fund as
determined by the Board of Directors and set forth in the Prospectus. Subject to
this requirement and the provisions of the Investment Company Act, the
3
<PAGE>
Securities Exchange Act of 1934, and other applicable, Adviser from the Fund is,
provisions of law, nothing shall prohibit the Adviser from selecting brokers or
dealers with which it or the Fund is affiliated.
(b) Administrative Services. In addition to the performance of
-----------------------
investment advisory services, the Adviser shall perform, or supervise the
performance of, administrative services in connection with the management of the
Fund and the Portfolios. In this connection, the Adviser agrees to (i) assist in
supervising all aspects of the Fund's operations, including the coordination
of all matters relating to the functions of the custodian, transfer agent, other
shareholder service agents, accountants, attorneys and, or operational functions
Fund, at the Adviser's compelete to perform such, other parties performing
services or operational functions for the Fund, (ii) provide the Fund, at the
Adviser's expense, with services of persons complete it to perform such
administrative and clerical functions as are necessary in order to provide
effective administration of the Fund, including duties in connection with
shareholder relations, reports, redemption requests and account adjustments and
the maintenance of certain books and records of the Fund, (iii) provide the
Fund, at the Adviser's expense, with adequate office space and related services
necessary for its operations as contemplated in this Agreement and (iv)
4
<PAGE>
supervise and administer the operation of the Exchange Privilege referred to in
the Prospectus. The Fund acknowledges that the Adviser intends to arrange for
the provision of services and the performance of functions referred to in,
this subsection (b) by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Administrator") pursuant to an Administration Agreement between the Adviser
and the Administrator.
ARTICLE 2.
Allocation of Charges and Expenses.
----------------------------------
(a) The Adviser. The Adviser assumes and shall pay for maintaining the
-----------
staff and personnel, and shall at its own expense provide the equipment, office
space and facilities, necessary to perform its obligations under this,
Agreement, and shall pay all compensation of officers of the Fund and the fees
of all directors of the Fund who are affiliated persons of Merrill Lynch & Co.,
Inc. or its, subsidiaries.
(b) The Fund. The Fund assumes and shall, pay all, expenses of the Fund,
--------
including, without limitation: organization costs, insurance, taxes, expenses
for legal and auditing services, costs of printing proxies, stock certi-
,prospectuses (except, ficates, shareholder reports and prospectuses (except to
the extent paid by the Distributor), charges of the Custodian and Transfer
Agent, expenses of redemption of
5
<PAGE>
shares, Securities and Exchange Commission fees, expenses of registering the
shares under Federal and state securities laws, fees and expenses of directors
who are not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries,
accounting and pricing costs (including the daily calculation of net asset
value), interest, brokerage costs, litigation and other extraordinary or non-
recurring expenses, and other expenses properly payable by the Fund.
ARTICLE 3.
Compensation of the Adviser.
---------------------------
(a) Investment Advisory Fee. For the services rendered, the facilities
-----------------------
furnished and expenses assumed by the Adviser, the Fund shall pay to the Adviser
at the end of each calendar month a fee based upon the average daily value of
the aggregate net assets of the Portfolios, as determined and computed in
accordance with the description of the method of determination of net asset
value contained in the Prospectus. During any period when the determination of
net asset value is suspended by the Board of Directors of the Fund, the net
asset value of a share as of the last business,day prior to such suspension
shall for this purpose bedeemed to be the net asset value at the close of each
succeeding business day until it is again determined.
6
<PAGE>
The fee with respect to each Portfolio shall be at the rates set forth
below. These rates are subject to reduction to the extent that the aggregate of
the average, daily net assets of the three combined Portfolios exceeds $250
million, $500 million or $750 million, as the case may be. The reductions shall
be applicable to each Portfolio regardless of size on a "uniform percentage"
basis. Determination of the portion of the net assets of that 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
by which the combined assets of all Portfolios exceed the minimum amount to
which such rate applies by such combined assets.
<TABLE>
<CAPTION>
Rate of Advisory Fee
Aggregate of ------------------------------------
average daily net High High Intermediate
assets of the three Quality Income Term
combined Portfolios Portfolio Portfolio Portfolio
--------- --------- ------------
<S> <C> <C> <C>
Not exceeding $250 million.............. 0.50% 0.55% 0.50%
In excess of $250 million but
not more than $500 million............ 0.45 0.50 0.45
In excess of $500 million but
not more than $750 million............ 0.40 0.45 0.40
In excess of $750 million............... 0.35 0.40 0.35
</TABLE>
(b) Expense Limitations. In the event the operating, expenses of any
-------------------
Portfolio, including the investment advisory fee applicable to such Portfolio
payable to the Ad-
7
<PAGE>
viser pursuant to subsection (a) hereof , for any fiscal year ending on a date
on which this Agreement is in effect exceed the expense limitations applicable
to that Portfolio, imposed by state securities laws or regulations thereunder,
as such limitations may be raised or lowered from time to time, the Adviser
shall reduce its investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse such Portfolio
in the amount of such excess; provided however, to the extent permitted by law,
there shall be excluded from such expenses the amount of any interest, taxes,
brokerage commissions and extraordinary expenses (including but not limited to
legal claims and liabilities and litigation costs and any indemnnification
related thereto) paid or payable by the Fund and allocated to such Portfolio.
Whenever the expenses of any Portfolio exceed a pro rata portion of the
applicable annual, expense limitations, the estimated amounts of reimbursement
under such limitations shall be applicable as an offset against the monthly
payment of the advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
--------------------------------------
The Adviser shall not be liable for any error ofjudgement or mistake of
law or for any loss suffered by
8
<PAGE>
the Fund in connection with any investment policy or the purchase, sale or
redemption of any securities on the recommendation of the Adviser. Nothing
herein contained shall be construed to protect the Adviser against any liability
to the Fund or its security holders to which the Adviser shall otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence in the
performance of its duties on behalf of the Fund, reckless disregard of the
Adviser's obligations and duties under this Agreement or the violation of any
applicable law.
ARTICLE 5.
Activities of the Adviser.
--------------------------
The services of the Adviser under this Agreement are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others so
long as its services hereunder are not impaired thereby. It is understood that
directors, officers, employees and shareholders of the Fund are or may become
interested in the Adviser, as directors, officers, employees or shareholders
or otherwise and that directors, officers, employees or shareholders of the,
similarly interested in the Fund,, Adviser are or may become similarly
interested in the Fund, and that the Adviser is or may become interested in the
Fund as shareholder or otherwise.
9
<PAGE>
ARTICLE 6.
Duration and Termination of this Agreement.
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until March 15, 1981 and thereafter, but only so long
as such continuance is specifically approved at least annually by (i) the Board
of Directors of the Fund, or by the vote of a majority of the outstanding shares
of the Fund, including a majority of the outstanding shares of each Portfolio,
and (ii) a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors of the Fund or by vote of a majority of the
outstanding shares of the Fund, or by the Adviser, on sixty days written notice
to the other party. This Agreement shall automatically terminate in the event
of its assignment.
ARTICLE 7.
Definitions.
-----------
The terms "assignment", "affiliated person" and "interested person",
when used in this Agreement, shall have the respective meanings specified in the
Investment Company Act. As used with respect to the Fund or any of its
Portfolios,
10
<PAGE>
the term "majority of the outstanding shares" 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.
ARTICLE 8.
Amendments of this Agreement.
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Board of,Fund, or by the vote of a majority of,
Directors of the Fund, or by the vote of a majority of outstanding shares of the
Fund, including a majority of the, of each Portfolio, and (ii) a majority,
outstanding shares of each Portfolio, and (ii) a majority of those directors of
the Fund who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
ARTICLE 9.
Governing Law.
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the
11
<PAGE>
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first above written.
MERRILL LYNCH CORPORATE
BOND FUND, INC.
By
-----------------------------
Attest: President
- ------------------------------
Secretary
FUND ASSET MANAGEMENT, INC.
By
-----------------------------
Attest: Vice President
- ------------------------------
Secretary
12
<PAGE>
EXHIBIT 99.8
CUSTODIAN AGREEMENT
-------------------
AGREEMENT made as of this 28th day of September, 1978, by and between
MERRILL LYNCH HIGH INCOME FUND, INC., a Maryland corporation having its
principal place of business at 1 Liberty Plaza, 165 Broadway, New York, New
York,, 10080 (hereinafter called the "Fund"), and STATE STREET BANK AND TRUST
COMPANY, a Massachusetts banking corporation having its principal place of
business at 225 Franklin Street, Boston, Massachusetts, 02110 (hereinafter
called "State Street").
WITNESSETH THAT:
----------------
In consideration of the mutual agreements herein contained, the Fund
and State Street, intending to be legally bound, hereby agree as
follows:
I. DEPOSITORY
----------
The Fund agrees to and does hereby appoint State Street its depository
subject to the provisions hereof, and likewise agrees to deliver to State Street
certified or authenticated copies of its Articles of Incorporation and By-Laws,
all amendments thereto, a certified copy of the resolution of the Board of
Directors appointing State Street to act in the capacities covered by this
Agreement and authorizing the signing of this Agreement and copies of such
resolutions of its Board of Directors, contracts and other documents as may be
required by State Street in the performance of its duties hereunder.
<PAGE>
II. CUSTODIAN
---------
1. The Fund agrees to and does hereby appoint State Street its
Custodian, subject to the provisions hereof, and likewise, subject to the
provisions hereof, agrees that State Street shall retain all securities and cash
now owned or hereafter acquired by the Fund, and the Fund also agrees to deliver
and pay or cause to be delivered and paid to State Street, as Custodian, all
securities and cash hereafter acquired by the Fund.
2. All securities delivered to State Street (other than in bearer form)
shall be properly endorsed and in form for transfer or in the name of State
Street or of a nominee of State Street or in the name of the Fund or of a
nominee of the Fund.
3. As Custodian, State Street shall have and perform the following
powers and duties:
A. Safekeeping. To keep safely in a separate account the securities
-----------
of the Fund and on behalf of the Fund, from time to time, to receive delivery of
certificates for safekeeping and to keep such certificates physically segregated
at all times from those of any other person. State Street shall maintain records
of all receipts, deliveries and locations of such securities, together with a
current inventory thereof and shall conduct periodic physical inspections of
certificates representing bonds and other securities held by it under this
Agreement in such manner as State Street shall determine from
-2-
<PAGE>
time to time to be advisable in order to verify the accuracy of such inventory.
With respect to securities held by any agent appointed pursuant to Paragraph 6-C
of Section II hereof, and with respect to securities held by any Sub-Custodian
appointed pursuant to Paragraph 6-D of Section II hereof, State Street may rely
upon certificates from such agent as to the holdings of such agent and from such
Sub-Custodian as to the holdings of such Sub-Custodian, it being understood
that such reliance in no way relieves State Street of its responsibilities under
this Agreement. State Street will promptly report to the Fund the results of
such inspections, indicating any shortages or discrepancies uncovered thereby,
and take appropriate action to remedy any such shortages or discrepancies.
B. Use of a System for the Central Handling of Securities. To use
-------------------------------------------------------
the facilities of Depository Trust Company, Federal Reserve Book-Entry System or
any other book-entry system for the central handling of securities (hereinafter
called a "central securities system" or "such system"), with which securities
are authorized to be deposited under the provisions of Section 17(f) of the
Investment Company Act of 1940, as from time to time amended, subject to such
rules, regulations and orders as may be adopted by t Securities and Exchange
Commission thereunder. Without limiting the generality of such use it is agreed
that the following provisvisions, shall, subject to such rules, regulations and
orders, apply thereto:
-3-
<PAGE>
1) Such system may be used to hold, receive, exchange, release, deliver
and otherwise deal with the securities owned by the Fund, including stock
dividends, rights and other items of like nature, and to receive and remit to
State Street all income and other payments thereon and to take all steps
necessary and proper in connection with the collection thereof.
2) Registration of the Fund's securities may be made in the name of any
nominee or nominees used by such system.
3) Payment for securities purchased and sold may be made through the
clearing medium employed by such system for transactions of participants acting
through it.
4) Securities and any cash of the Fund deposited in such system, will at all
times be segregated from any assets and cash controlled by State Street in other
than a fiduciary or custodian capacity but may be corningled with other assets
held in such capacities. State Street will pay out money only upon the receipt
of securities and will deliver securities only upon the receipt of money.
5) All books and records maintained by State Street which relate to the
Fund's participation in these systems will. at all times during State Street's
regular business hours be open to inspection by the Fund's duly authorized
employees or agents, and the Fund will, be furnished with all the information in
respect of the services rendered to it as it may require.
6) State Street will make available to the Fund copies of any internal
control reports concerning such system made to,
-4-
<PAGE>
it by either internal or external auditors within ten days after receipt of such
a report by State Street.
C. Registered Name, Nominee. To register securities of the Fund held
------------------------
by State Street in the name of the Fund or of any nominee of the Fund or in the
name of State Street or of any nominee of State Street or in the name of any
agent or any nominee of such agent pursuant to Paragraph 6-C of Section II
hereof or in the name of any Sub-Custodian or any nominee of any such Sub-
Custodian appointed pursuant to Paragraph 6-D of Section II hereof.
D. Purchases. Upon receipt of proper instructions, and insofar as
---------
cash is available for the purpose, to pay for and receive all securities
purchased for the account of the Fund, payment being made only upon receipt of
the securities by State Street (or any bank, banking firm, responsible com-
mercial agent or trust company doing business in the United States and/or any
foreign country and appointed by State Street pursuant to Paragraph 6-C of
Section II hereof as State Street's agent for this puroose or appointed as Sub-
Custodian pursuant to Paragraph 6-D of Section II hereof), registered as
provided in Paragraph 3-C of Section 11 hereof or in form for transfer
satisfactory to State Street, or in the case of repurchase agreements entered
into between the Fund and a bank located in Boston, delivery of the receipt
evidencing purchase by the Fund of securities owned by State
-5-
<PAGE>
Street or such other bank along with written evidence of the agreement by State
Street or other bank to repurchase such securities from the Fund, provided,
however,, that in the case of repurchase agreements extending not more than
seven days entered into between the Fund and bank not located in Boston, State
Street is specifically authorized to treat such bank as though State Street had
appointed it as agent pursuant to Paragraph 6-C of Section II hereof for the
limited purpose of receiving and holding documents evidencing such repurchase
agreements and evidencing the segregation on the books and records of the bank
of the specific securities purchased under or collateralizing such repurchase
agreement and State Street shall not be liable for failure of such bank to
fulfill any representations that it has effected such segregation, provided,
further, however, that State Street and the Fund agree to use their best efforts
to insure receipt by State Street of copies of such documentation for each such
transaction as promptly as possible. All securities accepted by State Street
shall be accompanied by payment of, or a "due bill" for, any dividends, interest
or other distributions of the issuer, due the purchaser. Except as otherwise
provided with respect to repurchase agreements in this Paragraph 3-D of Section
II hereof, in any and every case of a purchase of securities for the account of
the Fund where payment is made by State Street in advance of receipt of the
securities
-6-
<PAGE>
purchased, State Street shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by State
Street.
E. Exchanges. Upon receipt of proper instructions, to exchange
---------
securities or interim receipts or temporary securities held by it or by any
agent appointed by it pursuant to Paragraph 6-C of Section II hereof or any Sub-
Custodian appointed pursuant to Paragraph 6-D of Section II hereof for the
account of the Fund for other securities alone or for other securities and cash,
and to expend cash insofar as cash is available, in connection with any merger,
consolidation, reorganization, recapitalization, split-up of shares, changes of
par value, conversion or in connection with the exercise of warrants,
subscription or purchase rights, or otherwise; to deposit any such securities
and cash in accordance with the terms of any reorganization or protective plan
or otherwise, and to deliver securities to the designated depository or other
receiving agent in response to tender offers or similar offers to purchase
received in writing. Except as instructed by proper instructions received in
timely enough fashion for State Street to act thereon prior to any expiration
date (which shall be presumed to be three business days prior to such date
unless State Street has advised the Fund of a different period) and giving full
details of the time and method of submitting securities in response to any
tender or similar
-7-
<PAGE>
offer, exercising any subscription or purchase right or making any exchange
pursuant to this Paragraph and subject to State Street having fulfilled its
obligations under Paragraph 3-L of Section II hereof pertaining to notices or
announcements, State Street shall be under no obligation regarding any tender
or similar offer, subscription or purchase right or exchange except to exercise
its best efforts. When such securities are in the possession of an agent
appointed by State Street pursuant to Paragraph 6-C of Section II hereof, the
proper instructions referred to in the preceding sentence must be received by
State Street in timely enough fashion (which shall be presumed to be four
business days unless State Street has advised the Fund of a different period)
for State Street to notify the agent in sufficient time to permit such agent to
act prior to any expiration date. When the securities are in the possession of a
Sub-Custodian appointed pursuant to Paragraph 6-D of Section II hereof, the
proper instructions must be received by the Sub-Custodian in timely enough
fashion as advised to the Fund by State Street or the Sub-Custodian to permit
the Sub-Custodian to act prior to any expiration date.
F. Sales. Upon receipt of proper instructions and upon receipt of
-----
payment therefor to make delivery of securities which have been sold for the
account of the Fund. All such payments are to be made in cash,
by a certified check,
-8-
<PAGE>
upon or a treasurer's or cashier's check of a bank, by effective bank wire
transfer through the Federal Reserve Wire System or, if appropriate, outside of
the Federal Reserve Wire System and subsequent credit to the Fund's Custodian
account, or, in case of delivery through a stock clearing company, by book-entry
credit by the stock clearing company in accordance with the then current street
custom.
G. Purchases by Issuer. Upon receipt of proper instructions to
-------------------
release and deliver securities owned by the Fund to the Issuer thereof or its
agent when such securities are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or other consideration is to
be delivered to State Street.
H. Changes of Name and Denomination. Upon receipt of proper
--------------------------------
instructions to release and deliver securities owned by the Fund to the Issuer
thereof or its agent for transfer into the name of the Fund or State Street or
nominee of either, or for exchange for a different number of bonds,
certificates, or other evidence representing the same aggregate face amount or
number of units bearing the same interest rate, maturity date and call
provisions, if any; provided that, in any such case, the new securities are to
be delivered to State Street.
I. Street Delivery. Upon receipt of proper instructions, which in
---------------
the case of registered securities may be standing instructions, to release and
deliver securities owned by the
-9-
<PAGE>
Fund to the broker selling the same for examination in accordance with the then
current "street delivery" custom.
J. Release of Securities for Use as Collateral. Upon receipt of
-------------------------------------------
proper instructions, to release securities belonging to the Fund to any bank or
trust company for the purpose of pledge or hypothecation to secure any loan
incurred by the Fund; provided, however, that securities shall be released only
upon payment to State Street of the monies borrowed, except that in cases where
additional collateral is required to secure a borrowing already made, subject to
proper prior authorization, further securities may be released for that purpose.
Upon receipt of proper instructions, to pay such loan upon redelivery to it of
the securities pledged or hypothecated therefor and upon surrender of the note
or notes evidencing the loan.
K. Release or Delivery of Securities for Other Purposes. Upon
----------------------------------------------------
receipt of proper instructions, to release or deliver any securities held by it
for the account of the Fund for any other purpose (in addition to those
specified in Paragraphs 3-E, 3-F, 3-G, 3-H, 3-I and 3-J of Section II hereof)
which the Fund declares is a proper corporate purpose pursuant to the proper
instructions described in Paragraph 5-A of Section II hereof.
L. Proxies, Notices, Etc. Promptly to deliver or mail to the Fund
----------------------
all forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to the securities, and upon receipt of
proper instructions to
-10-
<PAGE>
execute and deliver or cause its nominee to execute and deliver such proxies or
other authorizations as may be required. Neither the Custodian nor its nominee
shall vote upon any of the securities or execute any proxy to vote thereon or
give any consent or take any other action with respect thereto (except as
otherwise herein provided) unless ordered to do so by proper instructions.
M. Miscellaneous. In general, to attend to all nondiscretionary
-------------
details in connection with the sale, exchange, substitution, purchase, transfer
or other dealing with such securities or property of the Fund except as
otherwise from time to time directed by proper instructions. State Street shall
render to the Fund an itemized statement of the securities for which it is
accountable to the Fund under this Agreement as of the end of each month, as
well as a list of all security transactions that remain unsettled at such time.
4. As Custodian, State Street shall have and perform the following
additional powers and duties:
A. Bank Account. To retain all cash, other than cash maintained by
------------
the Fund in a bank account established and used in accordance with Rule 17f-3
under the Investment Company Act of 1940, of the Fund in the banking department
of State Street in a separate account or accounts in the name of the Fund,
subject only to draft or order by State Street acting pursuant to the terms of
this Agreement. If and when authorized
-11-
<PAGE>
by proper instructions in accordance with a vote of the majority of the Board of
Directors of the Fund, State Street may open and maintain an additional account
or accounts in such other bank or trust companies as may be designated by such
instructions,, such account or accounts, however, to be in the name of State
Street in its capacity as Custodian and subject only to its draft or order in
accordance with the terms of this Agreement. If requested by the Fund, State
Street shall furnish the Fund, not later than twenty (20) calendar days after
the last business day of each month, a statement reflecting the current status
of its internal reconciliation of the closing balance as of that day in all
accounts described in this Paragraph to the balance shown on the daily cash
report for that day rendered to the Fund.
B. Collections. Unless otherwise instructed by receipt of proper
-----------
instructions, to collect, receive and deposit in the bank account or accounts
maintained pursuant to Paragraph 4-A of Section II hereof all income and other
payments with respect to the securities held hereunder, and to execute ownership
and other certificates and affidavits for all Federal and State tax purposes in
connection with the collection of bond and note coupons, and to do all other
things necessary or proper in connection with the collection of such income, and
without waiving the generality of the foregoing, to:
(1) present for payment on the date of payment
-12-
<PAGE>
all coupons and other income items requiring presentation;
(2) present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable on the
date such securities become payable;
(3) endorse and deposit for collection, in the name of the Fund,
checks, drafts or other negotiable instruments on the same
day as received.
In any case in which State Street does not receive any such due and unpaid
income within a reasonable time after it has made proper demands for the same
(which shall be presumed to consist of at least three demand letters and at
least one telephonic demand), it shall so notify the Fund in writing, including
copies of all demand letters, any written responses thereto, and memoranda of
all oral responses thereto and to telephonic demands, and await proper
instruction; the Custodian shall not be obliged to take legal action for
collection unless and until reasonably indemnified to its satisfaction. It shall
also notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
C. Sale of Shares of the Fund. To receive from the Transfer Agent of
--------------------------
the Fund, cash consideration due the Fund, as certified by the Transfer Agent,
for such shares of
-13-
<PAGE>
the Fund as may be issued or sold from time to time by the Fund.
D. Dividends and Distributions. Upon receipt of proper instructions
---------------------------
to release or otherwise apply cash insofar as available, for the payment of
dividends or other distributions to stockholders of the Fund.
E. Stock Dividends, Rights, Etc. To receive and collect all stock
----------------------------
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
F. Redemption of Shares of the Fund. From such funds as may be
--------------------------------
available for the purpose but subject to the limitations of Section of the
Fund's By-Laws, and applicable resolutions of the Board of Directors of the Fund
pursuant thereto, to make available to the Transfer Agent, funds which it
certifies are necessary to make payment to shareholders who have delivered to
the Transfer Agent a request for redemption of their shares by the Fund pursuant
to said Section.
G. Disbursements. Upon receipt of proper instructions, to make or
-------------
cause to be made, insofar as cash is available for the purpose, disbursements
for the payment on behalf of the Fund of interest, taxes, management or
supervisory fees and operating expenses, including registration and
qualification costs and other expenses of issuing and selling shares or changing
its capital structure,
-14-
<PAGE>
whether or not such expenses shall be in whole or in part capitalized or treated
as deferred expenses.
H. Other Prover Corporate Purposes. upon receipt of proper
-------------------------------
instructions, to make or cause to be made, insofar as cash is available,
disbursements for any other purpose (in addition to the purposes specified in
Paragraphs 3-D, 3-B, 4-D, 4-F and 4-G of this Agreement) which the Fund declares
is a proper corporate purpose pursuant to the proper instructions described in
Paragraph 5-A below.
I. Records. To create, maintain and retain all records relating to
-------
its activities and obligations under this Agreement in such manner as will meet
the obligations of the Fund under the Investment Company Act of 1940,
particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable
Federal and State tax laws and any other law or administrative rules or
procedures which may be applicable to the Fund. All records maintained by the
Bank in connection with the performance of its duties under this Agreement will
remain the property of the Fund and in the event of termination of this
Agreement will be delivered in accordance with the terms of Paragraph 8 below.
J. Accounts. To keep books of account and render statements,
--------
including interim monthly and complete quarterly financial statements, or copies
thereof from time to time as requested by the Treasurer or any Executive Officer
of the
-15-
<PAGE>
Fund.
K. Appraisals. Unless otherwise directed by receipt of proper
----------
instructions, to compute and determine, as of the close of business of the New
York Stock Exchange, the sonet asset value" of a share in the Fund, such
computation and determination to be made pursuant to the provisions of Section
of the By-Laws of the Fund, by a vice president, assistant vice president or
assistant secretary of the Custodian; and promptly to notify the Fund of the
result of such commutation and determination. In computing the "net asset value"
State Street shall rely upon security quotations received by telephone or
otherwise from sources designated by the Fund by proper instruction and may
further rely upon information furnished to it by any officer of the Fund
thereunto duly authorized relative (a) to liabilities of the Fund not appearing
on its books of account, (b) to the existence, status and proper treatment of
any reserve or reserves and (c) to the fair value of any security or other
property for which market quotations are not readily available.
L. Miscellaneous. To assist generally in the preparation of
-------------
routine reports to holders of shares of the Fund, to the Securities and Exchange
Commission, including forms N-lR and N-lQ, to State "Blue Sky" authorities and
to others, i.n the auditing of accounts, and in other matters of like nature.
-16-
<PAGE>
5. A. Proper Instructions. State Street shall be deemed to have received
-------------------
proper instructions upon receipt of written instructions signed by a majority of
the Board of Directors of the Fund or by one or more person or persons as the
Board of Directors shall have from time to time authorized to give the
particular class of instructions in question. Different persons may be
authorized to give instructions for different purposes. A certified copy of a
resolution or action of the Board of Directors of the Fund may be received and
accepted by State Street as conclusive evidence of the authority of any such
person or persons to act and may be considered as in full force and effect until
receipt of written notice to the contrary. Such instructions may be general or
specific in terms.
B. Investments, Limitations. In performing its duties generally, and more
------------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, State Street may take cognizance of the provisions of
the Articles of Incorporation of the Fund as from time to time amended; however,
except as otherwise expressly provided herein, it may assume unless and until
notified in writing to the contrary that instructions purporting to be proper
instructions received by it are not in conflict with or in any way contrary to
any provision of the Articles of Incorporation and By-Laws of the Fund as
amended, or resolutions or proceedings of the
-17-
<PAGE>
Directors of the Fund.
6. State Street and the Fund further agree as follows:
A. Indemnification. State Street, as Depository and Custodian, shall be
---------------
entitled to receive and act upon advice of counsel (who may be counsel for the
Fund) and shall be without liability for any action reasonably taken or thing
reasonably done pursuant to such advice, provided that such action is not in
violation of applicable Federal or State laws or regulations, and shall be kept
indemnified by the Fund and be without liability for any action taken or thing
done by it in carrying out the terms and provisions of this Agreement in good
faith and without negligence. In order that the indermification provision
contained in this Paragraph 6-A of Section II shall apply, however, it is
understood that if in any case the Fund may be asked to indemnify or save State
Street harmless, the Fund shall be fully and promptly advised of all pertinent
facts concerning the situation in question, and it is further understood that
State Street will use all reasonable care to identify and notify the Fund
promptly concerning any situation which presents or appears likely to present
the probability of such a claim for indemnification against the Fund. The Fund
shall have the option to defend State Street against any claim which may be the
subject of this indemnification, and in the event that the Fund so elects it
will so notify State Street, and thereupon the Fund shall
-18-
<PAGE>
take over complete defense of the claim, and State Street Bank shall in such
situations initiate no further legal or other expenses for which it shall seek
indemnification under this Paragraph 6-A of Section II. State Street shall in no
case confess any claim or make any compromise in any case in which the Fund will
be asked to indemnify State Street except with the Fund's prior written consent.
B. Expense Reimbursement. State Street shall be entitled to receive
---------------------
from the Fund on demand reimbursement for its cash disbursements, expenses and
charges in connection with its duties as Depository and Custodian as aforesaid,
but excluding salaries and usual overhead expenses.
C. Appointment of Agents. State Street, as Custodian, may at any
---------------------
time or times appoint (and nay at any time remove) any other bank, trust company
or responsible commercial agent as its agent to carry out such of the provisions
of this Agreement as State Street may from time to time direct, provided,
however, that the appointment of such agent shall not relieve State Street of
any of its responsibilities under this Agreement, except that with respect to
repurchase agreements entered into with banks located outside of Boston, the
responsibility of State Street shall be governed by the provisions of Paragraph
3-D Of Section II hereof and shall be no greater than its responsibility or
liability to the Fund with respect to a Sub-Custodian.
-19-
<PAGE>
D. Appointment of Sub-Custodian. State Street, as the Custodian, may
----------------------------
from time to time employ one or more Sub-Custodians, but only in accordance with
the !terms and conditions set forth in the Fund's By-Laws and provided that
State Street shall have no more responsibility or liability to the Fund on
account of any actions or omissions of any Sub-Custodian so employed, than any
such Sub-Custodian has to State Street.
E. Reliance on Documents. So long as and to the extent that it is in
---------------------
the exercise of reasonable care, State Street, as Depository and Custodian,
shall not be responsible for the title, validity or genuineness of any property
or evidence of title thereto received by it or delivered by it pursuant to this
Agreement, and shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed in accordance with
Paragraph 5-A of Section II hereof and shall, except as otherwise specifically
provided in this Agreement, be entitled to receive as conclusive proof of any
fact or matter required to be ascertained by it hereunder a certificate signed
by any Director or the Secretary of the Fund or any other person authorized by
the Directors.
F. Access to Records. Subject to security requirements of State
-----------------
Street applicable to its own employees having
-20-
<PAGE>
access to similar records within State Street and such regulations as to the
conduct of such monitors as may be reasonably imposed by State Street after
prior consultation with an officer of the Fund, the books and records of State
Street pertaining to its actions under this Agreement shall be open to
inspection and audit at reasonable times by the Board of Directors of, attorneys
for, and auditors employed by, the Fund.
G. Record-Keeping. State Street shall maintain such records as will
--------------
enable the Fund to comply with the requirements of all Federal and State Laws
and regulations applicable to the Fund with respect to the matters covered by
this Agreement, including but not limited to the requirements of Section 2.30
of Form N-lR.
7. The Fund shall pay to State Street as Depository and Custodian, the
compensation set forth on Exhibit A hereto until a different compensation
schedule shall be agreed upon in writing between the parties.
8. State Street and the Fund further agree as follows:
A. Effective Period, Termination and Amendment, and Interpretive
-------------------------------------------------------------
and Additional Provisions. This Agreement shall become effective as of the date
- -------------------------
of its execution, shall continue in full force and effect until terminated as
herein-after provided, may be amended at any time by mutual agreement of the
parties hereto and may be terminated by either party by an instrument in writing
delivered or mailed, postage pre-
-21-
<PAGE>
paid, to the other party, such termination to take effect not sooner than sixty
(60) days after the date of such delivery or mailing; provided, however, that
the Fund shall not amend or terminate this Agreement in contravention of any
applicable Federal or State laws or regulations, or any provision of the Fund's
Articles of Incorporation or By-Laws as the same may from time to time be
amended, and further provided, that the Fund may at any time by action of its
Board of Directors substitute another bank or trust company for State Street
by giving notice as above to State Street.
In connection with the operation of this Agreement, State Street and
the Fund may agree from time to time on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement, any such interpretive or
additional provisions to be signed by both parties and annexed hereto, provided
that no such interpretive or additional provisions shall contravene any
applicable Federal or State laws or regulations, or any provision of the Fund's
Articles of Incorporation or By-Laws as the same may from time to time be
amended. No interpretive or additional provisions made as .provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
B. Successor Custodian. Upon termination hereof the Fund shall pay
-------------------
to State Street such compensation as may
-22-
<PAGE>
be due as of the date of such termination and shall likewise reimburse State
Street for its costs, expenses and disbursements, reimburse State Street for its
costs, expenses, and disbursements incurred prior to such termination in
accordance with Section 6-B of Section II hereof and such reasonable costs,-
expenses and disbursements as may be incurred by State Street in connection
with such termination.
If a successor custodian is appointed by the Board of Directors of
the Fund in accordance with the By-Laws, State Street shall, upon termination,
deliver to such successor custodian at the office of State Street, duly endorsed
and in form for transfer, all securities then held hereunder and all funds or
other properties of the Fund deposited with or held by it hereunder.
If no such successor custodian is appointed, State Street shall, in
like manner at its office, upon receipt of a certified copy of a resolution of
the shareholders pursuant to the By-Laws, deliver such securities, funds and
other properties in accordance with such resolution.
In the event that no written order designating a successor custodian
or certified copy of a resolution of the shareholders shall have been delivered
to State Street on or before the date when such termination shall become
effective, then State Street shall have the right to deliver to a bank or trust
company doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and
-23-
<PAGE>
undivided profits, as shown by its last published report of not less than
$2,000,000, all securities, funds, and other properties held by State Street and
all instruments held by State Street and all instruments held by it relative
thereto and all other property held by it under this Agreement. Thereafter, such
bank or trust company shall be the successor of State Street under this
Agreement.
In the event that securities, funds, and other properties remain in
the possession of State Street after the date of termination hereof owing to
failure of the Fund to procure the certified copy above referred to, or of the
Board of Directors to appoint a successor custodian, State Street. shall be
entitled to fair compensation for its services during such period and the
provisions of this Agreement relating to the duties and obligations of State
Street shall remain in full force and effect.
9. The Fund shall not circulate any printed matter which contains any
reference to State Street without the prior written approval of State Street,
excepting solely such printed matter as merely identifies State Street as
Depository or Custodian. The Fund will submit printed matter requiring approval
to State Street in draft form, allowing sufficient time for review by State
Street and its counsel prior to any deadline for printing.
10. This instrument is executed and delivered in the Commonwealth of
Massachusetts and shall be subject to and be con-
-24-
<PAGE>
strued according to the laws of said Commonwealth.
11. Notices and other writings delivered or mailed postage prepaid to the
Fund at 1 Liberty Plaza, 165 Broadway, New York, New York, 10080 or to State
Street at 225 Franklin Street, Boston, Massachusetts, 02110 or to such other
address as the Fund or State Street may hereafter specify, shall be deemed to
have been properly delivered or given hereunder to the respective address.
12. It is understood and is expressly stipulated that neither the holders of
shares in the Fund nor the Directors of the Fund shall be personally liable
hereunder.
13. This Agreement shall be binding on and shall inure to the benefit of the
Fund and State Street and their respective successors.
14. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by a duly authorized officer as of the
day and year first above written.
ATTEST: MERRILL LYNCH HIGH INCOME FUND, INC.
/s/ Stephen M. M. Miller /s/
- ------------------------- -------------------------------------------
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ /s/
- ------------------------- -------------------------------------------
-25-
<PAGE>
EXHIBIT 99.9(a)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the lst day of September, 1987 by and
between Merrill Lynch Corporate Bond Fund, Inc. (the 'Fund') and Merrill Lynch
Financial Data Service, Inc. ("MLFDS"), a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint MLFDS to be the Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent upon, and subject to,
the terms and provisions of this Agreement, and MLFDS is desirous of accepting
such appointment upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants contained in
this Agreement, the Fund and MLFDS agree as follows:
3. APPOINTMENT OF MLFDS AS TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT.
(a) The Fund hereby appoints MLFDS to act as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and subject
to, the terms and provisions of this Agreement.
(b) MLFDS hereby accepts the appointment as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act
as such upon, and subject to, the terms and provisions of the Agreement.,
4. DEFINITIONS.
(a) In this Agreement:
(I) The term "Act' means the Investment Company Act of 1940 as amended
from time to time and any rule or regulation thereunder;
(II) The term "Account' means any account of a Shareholder, or, if the
shares are held in an account in the name of MLPF&S for benefit of an identified
customer, such account, including a Plan Account, any account under a plan (by
whatever name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any plan (by whatever
name referred to in the Prospectus) in conjunction with Section 401 of the
Internal Revenue Code ('Corporation Master Plan');
<PAGE>
(III) The term "application' means an application made by a Shareholder
or prospective Shareholder respecting the opening of an Account;
(IV) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a
Delaware corporation;
(V) The term "MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation;
(VI) The term "Officer's Instruction" means an instruction in writing
given on behalf of the Fund to MLFDS, and signed on behalf of the Fund by the
President, any Vice President, the Secretary or the Treasurer of the Fund;
(VII) The term "Prospectus" means the Prospectus and the Statement of
Additional Information of the Fund as from time to time in effect;
(VIII) The 'term beneficial interest, as the of class or series;,
"Shares" means shares of stock or case may be, of the Fund, irrespective of
class or series;
(IX) The term "Shareholder' means the holder of record, of Shares;
(X) The term "Plan Account" means an account opened by a Shareholder
or prospective Shareholder in respect to an open account, monthly payment or
withdrawal plan (in each case by whatever name referred to in the Prospectus),
and may also include an account relating to any other Plan if and when provision
is made for such plan in the Prospectus.
3. DUTIES OF MLFDS AS TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND SHAREHOLDER
SERVICING AGENT.
(a) Subject to the succeeding provisions of the Agreement, MLFDS hereby
agrees to perform the following functions as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent for the Fund;, Accounts;
(I) issuing, transferring and redeeming Shares;
(II) opening, maintaining, servicing and closing Accounts;
2
<PAGE>
(III) Acting as agent for the Fund Shareholders and/or customers of
MLPF&S in connection with Plan Accounts, upon the terms and subject to the
conditions contained in the Prospectus and application relating to the specific
Plan Account;
(IV) Acting as agent of the Fund and/or MLPF&S, maintaining such
records as may permit the imposition of such contingent deferred sales charges
as may be described in the Prospectus, including such reports as may be
reasonably requested by the Fund with respect to such Shares as may be subject
to a contingent deferred sales charge;
(V) Upon the redemption of Shares subject to such a contingent
deferred sales charge, calculating and deducting from the redemption proceeds
thereof the amount of such charge in the manner set forth in the Prospectus.
MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent deferred
sales charges imposed upon all Shares maintained in the name of MLPF&S, or
maintained in the name of an account identified as a customer account of MLPF&S.
Sales charges imposed upon any other Shares shall be paid by MLFDS to MLFD.
(VI) Exchanging the investment of an investor into, or from the shares
of other open-end investment companies or other series portfolios of the Fund,
if any, if and to the extent permitted by the Prospectus at the direction of
such investor.,
(VII) Processing redemptions;
(VIII) Examining and approving legal transfers;
(IX) Replacing lost, stolen or destroyed certificates representing
Shares, in accordance with, and subject to, procedures and conditions adopted by
the Fund;
(X) Furnishing such confirmations of transactions relating to their,
Shares as required by applicable law;
(XI) Acting as agent for the Fund and/or MLPF&S, furnishing such
appropriate periodic statements relating to Accounts, together with additional
enclosures, including, appropriate income tax information and income tax forms
duly completed, as required by applicable law;
(XII) Acting as agent for the Fund and/or MLPF&S, mailing annual, semi-
annual and quarterly reports prepared by or on behalf of the Fund, and mailing
new Prospectuses upon their issue to Shareholders as required by applicable law;
(XIII) Furnishing such periodic statements of transactions effected by
MLFDS, reconciliations, balances and summaries as the Fund may reasonably
request;
3
<PAGE>
(XIV) Maintaining such books and records relating to transactions
effected by MLFDS as are required by the Act, or by any other applicable
provision of law, rule or regulation, to be maintained by the Fund or its
transfer agent with respect to such transactions, and preserving, or causing to
be preserved any such books and records for such periods as may be required by
any such law, rule or regulation and as may be agreed upon from time to time
between MLFDS and the Fund. In addition, MLFDS agrees to maintain and preserve
master files and historical computer tapes on a daily basis in multiple separate
locations a sufficient distance apart to insure preservation of at least one
copy of such information;
(XV) Withholding taxes on non-resident alien Accounts, preparing and
filing U.S. Treasury Department Form 1099 and other appropriate forms as
required by applicable law with respect to dividends and distributions; and
(XVI) Reinvesting dividends for full and fractional shares and
disbursing cash dividends, as applicable.
(b) MLFDS agrees to act as proxy agent in connection with the holding of
annual, if any, and special meetings of Shareholders, mailing such notices,
proxies and proxy statements in connection with the holding of such meetings as
may be required by applicable law, receiving and tabulating votes cast by proxy
and communicating to the Fund the results of such tabulation accompanied by
appropriate certifications, and preparing and furnishing to the Fund certified
lists of Shareholders as of such date, in such form and containing such
information as may be required by the Fund.
(c) MLFDS agrees to deal with, and answer in a-timely manner, all
correspondence and inquiries relating to the functions Of MLFDS under this
Agreement with respect to Accounts.
(d) MLFDS agrees to furnish to the Fund such information and at such
intervals as is necessary for the Fund to comply with the registration and/or,
the reporting requirements (including applicable escheat laws) of the Securities
and Exchange Commission, Blue Sky authorities or other governmental authorities.
4
<PAGE>
(e) MLFDS agrees to provide to the Fund such Information as may reasonably
be required to enable the Fund to reconcile the number of outstanding Shares
between MLFDS's records and the account books of the Fund.
(f) Notwithstanding anything in the foregoing revisions of this paragraph,
MLFDS agrees to perform its functions thereunder subject to such modification
(whether in respect of particular cases or in any particular class of cases) is
may from time to time be contained in an Officer's Instruction.
4. COMPENSATION.
The charges for services described in this Agreement, including "out-of-
pocket" expenses, will be set forth in the schedule of Fees attached hereto.
5. RIGHT OF INSPECTION.
MLFDS agrees that it will in a timely manner make available to, and
permit, any officer, accountant, attorney or autborized agent of the Fund to
examine and make transcripts and copies (including photocopies and computer or
other electronical information storage media and print-outs) of any and all of
its books and records which relate to any transaction or function performed by
MLFDS under or pursuant to this Agreement.
6. CONFIDENTIAL RELATIONSHIP.
MLFDS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all
information germane thereto, as confidential and not to be disclosed to any
person (other than the shareholder concerned, or the Fund, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the fund by way of
an Officer's Instruction.
7. INDEMNIFICATION.
The Fund shall indemnify and hold MLFDS harmless from any loss, costs,
damage and reasonable expenses, including reasonable attorney's fees (provided
that such attorney is appointed with the Fund's consent, which consent shall not
be unreasonably withheld), Incurred by it resulting from any claim, demand,
action, or suit in connection with the performance of its duties hereunder,
5
<PAGE>
provided that this indemnification shall not apply to actions or omissions of
MLFDS in cases Of willful misconduct, failure to act in good faith or negligence
by MLFDS, it's officers, employees or agents, and further provided, that prior
to confessing any claim against it which may be subject to this indemnification,
MLFDS shall give the Fund reasonable opportunity to defend against said claim in
its own name or in the name of MLFDS. An action taken by MLFDS upon any
officer's Instruction reasonably believed by it to have been properly executed
shall not constitute willful misconduct, failure to act in good faith or
negligence under this Agreement.
8. REGARDING MLFDS.
(a) MLFDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, resources and capabilities
as may be reasonably determined by the Fund to be necessary for the satisfactory
performance of -the duties and responsibilities of MLFDS. MLFDS warrants and
represents that its officers and supervisory personnel charged with carrying out
its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund possess the special skill and technical knowledge
appropriate for that purpose. MLFDS shall at all times exercise due care and
diligence in the performance of its functions as Transfer Agent, Dividend
Disbursing Agent and 'Shareholder Servicing Agent for the Fund. MLFDS agrees
that, in determining whether it has exercised due care and diligence, its
conduct shall be measured by the standard applicable to persons possessing such
special skill and technical knowledge.
(b) MLFDS warrants and represents that is duly authorized and permitted
to act as Transfer agent, Dividend Disbursing Agent, and Shareholder Servicing
Agent under all applicable laws and that it will immediately notify the Fund of
any revocation of such authority or permission or of the commencement of any
proceeding or other action which may lead to such revocation.
9. TERMINATION.
(a) This Agreement shall become effective as of the date first above
written and shall thereafter continue from year to year. This Agreement may be
terminated by the Fund or MLFDS (without penalty to the Fund or MLFDS) provided
that the terminating party gives the other party written notice of such
termination at least sixty (60) days in advance, except that the Fund may
terminate this Agreement immediately upon written notice to MLFDS if the
authority or permission of MLFDS to act as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent has been revoked or if any proceeding or
other action which the Fund reasonably believes will lead to such revocation has
been commenced.
6
<PAGE>
(b) Upon termination of this Agreement, MLFDS shall deliver all unissued
and canceled stock certificates representing Shares remaining in its possession,
and all Shareholder records, books, stock ledgers, instruments and other
documents (including computerized or other electronically stored information)
made or accumulated in the performance of its duties as Transfer Agent,
Disbursing Agent and Shareholder Servicing Agent for the Fund along with a
certified locator document clearly indicating the complete contents therein, to
such successor as may be specified in a notice of termination or Officer's
Instruction; and the Fund assumes all responsibility for failure thereafter to
produce any paper, record or documents so delivered and identified in the
locator document, if and when required to be produced.
10. AMENDMENT.
Except to the extent that the performance by MLFDS or its functions under
this Agreement may from time to time be modified by an officer's Instruction,
this Agreement may be amended or modified only by further written Agreement
between the parties.
11. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year above
written.
MERRILL LYNCH CORPORATE BOND FUND, INC.
By: /s/ Arthur Zeikel
-----------------------
Title: Director
---------------------
MERRILL LYNCH FINANCIAL DATA SERVICE, INC.
By: /s/ Robert Doan
-----------------------
Title: President
--------------------
7
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
MERRILL LYNCH CORPORATE BOND FUND, INC.:
We hereby consent to the use in Post-Effective Amendment No. 12 to Registration
Statement No. 2-62329 of our report dated November 6, 1987 appearing in the
Statement of Additional Informa- tion, which is a part of such Registration
Statement, and to the reference to us under the caption "Supplementary Financial
Information" appearing in the Prospectus, which also is a part of such
Registration Statement.
/s/ Deloitte Haskins & Sells
DELOITTE HASKINS & SELLS
Princeton, New Jersey
January 27, 1988
8
<PAGE>
EXHIBIT 99.9(b)
CONSENT TO USE OF NAME
MERRILL LYNCH MUNICIPAL BOND FUND, INC., a corporation organized under the
laws of the State of Maryland, hereby consents to the adoption by the Merrill
Lynch High Income Fund, Inc., a Maryland corporation, of the name "MERRILL LYNCH
CORPORATE BOND FUND, INC."
IN WITNESS WHEREOF, the said Merrill Lynch Municipal Bond Fund, Inc. has
caused this consent to be executed by its President and attested under its
corporate seal by its secretary, this 5th day of September, 1980.
MERRILL LYNCH MUNICIPAL
BOND FUND, INC.,
By /s/ Arthur Zeikel,
-------------------------
President
Attest:
/s/ Stephen M.M. Miller
- -----------------------
Secretary
(SEAL)
<PAGE>
EXHIBIT 15 (b)
DISTRIBUTION PLAN
OF
MERRILL LYNCH CORPORATE BOND FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the ______ day of __________, 198_ and
amended as of _____________, 1992, by and between Merrill Lynch Corporate Bond
Fund, Inc., a Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Fund intends to engage in business as an open-end
investment company registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"); and
WHEREAS, the Fund is comprised of three separate portfolios, namely, the
High Income Portfolio, the High Quality Portfolio and the Intermediate Term
Portfolio (the "Portfolios"), each of which pursues its own investment objective
through separate investment policies, and may in the future comprise one or more
additional portfolios; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund has entered into an amended Distribution Agreement
with MLFD, pursuant to which MLFD acts as the exclusive distributor and
representative of the Fund in the offer and sale of shares of the Class B High
Income Portfolio Series Common Stock, the Class B High Quality Portfolio Series
Common Stock and the Class B Intermediate Term Portfolio Series Common Stock
(collectively, the "Class B shares") of the Fund to the public; and
WHEREAS, the Fund has adopted this Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act, pursuant to which the Fund with respect
to the High Income and High Quality Portfolios will pay a distribution fee to
MLFD in connection with the distribution of Class B shares of each such
Portfolio;
<PAGE>
WHEREAS, the Fund desires to adopt this Distribution Plan with respect
to Class B Intermediate Term Portfolio Series Common Stock; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit the
Fund and its Class B shareholders.
Now, THEREFORE, the Fund hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act on the following terms and
conditions:
1. The Fund shall pay MLFD a distribution fee under the Plan at the end
of each month (i) at the annual rate of .75% of the average daily net asset
value of the Class B shares of the High Income and High Quality Portfolios, and
(ii) at the annual rate of .50% of the average daily net asset value of the
Class B shares of the Intermediate Term Portfolio, to compensate MLFD and
securities firms with which MLFD enters into related agreements
("Sub-Agreements") pursuant to Paragraph 2 hereof for providing sales and
promotional activities and services. Such activities and services will relate
to the sale, promotion and marketing of the Class B shares of such Portfolios
and payments related to the furnishing of services to Class B shareholders by
sales and marketing personnel. Such expenditures may consist of sales
commissions to financial consultants for selling Class B shares of such
Portfolios, compensation, sales incentives and payments to sales and marketing
personnel, and the payment of expenses incurred in its sales and promotional
activities, including advertising expenditures related to the Class B shares of
such Portfolios, the costs of preparing and distributing promotional materials,
and the costs of providing services to Class B shareholders of a Portfolio,
including assistance in connection with inquiries related to Class B shareholder
accounts. Only distribution expenditures properly attributable to the sale of
Class B shares of a Portfolio will be used to justify any fee paid by the Fund
with respect to that Portfolio pursuant to this Plan, and, to the extent that
such expenditures relate to more than one Portfolio, the expenditures will be
allocated between the affected Portfolios in a manner deemed appropriate by the
Board of Directors of the Fund.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its distribution fee to such Securities Firms as
compensation for the above-mentioned activities and services. Such Sub-Agreement
shall provide that the Securities Firms shall provide MLFD with such information
as is reasonably necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
2
<PAGE>
3. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the
distribution fee during such period.
4. This Plan shall not take effect with respect to a Portfolio until it
has been approved by a vote of at least a majority, as defined in the Investment
Company Act, of the outstanding Class B voting securities of that Portfolio.
5. This Plan shall not take effect with respect to a Portfolio until it
has been approved, together with any related agreements with respect to that
Portfolio, by votes of a majority of both (a) the Directors of the Fund and (b)
those Directors of the Fund who are not "interested persons" of the Fund, as
defined in the Investment Company Act, and have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it
(the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements.
6. This Plan shall continue in effect for so long as such continuance
is specifically approved at least annually in the manner provided for approval
of this Plan in Paragraph 5.
7. This Plan may be terminated with respect to a Portfolio at any time
by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of
the outstanding Class B voting securities of that Portfolio.
8. This Plan may not be amended to increase materially the rate of
distribution payments provided for in Paragraph 1 hereof unless such amendment
is approved in the manner provided for initial approval in Paragraphs 4 and 5
hereof, and no material amendment to the Plan shall be made unless approved in
the manner provided for approval and annual renewal of Paragraph 5 hereof.
9. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
10. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 3.
3
<PAGE>
hereof, for a period of not less than six years from the date of this Plan, or
the agreements or such report, as the case may be, the first two years in an
easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of , 1992.
----------------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
By
-------------------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
4
<PAGE>
DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of , 198 and amended as of
-------- ------- -
the day of , 1992 by and between Merrill Lynch Funds Distributor,
-------- -------
Inc., a Delaware corporation (the "Distributor"), and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation (the "Securities Firm")
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Distributor has entered into an agreement with Merrill
Lynch Corporate Bond Fund, Inc., a Maryland corporation (the "Fund"), pursuant
to which it acts as the exclusive distributor for the sale of shares of the
Class B High Income Portfolio Series Common Stock, the Class B High Quality
Portfolio Series Common Stock and the Class B Intermediate Term Portfolio Series
Common Stock (collectively, the "Class B shares") of the Fund; and
WHEREAS, the Distributor and the Fund have entered into a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "Act") pursuant to which the Distributor receives a distribution fee
from the Fund at the annual rate of 0.75% of the average daily net asset value
of the Class B shares of the Fund's High Income Portfolio and High Quality
Portfolio and at the annual rate of .50% of the average daily net asset value of
the Class B Shares of the Fund's Intermediate Term Portfolio for providing sales
and promotional activities and services related to the distribution of Class B
shares of the Fund; and
WHEREAS, the Distributor desires the Securities Firm to perform certain
sales and promotional activities and services for the Fund's Class B
shareholders, and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide sales and promotional activities
and services with respect to the sale of the Class B shares of the Fund, and
incur distribution expenditures, of the types referred to in Paragraph 1 of the
Plan.
2. As compensation for its services performed under this Sub-Agreement,
the Distributor shall pay the Securities Firm a fee and a distribution fee at
the end of each calendar month in an amount agreed upon by the parties hereto.
5
<PAGE>
3. The Securities Firm shall provide the Distributor, at least
quarterly, such information as reasonably requested by the Distributor to enable
the Distributor to comply with the reporting requirements of Rule 12b-1
regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.
4. This Sub-Agreement shall not take effect with respect to a Portfolio
until it has been approved with respect to that Portfolio by votes of a majority
of both (a) the Directors of the Fund and (b) those Directors of the Fund who
are not "interested persons" of the Fund, as defined in the Act, and have no
direct or indirect financial interest in the operation of this Plan, or any
agreements related to it, cast in person at a meeting or meetings called for the
purpose of voting on this Agreement.
5. This Sub-Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
6. This Sub-Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of , 1992.
------------------
MERRILL LYNCH FUNDS DISTRIBUTOR INC.
By
-----------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-----------------------------------
6
<PAGE>
EXHIBIT 99.16
Corporate Bond - High Income
Standardized Yield Computation
September 30, 1988
Long term Income generally based on
yield to maturity times market
value of each security $ 7,423,430.96
Plus short term income accrued for
the past thirty days 430,189.68
---------------
Equals Total Income (A) 7,873,620.64
Less expenses for the past thirty
days (B) 426,743.29
---------------
Equals net monthly income for yield
calculation 7,446,877.35
---------------
Average shares outstanding for the
month (C) 96,161,649.81
Times maximum offering price (D) 6.23
---------------
Equals total dollars $791,410,377.94
Net monthly income divided by total
dollars equals .009409628
Add 1 1.009409628
Raise to the power of 6 1.05780267
Subtract 1 .05780267
Times 2 .11561
Expressed as a percentage equals
the standardized yield for
the month 11.561%
======
<PAGE>
Corporate Bond - High Quality
Standardized Yield Computation
September 30, 1988
Longterm Income generally based on
yield to maturity times market
value of each security $ 1,945,539.83
Plus short term income accrued for
the past thirty days 142,363.58
---------------
Plus Total Income (A) 2,087,903.41
Less expenses for the past thirty
days (B) 132,267.70
---------------
Equals net monthly income for yield
calculation 1,955,635.71
---------------
Average shares outstanding for the
month (C) 23,330,617.28
Times maximum offering price (D) 11.50
---------------
Equals total dollars $268,302,098.72
Net monthly income divided by total
dollars equals .007288932
Add 1 1.00728932
Raise to the power of 6 1.044540722
Subtract 1 .044540722
Times 2 .089081444
Expressed as a percentage equals
the standardized yield for
the month 8.908%
=====
<PAGE>
Corporate Bond - Intermediate
Standardize Yield Computation
September 30, 1988
Longterm Income Generally based on
yield to maturity times market
value of each security $ 740,100.02
Plus short term income accrued for
the past thirty days 38,126.91
---------------
Equals Total Income (A) 778,226.93
Less expenses for the past thirty
days (B) 62,430.06
---------------
Equals net monthly income for yield
calculation 715,796.87
---------------
Average shares outstanding for the
month (C) 8,974,751.62
Times maximum offering price (D) 11.23
---------------
Equals total dollars $100,786,460.69
Net monthly income divided by total
dollars equals .007102113
Add 1 1.007102113
Raise to the power of 6 1.043376481
Subtract 1 .043376481
Times 2 .086752962
Expressed as a percentage equals
the standardized yield for
the month 8.675%
=====
<PAGE>
CORPORATE BOND FUND, INC. - HIGH INCOME PORTFOLIO
TOTAL RETURN
Since Annual
Inception Total
1 Year 5 Years (11/10/78) Return*
--------- --------- --------- ---------
Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00
Divided by
Maximum Offering Price 8.39 8.58 10.00
--------- --------- ---------
Divided by Net Asset Value 8.05
---------
Equals Shares Purchased 119.190 116.550 100.000 124.223
Plus Shares Acquired Through
Dividend Reinvestment 15.481 97.336 247.658 16.055
--------- --------- --------- ---------
Equals Shares Held
at 09/30/88 134.671 213.886 347.658 140.278
Multiplied by Net Asset
Value at 09/30/88 7.90 7.90 7.90 7.90
--------- --------- --------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $1,063.90 $1,689.70 $2,746.50 $1,108.20
Divided by $1,000 (P) 1.0639 1.6897 2.7465 1.1082
Subtract 1 .0639 .6897 1.7465 .1082
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 6.39% 68.97% 174.55%
--------- --------- ---------
Expressed as a percentage
equals the Annual
Total Return 10.82%
=========
ERV divided by P 1.0639 1.6897 2.7465
Raise to the power of 1 1/5 1/9.896
Equals 1.0639 1.1106 1.1075
Subtract 1 .0639 .1105 1.1075
--------- --------- ---------
Expressed as a percentage
equals the Average
Annualized Total Return 6.39% 11.06% 10.75%
========= ========= =========
* Does not include sales charge for the period.
<PAGE>
CORPORATE BOND FUND, INC. - HIGH QUALITY PORTFOLIO
TOTAL RETURN
Since Annual
Inception Total
1 Year 5 Years (10/31/90) Return*
--------- --------- --------- ---------
Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00
Divided by
Maximum Offering Price 11.05 10.80 10.42
--------- --------- ---------
Divided by Net Asset Value 10.61
---------
Equals Shares Purchased 90.498 92.593 95.969 94.251
Plus Shares Acquired Through
Dividend Reinvestment 8.415 60.469 141.481 8.783
--------- --------- --------- ---------
Equals Shares Held
at 09/30/88 98.913 153.062 237.45 103.034
Multiplied by Net Asset
Value at 09/30/88 11.04 11.04 11.04 11.04
--------- --------- --------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $1,092.00 $1,689.80 $2,621.44 $1,137.50
Divided by $1,000 (P) 1.0920 1.6898 2.6214 1.1375
Subtract 1 .092 .6898 1.6214 .1375
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 9.20% 68.98% 162.14%
--------- --------- ---------
Expressed as a percentage
equals the Annual
Total Return 13.75%
=========
ERV divided by P 1.092 1.6898 2.6214
Raise to the power of 1 1/5 1/7.9205
Equals 1.092 1.1106 .1294
Subtract 1 .092 .1106 .1294
--------- --------- ---------
Expressed as a percentage
equals the Average
Annualized Total Return 9.20% 11.05% 12.94%
========= ========= =========
* Does not include sales charge for the period.
<PAGE>
CORPORATE BOND FUND, INC. - INTERMEDIATE PORTFOLIO
TOTAL RETURN
Since Annual
Inception Total
1 Year 5 Years (10/31/90) Return*
--------- --------- --------- ---------
Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00
Divided by
Maximum Offering Price 10.92 10.64 10.20
--------- --------- ---------
Divided by Net Asset Value 10.70
---------
Equals Shares Purchased 91.575 93.985 93.039 93.458
Plus Shares Acquired Through
Dividend Reinvestment 8.343 58.931 137.129 8.485
--------- --------- --------- ---------
Equals Shares Held
at 09/30/88 99.918 152.916 235.168 101.953
Multiplied by Net Asset
Value at 09/80/88 11.01 11.01 11.01 11.01
--------- --------- --------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $1,100.10 $1,683.60 $2,589.20 $1,122.50
Divided by $1,000 (P) 1.1001 1.6836 2.5692 1.1225
Subtract 1 .1001 .6836 1.5892 .1235
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 10.01% 68.36% 158.92%
--------- --------- ---------
Expressed as a percentage
equals the Annual
Total Return 12.25%
=========
ERV divided by P 1.1001 1.6836 2.5892
Raise to the power of 1 1/5 1/7.9205
Equals 1.1001 1.1098 1.1276
Subtract 1 .1001 .1098 .1276
--------- --------- ---------
Expressed as a percentage
equals the Average
Annualized Total Return 10.01% 10.98% 12.76%
========= ========= =========
* Does not include sales charge for the period.
<PAGE>
Corporate Bond: High Income - Class B
09/30/94 - 09/30/95
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 7.66 7.66
--------- ---------
Equals Shares Purchased 130.548 130.548
Plus Shares Acquired through
Dividend Reinvestment 13.211 13.211
--------- ---------
Equals Shares Held at 09/30/95 143.760 143.760
Multiplied by Net Asset Value at 09/30/95 7.82 7.82
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 1,124.20 1,124.20
Less deferred sales charge (40.00) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 09/30/95 1,084.20 1,124.20
--------- ---------
Divided by $1,000 (P) 1.0842 1.1242
Subtract 1 0.0842 0.1242
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 8.42%
==========
Expressed as a percentage equals the
Aggregate Total Return for the Period 12.42%
=========
ERV divided by P 1.0842
Raise to the power of 1.0000
Equals 1.0842
Subtract 1 0.0842
Expressed as a percentage equals the
Average Annualized Total Return 8.42%
==========
* Does not include sales charge for the period.
<PAGE>
Corporate Bond: Investment Grade - Class B
09/30/94 - 09/30/95
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.77 10.77
--------- ---------
Equals Shares Purchased 92.851 92.851
Plus Shares Acquired through
Dividend Reinvestment 6.065 6.065
--------- ---------
Equals Shares Held at 9/30/95 98.916 98.916
Multiplied by Net Asset Value at 9/30/95 11.53 11.53
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 1,140.50 1,140.50
Less deferred sales charge (40.00) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 09/30/95 1,100.50 1,140.50
--------- ---------
Divided by $1,000 (P) 1.1005 1.1405
Subtract 1 0.1005 0.1405
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 10.05%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 14.05%
=========
ERV divided by P 1.1005
Raise to the power of 1.0000
Equals 1.1005
Subtract 1 0.1005
Expressed as a percentage equals the
Average Annualized Total Return 10.05%
=========
*Does not include sales charge for the period.
<PAGE>
Corporate Bond: Intermediate - Class B
09/30/94 - 09/30/95
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.90 10.90
--------- ---------
Equals Shares Purchased 91.743 91.743
Plus Shares Acquired through
Dividend Reinvestment 6.121 6.121
--------- ---------
Equals Shares Held at 09/30/95 97.865 97.865
Multiplied by Net Asset Value at 09/30/95 11.52 11.52
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 1,127.40 1,127.40
Less deferred sales charge (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 09/30/95 1,117.40 1,127.40
--------- ---------
Divided by $1,000 (P) 1.1174 1.1274
Subtract 1 0.1174 0.1274
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 11.74%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 12.74%
=========
ERV divided by P 1.1174
Raise to the power of 1.0000
Equals 1.1174
Subtract 1 0.1174
Expressed as a percentage equals the
Average Annualized Total Return 11.74%
=========
*Does not include sales charge for the period.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> HIGH INCOME PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 4401039202
<INVESTMENTS-AT-VALUE> 4352300045
<RECEIVABLES> 110913319
<ASSETS-OTHER> 77987
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4463291351
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<PAGE>
<ARTICLE> 6
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<NAME> INVESTMENT GRADE PORTFOLIO - CLASS A
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS A
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> HIGH INCOME PORTFOLIO - CLASS B
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INVESTMENT GRADE PORTFOLIO - CLASS B
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1995
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS B
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> HIGH INCOME PORTFOLIO - CLASS C
<S> <C>
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<PERIOD-START> OCT-21-1994
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INVESTMENT GRADE PORTFOLIO - CLASS C
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS C
<S> <C>
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<NAME> HIGH INCOME PORTFOLIO - CLASS D
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<PAGE>
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<NAME> INVESTMENT GRADE PORTFOLIO - CLASS D
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<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS D
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<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Corporate Bond Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 22 to Registration
Statement No. 2-62329 of our report dated November 8, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to use under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 26, 1996
