<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997.
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. 23 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 19 [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:
LEONARD B. MACKEY, JR., ESQ.
IRA P. SHAPIRO, 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 HIGH INCOME PORTFOLIO COMMON
STOCK, INVESTMENT GRADE PORTFOLIO COMMON STOCK AND INTERMEDIATE TERM 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 22, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 28, 1997
MERRILL LYNCH CORPORATE BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company consisting of three separate
Portfolios. The primary objective of each Portfolio is to provide shareholders
with as high a level of current income as is consistent with the investment
policies of such Portfolio and with prudent investment management. As a
secondary objective, each Portfolio seeks capital appreciation when consistent
with its primary objective. Each Portfolio invests primarily in a diversified
portfolio of corporate fixed-income securities, such as corporate bonds and
notes, convertible securities and preferred stocks. There can be no assurance
that the objectives of any Portfolio will be realized. Each of the Portfolios
pursues its investment objective through the separate investment policies
described below:
High Income Portfolio may invest substantially all of its assets in fixed-
income securities that are rated in the lower rating categories of the
established rating services (Baa or lower by Moody's Investors Service, Inc. or
BBB or lower by Standard & Poor's Ratings 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. 19.
Investment Grade Portfolio invests primarily in long-term fixed-income
securities rated A or better by either Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group.
(continued on following page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 28, 1997,
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 fixed-income securities
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 19.
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.
Class A and Class D shares of the Fund's Portfolios may be purchased
directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 (609 282-2800), or from securities
dealers that have entered into selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). Class B and Class C shares of the Fund's Portfolios may
only be purchased either directly from the Distributor or Merrill Lynch. See
"Purchase of Shares." The minimum initial purchase for shares of each
Portfolio is $1,000 ($100 for retirement plans), and the minimum subsequent
purchase in each Portfolio is $50 ($1 for retirement plans). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming
purchases and redemptions. 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 net investment income of each
Portfolio is declared daily and paid monthly.
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%(i) 1.00%(j) None(e) None(e) 4.00%(i) 1.00%(j) None(e)
Exchange Fee..... None None None None None None None None
Annual Portfolio
Operating
Expenses:
Investment
Adviser Fees(f).. 0.41% 0.41% 0.41% 0.41% 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(g):
Account
Maintenance Fees. None 0.25% 0.25% 0.25% None 0.25% 0.25% 0.25%
Distribution
Fees............. None 0.50%(k) 0.55% None None 0.50%(k) 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(h)......... 0.06% 0.08% 0.08% 0.06% 0.15% 0.16% 0.17% 0.15%
Other Fees....... 0.03% 0.03% 0.03% 0.03% 0.04% 0.04% 0.04% 0.04%
----- ----- ----- ----- ----- ----- ----- -----
Total Other
Expenses........ 0.10% 0.12% 0.12% 0.10% 0.20% 0.21% 0.22% 0.20%
----- ----- ----- ----- ----- ----- ----- -----
Total Portfolio
Operating
Expenses......... 0.51% 1.28% 1.33% 0.76% 0.56% 1.32% 1.38% 0.81%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
-------------------------------------------
CLASS A(a) CLASS B(b) CLASS C CLASS D
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of
offering price).. 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%(j) 1.00%(l) None(e)
Exchange Fee..... None None None None
Annual Portfolio
Operating
Expenses:
Investment
Adviser Fees(f).. 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(g):
Account
Maintenance Fees. None 0.25% 0.25% 0.10%
Distribution
Fees............. None 0.25%(k) 0.25% None
Other Expenses:
Custodial Fees... 0.01% 0.01% 0.01% 0.01%
Shareholder
Servicing
Costs(h)......... 0.18% 0.20% 0.24% 0.20%
Other Fees....... 0.04% 0.04% 0.04% 0.04%
----- ----- ----- -----
Total Other
Expenses........ 0.23% 0.25% 0.29% 0.25%
----- ----- ----- -----
Total Portfolio
Operating
Expenses......... 0.59% 1.11% 1.15% 0.71%
===== ===== ===== =====
</TABLE>
- ----
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in
connection with certain fee-based programs. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 34
and "Shareholder Services--Fee-Based Programs"--page 50.
(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 37.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 34.
(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 34.
(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
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% (for High Income Portfolio and Investment Grade Portfolio) or
.20% (for Intermediate Term Portfolio) of amounts redeemed within the
first year after purchase. Such CDSC may be waived for redemptions made in
connection with fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 50.
(f) See "Investment Adviser"--page 29.
(g) See "Purchase of Shares--Distribution Plans"--page 41.
(h) See "Transfer Agency Services"--page 30.
(i) Decreasing 1.0% annually thereafter to 0.0% after the fourth year. The
CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs. See "Shareholder Services--
Fee-Based Programs"--page 50.
(j) Decreasing 1.0% annually thereafter to 0.0% after the first year. The CDSC
may be waived for redemptions made in connection with fund participation
in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 50.
(k) Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
(l) Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege. See "Shareholder Services--Exchange
Privilege"--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 would pay the
following expenses on a
$1,000 investment
including the maximum $40
initial sales charge
(Class A and Class D
shares only) assuming (1)
the Total Portfolio
Operating Expenses for
each class set forth on
page 3, (2) a 5% annual
return throughout the
periods and (3)
redemption at the end of
the period (including any
applicable CDSC's for
Class B and Class C
shares):
High Income Portfolio
Class A................. $45 $56 $67 $101
Class B................. $53 $61 $70 $155
Class C................. $24 $42 $73 $160
Class D................. $47 $63 $81 $130
Investment Grade Portfolio
Class A................. $46 $57 $70 $107
Class B................. $53 $62 $72 $159
Class C................. $24 $44 $76 $166
Class D................. $48 $65 $83 $136
Intermediate Term
Portfolio
Class A................. $16 $29 $43 $ 83
Class B................. $21 $35 $61 $135
Class C*................ $22 $37 $63 $140
Class D................. $17 $32 $49 $ 97
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
High Income Portfolio
Class A................. $45 $56 $67 $101
Class B................. $13 $41 $70 $155
Class C................. $14 $42 $73 $160
Class D................. $47 $63 $81 $130
Investment Grade Portfolio
Class A................. $46 $57 $70 $107
Class B................. $13 $42 $72 $159
Class C................. $14 $44 $76 $166
Class D................. $48 $65 $83 $136
Intermediate Term
Portfolio
Class A................. $16 $29 $43 $ 83
Class B................. $11 $35 $61 $135
Class C*................ $12 $37 $63 $140
Class D................. $17 $32 $49 $ 97
</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 the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes the reinvestment of all
dividends and distributions and utilizes a five percent annual rate of return
as mandated by 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"). Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and redemptions. 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."
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 registered
investment companies 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 which utilize the Merrill Lynch Select
Pricing SystemSM are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of each 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, distribution 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 or her 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%(/4/) ten years(/5/)
- -----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year(/6/)
- -----------------------------------------------------------------------------------------
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 fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but, if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class
D" below.
(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.
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(/4/) ten years(/5/)
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year(/6/)
- ----------------------------------------------------------------------------------------
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 and waived for purchases of
Class A shares by certain retirement plans in connection with certain fee-
based programs. Class A and Class D share purchases of $1,000,000 or more
may not be subject to an initial sales charge but, if the initial sales
charge is waived, may be subject to a .20% CDSC for one year. A .30% sales
charge for 401(k) purchases over $1,000,000 will apply. See "Class A" and
"Class D" below.
(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.
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 of a Portfolio are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A
shares of 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 fee-based programs. In addition, Class A
shares will be offered at net asset value to directors and employees
of Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the
term "subsidiaries," when used herein with respect to ML & Co.,
includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge 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 and participants in connection with certain
fee-based programs, for the High Income and Investment
7
<PAGE>
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 may be
subject to a contingent deferred sales charge ("CDSC") of 1.0% for the
High Income and Investment Grade Portfolios or 0.20% for the
Intermediate Term Portfolio, if the shares are redeemed within one year
after purchase. Such CDSC may be waived for redemptions made in
connection with fund participation in certain fee-based programs. 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. Such CDSC may be waived for
redemptions made in connection with fund participation in certain fee-
based programs. 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 1.0% CDSC if they are
redeemed within one year of purchase. Such CDSC may be waived for
redemptions made in connection with fund participation in certain fee-
based programs. Although Class C shares are subject to a 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
8
<PAGE>
investor who purchases Class C shares will be subject to distribution
fees that will be imposed on Class C shares for an indefinite period
subject to annual approval by the Fund's Board of Directors and
regulatory limitations. Class C shares of the Intermediate Term
Portfolio are available only through the Exchange Privilege.
Class D: Class D shares of a Portfolio incur an initial sales charge when they
are purchased and are subject to an ongoing account maintenance fee of
0.25% of average net assets for the High Income and Investment Grade
Portfolios and 0.10% of average net assets for the Intermediate Term
Portfolio. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may 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. Such CDSC may be waived for redemptions made in
connection with fund participation in certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B." See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from
9
<PAGE>
the time the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to ongoing
account maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares of a Portfolio will be converted
into Class D shares of that Portfolio after a conversion period of
approximately ten years, and thereafter investors will be subject to lower
ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
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 annual audits of the
financial statements of the Portfolios by Deloitte & Touche LLP, independent
auditors. Audited financial statements for the fiscal year ended September 30,
1996, and the independent auditors' report thereon, are included in the
Statement of Additional Information. 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,
---------------------------------------------------------------------------------------------------
1996+ 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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...... $ 7.80 $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05 $ 8.28
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .75 .81 .75 .79 .87 .92 1.00 .95 .96 .95
Realized and unrealized
gain (loss) on
investments--net....... .14 .14 (.47) .29 .82 .63 (1.13) (.37) (.15) (.23)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .89 .95 .28 1.08 1.69 1.55 (.13) .58 .81 .72
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.76) (.81) (.75) (.79) (.87) (.92) (1.00) (.96) (.96) (.95)
In excess of investment
income--net............ -- ** -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (.76) (.81) (.75) (.79) (.87) (.92) (1.00) (.96) (.96) (.95)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 7.93 $ 7.80 $ 7.66 $ 8.13 $ 7.84 $ 7.02 $ 6.39 $ 7.52 $ 7.90 $ 8.05
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 11.95% 13.27% 3.42% 14.35% 25.22% 26.46% (1.95%) 7.69% 10.82% 8.82%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .51% .55% .53% .55% .59% .66% .68% .66% .64% .65%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 9.57% 10.70% 9.27% 9.78% 11.44% 14.13% 14.22% 12.30% 12.33% 11.31%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $947,479 $902,321 $876,573 $886,784 $683,801 $522,703 $486,426 $641,619 $759,403 $811,558
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 32.44% 24.58% 32.52% 34.85% 40.52% 39.95% 47.60% 56.00% 38.99% 56.95%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
** Amount is less than $.01 per share.
+ Based on average shares outstanding during the year.
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
----------------------------------------------------------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO
----------------------------------------------------------------------------- SEPT. 30,
1996++ 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 7.80 $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52 $ 7.92
---------- ---------- ---------- ---------- -------- -------- -------- --------
Investment income--net.. .69 .75 .69 .72 .81 .87 .95 .86
Realized and unrealized
gain (loss) on
investments--net....... .15 .14 (.47) .28 .83 .62 (1.12) (.40)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total from investment
operations............. .84 .89 .22 1.00 1.64 1.49 (.17) .46
---------- ---------- ---------- ---------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.71) (.75) (.69) (.72) (.81) (.87) (.95) (.86)
In excess of investment
income--net............ -- ## -- -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total dividends and
distributions.......... (.71) (.75) (.69) (.72) (.81) (.87) (.95) (.86)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.93 $ 7.80 $ 7.66 $ 8.13 $ 7.85 $ 7.02 $ 6.40 $ 7.52
========== ========== ========== ========== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 11.11% 12.41% 2.66% 13.35% 24.44% 25.32% (2.54%) 6.08%#
========== ========== ========== ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.28% 1.32% 1.29% 1.31% 1.35% 1.42% 1.45% 1.45%*
========== ========== ========== ========== ======== ======== ======== ========
Investment income--net.. 8.80% 9.81% 8.53% 8.94% 10.42% 13.24% 13.69% 11.75%*
========== ========== ========== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $4,250,539 $3,220,767 $2,347,223 $1,823,275 $847,354 $264,486 $157,979 $120,969
========== ========== ========== ========== ======== ======== ======== ========
Portfolio turnover...... 32.44% 24.58% 32.52% 34.85% 40.52% 39.95% 47.60% 56.00%
========== ========== ========== ========== ======== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the year.
#Aggregate total investment return.
##Amount is less than $.01 per share.
12
<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 C CLASS D
---------------------------- ----------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR OCTOBER 21, FOR THE YEAR OCTOBER 21,
ENDED 1994+ TO ENDED 1994+ TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996++ 1995 1996++ 1995
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 7.81 $ 7.59 $ 7.80 $ 7.59
-------- -------- -------- --------
Investment income--net.. .68 .71 .72 .75
Realized and unrealized
gain on investments--
net.................... .15 .22 .16 .21
-------- -------- -------- --------
Total from investment
operations............. .83 .93 .88 .96
-------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.70) (.71) (.74) (.75)
In excess of investment
income--net............. -- ## -- -- ## --
-------- -------- -------- --------
Total dividends and
distributions.......... (.70) (.71) (.74) (.75)
-------- -------- -------- --------
Net asset value, end of
period................. $ 7.94 $ 7.81 $ 7.94 $ 7.80
======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 11.05% 12.92%# 11.82% 13.37%#
======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.33% 1.38%* .76% .81%*
======== ======== ======== ========
Investment income--net.. 8.73% 9.06%* 9.30% 9.70%*
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $362,518 $135,019 $267,687 $102,676
======== ======== ======== ========
Portfolio turnover...... 32.44% 24.58% 32.44% 24.58%
======== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## Amount is less than $.01 per share.
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 A
--------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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...... $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61 $ 11.69
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .76 .80 .75 .81 .88 .92 .95 1.00 .99 .99
Realized and unrealized
gain (loss) on
investments--net....... (.35) .74 (1.49) .67 .71 .76 (.38) .17 .43 (1.08)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .41 1.54 (.74) 1.48 1.59 1.68 .57 1.17 1.42 (.09)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net. (.76) (.80) (.75) (.81) (.88) (.92) (.95) (1.00) (.99) (.99)
Realized gain on
investments--net...... -- -- (.10) (.16) -- -- -- -- -- --
In excess of realized
gain on investments--
net................... -- -- (.45) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (.76) (.80) (1.30) (.97) (.88) (.92) (.95) (1.00) (.99) (.99)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 11.16 $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.04 $ 10.61
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 3.60% 14.93% (6.03%) 12.76% 14.30% 16.18% 5.22% 11.11% 13.75% (1.14%)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .56% .58% .53% .56% .58% .61% .64% .66% .60% .59%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 6.64% 7.30% 6.61% 6.94% 7.43% 8.26% 8.54% 9.04% 9.02% 8.52%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $608,901 $472,388 $366,792 $407,625 $362,139 $324,818 $307,723 $289,804 $258,435 $238,637
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 88.53% 108.07% 159.05% 121.34% 65.43% 126.32% 126.39% 212.85% 174.99% 126.19%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
14
<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
-----------------------------------------------------------------------------------
FOR THE
PERIOD
OCTOBER 21,
FOR THE YEAR ENDED SEPTEMBER 30, 1988+ TO
-------------------------------------------------------------------- SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21 $ 11.08
-------- -------- -------- -------- -------- -------- -------- -------
Investment income--net.. .67 .72 .66 .72 .79 .84 .86 .87
Realized and unrealized
gain (loss) on
investments--net....... (.35) .74 (1.49) .67 .71 .76 (.38) .13
-------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations............. .32 1.46 (.83) 1.39 1.50 1.60 .48 1.00
-------- -------- -------- -------- -------- -------- -------- -------
Less dividends and
distributions:
Investment income--net. (.67) (.72) (.66) (.72) (.79) (.84) (.86) (.87)
Realized gain on
investments--net...... -- -- (.10) (.16) -- -- -- --
In excess of realized
gain on investments--
net................... -- -- (.45) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
Total dividends and
distributions.......... (.67) (.72) (1.21) (.88) (.79) (.84) (.86) (.87)
-------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period................. $ 11.16 $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59 $ 10.83 $ 11.21
======== ======== ======== ======== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 2.81% 14.04% (6.73%) 11.91% 13.44% 15.30% 4.42% 9.44%#
======== ======== ======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.32% 1.35% 1.29% 1.29% 1.34% 1.37% 1.41% 1.45%*
======== ======== ======== ======== ======== ======== ======== =======
Investment income--net.. 5.88% 6.52% 5.85% 5.80% 6.65% 7.50% 7.77% 8.17%*
======== ======== ======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $724,089 $631,517 $483,053 $515,402 $325,706 $198,504 $174,914 $91,914
======== ======== ======== ======== ======== ======== ======== =======
Portfolio turnover...... 88.53% 108.07% 159.05% 121.34% 65.43% 126.32% 126.39% 212.85%
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
15
<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 C CLASS D
--------------------------- ---------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE OCTOBER 21, FOR THE OCTOBER 21,
YEAR ENDED 1994+ TO YEAR ENDED 1994+ TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 11.51 $ 10.67 $ 11.51 $ 10.67
------- ------- ------- -------
Investment income--net.. .66 .67 .73 .73
Realized and unrealized
gain (loss) on
investments--net....... (.34) .84 (.34) .84
------- ------- ------- -------
Total from investment
operations............. .32 1.51 .39 1.57
------- ------- ------- -------
Less dividends from
investment income--net. (.66) (.67) (.73) (.73)
------- ------- ------- -------
Net asset value, end of
period................. $ 11.17 $ 11.51 $ 11.17 $ 11.51
======= ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 2.85% 14.60%# 3.43% 15.22%#
======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.38% 1.40%* .81% .83%*
======= ======= ======= =======
Investment income--net.. 5.83% 6.27%* 6.40% 6.91%*
======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $64,931 $25,778 $63,822 $25,153
======= ======= ======= =======
Portfolio turnover...... 88.53% 108.07% 88.53% 108.07%
======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
16
<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,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
<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...... $ 11.50 $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70 $ 11.69
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
Investment income--net.. .73 .79 .75 .76 .88 .93 .97 .98 .96 .94
Realized and unrealized
gain (loss) on
investments--net....... (.22) .60 (1.26) .55 .62 .53 (.17) .05 .31 (.99)
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
Total from investment
operations............. .51 1.39 (.51) 1.31 1.50 1.46 .80 1.03 1.27 (.05)
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
Less dividends and
distributions:
Investment income--net. (.73) (.79) (.75) (.76) (.88) (.93) (.97) (.99) (.96) (.94)
Realized gain on
investments--net...... -- -- -- (.14) -- -- -- -- -- --
In excess of realized
gain on investments--
net................... -- -- (.28) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
Total dividends and
distributions.......... (.73) (.79) (1.03) (.90) (.88) (.93) (.97) (.99) (.96) (.94)
-------- -------- -------- -------- -------- -------- ------- ------- ------- --------
Net asset value, end of
year................... $ 11.28 $ 11.50 $ 10.90 $ 12.44 $ 12.03 $ 11.41 $ 10.88 $ 11.05 $ 11.01 $ 10.70
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 4.56% 13.33% (4.25%) 11.39% 13.71% 13.97% 7.55% 9.79% 12.25% (0.72%)
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .59% .59% .53% .58% .62% .67% .71% .72% .62% .61%
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
Investment income--net.. 6.41% 7.14% 6.48% 6.42% 7.54% 8.35% 8.86% 8.97% 8.83% 8.09%
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $216,545 $217,714 $170,222 $193,505 $154,333 $103,170 $88,248 $87,001 $97,577 $111,207
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
Portfolio turnover...... 96.40% 142.84% 155.42% 180.52% 95.33% 132.56% 102.53% 148.75% 152.41% 152.53%
======== ======== ======== ======== ======== ======== ======= ======= ======= ========
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
17
<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 FOR THE
PERIOD FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 13, YEAR OCT. 21, YEAR OCT. 21,
SEPTEMBER 30, 1992+ TO ENDED 1994+ TO ENDED 1994+ TO
---------------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1996 1995 1994 1993 1996 1995 1996 1995
-------- -------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 11.50 $ 10.90 $ 12.44 $ 11.68 $ 11.50 $ 10.81 $ 11.50 $ 10.81
-------- -------- -------- -------- ------- ------- ------- -------
Investment income--net.. .67 .74 .69 .61 .67 .70 .72 .74
Realized and unrealized
gain (loss) on
investments--net....... (.22) .60 (1.26) .90 (.22) .69 (.22) .69
-------- -------- -------- -------- ------- ------- ------- -------
Total from investment
operations............. .45 1.34 (.57) 1.51 .45 1.39 .50 1.43
-------- -------- -------- -------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net. (.67) (.74) (.69) (.61) (.67) (.70) (.72) (.74)
Realized gain on
investments--net...... -- -- -- (.14) -- -- -- --
In excess of realized
gain on investments--
net................... -- -- (.28) -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------- -------
Total dividends and
distributions.......... (.67) (.74) (.97) (.75) (.67) (.70) (.72) (.74)
-------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of
period................. $ 11.28 $ 11.50 $ 10.90 $ 12.44 $ 11.28 $ 11.50 $ 11.28 $ 11.50
======== ======== ======== ======== ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 4.02% 12.73% (4.72%) 13.30%# 3.99% 13.25%# 4.46% 13.65%#
======== ======== ======== ======== ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.11% 1.11% 1.04% 1.07%* 1.15% 1.14%* .71% .70%*
======== ======== ======== ======== ======= ======= ======= =======
Investment income--net.. 5.89% 6.61% 5.98% 5.61%* 5.86% 6.24%* 6.32% 6.81%*
======== ======== ======== ======== ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $216,641 $212,146 $141,212 $134,122 $10,144 $ 6,806 $33,270 $16,349
======== ======== ======== ======== ======= ======= ======= =======
Portfolio turnover...... 96.40% 142.84% 155.42% 180.52% 96.40% 142.84% 96.40% 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.
18
<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
and options 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 that are rated in the lower
rating categories of the established rating services (Baa or lower by Moody's
Investors Service, Inc. ("Moody's") and BBB or lower by Standard & Poor's
Ratings Group ("S&P")), or in unrated securities of comparable quality.
Securities rated below Baa by Moody's or below BBB by S&P, and unrated
securities of comparable quality, are commonly known as "junk bonds." See
"Appendix: Description of Corporate Bond Ratings" for additional information
concerning rating categories.
19
<PAGE>
Junk bonds may constitute as much as 100% of the Portfolio's investments.
Although junk bonds can be expected to provide higher yields, such securities
may be subject to greater market fluctuations and risk of loss of income and
principal than lower-yielding, higher-rated fixed-income securities. See "Risk
Factors in Transactions in Junk Bonds." Because investment in 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 involve continuous analysis of individual issuers,
general business conditions and other factors that may be too time-consuming or
too costly for the average investor. The furnishing of these services does not,
of course, guarantee successful results. The Investment Adviser's analysis of
issuers includes, among other things, historic and current financial
conditions, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing, and current and
anticipated results of operations. Analysis of general business conditions and
other factors may include anticipated change in economic activity and interest
rates, the availability of new investment opportunities, and the economic
outlook for specific industries. While the Investment Adviser considers as one
factor in its credit analysis the ratings assigned by the rating services, the
Investment Adviser performs its own independent credit analysis of issuers and
consequently, the 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 that 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 that are subsequently downgraded may continue to be held
and will be sold only if, in the judgment of the Investment Adviser, it is
advantageous to do so.
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 that are in default or in risk of being in
default but not yet in bankruptcy proceedings may be the subject of a pre-
bankruptcy exchange offer pursuant to which holders of the Distressed
Securities receive securities or assets in exchange for the Distressed
Securities. Holders of Distressed Securities that are the subject of bankruptcy
proceedings may, following approval of a plan of reorganization by the
bankruptcy court, receive securities or assets in exchange for the Distressed
Securities. Generally, the 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
20
<PAGE>
characteristics which offer the Portfolio significant opportunities for capital
appreciation and future high rates of current income. See "Risk Factors in
Transactions in Junk Bonds."
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the High
Income Portfolio may purchase higher-rated securities if the 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
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 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.
21
<PAGE>
Despite the inherently greater defensive characteristics of the shorter
maturities in the Intermediate Term Portfolio, during periods of unusually high
yields on money market instruments the prices of intermediate-term maturity
securities may be adversely affected to a substantial degree. Therefore,
management will seek to mitigate the effect of any such interest rate
development by shortening the average maturity of securities held by the
Portfolio during such periods. Active management strategy within the 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 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 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 High
Income Portfolio may invest do not include securities that, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the 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
22
<PAGE>
make a market in such securities for their own accounts. However, there are
fewer dealers in the junk bond market, which may be less liquid than the market
for higher rated fixed-income securities, even under normal economic
conditions. Also, there may be significant disparities in the prices quoted for
junk bonds by various dealers. Adverse economic conditions or investor
perceptions (whether or not based on economic fundamentals) may impair the
liquidity of this market, and may cause the prices the Portfolio receives for
its junk bonds to be reduced, or the Portfolio may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgment may play a greater role in valuing certain of the Portfolio's
portfolio securities than in the case of securities trading in a more liquid
market.
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.
23
<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, 1996.
<TABLE>
<CAPTION>
% MARKET VALUE
DOLLAR-
WEIGHTED
% NET CORPORATE
RATING ASSETS BONDS
------ ------ --------------
<S> <C> <C>
AAA -- --
AA -- --
A -- --
BBB 1.3 1.5
BB 28.7 32.9
B 47.2 54.1
CCC 4.9 5.6
CC -- --
C -- --
D 1.3 1.5
NR* 3.8 4.4
---- ----
87.2% 100%
==== ====
</TABLE>
- --------
* Bonds that are not rated by S&P. Such bonds may be rated by nationally
recognized statistical rating organizations other than S&P, or may not be
rated by any such organization. With respect to the percentage of the Fund's
assets invested in such securities, the Fund's Investment Adviser believes
that 0.2% are of comparable quality to bonds rated BB, 2.7% are of comparable
quality to bonds rated B and 0.8% are of comparable quality to bonds rated
CCC. This determination is based on the Investment Adviser's own internal
evaluation and does not necessarily reflect how such securities would be rated
by S&P 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 bond futures
contracts and options thereon. The Portfolios currently may trade only in
futures contracts on U.S. Treasury bonds, bills and notes
24
<PAGE>
and Government National Mortgage Association ("GNMA") mortgage-backed
certificates and options on such futures contracts. However, under the
investment restrictions of the Fund, each Portfolio is 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 that
Portfolio, subject to the restrictions noted below. Reference is made to the
Statement of Additional Information for a further description of the various
instruments and related portfolio strategies that may be used by the Fund.
Futures. Each Portfolio may engage in transactions in futures contracts and
options thereon. Futures are standardized, exchange-traded derivatives
contracts which obligate a purchaser to take delivery, and a seller to make
delivery, of a specific amount of a commodity at a specified future date at a
specified price. Options on futures are options to either buy (call) or sell
(put) a futures contract at a specified price prior to a specified date. No
price is paid upon entering into a futures contract (although a fee, or option
premium, is generally paid to the seller of an option on a futures contract at
the initiation of the transaction). Rather, upon purchasing or selling a
futures contract a Portfolio is required to deposit collateral ("margin") equal
to a percentage (generally less than 10%) of the contract value. Each day
thereafter until the futures position is closed, the Portfolio will pay
additional margin representing any loss experienced as a result of the futures
position the prior day or be entitled to a payment representing any profit
experienced as a result of the futures position the prior day.
A Portfolio may sell futures contracts or purchase a put option on futures
contracts in anticipation of an increase in interest rates. Generally, as
interest rates rise, the market value of the fixed-income securities held by
the Portfolio will fall, reducing the net asset value of the Portfolio. The
sale of futures contracts may limit the Portfolio's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contracts prior to the futures contracts' expiration date. In the event the
market value of the portfolio holdings correlated with the futures contracts
increases rather than decreases, however, the Portfolio will realize a loss on
the futures position and a lower overall return than would have been realized
without the purchase of the futures contracts.
A Portfolio may purchase futures contracts or purchase a call option on
futures contracts in anticipation of a decrease in interest rates. Generally,
as interest rates decrease, the market value of fixed-income securities which
the Portfolio may be considering purchasing will increase. The purchase of
futures contracts may protect a Portfolio from having to pay more for such
securities when it identifies specific securities it wishes to purchase. In the
event that such securities decline in value or the Portfolio determines not to
purchase any additional securities, however, the Portfolio may realize a loss
relating to the futures position.
Each Portfolio will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a bond, bond index or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). Each Portfolio will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Risk Factors in Futures and Options on Futures. Use of futures and options on
futures for hedging purposes involves the risk of imperfect correlation in
movements in the value of the futures contract and the value of the fixed-
income securities being hedged. An increase or decrease in the general level of
interest rates can generally be expected to have a broadly similar effect on
the market value of government securities on which futures contracts are based
and on the market value of the corporate fixed-income securities in which
25
<PAGE>
each Portfolio will primarily invest, but it is unlikely that the changes in
value of government securities and corporate fixed-income securities will be
perfectly correlated. In addition, disparities in the average maturity of a
Portfolio's investments compared to a financial instrument on which a futures
contract is based may also affect the correlation of price movements. If the
value of the futures contract moves more or less than the value of the hedged
corporate fixed-income securities which a Portfolio owns or anticipates
purchasing, a Portfolio will experience a gain or loss which will not be
completely offset by movements in the value of the hedged fixed-income
securities.
Transactions in futures and options on futures may expose the Fund to
potential losses which exceed the amount originally invested by the Fund in
such instruments. When a Portfolio engages in such a transaction, the Portfolio
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Portfolio's exposure, on a mark-to-market basis, to
the transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Portfolio has
assets available to satisfy its obligations with respect to the transaction,
but will not limit the Portfolio's exposure to loss.
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. Each Portfolio may purchase securities on a when-issued
basis or forward commitment basis, and may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or
sold by the Portfolio with payment and delivery taking place in the future to
secure what is considered an advantageous yield and price to the Portfolio 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
establish a segregated account in connection with such transactions in which
the Portfolio will deposit liquid securities with a value at least equal to the
Portfolio's exposure, on a mark-to-market basis, to the transaction (as
calculated pursuant to requirements of the Securities and Exchange Commission).
Such segregation will ensure that the Portfolio has assets available to satisfy
its obligations with respect to the transaction, but will not limit the
Portfolio's exposure to loss).
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
26
<PAGE>
resale of securities acquired in private placements. If registration of such
securities under the Securities Act is required, such registration may not be
readily accomplished, and if such securities may be resold without
registration, such resale may be permissible only in limited quantities. In
either event, a Portfolio of the Fund may not be able to sell its restricted
securities at a time which, in the judgment of the Investment Adviser, would be
most opportune.
Standby Commitment Agreements. The High Income Portfolio of the Fund may from
time to time enter into standby commitment agreements. Such agreements commit
the Portfolio, for a stated period of time, to purchase a stated amount of a
fixed-income security, which may be issued and sold to the Portfolio at the
option of the issuer. The price and coupon of the security is fixed at the time
of the commitment. At the time of entering into the agreement, the Portfolio is
paid a commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately .5% of the aggregate purchase price of
the security which the Portfolio has committed to purchase. The Portfolio will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price which is considered advantageous
to the Portfolio. The Portfolio will not enter into a standby commitment with a
remaining term in excess of 45 days and will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 10% of its assets taken at the
time of acquisition of such commitment or security. The Portfolio will at all
times maintain a segregated account with its custodian of cash or liquid, high-
grade debt obligations in an amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Portfolio may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Portfolio's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Options on Debt Securities. The Portfolios may write call and put options on
U.S. Treasury bills, notes and bonds in order to increase the return on their
investments and in order to hedge optionable U.S. Treasury securities held by
the Portfolios. The Portfolios will write only covered call options on debt
securities (i.e., options in which it owns the underlying security) or fully
funded put options on debt securities (i.e., options 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
27
<PAGE>
securities on which a call is written or a decrease in the value of securities
on which a put is written. As a result, the Portfolio may receive less total
return, and at other times greater total return, than if it had not written
options.
The Portfolios also may purchase put options on optionable U.S. Treasury
bills, notes and bonds held in a Portfolio and, under certain limited
circumstances described in the Statement of Additional Information, call
options on such instruments. Purchases of put options may enable the Portfolios
to limit the risk of declines in the value of the portfolio security underlying
the put, until the expiration of the option or the closing of the option
transaction. By purchasing a put, however, a Portfolio will be required to pay
the premium, which will reduce the benefits obtained from the transaction.
Although options written by a Portfolio may be terminated prior to exercise
or expiration by entering into an offsetting transaction, the ability to do so
depends upon the presence of a liquid secondary market on the exchange on which
the option is traded. If no such market is available, the Portfolio may be
unable to terminate existing positions and may be subject to exercise of the
option under unfavorable circumstances. The Portfolios will enter into
transactions in options on debt securities only when the management of the Fund
believes that a liquid secondary market for such options is available.
Reference is made to the Appendix to the Statement of Additional Information
for further information regarding the trading of options on debt securities.
Exchanges generally introduce options series on specific issues of U.S.
Treasury bonds and notes as such securities are issued. Such Exchanges,
however, do not ordinarily introduce new series of options on such issues to
replace expiring series inasmuch as trading interest tends to center on the
most recently auctioned issues of Treasury bonds and notes. Consequently,
options representing a full range of expirations will not usually be available
for every issue on which options are traded.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (including a majority of the shares of
each Portfolio). Among such restrictions are prohibitions against the Fund's
investing more than 5% of the total assets of any Portfolio in the securities
of any one issuer; purchasing more than 10% (i) in principal amount of
outstanding securities of an issuer, or (ii) of outstanding voting securities
of an issuer; and investing more than 25% of the total assets of any Portfolio
in the securities of issuers primarily engaged in the same industry. Investors
are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
28
<PAGE>
INVESTMENT ADVISER
The investment adviser to the Fund is FAM, an affiliate of MLAM, an indirect
subsidiary of Merrill Lynch & Co., Inc., ("ML&Co."), a financial services
holding company and the parent of Merrill Lynch. The address of FAM is P.O. Box
9011, Princeton, New Jersey 08543-9011. FAM or MLAM acts as the Investment
Adviser for more than 130 registered investment companies. As of December 31,
1996, the Investment Adviser and MLAM had a total of $234.1 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Investment Adviser.
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM U.K., an indirect, wholly owned subsidiary of
ML&Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K., but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
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
fiscal year ended September 30, 1996, FAM received advisory fees from the Fund
in the amount of $27,255,524 of which $20,696,123 was received with respect to
the High Income Portfolio (representing .41% of its average net assets),
$4,816,371 was received with respect to the Investment Grade Portfolio
(representing .36% of its average net assets) and $1,743,030 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, 1996 were $74,094,954 of which $56,733,107 was attributable to the High
Income Portfolio, $13,253,148 was attributable to the Investment Grade
Portfolio, and $4,108,699 was attributable to the Intermediate Term Portfolio,
respectively.
For the fiscal year ended September 30, 1996, the ratio of total expenses to
average net assets with respect to the High Income Portfolio was .51%, 1.28%,
1.33% and .76% for Class A, Class B, Class C and Class D shares, respectively.
For the fiscal year ended September 30, 1996, the ratio of total expenses to
average net assets with respect to the Investment Grade Portfolio was .56%,
1.32%, 1.38% and .81% for Class A, Class B, Class C and Class D shares,
respectively.
For the fiscal year ended September 30, 1996 the ratio of total expenses to
average net assets with respect to the Intermediate Term Portfolio was .59%,
1.11%, 1.15% and .71% for Class A, Class B, Class C and Class D shares,
respectively.
29
<PAGE>
Accounting services are provided to the Fund by FAM and the Fund reimburses
FAM for its costs in connection with such services. For the fiscal year ended
September 30, 1996, the Fund reimbursed FAM $606,335 for accounting services of
which $443,142 was attributable to the High Income Portfolio, $115,335 was
attributable to the Investment Grade Portfolio and $47,858 was attributable to
the Intermediate Term Portfolio.
Vincent T. Lathbury III serves as Portfolio Manager of the High Income
Portfolio, and Jay C. Harbeck serves 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 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).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. ("MLFDS" or the "Transfer
Agent"), which is a wholly owned subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing 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, MLFDS receives an annual
fee of $11.00 per shareholder account for Class A or Class D shares of the
Portfolios and $14.00 per shareholder account for Class B or Class C shares of
the Portfolios, and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. For the fiscal year ended
September 30, 1996, the High Income, Investment Grade and Intermediate Term
Portfolios of the Fund incurred fees of $3,936,617, $2,105,873 and $921,651,
respectively, pursuant to the Transfer Agency Agreement.
30
<PAGE>
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 and its affiliate, MLAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML&Co.; and 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 of Competition and Strategy, Harvard
Business School.
Charles C. Reilly--Former Adjunct Professor, Columbia University Graduate
School of Business.
Kevin A. Ryan--Professor of Education at Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
- --------
*Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
PURCHASE OF SHARES
Each Portfolio continuously offers its shares in four classes at a public
offering price equal to the net asset value plus varying sales charges as set
forth below. The Distributor, an affiliate of both the Investment Adviser and
Merrill Lynch, acts as the distributor of the shares. Class C shares of the
Intermediate Term Portfolio are offered only through the Exchange Privilege.
See p. 51.
Shares may be purchased directly from the Distributor or from other
securities dealers, including Merrill Lynch, with whom the Distributor has
entered into selected dealer agreements. The minimum initial purchase in each
Portfolio is $1,000. The minimum subsequent purchase in each Portfolio is $50.
For retirement plans, the minimum initial purchase in each Portfolio is $100
and the minimum subsequent purchase requirement is $1. Merrill Lynch charges
its customers a processing fee (currently $4.85) to confirm a sale of shares
to such customers.
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
31
<PAGE>
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 fund.
The alternate 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 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.
32
<PAGE>
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(/5/)
1.0%
annually to 0.0%(/4/)
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year(/6/)
- ---------------------------------------------------------------------------------------------
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 fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but, if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.
33
<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(/5/)
after
the first year(/4/)
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.25% No
decreasing to 0.0% after the
first year(/6/)
- ---------------------------------------------------------------------------------------------
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 and waived for purchases of
Class A shares by certain retirement plans in connection with certain fee-
based programs. Class A and Class D share purchases of $1,000,000 or more
may not be subject to an initial sales charge but, if the initial sales
charge is waived, may be subject to a .20% CDSC for one year. A .30% sales
charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D
shares. Sales charges for purchases of Class A and Class D shares of the
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
34
<PAGE>
to the Portfolios, expressed as a percentage of the gross public offering
price and the net amount invested, and expected dealer discounts, expressed as
a percentage of the gross public offering price, are as follows:
<TABLE>
<CAPTION>
CLASS A AND CLASS D SHARES
OF 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**...... 0.00 0.00 0.00
<CAPTION>
CLASS A AND CLASS B SHARES
OF 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% 0.95%
$100,000 but less than
$250,000.................. 0.75 0.76 0.70
$250,000 but less than
$500,000.................. 0.50 0.50 0.45
$500,000 but less than
$1,000,000................ 0.30 0.30 0.27
$1,000,000 or more**....... 0.00 0.00 0.00*
</TABLE>
- --------
*Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A purchases by certain retirement plan
investors in connection with certain fee-based 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. 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, 1996, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 17,653,142,
21,512,307 and 7,219,026 Class A shares, respectively, for aggregate net
proceeds of $138,206,292, $245,167,944 and $82,894,354, 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
$474,277, $96,333 and $11,570, respectively, of which $46,008, $9,077 and
$802, respectively, were received by the Distributor and $428,269, $87,256 and
$10,768, respectively, were received by Merrill Lynch. For the fiscal year
ended September 30, 1996, the Distributor did not receive any CDSC proceeds
with respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver of the High Income
Portfolio, the Investment Grade Portfolio or the Intermediate Term Portfolio.
For the fiscal year ended September 30, 1996, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio sold 45,431,713,
4,314,720 and 2,494,925 Class D shares, respectively, for aggregate net
proceeds of $356,012,837, $49,192,753 and $28,661,987, respectively. The gross
sales charges for the sales of Class D shares of the High Income Portfolio,
Investment Grade Portfolio and Intermediate
35
<PAGE>
Term Portfolio were $1,695,560, $208,545 and $31,535, respectively, of which
$159,008, $21,853 and $2,646, respectively, were received by the Distributor
and $1,536,552, $186,693 and $28,889, respectively, were received by Merrill
Lynch. For the fiscal year ended September 30, 1996, the Distributor received
CDSC proceeds of $27,054, $22,295 and $1,970 with respect to redemption within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver of the High Income Portfolio, the Investment Grade
Portfolio and the Intermediate Term Portfolio, respectively.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio of the Fund in a shareholder account, including participants in the
Merrill Lynch Blueprint SM Program, are entitled to purchase additional Class
A shares of a Portfolio of the Fund in that account. Certain employer
sponsored retirement or savings plans, including eligible 401(k) plans, may
purchase Class A shares of a Portfolio of the Fund at net asset value provided
such plans meet the required minimum number of eligible employees or required
amount of assets advised by FAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs provided that the program has $3 million or more initially invested
in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment programs including TMA SM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee and purchases made in connection with certain fee-
based programs. In addition, Class A shares will be offered at net asset value
to Merrill Lynch & Co., Inc. and its subsidiaries and their directors and
employees and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLAM-
advised closed-end funds in their initial offerings who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A or Class D shares of a Portfolio
of the Fund if certain conditions set forth in the Statement of Additional
Information are met (for closed-end funds that commenced operations prior to
October 21, 1994). For example, Class A shares of a Portfolio of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior
Floating Rate Fund") and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. ("Municipal Strategy Fund") and Merrill Lynch High Income
Municipal Bond Fund, Inc. ("High Income Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock pursuant to a
tender offer conducted by such funds in shares of the Fund and certain other
MLAM-advised mutual funds.
As to purchase orders received by securities dealers prior to the close of
the New York Stock Exchange (generally 4:00 p.m. New York City time) on the
day the order is placed with the Distributor, including orders received after
the close on the previous day, the applicable offering price will be based on
the net asset value determined as of 15 minutes after the close of the 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 will be deemed received on the next
business day. Any order may be rejected by the Distributor or the Fund.
Neither the Distributor nor securities dealers are permitted to withhold
placing orders to benefit themselves by a price change. The Fund reserves the
right to suspend the sale of its shares to the public in response to
conditions in the securities markets, or otherwise.
36
<PAGE>
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee Based Programs."
Class A and Class D shares are offered at net asset value to Employee Access
AccountsSM available through qualified employers which provide employer-
sponsored retirement and savings plans that are eligible to purchase such
shares at net asset value. Subject to certain conditions Class A and Class D
shares are offered at net asset value to shareholders of Municipal Strategy
Fund and High Income Fund and Class A shares are offered at net asset value to
shareholders of Senior Floating Rate Fund who wish to reinvest in shares of the
Fund the net proceeds from a sale of certain of their shares of common stock,
pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
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 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 same Portfolio and
thereafter will be subject to lower continuing fees. Class C shares of the
Intermediate Term Portfolio are available only through the Exchange Privilege.
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.
37
<PAGE>
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately ten years after issuance, Class B shares of
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 CDSC on Class B shares:
HIGH INCOME PORTFOLIO AND 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....................................... 0.0%
</TABLE>
38
<PAGE>
During the fiscal year ended September 30, 1996 for Class B shares of the
High Income Portfolio and the Investment Grade Portfolio, the Distributor
received CDSC proceeds with respect to redemptions of $4,772,201 and
$1,143,774, respectively, all of which were paid to Merrill Lynch.
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............................................. 0.0%
</TABLE>
During the fiscal year ended September 30, 1996 for Class B shares of the
Intermediate Term Portfolio, the Distributor received CDSC proceeds with
respect to redemptions of $292,161, all of which were paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible
applicable rate being charged. Therefore, 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 a CDSC at a rate of 2.0% (the applicable rate in the
third year after purchase) for shares purchased on or after October 21, 1994.
The Class B CDSC is waived on redemptions of shares made in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares in connection with certain group plans through the
Merrill Lynch Blueprint 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
CDSC is also waived for any Class B shares which are purchased by an eligible
401(k) or eligible 401(a) plan and are rolled over into a Merrill Lynch 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
39
<PAGE>
redemption in an Employee Access Account available through employers providing
eligible 401(k) plans. Additional information concerning the waiver of the
Class B CDSC is set forth in the Statement of Additional Information. The terms
of the CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs. See "Shareholder Services--Fee
Based Programs."
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. No Class C CDSC will be assessed on redemptions
made in connection with fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."
The following table sets forth the rates of the contingent deferred sales
charge on Class C shares of the 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............................................. 0.0%
</TABLE>
For the fiscal year ended September 30, 1996, the Distributor received CDSC
proceeds with respect to redemptions of Class C shares of $200,924 for the High
Income Portfolio, $35,555 for the Investment Grade Portfolio and $6,419 for the
Intermediate Term Portfolio, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the relevant Portfolio. Class D shares are subject to an
ongoing account maintenance fee of 0.25% of net assets for the High Income and
Investment Grade Portfolios and 0.10% of net assets for the Intermediate Term
Portfolio, but are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class D shares will occur
at least once each month (on the "Conversion Date") on the basis of the
relative net asset values of the shares of the two classes on the Conversion
Date, without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchase or sale of
the shares for federal income tax purposes.
40
<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. 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 same 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.
In general, Class B shares of MLAM-advised equity mutual funds will convert
approximately eight years after initial purchase, and Class B shares of MLAM-
advised taxable and tax-exempt fixed-income mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans 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 Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
In the event that all Class B shares of 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 Conversion Period may also be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
41
<PAGE>
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 CDSC and ongoing distribution fees provide for
the financing of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% (in the case
of the High Income Portfolio and Investment Grade Portfolio) and 0.50% (in the
case of the Intermediate Term Portfolio) of the average daily net assets for
the Class B shares of the respective Portfolios (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are identical
to the aggregate fee rate payable and the services provided under the
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the fiscal year ended September 30, 1996 the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio paid the Distributor
$27,772,529, $5,197,514 and $1,111,276, respectively, pursuant to the Class B
Distribution Plan (based on average net assets subject to such Class B
Distribution Plan of approximately $3.7 billion, $694.9 million and $222.9
million, respectively), all of which were paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. For the fiscal year ended September 30, 1996,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio, paid the Distributor $1,973,424, $386,450 and $46,132,
respectively, pursuant to the Class C Distribution Plan (based on average net
assets subject to such Class C Distribution Plan of approximately $247.4
million, $48.4 million and $9.3 million, respectively) all of which were paid
to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended September 30,
42
<PAGE>
1996, the High Income Portfolio, the Investment Grade Portfolio and the
Intermediate Term Portfolio, paid the Distributor $446,161, $108,621 and
$25,451, respectively, pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$179.0 million, $43.6 million and $25.5 million, respectively), all of which
were paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
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, 1995, 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 $51,152,000 (1.47% of Class B
net assets at that date) with respect to the High Income Portfolio and
approximately $6,714,000 (0.97% of Class B net assets at that date) with
respect to the Investment Grade Portfolio and approximately $533,000 (0.23% 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, 1996, direct
cash revenues for the period since commencement of the offering of Class B
shares exceeded direct cash expenses by $31,791,886 (0.75% of Class B net
assets at that date) with respect to the High Income Portfolio. As of September
30, 1996, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $13,274,065 (1.83%
of Class B net assets at that date) with respect to the Investment Grade
Portfolio. As of September 30, 1996, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$2,299,536 (1.06% 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, 1996 direct cash expenses exceeded direct cash
revenues by $1,111,438 (0.31% of Class C net assets at that date) for Class C
shares of the High Income Portfolio and $221,914 (0.34% 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, 1996 exceeded
direct cash expenses by $41,299 (0.41% 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, 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
43
<PAGE>
Distribution Plans. In their review of the Distribution Plans, the Directors
will be asked to take into consideration expenses incurred in connection with
the account maintenance and/or distribution of each class of shares separately.
The initial sales charges, the account maintenance fee, the distribution fee
and/or the CDSCs received with respect to one class will not be used to
subsidize the sale of shares of another class. Payments of the distribution fee
on Class B shares will terminate upon conversion of those Class B shares into
Class D shares as set forth under "Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares 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
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<PAGE>
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days after receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time, not exceeding ten
days, as it has assured itself that good payment (e.g., cash or certified check
drawn on a United States bank) has been collected for the purchase of such
shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. As described in the Statement of
Additional Information, the repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities dealers may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. The Fund reserves the right
to reject any order for repurchase, which right of rejection might adversely
affect shareholders seeking redemption through the repurchase procedure.
Merrill Lynch may charge its customers a processing fee (currently $4.85) to
confirm a repurchase of shares to such customers. Redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
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 privilege to reinstate their accounts by
purchasing shares of the same class at net asset value without a sales charge
up to the dollar amount redeemed. The reinstatement privilege may be exercised
by sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
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<PAGE>
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 is 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.
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 Internal Revenue Code of 1986 (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.
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<PAGE>
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 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
47
<PAGE>
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.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. With respect to such
transactions, the Investment Adviser seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Fund will not necessarily be
paying the lowest commission or spread available.
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to the policy
established by the Board of Directors, the Investment Adviser is primarily
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.
For the fiscal year ended September 30, 1996, the portfolio turnover rates
for the High Income Portfolio, the Investment Grade Portfolio and the
Intermediate Portfolio were 32.44%, 88.53% and 96.40%, respectively.
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<PAGE>
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 service and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. These statements will also
show any other activity in the account since the previous statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by purchasing shares at the applicable public offering price either
through a securities dealer that has entered into a selected dealer agreement
with the Distributor or by mail directly to the Transfer Agent, acting as agent
for the Distributor.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of a
Portfolio, a shareholder either must redeem the Class A or Class D shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of a Portfolio, a shareholder must either
redeem the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
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
49
<PAGE>
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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class of
shares at net asset value, which may be shares of a money market fund. In
addition, upon termination of participation in a Program, shares that have been
held for less than specified periods within such Program may be subject to a
fee based upon the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account at Merrill
Lynch, to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
Merrill Lynch Investor Services at (800) MER-FUND (637-3863).
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund 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
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. A 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, 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.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of a Portfolio have an exchange
privilege with the other Portfolios and certain other MLAM-advised mutual
funds. There is currently no limitation on the number of times a shareholder
may exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A
shares of the other Portfolio or second fund in his account in which the
exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of another 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 other Portfolio or 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 another Portfolio or other MLAM-advised mutual
funds. Class C shares of the Intermediate Term Portfolio are available only
through the Exchange Privilege.
Shares of a Portfolio that are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the 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.
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Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
MERRILL LYNCH BLUEPRINT 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").
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.
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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, 1996 was:
<TABLE>
<CAPTION>
INTERMEDIATE
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO TERM PORTFOLIO
--------------------- -------------------------- --------------
<S> <C> <C> <C>
Class A........ 9.17% 6.46% 6.40%
Class B........ 8.78% 5.96% 5.87%
Class C........ 8.74% 5.90% 5.81%
Class D........ 8.92% 6.20% 6.26%
</TABLE>
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 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, BusinessWeek, 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.
53
<PAGE>
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,
1996, the Fund paid MLSPS $31,336 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.
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 three billion fifty million (3,050,000,000) 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, 1,000,000,000 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," which consist
of 250,000,000, 250,000,000, 100,000,000 and 100,000,000 shares, respectively,
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,"
54
<PAGE>
which consist of 100,000,000, 50,000,000, 50,000,000 and 50,000,000,
respectively. 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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
REPORTS TO SHAREHOLDERS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act
55
<PAGE>
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 28, 1997, 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.
56
<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.
57
<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.
58
<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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
59
<PAGE>
MERRILL LYNCH CORPORATE BOND FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Dividends,
Distributions and Taxes--Federal Income Taxes") either because I have not been
notified that I am subject thereto as a result of a failure to report all
interest or dividends, or the Internal Revenue Service ("IRS") has notified me
that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (Available to holders of
Class A or Class D shares of the Intermediate Term Portfolio, the Investment
Grade Portfolio or the High Income Portfolio. See terms and conditions in the
Statement of Additional Information)
..................., 19......
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase [_] Class A
or [_] Class D (choose one) shares of the [_] High Income
Portfolio [_] Investment Grade Portfolio [_] Intermediate Term Portfolio
(choose one) of Merrill Lynch Corporate Bond Fund, Inc. or any other
investment company with an initial sales charge or deferred sales charge for
which Merrill Lynch Funds Distributor, Inc. acts as distributor over the next
13 month period which will equal or exceed:
High Income Portfolio or Investment Grade
Portfolio: [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Intermediate Term Portfolio:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Corporate Bond
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Corporate Bond Fund, Inc. held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - Shareholder's signature.
This form when completed should be
mailed to: .....................................
Merrill Lynch Corporate Bond Dealer Name and Address
Fund, Inc. c/o Merrill Lynch
Financial Data Services, Inc. By ..................................
P.O. Box 45289 Jacksonville, Authorized Signature of Dealer
Florida 32232-5289 [ ][ ][ ] [ ][ ][ ][ ]
Branch-Code F/C No.
...............
F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
60
<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.
61
<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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. 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
charge to my account ACH debits
......(month) or as soon thereafter as drawn on my account by and payable
possible. to Merrill Lynch Financial Data
Services, Inc., I agree that your
I agree that you are drawing these rights in respect of each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed per-
any loss arising from any delay in sonally by me. This authority is to
preparing or failure to prepare any remain in effect until revoked by me
such debit. If I change banks or de- in writing. Until you receive such
sire to terminate or suspend this notice, you shall be fully protected
program, I agree to notify you in honoring any such debit. I fur-
promptly in writing. I hereby autho- ther agree that if any such debit be
rize you to take any action to cor- dishonored, whether with or without
rect erroneous ACH debits of my bank cause and whether intentionally or
account or purchases of fund shares inadvertently, you shall be under no
including liquidating shares of the liability.
Fund and crediting my bank account. I
further agree that if a debit is not ............ ......................
honored upon presentation, Merrill Date Signature of
Lynch Financial Data Services, Inc. Depositor
is authorized to discontinue immedi-
ately the Automatic Investment Plan ............ ......................
and to liquidate sufficient shares Bank Signature of Depositor
held in my account to offset the pur- Account (If joint account,
chase made with the dishonored debit. Number both must sign)
............ ..................... NOTE: IF AUTOMATIC INVESTMENT PLAN
Date Signature of IS ELECTED, YOUR BLANK, UNSIGNED
Depositor CHECK MARKED "VOID" SHOULD ACCOMPANY
THIS APPLICATION.
.....................
Signature of Depositor
(If joint account,
both must sign)
62
<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
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 REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 3
Merrill Lynch Select Pricing SM System..................................... 5
Financial Highlights....................................................... 11
Investment Objectives and Policies......................................... 19
Investment Policies of the Portfolios...................................... 19
Risk Factors in Transactions in Junk Bonds................................ 22
Investments in Foreign Securities......................................... 24
Interest Rate Futures and Options Thereon................................. 24
Other Portfolio Strategies................................................ 26
Investment Restrictions................................................... 28
Investment Adviser......................................................... 29
Code of Ethics............................................................ 30
Transfer Agency Services.................................................. 30
Directors.................................................................. 31
Purchase of Shares......................................................... 31
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 34
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 37
Distribution Plans........................................................ 41
Redemption of Shares....................................................... 44
Redemption................................................................ 44
Repurchase................................................................ 45
Reinstatement Privilege--
Class A and Class D Shares............................................... 45
Dividends, Distributions and Taxes......................................... 46
Dividends and Distributions............................................... 46
Federal Income Taxes...................................................... 46
Portfolio Transactions..................................................... 48
Shareholder Services....................................................... 49
Investment Account........................................................ 49
Automatic Investment Plans................................................ 49
Fee-Based Programs........................................................ 50
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 50
Systematic Withdrawal Plans............................................... 50
Retirement Plans.......................................................... 50
Exchange Privilege........................................................ 51
Merrill Lynch Blueprint SM Program........................................ 52
Performance Data........................................................... 52
Additional Information..................................................... 54
Determination of Net Asset Value.......................................... 54
Organization of the Fund.................................................. 54
Shareholder Inquiries..................................................... 55
Reports to Shareholders................................................... 55
Additional Information.................................................... 55
Appendix: Description of Corporate Bond Ratings............................ 57
Authorization Form......................................................... 59
</TABLE>
Code # 10046-0197
[LOGO] MERRILL LYNCH
MERRILL LYNCH
CORPORATE BOND FUND, INC.
[ART]
PROSPECTUS
JANUARY 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 28, 1997
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 28, 1997, which has been filed with the Securities
and Exchange Commission (the "Commission") and is available upon oral or
written request without charge. Copies of the Prospectus can be obtained by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
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 19 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 thereon to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in fixed-income securities. In such instances, it is
possible that the market may instead decline. If the Fund does not then invest
in such securities because of concern as to possible further market decline or
for other reasons, the Fund may realize a loss on the futures or option
contract that is not offset by a reduction in the price of securities
purchased.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the 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 Commission 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 Commission regarding the manner in which such trading will be conducted.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, including a majority of the shares of 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. Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A Security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (7) above, the Fund
will not borrow amounts in 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.
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
7
<PAGE>
maintained in amounts equal to at least 100% of the current market value of the
loaned securities. Any cash collateral will be invested in short-term
securities, which will increase the current income of the Portfolio making the
loan. Such loans, which will not have terms longer than 30 days, will be
terminable at any time. The Fund will have the right to regain record ownership
of loaned securities to exercise beneficial rights such as voting rights,
subscription rights and rights of dividends, interest or other distributions.
The Fund may pay reasonable fees to persons unaffiliated with the Fund for
services in arranging such loans. In the event of a default by the borrower,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral.
Forward Commitments. U.S. Government securities and corporate debt
obligations may be purchased on a forward commitment basis at fixed purchase
terms with periods of up to 45 days between the commitment and settlement
dates. The purchase will be recorded on the date the Fund enters into the
commitment and the value of the security will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the security on the
delivery date may be more or less than its purchase price. A separate account
of the Fund will be established with the Custodian consisting of cash or liquid
high grade debt obligations having a market value at all times until the
delivery date at least equal to the amount of the forward commitment. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio, the Fund may dispose of a commitment
prior to settlement if the Investment Adviser deems it appropriate to do so.
There can, of course, be no assurance that the judgments upon which these
techniques are based will be accurate or that such techniques when applied will
be effective. The Fund will enter into forward commitment arrangements only
with respect to securities in which it may otherwise invest as described under
"Investment Objectives and Policies."
Repurchase Agreements. As described in the Prospectus, the Fund may invest in
securities pursuant to repurchase agreements. Under such agreements, the seller
agrees, upon entering into the contract, to repurchase the security at a
mutually agreed-upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such 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.
8
<PAGE>
Foreign Securities. Investments in foreign securities, particularly those of
nongovernmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. If it should
become necessary, the Fund could encounter greater difficulties in invoking
legal processes abroad than would be the case in the United States. Transaction
costs in foreign securities may be higher. The Investment Adviser will consider
these and other factors before investing in foreign securities, and will not
make such investments unless, in its opinion, such investments will meet the
Fund's standards and objectives. No Portfolio will concentrate its investments
in any particular foreign country. Each Portfolio may purchase securities
issued in dollar or foreign currency denominations. In the case of any such
investment in a security denominated in a foreign currency, the Portfolio
making the investment would be subject to the risk of changes in currency
exchange rates.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their 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 (64)--President and Director(1)(2)--President of Fund Asset
Management, L.P. ("FAM" or the "Investment Adviser"), (which term herein
includes its corporate predecessors) since 1977; President of Merrill Lynch
Asset Management, L.P. ("MLAM") (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 Merrill Lynch
Funds Distributor, Inc. (the "Distributor") since 1977.
Ronald W. Forbes (56)--Director(2)--1400 Washington Avenue, Albany, New York
12222. Associate Professor of Finance, School of Business, State University of
New York at Albany; Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund; Consultant, Public Finance Banking, Shearson Lehman
Brothers, Inc.
Cynthia A. Montgomery (44)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02613. Professor, Harvard Business School,
since 1989; Associate Professor, J.L. Kellog Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director, of UNUM Corporation since 1990 and Director of Newell Co. since 1995.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 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; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
9
<PAGE>
Kevin A. Ryan (64)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder,current Director and Professor of The Boston
University Center for Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
the University of Chicago, Stanford University and Ohio State University.
Richard R. West (58)--Director(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company), Smith-Corona Corporation (manufacturer of typewriters and
word processors) and Alexander's Inc. (real estate company).
Terry K. Glenn (56)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Joseph T. Monagle, Jr. (48)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1990; Vice President of MLAM
from 1978 to 1990; Senior Vice President of Princeton Services since 1993.
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 the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer of the Distributor since 1984.
Ira Shapiro (33)--Secretary (1)(2)--Vice President of MLAM since 1997 and
attorney associated with the Investment Adviser and MLAM since 1993.
- --------
(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").
As of December 31, 1996, the Directors and officers of the Fund as a group
(14 persons) owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment
10
<PAGE>
Adviser (each a "non-interested Director") an annual fee of $4,000 plus a fee
of $800 per meeting attended, together with such Director's actual out-of-
pocket expenses relating to attendance at meetings. The Fund also compensates
members of its Audit and Nominating Committee (the "Committee"), which
consists of all of the non-interested Directors, with a fee of $2,000 per
year. The Chairman of the Audit Committee is paid an additional annual fee of
$1,000. For the fiscal year ended September 30, 1996, fees and expenses paid
to the non-interested Directors which were allocated to the Fund aggregated
$47,152.
The following table sets forth for the fiscal year ended September 30, 1996,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate,
FAM ("MLAM/FAM Advised Funds") to the non-interested Directors:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
PENSION OR FUND AND
RETIREMENT BENEFIT MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR/TRUSTEE FROM THE FUND OF FUND EXPENSE TRUSTEE/DIRECTOR(1)
- ---------------- ------------- ------------------ -------------------
<S> <C> <C> <C>
Ronald W. Forbes........... $ 9,200 None $142,500
Cynthia A. Montgomery...... $ 9,200 None $142,500
Charles C. Reilly.......... $10,200 None $293,833
Kevin A. Ryan.............. $ 9,200 None $142,500
Richard R. West............ $ 9,200 None $269,833
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Forbes (23 registered investment companies consisting of 36
portfolios); Ms. Montgomery (23 registered investment companies consisting
of 36 portfolios); Mr. Reilly (41 registered investment companies
consisting of 54 portfolios); Mr. Ryan (23 registered investment companies
consisting of 36 portfolios); and Mr. West (41 registered investment
companies consisting of 54 portfolios).
INVESTMENT ADVISORY ARRANGEMENTS
The Investment Adviser, acts as the investment adviser for the Fund and
provides the Fund with management services. The Investment Adviser (the
general partner of which is Princeton Services Inc., a wholly owned subsidiary
of 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.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies.
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
11
<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.
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM, U.K., an indirect, wholly owned subsidiary of
ML & Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives
for providing services to the Fund pursuant to the Investment Advisory
Agreement.
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.
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 exceeds $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>
For the fiscal years ended September 30, 1994, 1995 and 1996, the advisory
fees paid by the Fund to the Investment Adviser totaled $17,493,674,
$19,482,874 and $27,255,524, respectively. The Investment Adviser did not
reimburse any portion of its advisory fee for the fiscal years ended September
30, 1994, 1995 and 1996.
12
<PAGE>
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, 1996, the amount of such
reimbursement for accounting services was $606,335, of which $443,142 was
attributable to the High Income Portfolio, $115,335 was received with respect
to the Investment Grade Portfolio and $47,858 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."
DURATION AND TERMINATION
Continuation of the Investment Advisory Agreement for the period March 1,
1997 to March 1, 1998 was approved by the Board of Directors, including a
majority of the disinterested directors, on December 4, 1996. Unless earlier
terminated as described below, the agreement will remain in effect until March
1, 1998 and thereafter will continue in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the directors who are
not parties to such contract or interested persons (as defined in the
Investment Company Act of 1940) of any such party. The agreement is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party or by the vote of the shareholders of the Fund.
TRANSFER AGENCY SERVICES ARRANGEMENTS
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, 1996, the Fund paid
MLFDS a fee of $6,964,141 pursuant to the Transfer Agency Agreement.
13
<PAGE>
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 54 of the Prospectus. The net asset value of the shares of each
Portfolio is determined once daily by the Investment Adviser immediately after
the declaration of dividends as of 15 minutes after the close of business on
the New York Stock Exchange (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 the Investment Adviser and any
account maintenance and/or distribution fees payable to the Distributor, are
accrued daily.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distribution which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities 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 that are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the over-the-counter market. Options on debt
securities, which are traded on exchanges, are valued at the last asked price
for options written and the last bid price for options purchased. Interest rate
futures contracts and options thereon, which are traded on exchanges, are
valued at their closing price at the close of such exchanges. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by a pricing service
retained by the Fund which may use a matrix system for valuations. These
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Directors.
14
<PAGE>
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 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
15
<PAGE>
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, 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. For the fiscal year
ended September 30, 1996, the Fund paid total brokerage commissions of $63,684,
of which $60,484 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. The portfolio turnover rates for the fiscal years
ended September 30, 1995 and September 30, 1996 were: 24.58% and 32.44% for the
High Income Portfolio; 108.07% and 88.53% for the Investment Grade Portfolio;
and 142.84% and 96.40% for the Intermediate Term Portfolio. 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.
16
<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
registered investment companies advised by MLAM or its affiliate, the
Investment Adviser. Funds advised by MLAM or the Investment Adviser, which
utilize the Merrill Lynch Select Pricing SM System, 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, 1995 and September 30, 1996, the
Distributor received $3,169,482 and $582,179, respectively, as sales charges
on Class A shares sold, of which $2,917,019 and $526,293, respectively, 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.
For the fiscal years ended September 30, 1995 and September 30, 1996, the
Distributor received $1,433,700 and $1,935,640, respectively, as sales charges
on Class D shares sold, of which $1,307,934, and $1,752,134 respectively, was
paid to Merrill Lynch. All of such sales charges were attributable to payments
of initial sales charges in connection with purchases of Class D shares of the
Portfolios.
17
<PAGE>
For information as to brokerage commissions received by Merrill Lynch, see
"Portfolio Transactions."
REDUCED INITIAL SALES CHARGES--CLASS A AND CLASS D SHARES
Reduced Sales Charges. As described generally in the Prospectus, a reduced
sales charge is available for any purchase of Class A or Class D shares of the
High Income Portfolio or Investment Grade Portfolio in excess of $25,000 and
Class A or Class D shares of the Intermediate Term Portfolio in excess of
$100,000. The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company," as that term is defined in
the Investment Company Act, but does not include purchases by any such company
that has not been in existence for at least six months or that has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a 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
18
<PAGE>
mutual funds made within a 13-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided by the Distributor. The
Letter of Intention is available only to investors whose accounts are
maintained at the Fund's Transfer Agent. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares, but
its execution will result in the purchaser's paying a lower sales charge at
the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and
Class D shares of any of the three Portfolios or of other MLAM-advised mutual
funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intention, may be
included as a credit toward the completion of such Letter. The reduced sales
charge applicable to the amount covered by the Letter of Intention will be
applied only to new purchases. If the total amount of shares purchased does
not equal the amount stated in the Letter of Intention, the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on Class A or Class D shares of the
Portfolio purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to five percent of the intended amount will be held in escrow during the 13-
month period (while remaining registered in the name of the purchaser). The
first purchase under the Letter of Intention must be five percent of the
dollar amount of such Letter. If, during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that
purchase and subsequent purchases to the reduced percentage sales charge which
would be applicable to a single purchase equal to the total dollar value of
the Class A or Class D shares of the Portfolio then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from a MLAM-advised money market fund into any Portfolio that creates a sales
charge will count toward completing a new or existing Letter of Intention in
any Portfolio.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Merrill Lynch Blueprint SM Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint SM
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of the Fund may purchase additional Class A shares of the Fund through
Blueprint. Blueprint is directed to small investors, Group IRAs and
participants in certain affinity groups such as benefit plans, credit unions
and trade associations. Investors placing orders to purchase Class A or Class
D shares of the Portfolios through Blueprint will acquire such Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $5,000 at 3.5% for the
High Income and Investment Grade Portfolios and .80% for the Intermediate Term
Portfolios. Purchases greater than $5,000 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 .50%
for participants in corporate or group IRA programs placing orders to purchase
their shares through Blueprint. However, services (including the exchange
privilege) available to Class A and Class D shareholders through Blueprint may
differ from those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to participants in
the Merrill Lynch Blueprint SM Program through the Merrill
19
<PAGE>
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 mutual funds, ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.), and their directors or employees, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
Class A shares of the Fund and other MLAM-advised mutual funds are offered
at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund
(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.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLAM who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A
20
<PAGE>
Shares of the Fund. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class D Shares"). In order to exercise this
investment option, closed-end fund shareholders must (i) sell their closed-end
fund shares through Merrill Lynch and reinvest the proceeds immediately in the
Eligible Class A or Class D Shares of the Fund, (ii) either have acquired the
shares in the closed-end fund's initial public offering or through reinvestment
of dividends earned on shares purchased in such offering, (iii) have maintained
their closed-end fund shares continuously in a Merrill Lynch account, and (iv)
purchase a minimum of $250 worth of Fund shares. Similarly, 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 he or she 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.
21
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Portfolios may be reduced to the net asset value per
Class D share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may in appropriate cases be adjusted to reduce possible adverse tax
consequences to the Fund which might result from an acquisition of assets
having net unrealized appreciation which is disproportionately higher at the
time of acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may acquire
through such transactions restricted or illiquid securities to the extent the
Fund does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLAN
Reference is made to "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Distribution Plan" in the Prospectus
for certain information with respect to the separate distribution plans of the
Fund for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes. For the fiscal year ended September 30, 1996, the High
Income, Investment Grade and Intermediate Term Portfolios paid the Distributor
$27,772,529, $5,197,514 and $1,111,276, respectively, pursuant to the Class B
Distribution Plan (based on average net assets subject to such Class B
Distribution Plan of approximately $3.7 billion, $694.9 million and $222.9
million, respectively) all of which were paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. For the fiscal year ended September 30, 1996,
the High Income, Investment Grade and Intermediate Term Portfolios paid the
22
<PAGE>
Distributor $1,973,424, $386,450 and $46,132, respectively, pursuant to the
Class C Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $247.4 million, $48.4 million and $9.3
million, respectively) all of which were paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class C shares. For the fiscal year ended September 30, 1996,
the High Income, Investment Grade and Intermediate Term Portfolios paid the
Distributor $446,161, $108,621 and $25,451, respectively, pursuant to the Class
D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $179.0 million, $43.6 million and $25.5
million, respectively) all of which were paid to Merrill Lynch for providing
account maintenance activities 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. 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.
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
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
23
<PAGE>
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with Class B shares in each Portfolio is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charge at any time. To the extent payments would exceed the voluntary
maximum, the Fund will not make further payments of the distribution fee with
respect to Class B shares, and any CDSCs will be paid to the Fund rather than
to the Distributor; however, the Fund will continue to make payments of the
account maintenance fees. In certain circumstances the amount payable pursuant
to the voluntary maximum may exceed the amount payable under the NASD formula.
In such circumstances, payment in excess of the amount payable under the NASD
formula will not be made.
The following tables set forth comparative information as of September 30,
1996 with respect to the Class B and Class C shares of each Portfolio
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,
1996 for the High Income and Investment Grade Portfolios, for the period
November 13, 1992 (commencement of Class B operations) to September 30, 1996
for the Intermediate Term Portfolio, and for the period October 21, 1994
(commencement of operations) to September 30, 1996 for Class C shares of each
Portfolio.
DATA CALCULATED AS OF SEPTEMBER 30, 1996
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 SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------- ----------- ------------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $4,214,626(1) $263,414 $51,437 $314,851 $72,276 $242,575 $21,252
Under Distributor's
Voluntary Waiver....... $4,214,626(1) $263,414 $21,073 $284,487 $72,276 $212,211 $21,252
<CAPTION>
CLASS C
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 385,219 $ 24,076 $ 1,788 $ 25,864 $ 1,870 $ 23,994 $ 1,993
</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 SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------- ----------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $846,873(1) $52,929 $13,441 $66,370 $20,063 $46,307 $3,620
Under Distributor's
Voluntary Waiver....... $846,873(1) $52,929 $ 4,234 $57,163 $20,063 $37,100 $3,620
<CAPTION>
CLASS C
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 60,957 $ 3,809 $ 276 $ 4,085 $ 349 $ 3,736 $ 357
</TABLE>
24
<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 SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4)
- ------- ----------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $164,924(5) $10,307 $1,690 $11,997 $2,377 $9,620 $541
Under Distributor's
Voluntary Waiver....... $164,924(5) $10,307 $ 824 $11,131 $2,377 $8,754 $541
<CAPTION>
CLASS C
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 4,785 $ 299 $ 18 $ 317 $ 31 $ 286 $ 25
</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 on Class B shares 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 on Class B
shares 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.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the
New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed (other than customary weekend
and holiday closings), for any period during which an emergency exists as
defined by the Securities and Exchange Commission as a result of which
disposal of portfolio securities or determination of the net asset value of
any Portfolio is not reasonably practicable, and for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
shareholders of each Portfolio. Reference is made to "Redemption of Shares" in
the Prospectus for certain information as to the redemption and repurchase of
Fund shares.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by
each Portfolio at such time.
REPURCHASE
The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the
25
<PAGE>
request for repurchase is received by the dealer prior to the close of business
on the New York Stock Exchange on the day received and is received by the Fund
from such dealer not later than 30 minutes after the close of business on the
New York Stock Exchange (generally 4:00 p.m., New York City time), on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the New York
Stock Exchange (generally 4:00 p.m., New York City time), in order to obtain
that day's closing price.
For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted in the Prospectus.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A or Class D shares of any Portfolio,
including redemption through repurchase by the Fund, have a one-time privilege
to reinstate their accounts by purchasing Class A or Class D shares, as the
case may be, of such Portfolio at the net asset value of such shares without a
sales charge up to the dollar amount redeemed. The reinstatement privilege may
be exercised as follows. A notice to exercise this privilege along with a check
for the amount to be reinstated must be received by the Transfer Agent within
30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the shareholder only
the first time such shareholder makes a redemption. A redemption resulting in a
gain is a taxable event whether or not the reinstatement privilege is
exercised. A redemption resulting in a loss will not be a taxable event to the
extent the reinstatement privilege is exercised, and an adjustment will be made
to the shareholder's tax basis in shares acquired pursuant to the reinstatement
to reflect the disallowed loss.
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
26
<PAGE>
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of
an excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Internal Revenue Code) of
a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within
one year of the death or initial determination of disability.
During the fiscal year ended September 30, 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. During the
fiscal year ended September 30, 1996, Merrill Lynch received contingent
deferred sales charges of $4,772,201 with respect to Class B shares of the
High Income Portfolio, $1,143,774 with respect to Class B shares of the
Investment Grade Portfolio and $292,161 with respect to Class B shares of the
Intermediate Term Portfolio all of which were paid to Merrill Lynch.
With respect to Class C shares of the High Income Portfolio, the Investment
Grade Portfolio and the Intermediate Term Portfolio, for the fiscal year ended
September 30, 1996, Merrill Lynch received contingent deferred sales charges
of $200,924, $35,555 and $6,419, respectively, all of which were paid to
Merrill Lynch.
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.
27
<PAGE>
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 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.
28
<PAGE>
The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98 percent of the Fund's investment
company income, with certain adjustments, for such calendar year, plus 98
percent of the Fund's capital gain net income for the one-year period ending on
October 31, of such calendar year. In addition, an amount equal to any
undistributed investment company taxable income or capital gain net income from
the previous calendar year must also be distributed to avoid the excise tax.
While the Fund intends to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. The excise tax is
imposed on the amount by which the regulated investment company does not meet
the foregoing distribution requirements.
Only dividends paid by the Fund which are attributable to dividends received
by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares
in the Fund for more than 45 days to qualify for the deduction on dividends
paid by the Fund. Because most of the income of each Portfolio will be interest
income, rather than dividends on common or preferred stock, it is unlikely that
any substantial proportion of its distributions will be eligible for the
dividends-received deduction available for corporations under the Code.
At September 30, 1996, the Fund had a capital loss carryforward of
approximately $4,727,000 in the High Income Portfolio, all of which expires in
1999; approximately $34,388,000 in the Investment Grade Portfolio, all of which
expires in 2003; and approximately $10,707,000 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.
29
<PAGE>
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.
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
30
<PAGE>
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. 49) at
any time by purchasing Class A shares (if he or she is an eligible Class A
investor as described in the Prospectus) or Class B, Class C or Class D shares
at the applicable public offering price either through the shareholder's
securities dealer or by mail directly to the Fund's Transfer Agent, acting as
agent for such securities dealer. Voluntary accumulation also can be made
through a service known as the Fund's Automatic Investment Plan whereby the
Fund is authorized through pre-authorized checks or automated clearing house
debits of $50 or more to charge the regular bank account of the shareholder on
a regular basis to provide systematic additions to the Investment Account of
such shareholder. For investors who buy shares of the fund through Blueprint no
minimum charge to the investors' bank accounts is required. An investor whose
shares of the Fund are held within a CMA (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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
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<PAGE>
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 terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Fund's Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yields or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept additions to an Investment Account in which an election has been made to
receive systematic withdrawals unless such addition is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account from which the
shareholder has elected to make systematic withdrawals.
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<PAGE>
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100 and the minimum subsequent purchase
is $1.
Retirement Plan
Any Retirement Plan which does not meet the qualifications to purchase Class
A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption if the following qualifications are met. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares and is
also waived for Class B redemptions from a 401(a) plan qualified under the
Code, provided that each such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Class B shares ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) and 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch may also purchase Class B shares with a waiver of the
CDSC. The CDSC is also waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled 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.
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<PAGE>
EXCHANGE PRIVILEGE
Shareholders of each class of shares of a Portfolio of the Fund have an
exchange privilege with other Portfolios of the Fund and with certain other
MLAM-advised mutual funds listed below. Under the Merrill Lynch Select
PricingSM System, Class A shareholders may exchange Class A shares of a
Portfolio for Class A shares of another Portfolio or a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the other Portfolio
or second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares of
the other Portfolio or a second MLAM-advised mutual fund, and the shareholder
does not hold Class A shares of the other Portfolio or second fund in his
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the other Portfolio or second fund, the shareholder will
receive Class D shares of the other Portfolio or the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of
another Portfolio or a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the other Portfolio or second fund. Class B, Class C
and Class D of a Portfolio shares will be exchangeable with shares of the same
class of other MLAM-advised mutual funds. For purposes of computing the CDSC
that may be payable upon a disposition of the shares acquired in the exchange,
the holding period for the previously owned shares of the Portfolio is "tacked"
to the holding period of the newly acquired shares of the other Portfolio or
other Fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money
market funds specifically designated below as available for exchange by holders
of Class A, Class B, Class C or Class D shares. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid 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 a Portfolio
generally may be exchanged into the Class A or Class D shares of the other
funds or into shares of the Class A and Class D money market funds with a
reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, ("new Class B or
Class C shares") of another MLAM-advised mutual fund on the basis of relative
net asset
34
<PAGE>
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the fund exercising the exchange privilege will continue to be subject to
the fund's CDSC schedule if such schedule is higher than the CDSC relating to
the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the fund acquired through use of the exchange
privilege will be subject to the higher of the fund's CDSC schedule or the CDSC
relating to the Class B shares of the fund from which the exchange has been
made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is "tacked" to the holding period of the
new Class B or Class C shares. For example, an investor may exchange Class B
shares of the High Income Portfolio of the Merrill Lynch Corporate Bond Fund,
Inc. ("High Income Portfolio") for those of Merrill Lynch Special Value Fund,
Inc. ("Special Value Fund") after having held the Fund's Class B shares for two
and a half years. The 2% sales load that generally would apply to a redemption
would not apply to the exchange. Two years later the investor may decide to
redeem the Class B shares of Merrill Lynch Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of High Income Portfolio Class B shares to the two
year holding period for the Merrill Lynch Special Value Fund Class B shares,
the investor will be deemed to have held the new Class B shares for more than
four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a Class B money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a fund may, in turn, be exchanged back into Class B or Class C shares of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of that fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the 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.
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.
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<PAGE>
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 applicable sales charge.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual
rates, but rather, actual annual, annualized or aggregate rate of return and
(2) the maximum applicable sales charge will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charge, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of
return reflect compounding over a longer period of time.
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<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, 1996
Class A................. (0.55%) 7.47% 3.51% $ 994.50 $ 1,074.70 $ 1,035.10
Class B................. (1.06%) 7.11% 3.04% $ 989.40 $ 1,071.10 $ 1,030.40
Class C................. 1.88% 10.05% 3.01% $ 1,018.80 $ 1,100.50 $ 1,030.10
Class D................. (0.71%) 7.34% 3.41% $ 992.90 $ 1,073.40 $ 1,034.10
Five Years Ended September
30, 1996
Class A................. 6.72% 12.51% 7.31% $ 1,384.30 $ 1,802.90 $ 1,422.90
Class B................. 6.78% 12.58% -- $ 1,388.20 $ 1,808.60 --
Ten Years Ended September
30, 1996
Class A Shares.......... 7.78% 11.25% 7.87% $ 2,114.50 $ 2,903.10 $ 2,133.80
Class B Shares
10/21/88 - 9/30/96..... 7.90% 11.31% -- $ 1,829.20 $ 2,343.20 --
Class B Shares
11/13/92 - 9/30/96..... -- -- 6.26% -- -- $ 1,265.90
Class C Shares
10/21/94 - 9/30/96..... 8.82% 12.34% 8.77% $ 1,178.60 $ 1,253.90 $ 1,177.70
Class D Shares
10/21/94 - 9/30/96..... 7.16% 10.62% 8.66% $ 1,144.10 $ 1,217.00 $ 1,175.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30,
1996
(Class A)............... 3.60% 11.95% 4.56% $ 1,036.00 $ 1,119.50 $ 1,045.60
(Class B)............... 2.81% 11.11% 4.02% $ 1,028.10 $ 1,111.10 $ 1,040.20
(Class C)............... 2.85% 11.05% 3.99% $ 1,028.50 $ 1,110.50 $ 1,039.90
(Class D)............... 3.43% 11.82% 4.46% $ 1,034.30 $ 1,118.20 $ 1,044.60
1995
(Class A)............... 14.93% 13.27% 13.33% $ 1,149.30 $ 1,132.70 $ 1,133.30
(Class B)............... 14.04% 12.41% 12.73% $ 1,140.40 $ 1,124.10 $ 1,127.30
(Class C)............... 14.60% 12.92% 13.25% $ 1,146.00 $ 1,129.20 $ 1,132.50
(Class D)............... 15.22% 13.37% 13.65% $ 1,152.20 $ 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% 13.30% $ 1,119.10 $ 1,133.50 $ 1,133.00
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>
- --------
*Commencement of operations October 21, 1988.
37
<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
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, 1996
Class A............... 413.38% 588.69% 405.90% $ 5,133.80 $ 6,886.90 $ 5,059.00
Class B............... 82.92% 134.32% 26.59% $ 1,829.20 $ 2,343.20 $ 1,265.90
Class C............... 17.86% 25.39% 17.77% $ 1,178.60 $ 1,253.90 $ 1,177.70
Class D............... 14.41% 21.70% 17.52% $ 1,144.10 $ 1,217.00 $ 1,175.20
YIELD
<CAPTION>
INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------------------
<S> <C> <C> <C>
30 Days Ended September
30, 1996
Class A............... 6.46% 9.17% 6.40%
Class B............... 5.96% 8.78% 5.87%
Class C............... 5.90% 8.74% 5.81%
Class D............... 6.20% 8.92% 6.26%
</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.
Commencement of operations for Class C shares and Class D shares of
Investment Grade Portfolio, High Income Portfolio and Intermediate Term
Portfolio was October 21, 1994.
In order to reflect the reduced sales charges applicable to certain
investors, as described under "Purchase of Shares," the total return data
quoted by the Fund in advertisements directed to such investors whose purchases
are subject to reduced sales load, in the case of Class A and Class D shares,
or waiver of the contingent deferred sales charge in the case of Class B and
Class C shares, may take into account the reduced, and not the maximum, sales
charge or may not take into account the contingent deferred sales charge and
therefore may reflect greater total return since, due to the reduced sales
charge, a lower amount of expenses is deducted.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 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.
38
<PAGE>
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The authorized capital stock of the Fund consists of three billion fifty
million (3,050,000,000) 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, 1,000,000,000 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" which consists of 250,000,000, 250,000,000, 100,000,000 and 100,000,000,
respectively, 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" which consists of
100,000,000, 50,000,000, 50,000,000 and 50,000,000 shares, respectively. 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.
39
<PAGE>
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, 1996, is calculated as set forth below.
HIGH INCOME PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets............... $947,479,106 $4,250,539,421 $362,517,515 $267,687,164
============ ============== ============ ============
Number of Shares Out-
standing................ 119,457,213 535,749,707 45,662,400 33,727,435
============ ============== ============ ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............ $ 7.93 $ 7.93 $ 7.94 $ 7.94
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........... $ 8.26 $ 7.93 $ 7.94 $ 8.27
============ ============== ============ ============
</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 and "Redemption of Shares--Deferred Sales Charge--Class B and
Class C Shares" herein.
INVESTMENT GRADE PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $608,900,606 $724,088,690 $64,931,023 $63,822,576
============ ============ =========== ===========
Number of Shares Outstanding. 54,539,733 64,858,598 5,813,886 5,713,177
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 11.16 $ 11.16 $ 11.17 $ 11.17
Sales Charge* (for Class A
and Class D shares: 4.00% of
offering price (4.17% of net
asset value per share))..... .47 ** ** .47
------------ ------------ ----------- -----------
Offering Price............... $ 11.63 $ 11.16 $ 11.17 $ 11.64
============ ============ =========== ===========
</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 and "Redemption of Shares--Deferred Sales Charge--Class B and
Class C Shares" herein.
40
<PAGE>
INTERMEDIATE GRADE PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $216,545,160 $216,641,211 $10,144,279 $33,269,282
============ ============ =========== ===========
Number of Shares Outstanding. 19,197,959 19,205,835 899,296 2,949,249
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 11.28 $ 11.28 $ 11.28 $ 11.28
Sales Charge* (for Class A
and Class D shares: 1.00% of
offering price (1.01% of net
asset value per share))..... .11 ** ** .11
------------ ------------ ----------- -----------
Offering Price............... $ 11.39 $ 11.28 $ 11.28 $ 11.39
============ ============ =========== ===========
</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 and "Redemption of Shares--Deferred Sales Charge--Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has been
selected as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive P2N, North Quincy,
Massachusetts 02171, acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc. 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Rogers & Wells, New York, New York is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 of each year. The Fund sends
to its shareholders at least quarterly reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After the end of each
year shareholders will receive federal income tax information regarding
dividends and capital gains distributions.
41
<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
42
<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.
43
<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.
44
<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 High Income, Investment Grade and
Intermediate Term Portfolios of Merrill Lynch Corporate Bond Fund, Inc. as of
September 30, 1996, 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 the 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, 1996 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 High Income,
Investment Grade and Intermediate Term Portfolios of Merrill Lynch Corporate
Bond Fund, Inc. as of September 30, 1996, 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 7, 1996
45
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Airlines--2.0% Piedmont Aviation, Inc.:
B+ B1 $ 1,304,000 Series 88J, 10.05% due 5/13/2005 $ 1,181,685 $ 1,293,822
B+ B1 1,116,000 Series 88J, 10.10% due 5/13/2007 999,021 1,111,519
B+ B1 3,767,000 Series 88J, 10.10% due 5/13/2009 3,327,542 3,804,237
B+ B1 2,710,000 Series 88J, 10.15% due 5/13/2011 2,366,806 2,629,946
B+ B1 104,000 Series 88J, 10.20% due 5/13/2012 90,874 99,333
B+ B1 870,000 Series 88K, 9.95% due 5/13/2003 796,746 870,465
B+ B1 2,226,000 Series 88K, 10% due 5/13/2004 2,026,506 2,204,152
B+ B1 2,666,000 Series 88K, 10.10% due 5/13/2008 2,374,020 2,691,194
B+ B1 2,550,000 Series 88K, 10.15% due 5/13/2010 2,251,293 2,585,585
B+ B1 200,000 Series C, 9.70% due 1/15/1999 201,676 200,603
B+ B1 100,000 Series C, 10.25% due 1/15/2007 103,706 100,540
B+ B1 1,985,000 Series E, 10.30% due 3/28/2007 1,855,291 2,002,706
B+ B1 1,950,000 Series F, 10.35% due 3/28/2011 1,999,718 1,921,618
B+ B1 50,000 Series G, 10.35% due 3/28/2011 51,424 49,272
B+ B1 450,000 Series H, 9.85% due 5/08/2005 454,617 441,427
B+ B1 1,500,000 Series H, 10% due 11/08/2012 1,493,250 1,392,630
B+ B1 536,000 Series I, 10% due 11/08/2012 545,048 497,633
United Air Lines Inc.:++
BB+ Baa1 4,000,000 10.02% due 3/22/2014 4,050,000 4,514,420
BB+ Baa1 2,000,000 9.08% due 10/26/2015 1,847,200 2,142,300
BB+ Baa1 7,100,000 9.35% due 4/07/2016 7,215,446 7,746,278
BB+ Baa1 10,500,000 9.21% due 1/21/2017 10,480,125 11,344,882
USAir Inc.:
CCC+ B3 30,000,000 9.625% due 2/01/2001 24,109,906 28,650,000
B+ B1 21,000,000 10.375% due 3/01/2013 20,768,125 21,000,000
B+ B1 5,000,331 Series 89A1, 9.33% due 1/01/2006++ 4,730,165 4,681,559
B+ B1 1,432,000 Series A, 10.70% due 1/15/2007 1,525,137 1,480,244
B+ B1 1,815,000 Series C, 10.70% due 1/15/2007 1,933,048 1,876,147
B+ B1 421,000 Series E, 10.70% due 1/01/2002 382,895 433,796
B+ B1 1,107,000 Series E, 10.70% due 1/15/2007 1,159,472 1,144,295
B+ B1 1,092,000 Series F, 10.70% due 1/01/2003 984,165 1,129,871
B+ B1 1,092,000 Series G, 10.70% due 1/01/2003 984,165 1,129,871
B+ B1 1,092,000 Series H, 10.70% due 1/01/2003 984,165 1,129,871
B+ B1 1,092,000 Series I, 10.70% due 1/01/2003 984,165 1,129,871
-------------- --------------
104,257,402 113,430,087
Automotive-- B B3 14,000,000 Collins & Aikman Corp., 11.50%
0.8% due 4/15/2006 14,000,000 14,770,000
B+ B1 21,875,000 Exide Corp., 10.75% due 12/15/2002 22,358,281 22,859,375
B B3 10,150,000 SPX Inc., 11.75% due 6/01/2002 10,175,000 11,190,375
-------------- --------------
46,533,281 48,819,750
Broadcasting & B+ B2 17,500,000 EZ Communications, Inc., 9.75%
Publishing-- due 12/01/2005 17,361,575 17,806,250
3.0% BB Ba3 30,000,000 Grupo Televisa S.A., 13.21% due
5/15/2008 (a) 16,664,189 18,712,500
BB- B1 21,500,000 Hollinger, Inc., 9.25% due
2/01/2006 20,925,312 20,801,250
B B3 14,000,000 The Katz Corp., 12.75% due
11/15/2002 14,313,750 15,540,000
B Caa 25,000,000 NWCG Holding Corp., 13.79% due
6/15/1999 (a) 17,395,053 20,125,000
Sinclair Broadcasting Group Inc.:
B B2 15,000,000 10% due 12/15/2003 15,036,250 15,056,250
B B2 42,315,000 10% due 9/30/2005 42,516,600 42,896,831
BB- B1 20,000,000 World Color Press, Inc., 9.125%
due 3/15/2003 20,019,375 19,900,000
B B2 2,000,000 Young Broadcasting Inc., 10.125%
due 2/15/2005 2,000,000 1,992,500
-------------- --------------
166,232,104 172,830,581
</TABLE>
46
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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/ CCC+ Caa $38,190,545 American Telecasting, Inc.,
Cable--10.8% 14.86% due 6/15/2004 (a) (b) $ 25,119,044 $ 28,547,432
B- B2 19,240,000 Argyle Television Inc., 9.75% due
11/01/2005 19,003,950 19,264,050
CCC Caa 79,117,000 Australis Media Ltd.,
13.81% due 5/15/2003 (a) (f) 49,085,415 46,679,030
BB- B2 59,000,000 Bell Cablemedia PLC, 11.86% due
9/15/2005 (a) 37,424,804 39,972,500
BB- B3 7,125,000 CAI Wireless Systems, Inc., 12.25%
due 9/15/2002 7,125,000 7,445,625
CCC+ Caa 10,500,000 CS Wireless Systems Inc.,
12% due 3/01/2006 (a) (c)+++ 6,153,419 5,407,500
Century Communications Corporation:
BB- Ba3 30,750,000 9.75% due 2/15/2002 30,486,250 31,403,438
BB- Ba3 17,750,000 9.50% due 3/01/2005 17,471,250 17,750,000
BB- B1 15,350,000 Comcast Corporation, 9.50% due
1/15/2008 14,511,000 15,676,188
B B2 55,000,000 Comcast UK Cable Partners Ltd.,
11.23% due 11/15/2007 (a) 35,007,451 34,925,000
B B2 50,000,000 Echostar Communications Corp.,
13.48% due 6/01/2004 (a) (i) 34,437,267 39,421,810
B NR 30,000,000 Echostar Satellite Broadcasting
Corp., 13.125% due 3/15/2004 (a) 19,328,919 20,700,000
B B2 25,000,000 Intermedia Capital Partners,
11.25% due 8/01/2006+++ 25,000,000 26,062,500
B B3 70,000,000 International Cabletel Inc., Series
B, 11.71% due 2/01/2006 (a) 42,431,291 42,175,000
Lenfest Communications, Inc.:
BB+ Ba3 50,000,000 8.375% due 11/01/2005 47,987,450 47,000,000
BB- B2 30,000,000 10.50% due 6/15/2006+++ 29,921,700 30,825,000
CCC+ Caa 20,000,000 People's Choice T.V. Corporation,
13.48% due 6/01/2004 (a) (g) 12,145,331 12,400,000
B- B3 35,000,000 SFX Broadcasting Inc., 10.75% due
5/15/2006 34,918,750 36,465,625
B- B2 45,000,000 UIH Australia/Pacific, Series B,
14% due 5/15/2006 (a) 24,128,629 24,187,500
United International Holdings,
Inc. (a):
B- B3 5,000,000 12.18% due 11/15/1999 3,388,238 3,525,000
B- B3 50,000,000 13.99% due 11/15/1999 (h) 32,768,012 35,250,000
B- B3 18,750,000 14% due 11/15/1999 12,284,601 13,125,000
BB+ Ba3 11,250,000 Videotron Groupe L'TEE, 10.25% due
10/15/2002 11,322,500 11,868,750
Videotron Holdings PLC:
B+ B3 50,000,000 12.08% due 7/01/2004 (a) 35,014,820 37,625,000
BB+ Ba3 3,300,000 10.625% due 2/15/2005 3,279,375 3,597,000
-------------- --------------
609,744,466 631,298,948
Building BB B1 15,000,000 Cemex S.A., 12.75% due 7/15/2006+++ 15,000,000 16,462,500
Materials--1.9% B- Caa 20,000,000 Inter-City Products Corp., 9.75%
due 3/01/2000 19,508,750 19,300,000
B- B2 20,550,000 Nortek Inc., 9.875% due 3/01/2004 20,362,365 20,036,250
B+ B3 27,220,000 Pacific Lumber Co., 10.50% due
3/01/2003 26,868,237 26,947,800
BB Ba2 29,084,000 US Gypsum Corp., 8.75% due 3/01/2017 25,890,006 28,575,030
-------------- --------------
107,629,358 111,321,580
Capital Goods-- B+ B1 21,450,000 Essex Group Inc., 10% due 5/01/2003 21,546,500 22,091,819
0.8% B- B3 25,000,000 International Wire Group, 11.75%
due 6/01/2005 24,986,250 26,562,500
-------------- --------------
46,532,750 48,654,319
</TABLE>
47
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Chemicals--1.9% B+ Ba3 $15,000,000 Agriculture Minerals & Chemicals
Company, L.P., 10.75% due
9/30/2003 $ 15,060,000 $ 15,918,750
G-I Holdings, Inc.:
B+ Ba3 20,469,000 11.51% due 10/01/1998 (a) 16,342,374 17,692,892
B+ Ba3 19,502,000 10% due 2/15/2006 20,184,570 19,599,510
B+ B2 25,000,000 Harris Chemical North America
Inc., 10.25% due 7/15/2001 25,000,000 25,562,500
BB+ Ba3 30,000,000 Viridian Inc., 9.75% due 4/01/2003 29,829,687 31,200,000
-------------- --------------
106,416,631 109,973,652
Communications-- NR* NR* 35,000,000 Brooks Fiber Properties Inc.,
9.7% 11.56% due 3/01/2006 (a) 20,824,054 21,612,500
NR* NR* 29,500,000 Comtel Brasileir Ltd., 10.75% due
9/26/2004+++ 29,500,000 30,200,625
B+ B3 53,472,000 Comunicacion Celular,
12.76% due 11/15/2003 (a) (j) 32,405,554 33,152,640
CCC- B3 20,000,000 Dial Call Communications, 13.83%
due 4/15/2004 (a) 13,458,581 13,900,000
B- B3 82,250,000 Millicom International Cellular
S.A., 13.53% due 6/01/2006 (a)+++ 44,626,148 47,293,750
Mobilemedia Communication, Inc.:
B- B3 33,000,000 11.58% due 12/01/2003 (a) 24,845,986 22,110,000
B- B3 10,126,000 9.375% due 11/01/2007 9,013,705 8,151,430
B- B3 80,000,000 Nextel Communications Inc.,
12.02% due 8/15/2004 (a) 55,784,199 51,700,000
NR* NR* 21,000,000 Page Mart Inc., 12.74% due
11/01/2003 (a) 15,946,703 16,432,500
B B2 20,000,000 Paging Network, Inc., 11.75% due
5/15/2002 20,387,500 21,450,000
B B3 46,210,000 PanAmSat L.P., 11.09% due
8/01/2003 (a) 38,139,920 42,166,625
Rogers Communications Inc.:
BB- B2 35,925,000 10.875% due 4/15/2004 36,431,094 37,182,375
BB- B2 2,000,000 9.125% due 1/15/2006 1,897,500 1,895,000
BB- B1 15,000,000 Telecom Argentina S.A., 8.375%
due 10/18/2000 12,159,375 14,625,000
BB- B1 40,000,000 Telefonica de Argentina S.A.,
11.875% due 11/01/2004 38,763,075 42,600,000
Teleport Communications Group Inc.:
B B1 20,000,000 9.875% due 7/01/2006 19,817,000 20,550,000
B B1 30,000,000 11.04% due 7/01/2007 (a) 18,075,266 19,275,000
BB B1 75,000,000 TeleWest Communications PLC,
11.02% due 10/01/2007 (a) 48,802,645 47,718,750
B- B2 19,730,000 USA Mobile Communications Holdings,
Inc., 9.50% due 2/01/2004 18,997,875 19,039,450
B+ B1 25,000,000 Vanguard Cellular Systems,
9.375% due 4/15/2006 24,975,250 24,812,500
B- B3 50,338,000 Wireless One Inc., 13.50% due
8/01/2006 (a) 26,761,011 27,560,055
-------------- --------------
551,612,441 563,428,200
Computer BB- Ba1 38,500,000 Advanced Micro Devices, 11%
Services--1.8% due 8/01/2003 38,938,750 39,895,625
ComputerVision Corp.:
B- B3 15,000,000 11.375% due 8/15/1999 14,473,750 15,787,500
B B2 12,500,000 8% due 12/01/2009 6,802,472 10,140,625
B- B3 40,000,000 Dictaphone Corp., 11.75% due
8/01/2005 39,705,625 36,600,000
-------------- --------------
99,920,597 102,423,750
</TABLE>
48
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Conglomerates-- B+ B3 $39,700,000 Coltec Industries, Inc., 10.25%
1.9% due 4/01/2002 $ 40,735,075 $ 41,387,250
CCC+ B3 20,000,000 The Interlake Corp., 12.125%
due 3/01/2002 20,147,500 21,000,000
B+ B2 10,000,000 JB Poindexter & Co., Inc.,
12.50% due 5/15/2004 10,000,000 9,800,000
NR* NR* 9,100,000 MacAndrews & Forbes Holdings,
Inc., 13% due 3/01/1999 8,568,400 9,145,500
B+ B3 26,000,000 Sequa Corp., 9.375% due 12/15/2003 25,146,562 26,195,000
-------------- --------------
104,597,537 107,527,750
Consumer B NR* 39,760,000 Coleman Holdings, Inc.,
Products--3.5% 11.57% due 5/27/1998 (a) 32,763,523 33,994,800
B+ Ba3 15,000,000 Coty Inc., 10.25% due 5/01/2005 15,000,000 15,937,500
B+ Ba2 38,880,000 International Semi-Tech
Microelectronics, Inc., 13.62%
due 8/15/2003 (a) 23,585,158 23,814,000
B- B2 16,000,000 Polymer Group Inc., 12.25% due
7/15/2002 16,323,750 17,520,000
Revlon Consumer Products Corp.:
B B2 3,500,000 9.50% due 6/01/1999 3,199,935 3,508,750
B B2 27,000,000 9.375% due 4/01/2001 24,935,005 27,472,500
B- B3 9,500,000 10.50% due 2/15/2003 8,795,000 9,880,000
B- B2 36,650,000 Samsonite Corporation, 11.125%
due 7/15/2005 36,088,625 38,940,625
B+ B1 32,550,000 Sealy Corp., 9.50% due 5/01/2003 32,274,650 32,387,250
-------------- --------------
192,965,646 203,455,425
Convertible B B2 6,195,000 Builders Transport, Inc., 8% due
Bonds**--0.3% 8/15/2005 (3) 3,614,250 5,203,800
B+ B2 2,000,000 OHM Corp., 8% due 10/01/2006 (4) 1,400,000 1,807,500
BBB+ Ba1 6,375,000 Quantum Health Resources Inc.,
4.75% due 10/01/2000 (2) 5,956,562 5,833,125
B Caa 3,659,000 UNC, Inc., 7.50% due 3/31/2006 (1) 2,151,592 3,450,894
-------------- --------------
13,122,404 16,295,319
Diversified-- B B1 25,000,000 Foamex Capital Corp., 11.25% due
0.6% 10/01/2002 24,964,375 26,125,000
B- B3 10,000,000 RBX Corporation, 11.25% due
10/15/2005 10,006,250 9,400,000
-------------- --------------
34,970,625 35,525,000
Energy--8.6% B+ Ba1 35,000,000 AES Corporation (The), 10.25% due
7/15/2006 35,000,000 37,275,000
BB Ba2 30,000,000 CE Casecnan Water & Energy Co.,
11.45% due 11/15/2005 30,000,000 31,406,250
BB Ba2 24,000,000 California Energy Company, Inc.,
9.875% due 6/30/2003 24,122,500 24,540,000
B+ B1 49,500,000 Clark R&M Holdings, Inc., 11% due
2/15/2000 (a) 34,490,633 35,454,375
B+ B2 9,000,000 Clark USA Inc., Series B, 10.875%
due 12/01/2005 9,000,000 9,180,000
NR* NR* 18,500,000 Consolidated Hydro, Inc.,
12.22% due 7/15/2003 (a) 14,828,506 4,625,000
B+ Ba1 20,000,000 Global Marine Inc., 12.75% due
12/15/1999 20,047,500 21,650,000
BB- Ba3 10,000,000 Gulf Canada Resources Ltd., 9.25%
due 1/15/2004 9,726,605 10,262,500
B- B1 22,000,000 KCS Energy Inc., 11% due 1/15/2003 22,723,750 23,925,000
Maxus Energy Corp.:
BB- B1 17,750,000 9.875% due 10/15/2002 16,726,250 18,016,250
BB- B1 7,550,000 11.50% due 11/15/2015 7,363,000 7,936,938
BB Ba2 8,750,000 Noble Drilling Corp., 9.25% due
10/01/2003 8,925,000 9,078,125
BBB- Baa3 28,000,000 Oleoducto Centrale S.A., 9.35% due
9/01/2005+++ 27,967,500 27,819,120
B+ Ba2 15,000,000 Rowan Companies, Inc., 11.875% due
12/01/2001 15,085,000 16,050,000
BB- B1 25,000,000 Seagull Energy Corp., 8.625% due
8/01/2005 24,990,000 24,812,500
CCC+ B3 4,016,000 Tesoro Petroleum Corp., 12.75% due
3/15/2001 3,473,254 4,076,240
NR* NR* 17,000,000 Transamerican Exploration Corp., 14%
due 9/19/1998+++ 16,830,000 17,000,000
</TABLE>
49
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds (continued) High Income Portfolio
<S> <S> <S> <C> <S> <C> <C>
Energy Transamerican Refining Corp.:
(concluded) CCC+ Caa $60,000,000 19.40% due 2/15/2002 (a) $ 45,383,400 $ 45,000,000
CCC+ Caa 10,000,000 16.50% due 2/15/2002 9,504,286 9,600,000
BB- B2 50,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 50,018,750 53,250,000
B+ B1 31,525,000 Triton Energy Corp., 10.61% due
11/01/1997 (a) 28,066,853 29,081,813
BB- B1 46,000,000 Yacimientos Petroliferos Fiscales
S.A. (YPF) (Sponsored), 8% due
2/15/2004 37,389,250 43,125,000
-------------- --------------
491,662,037 503,164,111
Entertainment-- B- B2 50,000,000 AMF Group Inc., Series B, 12.41%
1.8% due 3/15/2006 (a) 29,083,467 30,250,000
Marvel Holdings Inc.:
B- Caa 15,000,000 9.125% due 2/15/1998 13,305,750 14,100,000
B- Caa 4,500,000 12.07% due 4/15/1998 (a) 3,723,111 3,583,125
B B2 40,000,000 Six Flags Theme Parks, 12.18% due
6/15/2005 (a) 32,734,260 35,300,000
Spectravision Inc. (k):
D Caa 39,250,000 11.74% due 10/01/2001 (a) 33,732,587 20,998,750
D Ca 24,040,000 11.65% due 12/01/2002++++ 21,422,831 2,524,200
-------------- --------------
134,002,006 106,756,075
Financial NR* Ba3 12,000,000 First Nationwide Escrow, 10.625%
Services-- due 10/01/2003+++ 12,000,000 12,555,000
1.5% B B2 17,000,000 First Nationwide Holdings, 12.50%
due 4/15/2003 16,806,710 18,445,000
BB- B1 15,000,000 Olympic Financial Ltd., 13% due
5/01/2000 15,000,000 16,950,000
BB+ B1 9,000,000 Penncorp Financial Group Inc.,
9.25% due 12/15/2003 9,090,000 9,270,000
Reliance Group Holdings, Inc.:
BB+ Ba3 7,425,000 9% due 11/15/2000 6,798,125 7,517,813
BB- B1 22,575,000 9.75% due 11/15/2003 21,362,500 22,857,188
-------------- --------------
81,057,335 87,595,001
Food & Chiquita Brands International Inc.:
Beverage--3.4% B+ B1 30,000,000 9.125% due 3/01/2004 29,585,625 30,150,000
B+ B1 20,000,000 10.25% due 11/01/2006 19,881,400 20,700,000
NR* NR* 25,692,000 Cumberland Farms Inc., DE, 10.50%
due 10/01/2003 24,511,045 25,049,700
B B3 23,450,000 Curtice Burns Food, Inc., 12.25%
due 2/01/2005 23,562,125 23,098,250
B- B3 26,463,000 Envirodyne Industries, Inc.,
10.25% due 12/01/2001 25,608,891 24,213,645
CCC+ Caa 25,000,000 Fresh Del Monte Corp., 10% due
5/01/2003 25,012,500 23,750,000
Specialty Foods Corp.:
B B3 19,250,000 10.25% due 8/15/2001 18,784,375 17,902,500
B B3 12,000,000 11.125% due 10/01/2002 11,970,000 11,280,000
B+ B1 20,000,000 Texas Bottling Group, Inc., 9%
due 11/15/2003 20,002,500 20,250,000
-------------- --------------
198,918,461 196,394,095
Foreign BB Ba2 35,000,000 Banco Nationale de Commerce,
Government 7.25% due 2/02/2004 29,613,750 30,219,819
Obligations-- BB- B1 25,000,000 Republic of Argentina, 8.375% due
0.9% 12/20/2003 20,075,000 22,586,074
-------------- --------------
49,688,750 52,805,893
Gaming--4.6% BB Ba3 30,000,000 Bally's Park Place, Inc., 9.25%
due 3/15/2004 28,485,200 32,325,000
B+ B2 37,000,000 GB Property Funding Corp.,
10.875% due 1/15/2004 35,072,500 32,375,000
BB- B1 15,000,000 GNF Corp., 10.625% due 4/01/2003 14,975,000 16,462,500
</TABLE>
50
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Gaming D NR* $ 7,682,000 Goldriver Hotel & Casino Corp.,
(concluded) 13.375% due 8/31/1999 (k) $ 8,609,882 $ 2,496,650
BB Ba3 20,000,000 Grand Casinos Inc., 10.125% due
12/01/2003 19,837,500 19,700,000
D Caa 60,115,000 Harrah's Jazz Co., 14.25% due
11/15/2001 49,536,050 33,664,400
B+ B2 20,000,000 Hollywood Casino Corp.,
12.75% due 11/01/2003 19,153,426 20,000,000
BB- Ba3 30,000,000 Showboat Inc., 9.25% due 5/01/2008 30,107,350 30,000,000
BB- B1 83,000,000 Trump Atlantic City, 11.25% due
5/01/2006 82,139,062 81,962,500
-------------- --------------
287,915,970 268,986,050
Health Services-- B+ B1 45,200,000 Beverly Enterprises, Inc., 9%
1.7% due 2/15/2006 44,200,550 44,070,000
B B 14,190,000 MEDIQ, Inc., 12.125% due 7/01/1999 14,252,600 15,378,412
B+ Ba3 20,000,000 Tenet Healthcare Corp., 10.125%
due 3/01/2005 20,062,500 21,750,000
B B3 20,000,000 Unilab Corp., 11% due 4/01/2006 19,843,480 15,400,000
-------------- --------------
98,359,130 96,598,412
Home Builders-- Del E. Webb Corp.:
1.6% B+ Ba3 3,500,000 10.875% due 3/31/2000 3,524,375 3,552,500
B- B2 7,000,000 9.75% due 3/01/2003 6,944,910 7,035,000
B- B2 4,000,000 9% due 2/15/2006 3,140,000 3,860,000
B B1 20,000,000 Greystone Homes Inc., 10.75% due
3/01/2004 19,115,000 19,900,000
BB Ba2 20,000,000 Ryland Group, Inc. (The), 10.50%
due 7/01/2006 19,697,400 20,050,000
BB Ba2 36,300,000 U.S. Home Corp., 9.75% due 6/15/2003 36,367,250 36,572,250
-------------- --------------
88,788,935 90,969,750
Hotels--1.9% BB- Ba3 80,000,000 HMC Acquisition Properties, 9% due
12/15/2007 79,272,500 77,200,000
BB- B1 35,000,000 HMH Properties Inc., 9.50% due
5/15/2005 34,017,653 35,262,500
-------------- --------------
113,290,153 112,462,500
Industrial Thermadyne Industries, Inc.:
Services--0.2% CCC B3 5,706,000 10.25% due 5/01/2002 5,711,822 5,848,650
CCC Caa 7,912,000 10.75% due 11/01/2003 7,914,802 8,090,020
-------------- --------------
13,626,624 13,938,670
Industrials-- BB Ba3 23,500,000 Grupo Televisa S.A., 11.875%
0.4% due 5/15/2006 25,141,562 25,086,250
Metals & B- B2 40,000,000 Kaiser Aluminum & Chemical Corp.,
Mining--1.4% 12.75% due 2/01/2003 40,803,125 43,425,000
Maxxam Group, Inc.:
B- B3 5,000,000 11.25% due 8/01/2003 4,918,750 5,150,000
B- B3 41,155,000 12.37% due 8/01/2003 (a) 32,919,534 30,351,812
-------------- --------------
78,641,409 78,926,812
Packaging-- CCC- Ca 35,775,000 Anchor Glass Container Corp.,
1.3% 9.875% due 12/15/2008 32,401,062 4,293,000
B- Caa 21,500,000 Ivex Packaging Corp., 13.22% due
3/15/2005 (a) 13,807,427 13,706,250
Owens-Illinois, Inc.:
BB Ba3 20,000,000 11% due 12/01/2003 20,810,000 21,900,000
B+ B2 6,000,000 9.95% due 10/15/2004 5,931,250 6,255,000
B+ Ba3 6,000,000 Plastic Container Corp., 10.75%
due 4/01/2001 6,022,500 6,210,000
B+ B3 15,000,000 Printpack Inc., 10.625% due
8/15/2006+++ 15,000,000 15,375,000
B- B3 10,301,000 Silgan Holdings Inc., 13.25% due
12/15/2002 10,301,000 10,507,020
-------------- --------------
104,273,239 78,246,270
</TABLE>
51
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Paper--6.3% BB Ba3 $35,500,000 APP International Finance,
11.75% due 10/01/2005 $ 35,306,250 $ 36,920,000
Container Corporation of America:
B+ B1 15,420,000 9.75% due 4/01/2003 15,433,400 15,689,850
B+ B1 13,000,000 11.25% due 5/01/2004 13,000,000 13,828,750
B B3 25,000,000 Crown Paper Co., 11% due 9/01/2005 23,108,781 24,750,000
BB- Ba3 50,000,000 Doman Industries Ltd., 8.75% due
3/15/2004 47,581,250 46,750,000
Fort Howard Corp.:
B+ B1 10,000,000 9.25% due 3/15/2001 10,000,000 10,250,000
B B2 35,250,000 9% due 2/01/2006 32,561,250 34,897,500
B B3 35,000,000 Gaylord Container Corp., 11.50%
due 5/15/2001 35,401,250 37,187,500
P.T. Indah Kiat International
Finance:
BB Ba3 3,000,000 11.875% due 6/15/2002 3,000,000 3,202,500
BB Ba2 14,500,000 12.50% due 6/15/2006 14,572,500 15,551,250
B+ B3 25,500,000 Repap New Brunswick, 10.625% due
4/15/2005 25,597,500 25,755,000
BB- B2 25,000,000 Repap Wisconsin Inc., 9.25% due
2/01/2002 23,537,500 25,437,500
B B3 30,000,000 Riverwood International Corp.,
10.875% due 4/01/2008 30,105,000 29,700,000
B+ B1 16,000,000 S.D. Warren Co., 12% due 12/15/2004 16,000,000 17,260,000
Stone Container Corp.:
B+ B1 15,000,000 9.875% due 2/01/2001 13,948,672 15,112,500
BB- B1 15,000,000 10.75% due 10/01/2002 14,825,000 15,787,500
-------------- --------------
353,978,353 368,079,850
Restaurants-- CCC+ Caa 20,000,000 Flagstar Corp., 11.375% due
0.7% 9/15/2003 20,092,500 11,850,000
B+ Ba3 27,000,000 Foodmaker, Inc., 9.75% due
11/01/2003 26,216,200 26,055,000
-------------- --------------
46,308,700 37,905,000
Retail B+ B1 20,000,000 Specialty Retailers Group,
Specialty--0.4% Inc., 10% due 8/15/2000 20,000,000 20,100,000
Steel--1.0% B B3 20,000,000 Republic Engineered Steel Inc.,
9.875% due 12/15/2001 19,455,000 19,200,000
B B2 23,000,000 Weirton Steel Corporation, 10.75%
due 6/01/2005 22,413,750 22,425,000
BB- B1 20,000,000 Wheeling-Pittsburg Steel Corp.,
9.375% due 11/15/2003 18,670,000 19,100,000
-------------- --------------
60,538,750 60,725,000
Supermarkets-- Penn Traffic Co.:
1.8% BB- B1 10,000,000 8.625% due 12/15/2003 8,369,260 8,250,000
BB- B1 19,000,000 11.50% due 4/15/2006 17,086,250 16,815,000
B- B2 20,325,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 18,787,125 18,343,312
Ralph's Grocery Co.:
B B1 20,000,000 10.45% due 6/15/2004 18,951,699 20,450,000
B B1 10,000,000 10.45% due 6/15/2004 9,702,500 10,162,500
B- B3 31,000,000 Smith's Food & Drug Centers Inc.,
11.25% due 5/15/2007 31,065,000 33,015,000
-------------- --------------
103,961,834 107,035,812
Textiles--0.4% B+ B2 25,000,000 Westpoint Stevens Inc., 9.375%
due 12/15/2005 25,100,000 25,093,750
</TABLE>
52
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Transportation-- BB- Ba2 $25,000,000 Eletson Holdings, Inc., 9.25%
2.3% due 11/15/2003 $ 24,472,500 $ 24,374,244
BB Ba2 20,000,000 Gearbulk Holdings, Ltd., 11.25%
due 12/01/2004 20,518,750 21,600,000
Transportacion Maritima Mexicana,
S.A. de C.V.:
BB- Ba2 5,475,000 8.50% due 10/15/2000 3,175,500 5,214,937
BB- Ba2 20,000,000 9.25% due 5/15/2003 17,092,750 19,050,000
B- B3 54,606,000 Transtar Holdings L.P., 12.04%
due 12/15/2003 (a) 38,785,079 41,295,787
BB Ba2 20,000,000 Viking Star Shipping Co., Inc.,
9.625% due 7/15/2003 20,045,000 20,450,000
-------------- --------------
124,089,579 131,984,968
Utilities-- Beaver Valley Funding Corp.:
5.8% B+ B1 8,070,000 8.625% due 6/01/2007 7,099,175 7,653,144
B+ B1 34,469,000 9% due 6/01/2017 31,081,506 31,057,084
CTC Mansfield Funding Corp.:
B+ Ba3 15,950,000 10.25% due 3/30/2003 15,903,640 16,293,801
B+ Ba3 25,000,000 11.125% due 9/30/2016 26,416,875 26,502,999
BB Ba2 15,000,000 Cleveland Electric Illuminating
Co., 9.50% due 5/15/2005 14,971,200 15,413,100
BB- Ba3 27,000,000 El Paso Electric Company, 9.40%
due 5/01/2011 26,990,000 27,945,000
BB- B1 40,000,000 Metrogas S.A., 12% due 8/15/2000 40,031,875 42,800,000
Midland Cogeneration Venture
Limited Partnership:
BB- Ba3 4,110,433 10.33% due 7/23/2002++ 4,399,884 4,341,645
BB- Ba3 20,826,836 10.33% due 7/23/2002++ 21,575,578 21,998,345
B- B2 11,250,000 11.75% due 7/23/2005 11,310,000 12,137,062
B- B2 5,500,000 13.25% due 7/23/2006 6,002,565 6,274,015
NR* NR* 15,886,164 Sunflower Electric Power Corp.,
8% due 12/31/2016+++++ 10,420,874 12,907,509
B+ B1 20,000,000 Texas-New Mexico Power Corp.,
10.75% due 9/15/2003 20,065,000 21,150,000
BBB- NR* 42,000,000 Trans Gas de Occidente, 9.79% due
11/01/2010+++ 42,075,000 41,632,500
Tucson Electric & Power Co.+++++:
NR* NR* 33,847,782 10.21% due 1/01/2009 32,005,359 32,497,255
NR* NR* 17,426,207 10.732% due 1/01/2013 16,252,461 16,815,593
-------------- --------------
326,600,992 337,419,052
Waste Manage- D Ca 23,700,000 Mid-American Waste Systems, Inc.,
ment--0.2% 12.25% due 2/15/2003 23,667,250 14,220,000
Total Investments in Bonds--87.2% 5,034,146,311 5,079,477,682
Shares Held
Preferred Stocks
Broadcasting & 421,000 K-III Communications Corp. 10,562,750 11,209,125
Publishing 144,358 K-III Communications Corp.,
- --0.6% Series B 14,545,939 14,363,649
125,000 K-III Communications Corp.,
Series C+++ 12,500,000 11,750,000
-------------- --------------
37,608,689 37,322,774
Broadcasting/ 62,705 Cablevision Systems Corp.,
Cable--0.1% Series M 5,851,695 5,972,651
Energy--0.1% 29,517 Consolidated Hydro, Inc. 14,891,917 3,542,040
250 Transamerican Energy 25,000 28,031
-------------- --------------
14,916,917 3,570,071
Entertainment--1.4% 78,714 Time Warner Inc. (Series K)+++ 78,536,311 82,256,130
</TABLE>
53
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value
Industries Held Issue Cost (Note 1a)
Preferred Stocks (concluded) High Income Portfolio
<S> <C> <S> <C> <C>
Paper--0.5% 295,000 S.D. Warren Co.+++ $ 8,333,750 $ 8,628,750
535,000 S.D. Warren Co., Series B 15,072,190 18,858,750
-------------- --------------
23,405,940 27,487,500
Steel--0.2% 550,000 USX Capital LLC 13,750,000 13,681,250
Utilities--0.2% 100,000 El Paso Electric Company 10,000,000 11,475,000
Total Investments in Preferred
Stocks--3.1% 184,069,552 181,765,376
Common Stocks
Communications--0.1% 210,096 Echostar Communications Corp. 1,492,461 5,751,378
Consumer-- 200,369 Culligan Water Technologies Inc. 1,686,248 7,588,976
Products--0.2% 200,369 Samsonite Corp. 2,398,992 5,472,578
-------------- --------------
4,085,240 13,061,554
Energy--0.0% 57,237 Mesa Inc. 199,648 236,103
Food & 147,263 Foodbrands America 5,771,245 1,803,972
Beverage--0.1% 763,000 Seven-UP/RC Bottling Company 13,403,214 7,725,375
-------------- --------------
19,174,459 9,529,347
Gaming--0.0% 75,500 Goldriver Hotel & Casino Corporation
(Class B)(d)(k) 540,045 0
Hotels--0.0% 6,539 Buckhead America Corp. 36,373 40,460
Industrial Services 11,400 Thermadyne Industries, Inc. 165,300 239,400
- --0.0%
Supermarkets--0.1% 120,194 ABCO Markets Inc. (k)+++ 4,054,875 0
521,389 Grand Union Co. 29,475,625 3,258,681
-------------- --------------
33,530,500 3,258,681
Total Investments in Common
Stocks--0.5% 59,224,026 32,116,923
Trusts & Warrants
Broadcasting/ 177,500 American Telecasting Inc.
Cable--0.0% (Warrants) (e) 413,723 931,875
20,000 People's Choice T.V. Corp.
(Warrants) (e) 117,784 20,000
-------------- --------------
531,507 951,875
Communications--0.0% 53,472 Comunicacion Celular (Warrants)
(e)+++ 109,680 294,096
57,040 Page Mart Inc. (Warrants) (e) 236,127 385,020
-------------- --------------
345,807 679,116
Energy--0.1% 18,000 Consolidated Hydro Inc. (Warrants) (e) 390,123 258,750
407,677 Transamerican Refining Corp.
(Warrants) (e) 950,408 917,273
-------------- --------------
1,340,531 1,176,023
Financial Services--0.0% 7,194 Reliance Group Holdings, Inc.
(Warrants) (e) 0 0
Gaming--0.0% 7,550 Goldriver Hotel & Casino Corp.
Liquidating Trust+++ 192,320 68,514
113,386 Trump Castle Funding, Inc.
(Warrants) (e) 0 0
-------------- --------------
192,320 68,514
Paper--0.0% 60,000 S.D. Warren Co. (Warrants) (e) 165,310 187,500
Total Investments in Trusts &
Warrants--0.1% 2,575,475 3,063,028
</TABLE>
54
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value
Industries Amount Issue Cost (Note la)
Short-Term Securities High Income Portfolio
<S> <C> <S> <C> <C>
Commercial $15,000,000 Alpine Securitization Co., 5.40%
Paper***-- due 11/13/1996 $ 14,903,250 $ 14,903,250
7.1% 30,000,000 Ciesco L.P., 5.28% due 10/16/1996 29,934,000 29,934,000
70,448,000 General Electric Capital Corp.,
5.80% due 10/01/1996 70,448,000 70,448,000
15,000,000 Lucent Technologies, Inc., 5.36%
due 11/04/1996 14,924,067 14,924,067
10,000,000 McKenna Triangle National Corp.,
5.37% due 11/04/1996 9,949,283 9,949,283
50,000,000 Morgan Stanley Group, Inc., 5.30%
due 10/25/1996 49,823,333 49,823,333
National Fleet Funding Corp.:
25,000,000 5.32% due 10/01/1996 25,000,000 25,000,000
35,000,000 5.29% due 10/02/1996 34,994,857 34,994,857
15,000,000 5.27% due 10/18/1996 14,962,671 14,962,671
60,000,000 Navistar Financial Corp., 5.75%
due 10/21/1996 59,808,333 59,808,333
60,000,000 Onyx Corp., 5.85% due 10/21/1996 59,805,000 59,805,000
30,000,000 Xerox Corporation, 5.33% due
11/05/1996 29,844,542 29,844,542
-------------- --------------
414,397,336 414,397,336
Total Investments in Short-Term
Securities--7.1% 414,397,336 414,397,336
Total Investments--98.0% $5,694,412,700 5,710,820,345
==============
Other Assets Less Liabilities--2.0% 117,402,861
--------------
Net Assets--100.0% $5,828,223,206
==============
</TABLE>
[FN]
++Subject to principal paydowns.
++++Represents a pay-in-kind security which may pay
interest/dividends in additional face/shares.
*Not Rated.
**Industry classifications for convertible bonds are:
(1)Conglomerates; (2) Health Services; (3) Transportation Services;
(4)Waste Management.
***Commercial Paper is traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase by
the Portfolio.
(a)Represents 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 four common shares of CS
Wireless Systems Inc.
(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)Each $1,000 face amount contains one warrant of Australis Media
Ltd.
(g)Each $1,000 face amount contains one warrant of Peoples Choice
T.V. Corporation.
(h)Each $1,000 face amount contains one warrant of United
International Holdings, Inc.
(i)Each $1,000 face amount contains six warrants of Echostar
Communications Corp.
(j)Each $1,000 face amount contains one warrant of Comunicacion
Celular.
(k)Non-income producing security.
See Notes to Financial Statements.
+++Restricted securities as to resale. The value of the Portfolio's
investments in restricted securities was approximately $435,851,000,
representing 7.5% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <S> <C> <C>
ABCO Markets Inc. 11/19/1992 $ 4,054,875 $ 0
CS Wireless Systems Inc.,
12% due 3/01/2006 2/16/1996--9/09/1996 6,153,419 5,407,500
Cemex S.A., 12.75% due 7/15/2006 7/16/1996 15,000,000 16,462,500
Comtel Brasileir Ltd.,
10.75% due 9/26/2004 9/18/1996 29,500,000 30,200,625
Comunicacion Celular S.A. (Warrants) 11/17/1995--9/06/1996 109,680 294,096
First Nationwide Escrow,
10.625% due 10/01/2003 4/12/1996 12,000,000 12,555,000
Goldriver Hotel & Casino
Corp., Liquidating Trust 8/31/1992--11/17/1992 192,320 68,514
Intermedia Capital Partners,
11.25% due 8/01/2006 7/19/1996 25,000,000 26,062,500
K-III Communications Corp. Series C 1/19/1996 12,500,000 11,750,000
Lenfest Communications, Inc.,
10.50% due 6/15/2006 11/08/1995--6/10/1996 29,921,700 30,825,000
Millicom International Cellular S.A.,
13.53% due 6/01/2006 5/24/1996--7/12/1996 44,626,148 47,293,750
Oleoducto Centrale S.A.,
9.35% due 9/01/2005 6/21/1995--10/19/1995 27,967,500 27,819,120
Printpack Inc., 10.625% due 8/15/2006 8/15/1996 15,000,000 15,375,000
S.D. Warren Co. 9/20/1995 8,333,750 8,628,750
Sunflower Electric Power Corp.,
8% due 12/31/2016 11/29/1991--8/23/1995 10,420,874 12,907,509
Time Warner Inc. (Series K) 4/03/1996--9/06/1996 78,536,311 82,256,130
Trans Gas de Occidente,
9.79% due 11/01/2010 11/02/1995--2/20/1996 42,075,000 41,632,500
Transamerican Exploration Corp.,
14% due 9/19/1998 9/17/1996 16,830,000 17,000,000
Tucson Electric & Power Co.:
10.21% due 1/01/2009 7/27/1993--4/01/1996 32,005,359 32,497,255
10.732% due 1/01/2013 3/01/1993--7/16/1993 16,252,461 16,815,593
Total $426,479,397 $435,851,342
============ ============
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
55
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<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 Bonds
Obligations--5.6% & Notes:
AAA Aaa $ 6,000,000 5.75% due 9/30/1997 $ 5,994,453 $ 5,996,220
AAA Aaa 11,000,000 8.875% due 11/15/1997 11,354,063 11,348,920
AAA Aaa 5,000,000 9.25% due 8/15/1998 5,289,844 5,272,650
AAA Aaa 9,000,000 6.375% due 5/15/1999 8,990,156 9,026,730
AAA Aaa 3,500,000 5.875% due 6/30/2000 3,502,835 3,440,395
AAA Aaa 16,000,000 6.25% due 8/31/2000 16,012,734 15,909,920
AAA Aaa 2,500,000 7.50% due 5/15/2002 2,634,375 2,617,575
AAA Aaa 5,000,000 7.25% due 5/15/2004 5,510,938 5,180,450
AAA Aaa 6,000,000 7.25% due 8/15/2004 6,110,625 6,215,640
AAA Aaa 4,000,000 7.875% due 11/15/2004 4,612,500 4,298,760
AAA Aaa 3,000,000 7% due 7/15/2006 3,007,813 3,062,340
AAA Aaa 10,000,000 6% due 2/15/2026 8,952,762 8,787,500
-------------- --------------
81,973,098 81,157,100
Asset-Backed AAA Aaa 15,000,000 Advanta Corp., 5.639% due
Securities++-- 6/15/2005 (a) 14,995,313 14,990,550
5.8% AAA Aaa 31,255,000 Banc One, Master Trust (Series B),
7.55% due 12/15/1999 31,858,028 31,713,823
AAA Aaa 10,000,000 Citibank Credit Card Master
Trust I, 5.67% due 9/15/2005 9,992,240 9,984,300
AAA Aaa 28,000,000 Fifth Third Auto Grantor Trust,
6.45% due 7/15/2002 27,989,062 28,052,500
-------------- --------------
84,834,643 84,741,173
Banking-- AA- Aa3 2,000,000 Banc One, Dayton, 6.625% due
11.0% 4/15/2003 2,082,060 1,943,020
AA- Aa3 3,000,000 Banc One, Milwaukee, 6.625% due
4/15/2003 3,123,090 2,914,530
BankAmerica Corp.:
A+ A1 4,000,000 6.65% due 5/01/2001 3,996,120 3,972,680
A+ A1 3,000,000 7.125% due 5/12/2005 3,087,560 2,959,980
A A2 5,000,000 7.125% due 5/01/2006 4,846,700 4,921,500
A- A2 10,300,000 Chase Manhattan Bank Corporation,
8.65% due 2/13/1999 10,805,215 10,773,285
A+ A1 7,000,000 Citicorp, 8.80% due 2/01/2000 7,000,000 7,064,470
A- A2 9,000,000 Comerica Bank, 7.875% due 9/15/2026 8,891,820 9,049,590
A+ A1 6,000,000 Fifth Third Bank, 6.75% due
7/15/2005 5,960,400 5,778,480
First Bank System, Inc.:
A1 Aa3 10,000,000 6.375% due 3/15/2001 9,850,727 9,740,300
A- A3 8,500,000 6.875% due 9/15/2007 8,421,290 8,134,925
A A2 3,000,000 First Chicago Corp., 9% due
6/15/1999 3,182,940 3,152,520
First Union Corp.:
A- A2 9,000,000 6.75% due 1/15/1998 9,069,660 9,024,480
A- A2 6,350,000 7.50% due 7/15/2006 6,352,921 6,390,386
A- A3 5,000,000 Golden West Financial Corp.,
9.15% due 5/23/1998 5,678,700 5,202,150
BBB+ A3 5,000,000 MBNA Corporation, 5.775% due
9/14/1998 5,000,000 5,003,370
NationsBank Corporation:
A A2 5,000,000 7.50% due 2/15/1997 4,995,700 5,031,900
A A2 4,000,000 6.50% due 8/15/2003 3,804,120 3,845,320
A- A3 6,000,000 7.75% due 8/15/2015 6,000,000 5,988,540
Norwest Corp.:
AA- Aa3 17,000,000 6.25% due 4/15/1999 16,944,240 16,884,060
AA- Aa3 3,500,000 6.75% due 5/12/2000 3,494,785 3,503,815
A+ A1 3,500,000 6.625% due 3/15/2003 3,553,235 3,387,825
A A2 11,475,000 Security Pacific Corp., 9.80%
due 7/01/2003 13,389,719 13,122,466
</TABLE>
56
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Banking A- A3 $ 7,500,000 US Bancorp, 6.75% due 10/15/2005 $ 7,459,650 $ 7,166,025
(concluded) AA+ Aa2 6,000,000 Wachovia Bank of North Carolina,
6.55% due 6/09/1997 5,995,620 6,031,140
-------------- --------------
162,986,272 160,986,757
Canadian BBB+ A3 5,000,000 Petro-Canada, 9.25% due
Provinces*-- 10/15/2021 (4) 5,300,650 5,805,850
3.2% AA- Aa3 11,000,000 Province of Ontario (Canada),
7.75% due 6/04/2002 (5) 10,910,730 11,478,390
Province of Quebec (Canada) (5):
A+ A2 9,535,000 7.50% due 7/15/2002 10,058,986 9,754,591
A+ A2 6,000,000 8.80% due 4/15/2003 6,774,360 6,505,680
A+ A2 4,500,000 13% due 10/01/2013 5,706,285 5,214,510
A+ A2 9,000,000 7.125% due 2/09/2024 8,673,600 8,234,370
-------------- --------------
47,424,611 46,993,391
Federal AAA Aaa 15,000,000 Federal National Mortgage
Agencies--1.0% Association, 7.85% due
9/10/2004 14,817,438 15,203,850
Financial A- A3 14,000,000 Chrysler Financial Corp.,
Services-- 10.95% due 8/01/2017 16,298,000 15,199,660
Captive--4.5% Ford Motor Credit Co.:
A+ A1 10,000,000 7% due 9/25/2001 9,960,200 10,024,500
A+ A1 1,000,000 7.75% due 3/15/2005 999,090 1,023,210
General Motors Acceptance Corp.:
A- A3 7,630,000 5% due 1/27/1997 7,501,587 7,610,544
A- A3 8,000,000 7.60% due 1/20/1998 7,829,600 8,142,320
A- A3 6,100,000 7.125% due 5/11/1998 6,168,808 6,176,311
A- A3 4,000,000 6.625% due 9/19/2002 3,915,080 3,906,120
A- A3 7,000,000 7.125% due 5/01/2003 6,964,230 6,983,830
A- A3 7,000,000 7.40% due 9/01/2025 6,943,580 6,634,180
-------------- --------------
66,580,175 65,700,675
Financial Advanta Corp.:
Services-- BBB- Baa2 15,000,000 6.26% due 9/01/1997 14,991,450 14,939,700
Consumer--7.2% BBB- Baa2 3,000,000 7% due 5/01/2001 2,974,950 2,928,900
American General Finance Corp.:
A+ A1 1,300,000 7.70% due 11/15/1997 1,322,074 1,318,707
A+ A1 2,500,000 8.50% due 8/15/1998 2,848,650 2,585,675
A+ A1 4,000,000 5.875% due 7/01/2000 3,850,040 3,879,080
A+ A1 10,000,000 6.375% due 3/01/2003 9,926,100 9,588,800
Associates Corp. of North America:
AA- Aa3 6,000,000 8.375% due 1/15/1998 6,019,320 6,149,760
AA- Aa3 2,000,000 5.25% due 9/01/1998 1,939,180 1,957,120
AA- Aa3 1,500,000 7.25% due 9/01/1999 1,481,430 1,523,775
CIT Group Holdings, Inc.:
A+ Aa3 8,000,000 5.65% due 5/02/1997 (a) 8,000,000 7,989,920
A+ Aa3 13,000,000 7% due 9/30/1997 13,118,040 13,109,590
Finova Capital Corp.:
A- Baa1 31,460,000 8.25% due 3/11/1997 31,956,159 31,778,690
A- Baa1 7,000,000 6.375% due 10/15/2000 6,972,850 6,877,780
-------------- --------------
105,400,243 104,627,497
Financial Bear Stearns Companies, Inc.:
Services-- A A2 2,000,000 6.75% due 5/01/2001 1,993,680 1,981,280
Other--7.8% A A2 9,900,000 6.70% due 8/01/2003 8,945,640 9,582,606
A A2 3,000,000 8.75% due 3/15/2004 3,224,430 3,239,430
</TABLE>
57
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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 Dean Witter, Discover & Co.:
Services-- A A2 $ 3,500,000 6.75% due 8/15/2000 $ 3,486,805 $ 3,491,215
Other A A2 3,000,000 6.30% due 1/15/2006 2,986,800 2,774,943
(concluded) A A2 9,500,000 6.75% due 1/01/2016 9,064,450 8,491,670
A+ A2 10,000,000 Equitable Cos. Inc., 9% due
12/15/2004 11,040,500 10,991,200
AA Aa1 13,000,000 GE Global Insurance Holding Corp.,
7% due 2/15/2026 12,876,500 12,132,770
AAA Aaa 3,500,000 General Electric Capital Corp.,
8.125% due 5/15/2012 3,721,480 3,726,170
A Baa1 5,000,000 Lehman Brothers Inc., 7.375% due
8/15/1997 4,993,500 5,033,600
A+ A1 7,000,000 Morgan Stanley Group Inc., 5.625%
due 3/01/1999 6,985,580 6,856,710
PaineWebber Group Inc.:
BBB+ Baa1 10,000,000 8.875% due 3/15/2005 9,997,850 10,748,200
BBB+ Baa1 1,500,000 7.625% due 2/15/2014 1,432,470 1,401,885
Smith Barney Holdings, Inc.:
A- A2 7,000,000 6.50% due 10/15/2002 6,961,080 6,783,560
A- A2 6,000,000 6.875% due 6/15/2005 5,957,580 5,786,640
The Travelers Corp.:
A+ A1 9,000,000 9.50% due 3/01/2002 9,610,100 10,005,480
A+ A1 10,800,000 7.875% due 5/15/2025 10,845,324 10,880,784
-------------- --------------
114,123,769 113,908,143
Industrial-- AA- A1 3,000,000 Anheuser-Busch Cos., Inc., 8.75%
Consumer due 12/01/1999 3,367,590 3,176,850
Goods--4.0% AA- Aa2 10,400,000 Archer-Daniels-Midland Co.,
8.125% due 6/01/2012 11,522,436 11,042,824
AA Aa2 5,000,000 Kimberly-Clark Corporation, 7.875%
due 2/01/2023 5,084,900 4,983,150
BBB Baa2 9,000,000 Nabisco, Inc., 7.55% due 6/15/2015 8,981,960 8,536,770
A A2 9,500,000 Philip Morris Cos., Inc., 9% due
1/01/2001 9,698,815 10,147,140
RJR Nabisco, Inc.:
BBB- Baa3 4,750,000 6.25% due 1/31/1997 4,731,000 4,740,358
BBB- Baa3 3,000,000 8.75% due 4/15/2004 2,912,220 2,962,710
BBB- Baa3 13,000,000 8.75% due 8/15/2005 12,720,550 12,757,680
-------------- --------------
59,019,471 58,347,482
Industrial-- BP America Inc.:
Energy--3.0% AA Aa3 4,075,000 9.375% due 11/01/2000 4,488,287 4,453,853
AA Aa3 11,000,000 10% due 7/01/2018 11,869,080 12,024,100
AA- A1 7,500,000 Consolidated Natural Gas Co.,
8.75% due 6/01/1999 7,450,660 7,859,700
A- A1 5,900,000 Dresser Industries, Inc., 7.60%
due 8/15/2096 5,882,831 5,794,803
Texaco Capital Inc.:
A+ A1 5,500,000 9% due 12/15/1999 6,215,190 5,871,635
A+ A1 2,000,000 8.875% due 2/15/2021 1,999,720 2,311,340
A+ A1 4,500,000 8.625% due 4/01/2032 4,792,770 5,065,110
-------------- --------------
42,698,538 43,380,541
Industrial-- AA- Aa3 4,500,000 du Pont (E.I.) de Nemours & Co.,
Manufacturing-- 8.25% due 1/15/2022 4,676,445 4,600,890
4.0% Lockheed Martin Corp.:
BBB+ A3 10,000,000 6.625% due 6/15/1998 9,998,700 10,034,300
BBB+ A3 8,750,000 6.55% due 5/15/1999 8,745,800 8,737,400
BBB+ A3 5,000,000 6.85% due 5/15/2001 4,995,950 4,995,200
BBB+ A3 11,000,000 Loral Corporation, 8.375% due
6/15/2024 11,056,040 11,766,480
BBB+ A3 4,000,000 Martin Marietta Corporation,
7.375% due 4/15/2013 3,846,440 3,917,160
</TABLE>
58
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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-- McDonnell Douglas Financial
Manufacturing Corp.:
(concluded) A- Baa2 $ 9,000,000 8.625% due 4/01/1997 $ 9,203,220 $ 9,120,600
A- Baa2 5,000,000 6.30% due 10/20/1999 5,029,550 4,838,100
-------------- --------------
57,552,145 58,010,130
Industrial-- A+ A1 10,000,000 Bass America, Inc., 8.125% due
Services-- 3/31/2002 10,250,610 10,532,200
13.2% A A2 11,000,000 Carnival Cruise Lines, Inc., 7.70%
due 7/15/2004 11,028,940 11,249,810
BBB+ Baa2 6,000,000 Circus Circus Enterprises, Inc.,
6.45% due 2/01/2006 5,986,860 5,564,820
Columbia/HCA Healthcare Corp.:
A- A2 9,000,000 6.87% due 9/15/2003 9,101,160 8,933,220
A- A2 6,000,000 9% due 12/15/2014 6,651,540 6,694,260
A- A2 5,000,000 7.05% due 12/01/2027 4,688,200 4,612,850
A- A2 5,000,000 7.75% due 7/15/2036 4,961,400 4,980,600
Dillard Department Stores, Inc.:
A+ A2 4,000,000 7.375% due 6/15/1999 4,254,860 4,051,320
A+ A2 5,000,000 9.125% due 8/01/2011 6,054,000 5,654,750
A+ A1 2,000,000 Electronic Data Systems Corp.,
6.85% due 5/15/2000 (b) 1,998,420 2,009,004
A- A3 3,000,000 International Paper Company, 7%
due 6/01/2001 2,993,730 3,014,310
JC Penney & Co:
A+ A1 5,000,000 6.375% due 9/15/2000 4,991,900 4,929,400
A+ A1 16,000,000 7.65% due 8/15/2016 15,590,110 15,842,560
AAA Aaa 7,000,000 Johnson & Johnson Co., 8.72% due
11/01/2024 7,057,420 7,569,520
News American Holdings, Inc.:
BBB Baa3 4,000,000 9.125% due 10/15/1999 4,298,640 4,248,880
BBB Baa3 10,000,000 8.625% due 2/01/2003 10,965,400 10,662,800
BBB Baa3 10,000,000 7.60% due 10/11/2015 9,917,800 9,427,200
Royal Caribbean Cruises Ltd.:
BBB- Baa3 2,500,000 8.25% due 4/01/2005 2,568,775 2,583,775
BBB- Baa3 3,500,000 7.25% due 8/15/2006 3,372,950 3,428,530
Sears, Roebuck & Co.:
A- A2 5,000,000 9.25% due 4/15/1998 5,712,125 5,210,150
A- A2 8,785,000 8.45% due 11/01/1998 9,709,797 9,074,817
Service Corporation International:
BBB+ Baa1 7,000,000 6.75% due 6/01/2001 6,978,580 6,912,507
BBB+ Baa1 9,500,000 7.20% due 6/01/2006 9,471,215 9,290,145
Time Warner Entertainment Co.:
BBB- Ba1 6,000,000 8.875% due 10/01/2012 6,624,540 6,381,240
BBB- Ba1 5,000,000 8.375% due 3/15/2023 5,281,450 4,935,250
AA A2 14,345,000 Wal-Mart Stores, Inc., 8.50% due
9/15/2024 14,488,240 15,093,809
A A2 10,000,000 Walt Disney Co., 6.375% due
3/30/2001 10,000,000 9,845,500
-------------- --------------
194,998,662 192,733,227
Industrial-- BBB Baa2 9,000,000 Federal Express Corporation,
Transportation-- 9.65% due 6/15/2012 10,137,590 10,446,120
2.7% BBB+ Baa2 15,000,000 Kansas City Southern Industries,
Inc., 7% due 12/15/2025 14,805,750 13,148,850
Southwest Airlines, Inc.:
A- A3 10,000,000 9.40% due 7/01/2001 11,326,040 10,798,500
A- A3 2,000,000 8% due 3/01/2005 1,989,220 2,063,220
A- A3 3,000,000 7.875% due 9/01/2007 2,983,950 3,036,840
-------------- --------------
41,242,550 39,493,530
</TABLE>
59
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Supranational-- Asian Development Bank:
2.0% AAA Aaa $ 3,000,000 10.75% due 6/01/1997 $ 3,302,730 $ 3,089,760
AAA Aaa 5,000,000 6.125% due 3/09/2004 4,952,900 4,821,250
AAA Aaa 8,000,000 Inter-American Development Bank
Co., 8.875% due 6/01/2009 10,115,250 9,166,640
AAA Aaa 10,000,000 International Bank for
Reconstruction & Development,
12.375% due 10/15/2002 13,082,110 12,689,600
-------------- --------------
31,452,990 29,767,250
Utilities-- GTE Corp.:
Communications BBB+ A3 7,500,000 9.375% due 12/01/2000 8,235,170 8,166,750
- --2.8% BBB+ A3 4,000,000 9.10% due 6/01/2003 4,242,720 4,411,160
BBB+ A3 3,000,000 10.30% due 11/15/2017 3,285,270 3,265,800
BBB+ A3 9,500,000 8.75% due 11/01/2021 9,904,225 10,488,380
AAA Aaa 7,000,000 Indiana Bell Telephone Co. Inc.,
7.30% due 8/15/2026 6,988,030 6,868,540
A A2 6,000,000 MCI Communications Corporation,
6.95% due 8/15/2006 5,980,200 5,896,500
AA Aa3 2,000,000 Southwestern Bell Telecommunications
Corp., 6.125% due 3/01/2000 2,011,250 1,965,620
-------------- --------------
40,646,865 41,062,750
Utilities-- A A2 22,800,000 Central Power & Light Co., 6% due
Electric--4.2% 10/01/1997 22,712,058 22,767,396
AA- Aa2 6,000,000 Duke Power Co., 8% due 11/01/1999 5,964,660 6,221,640
A+ A1 2,000,000 Georgia Power Co., 6.125% due
9/01/1999 1,961,420 1,973,020
AA- A1 5,000,000 Northern States Power Company,
7.125% due 7/01/2025 5,305,900 4,657,740
A- A3 11,000,000 Public Service Electric & Gas Co.,
7.125% due 11/01/1997 11,092,510 11,074,690
AA- A1 5,000,000 TECO Energy, Inc., 9.27% due
6/12/2000 5,000,000 5,405,100
A A2 8,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024 8,377,160 9,044,306
-------------- --------------
60,413,708 61,143,892
Yankee AA- Aa2 6,000,000 ABN AMRO Bank, 7.55% due
Corporates*-- 6/28/2006 (2) 5,999,160 6,112,680
10.2% A+ A1 6,000,000 Australia & New Zealand Banking
Group Ltd., 7.55% due
9/15/2006 (2) 5,990,880 6,089,640
BBB+ A3 8,885,000 Bangkok Metropolitan Bank Public
Company Limited, 7.25% due
9/15/2005 (2) (b) 8,799,674 8,565,495
AA- Aa3 9,500,000 CRA Finance Ltd., 6.50% due
12/01/2003 (2) 9,519,310 9,101,380
BBB Baa1 7,500,000 China International Trust, 9% due
10/15/2006 (2) 8,060,850 8,007,675
A A3 4,000,000 China Light & Power Company,
Limited, 7.50% due 4/15/2006 (9) 3,974,520 3,945,160
Ford Capital B.V. (2):
A+ A1 10,000,000 9.875% due 5/15/2002 10,531,200 11,274,100
A+ A1 3,995,000 9.50% due 6/01/2010 4,430,215 4,610,430
Grand Metropolitan Investment
Corp. (2):
A+ A2 4,000,000 6.50% due 9/15/1999 4,000,000 3,971,560
A+ A2 9,000,000 8.625% due 8/15/2001 9,412,690 9,650,610
A A3 11,500,000 Mass Transit Railway Corp.,
7.25% due 10/01/2005 (8) 11,657,700 11,201,000
A- A2 6,250,000 Maybank New York, 7.125% due
9/15/2005 (2) 6,217,937 6,092,875
A A1 8,000,000 Midland Bank PLC, 7.625% due
6/15/2006 (2) 7,980,960 8,130,160
A A2 10,000,000 Norsk Hydro AS, 7.15% due
11/15/2025 (9) 9,958,300 9,300,500
A+ A1 12,000,000 Petroliam Nasional BHD, 6.875% due
7/01/2003 (9) (b) 11,929,530 11,827,080
</TABLE>
60
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<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>
Yankee BBB+ A3 $ 5,000,000 Philips Electronics N.V., 7.20%
Corporates* due 6/01/2026 (9) $ 4,988,700 $ 4,971,650
(concluded) A+ A1 12,000,000 Pohang Iron & Steel Industries
Co., Ltd., 7.375% due
5/15/2005 (7) 12,217,645 11,871,000
A+ A1 6,500,000 Telekom Malaysia BHD, 7.125%
due 8/01/2005 (9) (b) 6,668,405 6,431,295
A A2 9,000,000 WMC (Western Mining Corp.)
Finance Ltd., 7.25% due
11/15/2013 (1) 9,089,100 8,578,980
-------------- --------------
151,426,776 149,733,270
Yankee AAA Aaa 4,000,000 Export-Import Bank of Japan,
Sovereign*-- 8.35% due 12/01/1999 (3) 4,226,640 4,197,880
3.1% AA- A1 4,000,000 Export-Import Bank of Korea,
6.375% due 2/15/2006 (6) 3,977,840 3,752,920
AA- A1 7,000,000 Korea Development Bank, 7.25% due
5/15/2006 (2) 6,850,340 6,977,740
Metropolis of Tokyo (Japan) (3):
AAA Aaa 3,550,000 9.25% due 10/11/1998 4,134,756 3,736,730
AAA Aaa 3,000,000 8.70% due 10/05/1999 3,469,410 3,167,550
AAA Aaa 4,000,000 9.25% due 11/08/2000 4,219,660 4,354,240
BBB A3 5,000,000 People's Republic of China,
7.375% due 7/03/2001 (6) 5,033,025 5,027,895
AA Aa3 10,803,000 Republic of Italy, 6.875% due
9/27/2023 (6) 9,420,095 9,832,242
A- A3 5,000,000 State of Israel, 6.375% due
12/15/2005 (6) 4,957,750 4,662,150
-------------- --------------
46,289,516 45,709,347
Total Investments in Bonds &
Notes--95.3% 1,403,881,470 1,392,700,005
Short-Term Securities
Repurchase 44,619,000 Lehman Brothers Inc., purchased
Agreements** on 9/30/1996 to yield 5.80%
to 10/01/1996 44,619,000 44,619,000
Total Investments in
Short-Term Securities--3.0% 44,619,000 44,619,000
Total Investments--98.3% $1,448,500,470 1,437,319,005
==============
Other Assets Less Liabilities--1.7% 24,423,880
--------------
Net Assets--100.0% $1,461,742,885
==============
<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.
(8)Transportation.
(9)Industrial.
**Repurchase Agreements are fully collateralized by US Government
Obligations.
++Subject to principal paydowns.
(a)Floating Rate Note.
(b)Restricted securities as to resale. The value of the Portfolio's
investments in restricted securities was approximately $28,833,000,
representing 2.0% of net assets.
Acquisition Value
Issue Date(s) Cost (Note 1a)
Bangkok Metropolitan Bank Public
Company Limited,7.25% due 9/15/2005 9/29/1995 $ 8,799,674 $ 8,565,495
Electronic Data Systems Corp.,
6.85% due 5/15/2000 5/19/1995 1,998,420 2,009,004
Petroliam Nasional BHD,
6.875% due 7/01/2003 8/07/1995 11,929,530 11,827,080
Telekom Malaysia BHD,
7.125% due 8/01/2005 10/06/1995--11/22/1995 6,668,405 6,431,295
Total $29,396,029 $28,832,874
=========== ===========
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
61
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<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
Obligations--4.7% Bonds & Notes:
AAA Aaa $ 5,000,000 6% due 8/15/1999 $ 4,982,813 $ 4,964,850
AAA Aaa 6,000,000 7.75% due 12/31/1999 6,271,875 6,245,640
AAA Aaa 2,000,000 6.25% due 8/31/2000 2,000,781 1,988,740
AAA Aaa 1,000,000 8% due 5/15/2001 1,070,000 1,060,940
AAA Aaa 1,000,000 7.50% due 5/15/2002 1,053,750 1,047,030
AAA Aaa 3,000,000 6.375% due 8/15/2002 3,003,750 2,979,360
AAA Aaa 4,000,000 7% due 7/15/2006 4,051,953 4,083,120
-------------- --------------
22,434,922 22,369,680
Asset-Backed AAA Aaa 2,000,000 Banc One, Master Trust
Securities++--0.4% (Series B), 7.55% due
12/15/1999 2,037,109 2,029,360
Banking--17.3% A- A2 3,500,000 Bank of New York Company, Inc.
(The), 7.875% due 11/15/2002 3,873,450 3,627,820
BankAmerica Corp.:
A+ A1 5,000,000 6.65% due 5/01/2001 4,997,250 4,965,850
A A2 4,000,000 7.50% due 10/15/2002 4,268,880 4,083,320
A+ A1 3,000,000 7.125% due 5/12/2005 2,956,500 2,959,980
A+ A1 2,000,000 Citicorp, 8.80% due 2/01/2000 2,000,000 2,018,420
A+ A1 4,000,000 Fifth Third Bank, 6.75% due
7/15/2005 3,973,600 3,852,320
A A2 9,000,000 First Chicago Corp., 9% due
6/15/1999 9,548,820 9,457,560
A- A3 4,000,000 Golden West Financial Corp.,
9.15% due 5/23/1998 4,542,960 4,161,720
A- A3 6,000,000 Mellon Financial, 6.875% due
3/01/2003 5,483,220 5,914,260
Nationsbank Corp.:
A A2 11,500,000 6.65% due 4/09/2002 11,423,540 11,328,190
A A2 6,000,000 6.50% due 8/15/2003 5,706,180 5,767,980
Norwest Corp.:
AA- Aa3 7,000,000 6.25% due 4/15/1999 6,977,040 6,952,260
A+ A1 1,000,000 6.625% due 3/15/2003 1,003,060 967,950
A- A3 2,500,000 US Bancorp, 6.75% due 10/15/2005 2,486,550 2,388,675
AA+ Aa2 5,000,000 Wachovia Corporation, 6% due
3/15/1999 4,890,950 4,951,850
BBB Baa1 9,000,000 Washington Mutual Inc., 7.25% due
8/15/2005 8,930,520 8,839,530
-------------- --------------
83,062,520 82,237,685
Canadian Province of Quebec (Canada) (3):
Provinces*-- A+ A2 9,000,000 7.50% due 7/15/2002 9,486,070 9,207,270
3.1% A+ A2 5,000,000 8.80% due 4/15/2003 5,538,670 5,421,400
-------------- --------------
15,024,740 14,628,670
Federal AAA Aaa 2,500,000 Federal National Mortgage
Agencies--0.5% Association, 7.85% due
9/10/2004 2,496,484 2,533,975
Finance--21.0% Advanta Corp.:
BBB- Baa2 10,000,000 6.26% due 9/01/1997 9,994,300 9,959,800
BBB- Baa2 11,000,000 7% due 5/01/2001 10,980,980 10,739,300
BBB Baa2 11,580,000 Alex Brown Inc., 7.625% due
8/15/2005 11,797,083 11,607,908
AA- Aa3 10,000,000 Associates Corp. of North America,
7.375% due 8/01/2006 10,122,100 10,078,600
Bear Stearns Companies, Inc.:
A A2 2,000,000 6.75% due 5/01/2001 1,993,680 1,981,280
A A2 3,000,000 8.75% due 3/15/2004 3,224,430 3,239,430
</TABLE>
62
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<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>
Finance CIT Group Holdings, Inc.:
(concluded) A+ Aa3 $ 4,000,000 7.625% due 12/05/1996 $ 3,987,120 $ 4,011,880
A+ Aa3 3,000,000 5.533% due 2/28/1997 (a) 2,998,020 2,999,760
BBB+ Baa2 4,000,000 Comdisco, Inc., 7.25% due
4/15/1998 3,990,720 4,049,080
A A2 6,250,000 Dean Witter, Discover & Co.,
6.75% due 8/15/2000 6,226,438 6,234,312
Finova Capital Corp.:
A- Baa1 7,000,000 6.375% due 10/15/2000 6,972,980 6,877,780
A- Baa1 5,000,000 6.625% due 9/15/2001 5,096,550 4,908,950
BBB+ A3 5,000,000 MBNA Corporation, 7.29% due
12/08/1997 5,074,550 5,066,000
A+ A1 8,000,000 Morgan Stanley Group, Inc., 5.625%
due 3/01/1999 7,983,520 7,836,240
BBB+ Baa1 4,000,000 PaineWebber Group, Inc., 8.875%
due 3/15/2005 4,025,080 4,299,280
Smith Barney Holdings Inc.:
A- A2 3,000,000 6.50% due 10/15/2002 2,986,120 2,907,240
A- A2 1,000,000 6.875% due 6/15/2005 992,930 964,440
A+ A1 2,000,000 The Travelers Corp., 9.50% due
3/01/2002 2,168,400 2,223,440
-------------- --------------
100,615,001 99,984,720
Industrial-- AA- A1 5,481,000 Anheuser-Busch Cos., Inc., 8.75%
Consumer due 12/01/1999 6,189,909 5,804,105
Goods--5.1% Nabisco, Inc.:
BBB Baa2 5,000,000 6.70% due 6/15/2002 4,997,050 4,884,200
BBB Baa2 3,000,000 6.85% due 6/15/2005 2,994,300 2,873,790
A A1 4,000,000 PepsiCo., Inc., 6.125% due 1/15/1998 3,972,240 3,988,880
A A2 3,500,000 Philip Morris Cos., Inc., 9% due
1/01/2001 3,576,195 3,738,420
BBB- Baa3 3,000,000 RJR Nabisco Holding Corp., 8.75%
due 4/15/2004 2,911,320 2,962,710
-------------- --------------
24,641,014 24,252,105
Industrial-- Texaco Capital Inc.:
Energy--0.9% A+ A1 2,000,000 6.875% due 7/15/1999 1,996,120 2,006,460
A+ A1 2,000,000 9% due 12/15/1999 2,342,460 2,135,140
-------------- --------------
4,338,580 4,141,600
Industrial-- BBB Baa2 4,000,000 Applied Materials Inc., 6.65% due
Manufacturing-- 9/05/2000 4,000,000 3,965,640
10.2% A+ A1 5,000,000 Ford Motor Credit Co., 7.75% due
3/15/2005 4,995,450 5,116,050
General Motors Acceptance Corp.:
A- A3 6,000,000 6.70% due 4/18/1997 6,090,180 6,026,280
A- A3 2,000,000 7.60% due 1/20/1998 1,957,400 2,035,580
A- A3 5,000,000 7.125% due 5/11/1998 5,056,400 5,062,550
A- A3 5,000,000 6.625% due 10/01/2002 4,991,000 4,888,250
A- A3 2,000,000 7.125% due 5/01/2003 1,989,780 1,995,380
A- A3 2,000,000 International Paper Company,
7% due 6/01/2001 1,995,820 2,009,540
Lockheed Martin Corp.:
BBB+ A3 1,000,000 6.625% due 6/15/1998 999,870 1,003,430
BBB+ A3 2,500,000 6.55% due 5/15/1999 2,498,800 2,496,400
BBB+ A3 5,000,000 6.85% due 5/15/2001 4,995,950 4,995,200
McDonnell Douglas Corporation:
A- Baa2 4,000,000 8.625% due 4/01/1997 4,142,720 4,053,600
A- Baa2 5,000,000 6.30% due 10/20/1999 5,029,550 4,838,100
-------------- --------------
48,742,920 48,486,000
</TABLE>
63
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Issue Cost (Note 1a)
Bonds & Notes (continued) Intermediate Term Portfolio
<S> <S> <S> <C> <S> <C> <C>
Industrial-- A+ A1 $ 3,000,000 Bass America, Inc., 6.625% due
Services--18.3% 3/01/2003 $ 2,825,520 $ 2,912,010
A A2 9,000,000 Carnival Cruise Lines, Inc.,
7.70% due 7/15/2004 8,799,420 9,204,390
A- A2 7,000,000 Columbia/HCA Healthcare Corp.,
6.87% due 9/15/2003 7,043,300 6,948,060
A+ A1 3,500,000 Electronic Data Systems Corp.,
6.85% due 5/15/2000 (b) 3,497,235 3,515,757
A+ A1 5,000,000 JC Penney & Co., 6.375% due
9/15/2000 4,991,900 4,929,400
BBB- Ba1 10,000,000 La Quinta Inns, Inc., 7.25% due
3/15/2004 9,949,000 9,627,610
BBB Baa3 14,500,000 News American Holdings, Inc., 8.50%
due 2/15/2005 14,789,005 15,345,350
Royal Caribbean Cruises Ltd.:
BBB- Baa3 2,500,000 8.25% due 4/01/2005 2,568,775 2,583,775
BBB- Baa3 1,800,000 7.25% due 8/15/2006 1,776,006 1,763,244
Sears, Roebuck & Co.:
A- A2 2,500,000 9.25% due 4/15/1998 2,837,275 2,605,075
A- A2 7,000,000 8.45% due 11/01/1998 7,762,380 7,230,930
A- A2 5,550,000 Sears Roebuck Acceptance Corp.,
6.22% due 3/25/1999 5,478,183 5,508,319
Service Corporation International:
BBB+ Baa1 1,000,000 6.75% due 6/01/2001 996,940 987,501
BBB+ Baa1 1,500,000 7.20% due 6/01/2006 1,495,455 1,466,865
Time Warner Entertainment:
BBB- Ba1 5,000,000 7.95% due 2/01/2000 5,172,300 5,115,050
BBB- Ba1 5,000,000 9.625% due 5/01/2002 5,586,000 5,522,850
A A2 2,000,000 Walt Disney Co., 6.375% due
3/30/2001 2,000,000 1,969,100
-------------- --------------
87,568,694 87,235,286
Industrial-- BB+ Baa3 4,310,000 AMR Corporation, 9.50% due
Transportation-- 7/15/1998 4,606,528 4,508,993
3.4% AA A1 4,000,000 Boeing Co. (The), 6.35% due
6/15/2003 3,599,960 3,861,840
Southwest Airlines, Inc.:
A- A3 6,500,000 9.40% due 7/01/2001 7,564,180 7,019,025
A- A3 1,000,000 8% due 3/01/2005 994,610 1,031,610
-------------- --------------
16,765,278 16,421,468
Utilities-- GTE Corporation:
Communications-- BBB+ A3 1,000,000 9.375% due 12/01/2000 1,090,310 1,088,900
2.4% BBB+ A3 2,000,000 9.10% due 6/01/2003 2,194,920 2,205,580
A A2 6,000,000 MCI Communications Corporation,
6.95% due 8/15/2006 5,980,200 5,896,500
AA Aa3 2,200,000 Southwestern Bell Capital Corp.,
6.625% due 4/01/2005 2,108,590 2,130,766
-------------- --------------
11,374,020 11,321,746
Utilities-- A- A3 4,000,000 Pennsylvania Power & Light Co.,
Electric--0.8% 5.50% due 4/01/1998 3,991,280 3,949,480
Utilities-- AA- A1 2,000,000 Consolidated Natural Gas Co., 8.75%
Gas--0.4% due 6/01/1999 2,125,440 2,095,920
Yankee BBB+ A3 5,000,000 Bangkok Metropolitan Bank Public
Corporates*-- Company Limited, 7.25% due
6.2% 9/15/2005 (8) (b) 4,949,950 4,820,200
AA- Aa3 4,000,000 CRA Finance Ltd., 6.50% due
12/01/2003 (8) 4,006,020 3,832,160
A+ A1 2,000,000 Ford Capital B.V., 9.875% due
5/15/2002 (8) 2,300,380 2,254,820
Grand Metropolitan Investment
Corp. (8):
A+ A2 3,000,000 6.50% due 9/15/1999 3,040,120 2,978,670
A+ A2 3,000,000 8.625% due 8/15/2001 3,069,700 3,216,870
</TABLE>
64
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<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>
Yankee A A1 $ 1,000,000 Midland Bank PLC, 7.625% due
Corporates* 6/15/2006 (8) $ 992,340 $ 1,016,270
(concluded) A+ A1 2,000,000 Petroliam Nasional BHD, 6.875%
due 7/01/2003 (7) (b) 1,972,960 1,971,180
BBB+ A3 5,000,000 Philips Electronics N.V., 7.75%
due 4/15/2004 (7) 5,430,750 5,103,150
A+ A1 1,000,000 Pohang Iron & Steel Co., 7.375%
due 5/15/2005 (6) 1,018,160 989,250
A+ A1 3,500,000 Telekom Malaysia BHD, 7.125%
due 8/01/2005 (7) (b) 3,595,295 3,463,005
-------------- --------------
30,375,675 29,645,575
Yankee AA- A1 3,000,000 Export-Import Bank of Korea, 6.375%
Sovereign*-- due 2/15/2006 (1) 2,983,380 2,814,690
2.2% AA- A1 2,000,000 Korea Development Bank, 7.25%
due 5/15/2006 (2) 1,957,240 1,993,640
AAA Aaa 2,000,000 Metropolis of Tokyo (Japan), 8.70%
due 10/05/1999 (5) 2,312,940 2,111,700
BBB A3 1,500,000 People's Republic of China, 7.75%
due 7/05/2006 (1) 1,475,865 1,505,760
A- A3 2,000,000 State of Israel, 6.375% due
12/15/2005 (1) 1,983,100 1,864,860
-------------- --------------
10,712,525 10,290,650
Total Investments in Bonds &
Notes--96.9% 466,306,202 461,623,920
Short-Term Securities
Repurchase 9,529,000 UBS Securities Funding, Inc.,
Agreements**--2.0% purchased on 9/30/1996 to yield
5.75% to 10/01/1996 9,529,000 9,529,000
Total Investments in
Short-Term Securities--2.0% 9,529,000 9,529,000
Total Investments--98.9% $ 475,835,202 471,152,920
==============
Other Assets Less Liabilities--1.1% 5,447,012
--------------
Net Assets--100.0% $ 476,599,932
==============
</TABLE>
[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 the Province.
(4)Industrial Mining.
(5)Government Entity; Guaranteed by Japan.
(6)Industrial; Metals.
(7)Industrial.
(8)Financial Institution.
**Repurchase Agreements are fully collateralized by US Government
Obligations.
++Subject to principal paydowns.
(a)Floating Rate Note.
(b)Restricted securities as to resale. The value of the Portfolio's
investments in restricted securities was approximately $13,770,000,
representing 2.9% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Bangkok Metropolitan Bank
Public Company Limited,
7.25% due 9/15/2005 9/22/1995--9/29/1995 $ 4,949,950 $ 4,820,200
Electronic Data Systems Corp.,
6.85% due 5/15/2000 5/19/1995 3,497,235 3,515,757
Petroliam Nasional BHD,
6.875% due 7/01/2003 7/14/1995--8/07/1995 1,972,960 1,971,180
Telekom Malaysia BHD,
7.125% due 8/01/2005 10/06/1995--11/22/1995 3,595,295 3,463,005
Total $14,015,440 $13,770,142
=========== ===========
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
65
<PAGE>
FINANCIAL INFORMATION
Statements of Assets and Liabilities as of September 30, 1996
<TABLE>
<CAPTION>
High Income Investment Intermediate
Portfolio Grade Portfolio Term Portfolio
<S> <S> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $5,710,820,345 $1,437,319,005 $ 471,152,920
Cash 1,553,815 407,420 1,873
Receivables:
Interest 107,581,606 26,107,005 8,594,863
Securities sold 63,713,835 2,501,953 --
Capital shares sold 20,211,893 4,743,968 761,814
Paydowns 80,712 -- --
Loans -- 1,989 1,874
Prepaid registration fees and other assets
(Note 1e) 114,224 65,728 46,378
-------------- -------------- --------------
Total assets 5,904,076,430 1,471,147,068 480,559,722
-------------- -------------- --------------
Liabilities: Payables:
Securities purchased 46,962,985 2,500,000 --
Dividends to shareholders (Note 1f) 15,311,894 2,758,083 866,906
Distributor (Note 2) 2,643,810 463,564 88,988
Capital shares redeemed 7,377,540 2,555,686 2,606,318
Investment adviser (Note 2) 1,784,478 397,985 130,664
Accrued expenses and other liabilities 1,772,517 728,865 266,914
-------------- -------------- --------------
Total liabilities 75,853,224 9,404,183 3,959,790
-------------- -------------- --------------
Net Assets: Net assets $5,828,223,206 $1,461,742,885 $ 476,599,932
============== ============== ==============
Net Assets Class A Common Stock, $.10 par value++ $ 11,945,721 $ 5,453,973 $ 1,919,796
Consist of: Class B Common Stock, $.10 par value++++ 53,574,971 6,485,860 1,920,584
Class C Common Stock, $.10 par value++++++ 4,566,240 581,389 89,930
Class D Common Stock, $.10 par value++++++++ 3,372,744 571,318 294,925
Paid-in capital in excess of par 5,746,162,805 1,498,276,635 487,940,541
Accumulated distributions in excess of
investment income--net (Note 1f) (2,665,658) -- --
Accumulated realized capital losses on
investments--net (5,141,262) (6,680,118) (5,362,923)
Accumulated distributions in excess of realized
capital gains on investments--net (Note 1f) -- (31,764,707) (5,520,639)
Unrealized appreciation (depreciation) on
investments--net 16,407,645 (11,181,465) (4,682,282)
-------------- -------------- --------------
Net assets $5,828,223,206 $1,461,742,885 $ 476,599,932
============== ============== ==============
Net Asset Class A: Net assets $ 947,479,106 $ 608,900,606 $ 216,545,160
Value: ============== ============== ==============
Shares outstanding 119,457,213 54,539,733 19,197,959
============== ============== ==============
Net asset value and redemption price per share $ 7.93 $ 11.16 $ 11.28
============== ============== ==============
Class B: Net assets $4,250,539,421 $ 724,088,680 $ 216,641,211
============== ============== ==============
Shares outstanding 535,749,707 64,858,598 19,205,835
============== ============== ==============
Net asset value and redemption price per share $ 7.93 $ 11.16 $ 11.28
============== ============== ==============
Class C: Net assets $ 362,517,515 $ 64,931,023 $ 10,144,279
============== ============== ==============
Shares outstanding 45,662,400 5,813,886 899,296
============== ============== ==============
Net asset value and redemption price per share $ 7.94 $ 11.17 $ 11.28
============== ============== ==============
Class D: Net assets $ 267,687,164 $ 63,822,576 $ 33,269,282
============== ============== ==============
Shares outstanding 33,727,435 5,713,177 2,949,249
============== ============== ==============
Net asset value and redemption price per share $ 7.94 $ 11.17 $ 11.28
============== ============== ==============
<FN>
*Identified cost $5,694,412,700 $1,448,500,470 $ 475,835,202
============== ============== ==============
++Authorized shares--Class A 400,000,000 250,000,000 100,000,000
============== ============== ==============
++++Authorized shares--Class B 1,000,000,000 250,000,000 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>
66
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statements of Operations for the Year Ended September 30, 1996
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C>
Investment Interest and discount earned $ 494,568,206 $ 96,053,974 $ 33,808,458
Income Dividends 10,274,484 -- --
(Note 1d): Loaned securities -- 264,364 104,466
Other 4,272,092 -- --
-------------- -------------- --------------
Total income 509,114,782 96,318,338 33,912,924
-------------- -------------- --------------
Expenses: Account maintenance and distribution
fees--Class B (Note 2) 27,772,529 5,197,514 1,111,276
Investment advisory fees (Note 2) 20,696,123 4,816,371 1,743,030
Transfer agent fees--Class B (Note 2) 2,995,870 1,142,543 449,465
Account maintenance and distribution
fees--Class C (Note 2) 1,973,424 386,450 46,132
Transfer agent fees--Class A (Note 2) 612,406 813,512 402,094
Registration fees (Note 1e) 707,091 257,891 87,772
Accounting services (Note 2) 443,142 115,335 47,858
Account maintenance fees--Class D (Note 2) 446,161 108,621 25,451
Printing and shareholder reports 399,622 114,864 49,641
Transfer agent fees--Class C (Note 2) 207,462 83,877 21,447
Custodian fees 143,526 84,160 45,760
Transfer agent fees--Class D (Note 2) 120,879 65,941 48,645
Professional fees 102,613 30,090 13,140
Directors' fees and expenses 34,362 9,508 3,282
Pricing fees (Note 2) 19,921 11,990 6,748
Other 57,976 14,481 6,958
-------------- -------------- --------------
Total expenses 56,733,107 13,253,148 4,108,699
-------------- -------------- --------------
Investment income--net 452,381,675 83,065,190 29,804,225
-------------- -------------- --------------
Realized & Realized gain on investments--net 31,483,874 1,240,458 3,880,395
Unrealized Gain Change in unrealized appreciation/depreciation
(Loss) on on investments--net 65,146,802 (44,461,678) (13,083,867)
Investments--Net -------------- -------------- --------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from
Operations $ 549,012,351 $ 39,843,970 $ 20,600,753
============== ============== ==============
See Notes to Financial Statements.
</TABLE>
67
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets High Income Portfolio
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 452,381,675 $ 360,156,487
Realized gain (loss) on investments--net 31,483,874 (21,583,485)
Change in unrealized appreciation/depreciation on
investments--net 65,146,802 103,640,401
-------------- --------------
Net increase in net assets resulting from operations 549,012,351 442,213,403
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (87,755,895) (92,450,302)
Shareholders Class B (329,093,983) (259,162,896)
(Note 1f): Class C (21,699,154) (4,442,179)
Class D (16,708,496) (4,101,110)
In excess of investment income--net:
Class A (505,842) --
Class B (1,896,961) --
Class C (125,078) --
Class D (96,311) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (457,881,720) (360,156,487)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 1,376,309,947 1,054,930,541
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 1,467,440,578 1,136,987,457
Beginning of year 4,360,782,628 3,223,795,171
-------------- --------------
End of year* $5,828,223,206 $4,360,782,628
============== ==============
<FN>
*Undistributed (accumulated) investment income
(loss)--net (Note 1g) $ (2,665,658) $ 2,875,853
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets (continued) Investment Grade Portfolio
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 83,065,190 $ 63,342,700
Realized gain (loss) on investments--net 1,240,458 (6,680,118)
Change in unrealized appreciation/depreciation on
investments--net (44,461,678) 69,854,981
-------------- --------------
Net increase in net assets resulting from operations 39,843,970 126,517,563
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (36,619,895) (28,557,399)
(Note 1f): Class B (40,835,373) (33,602,341)
Class C (2,822,765) (458,421)
Class D (2,787,157) (724,539)
-------------- --------------
Net decrease in net assets resulting from dividends to
shareholders (83,065,190) (63,342,700)
-------------- --------------
Capital Share Net increase in net assets derived from capital share 350,127,963 241,816,022
Transactions transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 306,906,743 304,990,885
Beginning of year 1,154,836,142 849,845,257
-------------- --------------
End of year $1,461,742,885 $1,154,836,142
============== ==============
</TABLE>
See Notes to Financial Statements.
68
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets (concluded) Intermediate Term Portfolio
For the Year Ended September 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 29,804,225 $ 22,585,754
Realized gain (loss) on investments--net 3,880,395 (5,362,923)
Change in unrealized appreciation/depreciation on
investments--net (13,083,867) 22,789,142
-------------- --------------
Net increase in net assets resulting from operations 20,600,753 40,011,973
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (14,523,748) (12,207,578)
(Note 1f): Class B (13,124,698) (9,963,391)
Class C (542,378) (58,841)
Class D (1,613,401) (355,944)
-------------- --------------
Net decrease in net assets resulting from dividends to
shareholders (29,804,225) (22,585,754)
-------------- --------------
Capital Share Net increase in net assets derived from capital share 32,787,882 124,155,845
Transactions transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 23,584,410 141,582,064
Beginning of year 453,015,522 311,433,458
-------------- --------------
End of year $ 476,599,932 $ 453,015,522
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<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: 1996++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 7.80 $ 7.66 $ 8.13 $ 7.84 $ 7.02
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .75 .81 .75 .79 .87
Realized and unrealized gain (loss)
on investments--net .14 .14 (.47) .29 .82
---------- ---------- ---------- ---------- ----------
Total from investment operations .89 .95 .28 1.08 1.69
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.76) (.81) (.75) (.79) (.87)
In excess of investment income--net --** -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.76) (.81) (.75) (.79) (.87)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.93 $ 7.80 $ 7.66 $ 8.13 $ 7.84
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 11.95% 13.27% 3.42% 14.35% 25.22%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .51% .55% .53% .55% .59%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 9.57% 10.70% 9.27% 9.78% 11.44%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $ 947,479 $ 902,321 $ 876,573 $ 886,784 $ 683,801
Data: ========== ========== ========== ========== ==========
Portfolio turnover 32.44% 24.58% 32.52% 34.85% 40.52%
========== ========== ========== ========== ==========
</TABLE>
[FN]
++Based on average shares outstanding during the period.
*Total investment returns exclude the effect of sales loads.
**Amount is less than $.01 per share.
See Notes to Financial Statements.
69
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Financial Highlights High Income Portfolio
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: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 7.80 $ 7.66 $ 8.13 $ 7.85 $ 7.02
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .69 .75 .69 .72 .81
Realized and unrealized gain (loss)
on investments--net .15 .14 (.47) .28 .83
---------- ---------- ---------- ---------- ----------
Total from investment operations .84 .89 .22 1.00 1.64
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.71) (.75) (.69) (.72) (.81)
In excess of investment income--net --+++++ -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.71) (.75) (.69) (.72) (.81)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.93 $ 7.80 $ 7.66 $ 8.13 $ 7.85
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 11.11% 12.41% 2.66% 13.35% 24.44%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.28% 1.32% 1.29% 1.31% 1.35%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 8.80% 9.81% 8.53% 8.94% 10.42%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $4,250,539 $3,220,767 $2,347,223 $1,823,275 $ 847,354
Data: ========== ========== ========== ========== ==========
Portfolio turnover 32.44% 24.58% 32.52% 34.85% 40.52%
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1996++++ 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.81 $ 7.59 $ 7.80 $ 7.59
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .68 .71 .72 .75
Realized and unrealized gain on investments--net .15 .22 .16 .21
---------- ---------- ---------- ----------
Total from investment operations .83 .93 .88 .96
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.70) (.71) (.74) (.75)
In excess of investment income--net --+++++ -- --+++++ --
---------- ---------- ---------- ----------
Total dividends and distributions (.70) (.71) (.74) (.75)
========== ========== ========== ==========
Net asset value, end of period $ 7.94 $ 7.81 $ 7.94 $ 7.80
========== ========== ========== ==========
Total Investment Based on net asset value per share 11.05% 12.92%+++ 11.82% 13.37%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.33% 1.38%* .76% .81%*
Net Assets: ========== ========== ========== ==========
Investment income--net 8.73% 9.06%* 9.30% 9.70%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 362,518 $ 135,019 $ 267,687 $ 102,676
Data: ========== ========== ========== ==========
Portfolio turnover 32.44% 24.58% 32.44% 24.58%
========== ========== ========== ==========
</TABLE>
[FN]
++Commencement of Operations.
++++Based on average shares outstanding during the period.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
70
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued) Investment Grade 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: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .76 .80 .75 .81 .88
Realized and unrealized gain (loss)
on investments--net (.35) .74 (1.49) .67 .71
---------- ---------- ---------- ---------- ----------
Total from investment operations .41 1.54 (.74) 1.48 1.59
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.76) (.80) (.75) (.81) (.88)
Realized gain on investments--net -- -- (.10) (.16) --
In excess of realized gain on
investments--net -- -- (.45) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.76) (.80) (1.30) (.97) (.88)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 11.16 $ 11.51 $ 10.77 $ 12.81 $ 12.30
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 3.60% 14.93% (6.03%) 12.76% 14.30%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .56% .58% .53% .56% .58%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.64% 7.30% 6.61% 6.94% 7.43%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $ 608,901 $ 472,388 $ 366,792 $ 407,625 $ 362,139
Data: ========== ========== ========== ========== ==========
Portfolio turnover 88.53% 108.07% 159.05% 121.34% 65.43%
========== ========== ========== ========== ==========
<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: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.51 $ 10.77 $ 12.81 $ 12.30 $ 11.59
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .67 .72 .66 .72 .79
Realized and unrealized gain (loss)
on investments--net (.35) .74 (1.49) .67 .71
---------- ---------- ---------- ---------- ----------
Total from investment operations .32 1.46 (.83) 1.39 1.50
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.67) (.72) (.66) (.72) (.79)
Realized gain on investments--net -- -- (.10) (.16) --
In excess of realized gain on
investments--net -- -- (.45) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.67) (.72) (1.21) (.88) (.79)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 11.16 $ 11.51 $ 10.77 $ 12.81 $ 12.30
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 2.81% 14.04% (6.73%) 11.91% 13.44%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.32% 1.35% 1.29% 1.29% 1.34%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.88% 6.52% 5.85% 5.80% 6.65%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $ 724,089 $ 631,517 $ 483,053 $ 515,402 $ 325,706
Data: ========== ========== ========== ========== ==========
Portfolio turnover 88.53% 108.07% 159.05% 121.34% 65.43%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
71
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued) Investment Grade Portfolio
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.51 $ 10.67 $ 11.51 $ 10.67
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .66 .67 .73 .73
Realized and unrealized gain (loss) on
investments--net (.34) .84 (.34) .84
---------- ---------- ---------- ----------
Total from investment operations .32 1.51 .39 1.57
---------- ---------- ---------- ----------
Less dividends from investment income--net (.66) (.67) (.73) (.73)
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.17 $ 11.51 $ 11.17 $ 11.51
========== ========== ========== ==========
Total Investment Based on net asset value per share 2.85% 14.60%+++ 3.43% 15.22%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.38% 1.40%* .81% .83%*
Net Assets: ========== ========== ========== ==========
Investment income--net 5.83% 6.27%* 6.40% 6.91%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 64,931 $ 25,778 $ 63,822 $ 25,153
Data: ========== ========== ========== ==========
Portfolio turnover 88.53% 108.07% 88.53% 108.07%
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued) Intermediate Term Portfolio
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.50 $ 10.90 $ 12.44 $ 12.03 $ 11.41
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .73 .79 .75 .76 .88
Realized and unrealized gain (loss) on
investments--net (.22) .60 (1.26) .55 .62
---------- ---------- ---------- ---------- ----------
Total from investment operations .51 1.39 (.51) 1.31 1.50
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.73) (.79) (.75) (.76) (.88)
Realized gain on investments--net -- -- -- (.14) --
In excess of realized gain on
investments--net -- -- (.28) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.73) (.79) (1.03) (.90) (.88)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 11.28 $ 11.50 $ 10.90 $ 12.44 $ 12.03
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 4.56% 13.33% (4.25%) 11.39% 13.71%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .59% .59% .53% .58% .62%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.41% 7.14% 6.48% 6.42% 7.54%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $ 216,545 $ 217,714 $ 170,222 $ 193,505 $ 154,333
Data: ========== ========== ========== ========== ==========
Portfolio turnover 96.40% 142.84% 155.42% 180.52% 95.33%
========== ========== ========== ========== ==========
</TABLE>
[FN]
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
72
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued) Intermediate Term Portfolio
Class B
For the
Period
The following per share data and ratios have been derived Nov. 13,
from information provided in the financial statements. 1992++ to
For the Year Ended September 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.50 $ 10.90 $ 12.44 $ 11.68
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .67 .74 .69 .61
Realized and unrealized gain (loss) on
investments--net (.22) .60 (1.26) .90
---------- ---------- ---------- ----------
Total from investment operations .45 1.34 (.57) 1.51
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.67) (.74) (.69) (.61)
Realized gain on investments--net -- -- -- (.14)
In excess of realized gain on investments--net -- -- (.28) --
---------- ---------- ---------- ----------
Total dividends and distributions (.67) (.74) (.97) (.75)
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.28 $ 11.50 $ 10.90 $ 12.44
========== ========== ========== ==========
Total Investment Based on net asset value per share 4.02% 12.73% (4.72%) 13.30%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.11% 1.11% 1.04% 1.07%*
Net Assets: ========== ========== ========== ==========
Investment income--net 5.89% 6.61% 5.98% 5.61%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 216,641 $ 212,146 $ 141,212 $ 134,122
Data: ========== ========== ========== ==========
Portfolio turnover 96.40% 142.84% 155.42% 180.52%
========== ========== ========== ==========
</TABLE>
[FN]
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
73
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded) Intermediate Term Portfolio
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.50 $ 10.81 $ 11.50 $ 10.81
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .67 .70 .72 .74
Realized and unrealized gain (loss) on
investments--net (.22) .69 (.22) .69
---------- ---------- ---------- ----------
Total from investment operations .45 1.39 .50 1.43
---------- ---------- ---------- ----------
Less dividends from investment income--net (.67) (.70) (.72) (.74)
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.28 $ 11.50 $ 11.28 $ 11.50
========== ========== ========== ==========
Total Investment Based on net asset value per share 3.99% 13.25%+++ 4.46% 13.65%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.15% 1.14%* .71% .70%*
Net Assets: ========== ========== ========== ==========
Investment income--net 5.86% 6.24%* 6.32% 6.81%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 10,144 $ 6,806 $ 33,270 $ 16,349
Data: ========== ========== ========== ==========
Portfolio turnover 96.40% 142.84% 96.40% 142.84%
========== ========== ========== ==========
</TABLE>
[FN]
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
74
<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 investment company consisting of three separate
portfolios: the High Income Portfolio, the Investment Grade
Portfolio 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
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
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. 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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements 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 purchase 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 contract, 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 contract 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 exercise 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
realizes 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 premium paid or received) Written
and purchased options are non-income producing investments.
75
<PAGE>
(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
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(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
treatments for post-October losses.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$41,466 on the High Income Portfolio have been reclassified between
accumulated net realized capital losses and accumulated
distributions in excess of 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" or "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, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, FAM receives at the end of each month a fee with respect
to each Portfolio at the annual rates set forth below which are
based upon the average daily value of the Fund's net assets.
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%
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 Distribution
Maintenance Fees 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 maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended September 30, 1996, MLFD earned underwriting
discounts and direct commissions 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 $46,008 $159,008 $428,269 $1,536,552
Investment Grade 9,077 21,853 87,256 186,693
Intermediate Term 802 2,646 10,768 28,889
76
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended September 30, 1996, MLPF&S received contingent
deferred sales charges of $6,208,136 relating to transactions in
Class B Shares, amounting to $4,772,201, $1,143,774, and $292,161 in
the High Income, Investment Grade, and Intermediate Term Portfolios,
respectively, $242,898 relating to transactions in Class C Shares,
amounting to $200,924, $35,555 and $6,419 in the High Income,
Investment Grade, and Intermediate Term Portfolios, respectively and
$51,319 relating to transactions subject to front-end sales charge
waivers in Class D Shares, amounting to $27,054, $22,295, and $1,970
in the High Income, Investment Grade, and Intermediate Term
Portfolios, respectively. In addition, MLPF&S received $58,500 in
commissions on the execution of security transactions, for the High
Income Portfolio for the year ended September 30, 1996.
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, 1996, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $31,336 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, 1996 were as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Purchases $2,620,285,720 $1,476,525,727 $504,005,990
============== ============== ============
Sales $1,492,933,779 $1,077,698,245 $434,623,613
============== ============== ============
Net realized and unrealized gains (losses) as of September 30, 1996
were as follows:
Realized Unrealized
High Income Portfolio Gains (Losses) Gains
Long-term investments $ 31,593,051 $ 16,407,645
Short-term investments (109,177) --
------------- -------------
Total $ 31,483,874 $ 16,407,645
============= =============
Realized Unrealized
Investment Grade Portfolio Gains Losses
Long-term investments $ 1,240,458 $ (11,181,465)
------------- -------------
Total $ 1,240,458 $ (11,181,465)
============= =============
Realized Unrealized
Intermediate Term Portfolio Gains (Losses) Losses
Long-term investments $ 3,880,745 $ (4,682,282)
Short-term investments (350) --
------------- -------------
Total $ 3,880,395 $ (4,682,282)
============= =============
As of September 30, 1996, net unrealized appreciation (depreciation)
for Federal income tax purposes was as follows:
High Investment Intermediate
Income Grade Term
Portfolio Portfolio Portfolio
Gross unrealized
appreciation $ 216,506,264 $ 13,913,520 $ 3,199,085
Gross unrealized
depreciation (207,626,085) (25,752,806) (8,058,104)
------------- ------------- -------------
Net unrealized
appreciation
(depreciation) $ 8,880,179 $ (11,839,286) $ (4,859,019)
============= ============= =============
The aggregate cost of investments at September 30, 1996 for Federal
income tax purposes was $5,701,940,166 for the High Income
Portfolio, $1,449,158,291 for the Investment Grade Portfolio, and
$476,011,939 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, 1996, was $1,376,309,947 for the
High Income Portfolio, $350,127,963 for the Investment Grade
Portfolio and $32,787,882 for the Intermediate Term Portfolio. 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.
Transactions in capital shares for each class were as follows:
High Income Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 17,653,142 $138,206,292
Shares issued to shareholders
in reinvestment of dividends
and distributions 5,577,702 43,685,460
------------ ------------
Total issued 23,230,844 181,891,752
Shares redeemed (19,467,577) (152,268,118)
------------ ------------
Net increase 3,763,267 $ 29,623,634
============ ============
77
<PAGE>
High Income Portfolio
Class A Shares for the Year Dollar
Ended 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 B Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 182,572,014 $1,430,080,855
Shares issued to shareholders
in reinvestment of dividends
and distributions 19,579,491 153,319,965
-------------- --------------
Total issued 202,151,505 1,583,400,820
Automatic conversion of shares (2,223,768) (17,369,063)
Shares redeemed (77,015,717) (603,076,378)
-------------- --------------
Net increase 122,912,020 $962,955,379
============== ==============
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 C Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 35,104,878 $275,231,433
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,535,893 12,030,927
------------ ------------
Total issued 36,640,771 287,262,360
Shares redeemed (8,274,123) (64,777,972)
------------ ------------
Net increase 28,366,648 $222,484,388
============ ============
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 Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 45,431,713 $356,012,837
Automatic conversion of shares 2,222,223 17,369,063
Shares issued to shareholders
in reinvestment of dividends 997,894 7,813,928
------------ ------------
Total issued 48,651,830 381,195,828
Shares redeemed (28,082,126) (219,949,282)
------------ ------------
Net increase 20,569,704 $161,246,546
============ ============
High Income Portfolio
Class D Shares for the Period
October 24, 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 Dollar
Ended September 30, 1996 Shares Amount
Shares sold 21,512,307 $245,167,944
Shares issued to shareholders
in reinvestment of dividends 1,723,312 19,614,975
------------ ------------
Total issued 23,235,619 264,782,919
Shares redeemed (9,749,755) (110,603,218)
------------ ------------
Net increase 13,485,864 $154,179,701
============ ============
Investment Grade Portfolio
Class A Shares for the Year Dollar
Ended 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 B Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 25,682,986 $293,704,255
Shares issued to shareholders
in reinvestment of dividends 2,302,336 26,218,517
------------ ------------
Total issued 27,985,322 319,922,772
Automatic conversion of shares (492,211) (5,556,607)
Shares redeemed (17,518,653) (199,596,946)
------------ ------------
Net increase 9,974,458 $114,769,219
============ ============
78
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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 C Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 4,830,230 $ 55,222,029
Shares issued to shareholders
in reinvestment of dividends 170,995 1,937,935
------------ ------------
Total issued 5,001,225 57,159,964
Shares redeemed (1,426,919) (16,176,400)
------------ ------------
Net increase 3,574,306 $ 40,983,564
============ ============
Investment Grade Portfolio
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Sept. 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 Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 4,314,720 $ 49,192,753
Automatic conversion of shares 491,987 5,556,607
Shares issued to shareholders
in reinvestment of dividends 169,863 1,927,735
------------ ------------
Total issued 4,976,570 56,677,095
Shares redeemed (1,448,119) (16,481,616)
------------ ------------
Net increase 3,528,451 $ 40,195,479
============ ============
Investment Grade Portfolio
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Sept. 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.
Intermediate Term Portfolio
Class A Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 7,219,026 $ 82,894,354
Shares issued to shareholders
in reinvestment of dividends 697,766 8,005,089
------------ ------------
Total issued 7,916,792 90,899,443
Shares redeemed (7,646,836) (87,796,852)
------------ ------------
Net increase 269,956 $ 3,102,591
============ ============
Intermediate Term Portfolio
Class A Shares for the Year Dollar
Ended 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 B Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 8,947,464 $102,809,743
Shares issued to shareholders
in reinvestment of dividends 750,062 8,601,518
------------ ------------
Total issued 9,697,526 111,411,261
Automatic conversion of shares (94,088) (1,066,696)
Shares redeemed (8,841,519) (101,696,552)
------------ ------------
Net increase 761,919 $ 8,648,013
============ ============
79
<PAGE>
Intermediate Term Portfolio
Class B Shares for the Year Dollar
Ended 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 C Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 807,328 $ 9,279,082
Shares issued to shareholders
in reinvestment of dividends 36,273 415,777
------------ ------------
Total issued 843,601 9,694,859
Shares redeemed (536,033) (6,197,495)
------------ ------------
Net increase 307,568 $ 3,497,364
============ ============
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 Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 2,494,925 $ 28,661,987
Automatic conversion of shares 94,087 1,066,696
Shares issued to shareholders
in reinvestment of dividends 95,536 1,090,298
------------ ------------
Total issued 2,684,548 30,818,981
Shares redeemed (1,156,648) (13,279,067)
------------ ------------
Net increase 1,527,900 $ 17,539,914
============ ============
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, 1996, the Investment Grade Portfolio held US
Treasury Bonds/Notes having an aggregate value of approximately
$12,208,000 as collateral for Portfolio securities loaned, having a
market value of approximately $11,903,000. The Intermediate Term
Portfolio held US Treasury Bonds/Notes having an aggregate value of
approximately $9,203,000 as collateral for Portfolio securities
loaned, having a market value of approximately $9,084,000.
6. Capital Loss Carryforward:
At September 30, 1996, the Fund had a capital loss carryforward of
approximately $4,727,000 in the High Income Portfolio, all of which
expires in 1999; approximately $34,388,000 in the Investment Grade
Portfolio, all of which expires in 2003; and approximately
$10,707,000 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.
80
<PAGE>
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81
<PAGE>
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82
<PAGE>
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83
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................ 2
Transactions in Futures and Options Thereon.............................. 2
Options on Debt Securities............................................... 3
Risk Factors in Transactions in Futures and Options Thereon.............. 4
Investment Restrictions................................................... 6
Management of the Fund.................................................... 9
Directors and Officers................................................... 9
Investment Advisory Arrangements......................................... 11
Duration and Termination................................................. 13
Transfer Agency Services Arrangements.................................... 13
Determination of Net Asset Value.......................................... 14
Portfolio Transactions.................................................... 15
Portfolio Turnover....................................................... 16
Purchase of Shares........................................................ 17
Alternative Sales Arrangements........................................... 17
Initial Sales Charge Alternative--Class A and
Class D Shares.......................................................... 17
Reduced Initial Sales Charges--Class A and
Class D Shares.......................................................... 18
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 22
Distribution Plan........................................................ 22
Limitations on the Payment of Deferred Sales Charges..................... 23
Redemption of Shares...................................................... 25
Repurchase............................................................... 25
Reinstatement Privilege.................................................. 26
Deferred Sales Charge--Class B and Class C Shares........................ 26
Dividends, Distributions and Taxes........................................ 28
Dividends and Distributions.............................................. 28
Federal Income Taxes..................................................... 28
Tax Treatment of Transactions in Options on Debt Securities, Futures
Contracts and Options Thereon........................................... 29
Shareholder Services...................................................... 30
Investment Account....................................................... 30
Automatic Investment Plans............................................... 31
Fee-Based Programs....................................................... 31
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 32
Systematic Withdrawal Plans.............................................. 32
Retirement Plans.......................................................... 33
Exchange Privilege........................................................ 34
Performance Data.......................................................... 36
Additional Information.................................................... 39
Organization of the Fund................................................. 39
Computation of Offering Price Per Share.................................. 40
Independent Auditors..................................................... 41
Custodian................................................................ 41
Transfer Agent........................................................... 41
Legal Counsel............................................................ 41
Reports to Shareholders.................................................. 41
Appendix................................................................. 42
Interest Rate Futures, Options Thereon and Options on Debt Securities.... 42
Independent Auditors' Report.............................................. 45
Financial Statements...................................................... 46
</TABLE>
Code #10210-0197
[LOGO] MERRILL LYNCH
MERRILL LYNCH
CORPORATE BOND FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
JANUARY 28, 1997
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, 1996,
Contained in Part B:
Schedules of Investments as of September 30, 1996.
Statements of Assets and Liabilities as of September 30, 1996.
Statements of Operations for the year ended September 30, 1996.
Statements of Changes in Net Assets for each of the years in the two-
year period ended September 30, 1996.
Financial Highlights for each of the years in the five-year period ended
September 30, 1996.
(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(a) --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).
5(b) --Form of Investment Sub-Advisory Agreement between Fund Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited
(filed herewith).
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--incorporated by reference to Exhibit 16 filed with
Post-Effective Amendment No. 21).
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 31, 1996
-------------- -----------------
<S> <C>
High Income Portfolio Class A common stock, par value
$0.10 per share....................................... 49,556
High Income Portfolio Class B common stock, par value
$0.10 per share....................................... 189,956
High Income Portfolio Class C common stock, par value
$0.10 per share....................................... 22,166
High Income Portfolio Class D common stock, par value
$0.10 per share....................................... 10,948
Investment Grade Portfolio Class A common stock, par
value $0.10 per share................................. 61,240
Investment Grade Portfolio Class B common stock, par
value $0.10 per share................................. 41,492
Investment Grade Portfolio Class C common stock, par
value $0.10 per share................................. 4,833
Investment Grade Portfolio Class D common stock, par
value $0.10 per share................................. 4,946
Intermediate Term Portfolio Class A common stock, par
value $0.10 per share................................. 32,363
Intermediate Term Portfolio Class B common stock, par
value $0.10 per share................................. 17,247
Intermediate Term Portfolio Class C common stock, par
value $0.10 per share................................. 1,888
Intermediate Term Portfolio Class D common stock, par
value $0.10 per share................................. 3,367
</TABLE>
--------
Note: The number of holders shown in the table 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 investment
adviser for the following open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New
York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch
C-5
<PAGE>
Variable Series Funds, Inc.; and for the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Investment Adviser, MLAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. also is P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of MLFD is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch and Merrill Lynch & Co., Inc.
("ML & Co.") is North Tower, World Financial Center, 250 Vesey Street, New
York, New York 10281-1213. The address of MLFDS 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>
ML & Co. ............... Limited Partner Financial Services Holding
Company; Limited Partner of MLAM.
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of MLAM.
Fund Asset Management, Limited Partner Investment Advisory Services
Inc. ..................
Arthur Zeikel........... President and President of MLAM; President and
Director Director of Princeton Services;
Executive Vice President of ML &
Co. and Merrill Lynch; Director
of MLFD.
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of Merrill Lynch
Financial Data Services, Inc.
("FDS"); President of Princeton
Administrators, L.P.
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.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
---- ------------------ ------------------------------------------------
<S> <C> <C>
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel and Senior Vice President, General
Secretary Counsel, Director and Secretary
of Princeton Services; Director
of MLFD.
Ronald M. Kloss......... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior Vice
President and Controller of
Princeton Services.
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services.
Joseph T. Monagle....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Michael L. Quinn........ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice President
of Merrill Lynch, Pierce, Fenner
and Smith from 1989 to 1995.
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of MLFD.
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
C-7
<PAGE>
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Convertible Holdings, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Growth Fund, Merrill Lynch Global
Resources Trust, Merrill Lynch Healthcare Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund,
Inc., Worldwide DollarVest Fund, Inc., and Merrill Lynch Short-Term Global
Income Fund, Inc. The address of each of these investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1994, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- -------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel......... Director and Chairman President of the Manager and FAM;
President and Director of
Princeton Services, Director of
MLFD; Executive Vice President of
ML & Co.
Alan J. Albert........ Senior Managing Vice President of the Manager
Director
Terry K. Glenn........ Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of
Princeton Services; President and
Director of MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
Adrian Holmes......... Managing Director Director of Merrill Lynch Global
Asset Management
Andrew John Bascand... Director Director of Merrill Lynch Global
Asset Management
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- -------------- ----------------------------------
<S> <C> <C>
Edward Gobora ........ Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride...... Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan........ Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets
from 1989 to 1994
Gerald M. Richard..... Senior Vice President Senior Vice President and
Treasurer of the Manager and FAM;
Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Stephen J. Yardley.... Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham..... Company Secretary None
Debra Anne Searle..... Assistant Company None
Secretary
</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-9
<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, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2646.
<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 and
Director
Philip Kirstein.................... Director None
William E. Aldrich................. Senior Vice None
President
Robert W. Crook.................... Senior Vice None
President
Gerald M. Richard.................. Vice President and Treasurer
Treasurer
Kevin P. Boman..................... Vice President None
Michael J. Brady................... Vice President None
William M. Breen................... Vice President None
Mark A. DeSario.................... Vice President None
James T. Fatseas................... Vice President None
Debra W. Landsman-Yaros............ Vice President None
Michelle T. Lau.................... Vice President None
Salvatore Venezia.................. Vice President None
William Wasel...................... Vice President None
Robert Harris...................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
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-10
<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 28th day of January, 1997.
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 28,
Arthur Zeikel 1997
/s/ Gerald M. Richard Treasurer (Principal
- ---------------------------- Financial and Accounting January 28,
Gerald M. Richard Officer) 1997
* 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 28,
Arthur Zeikel (Attorney-in- 1997
Fact)
C-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<C> <S> <C>
5(b) Form of Sub-Advisory Agreement between Fund Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited..........
11 --Consent of Deloitte & Touche LLP, independent accountants for
the Registrant................................................
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> HIGH INCOME PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 5694412700
<INVESTMENTS-AT-VALUE> 5710820345
<RECEIVABLES> 191588046
<ASSETS-OTHER> 1668039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5904076430
<PAYABLE-FOR-SECURITIES> 46962985
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28890239
<TOTAL-LIABILITIES> 75853224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5819622481
<SHARES-COMMON-STOCK> 119457213
<SHARES-COMMON-PRIOR> 115693946
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2665658)
<ACCUMULATED-NET-GAINS> (5141262)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16407645
<NET-ASSETS> 947479106
<DIVIDEND-INCOME> 10274484
<INTEREST-INCOME> 494568206
<OTHER-INCOME> 4272092
<EXPENSES-NET> (56733107)
<NET-INVESTMENT-INCOME> 452381675
<REALIZED-GAINS-CURRENT> 31483874
<APPREC-INCREASE-CURRENT> 65146802
<NET-CHANGE-FROM-OPS> 549012351
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (88261737)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17653142
<NUMBER-OF-SHARES-REDEEMED> (19467577)
<SHARES-REINVESTED> 5577702
<NET-CHANGE-IN-ASSETS> 1467440578
<ACCUMULATED-NII-PRIOR> 2875853
<ACCUMULATED-GAINS-PRIOR> (36666602)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 20696123
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56733107
<AVERAGE-NET-ASSETS> 911043239
<PER-SHARE-NAV-BEGIN> 7.80
<PER-SHARE-NII> .75
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> (.76)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.93
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> INVESTMENT GRADE PORTFOLIO- CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 1448500470
<INVESTMENTS-AT-VALUE> 1437319005
<RECEIVABLES> 33354915
<ASSETS-OTHER> 473148
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1471147068
<PAYABLE-FOR-SECURITIES> 2500000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6904183
<TOTAL-LIABILITIES> 9404183
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1511369175
<SHARES-COMMON-STOCK> 54539733
<SHARES-COMMON-PRIOR> 41053869
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6680118)
<OVERDISTRIBUTION-GAINS> (31764707)
<ACCUM-APPREC-OR-DEPREC> (11181465)
<NET-ASSETS> 608900606
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 96053974
<OTHER-INCOME> 264364
<EXPENSES-NET> (13253148)
<NET-INVESTMENT-INCOME> 83065190
<REALIZED-GAINS-CURRENT> 1240458
<APPREC-INCREASE-CURRENT> (44461678)
<NET-CHANGE-FROM-OPS> 39843970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36619895)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21512307
<NUMBER-OF-SHARES-REDEEMED> (9749755)
<SHARES-REINVESTED> 1723312
<NET-CHANGE-IN-ASSETS> 306906743
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6680118)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (33005165)
<GROSS-ADVISORY-FEES> 4816371
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13253148
<AVERAGE-NET-ASSETS> 551242054
<PER-SHARE-NAV-BEGIN> 11.51
<PER-SHARE-NII> .76
<PER-SHARE-GAIN-APPREC> (.35)
<PER-SHARE-DIVIDEND> (.76)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.16
<EXPENSE-RATIO> .56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 475835202
<INVESTMENTS-AT-VALUE> 471152920
<RECEIVABLES> 9358551
<ASSETS-OTHER> 48251
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 480559722
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3959790
<TOTAL-LIABILITIES> 3959790
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 492165776
<SHARES-COMMON-STOCK> 19197959
<SHARES-COMMON-PRIOR> 18928003
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5362923)
<OVERDISTRIBUTION-GAINS> (5520639)
<ACCUM-APPREC-OR-DEPREC> (4682282)
<NET-ASSETS> 216545160
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 33808458
<OTHER-INCOME> 104466
<EXPENSES-NET> (4108699)
<NET-INVESTMENT-INCOME> 29804225
<REALIZED-GAINS-CURRENT> 3880395
<APPREC-INCREASE-CURRENT> (13083867)
<NET-CHANGE-FROM-OPS> 20600753
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14523748)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7219026
<NUMBER-OF-SHARES-REDEEMED> (7646836)
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<NET-CHANGE-IN-ASSETS> 23584410
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<ACCUMULATED-GAINS-PRIOR> (5362923)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (9401034)
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<GROSS-EXPENSE> 4108699
<AVERAGE-NET-ASSETS> 226557563
<PER-SHARE-NAV-BEGIN> 11.50
<PER-SHARE-NII> .73
<PER-SHARE-GAIN-APPREC> (.22)
<PER-SHARE-DIVIDEND> (.73)
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.28
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> HIGH INCOME PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 5694412700
<INVESTMENTS-AT-VALUE> 5710820345
<RECEIVABLES> 191588046
<ASSETS-OTHER> 1668039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5904076430
<PAYABLE-FOR-SECURITIES> 46962985
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28890239
<TOTAL-LIABILITIES> 75853224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5819622481
<SHARES-COMMON-STOCK> 535749707
<SHARES-COMMON-PRIOR> 412837687
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2665658)
<ACCUMULATED-NET-GAINS> (5141262)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16407645
<NET-ASSETS> 4250539421
<DIVIDEND-INCOME> 10274484
<INTEREST-INCOME> 494568206
<OTHER-INCOME> 4272092
<EXPENSES-NET> (56733107)
<NET-INVESTMENT-INCOME> 452381675
<REALIZED-GAINS-CURRENT> 31483874
<APPREC-INCREASE-CURRENT> 65146802
<NET-CHANGE-FROM-OPS> 549012351
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (330990944)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 182572014
<NUMBER-OF-SHARES-REDEEMED> (79239485)
<SHARES-REINVESTED> 19579491
<NET-CHANGE-IN-ASSETS> 1467440578
<ACCUMULATED-NII-PRIOR> 2875853
<ACCUMULATED-GAINS-PRIOR> (36666602)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 20696123
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56733107
<AVERAGE-NET-ASSETS> 3713149034
<PER-SHARE-NAV-BEGIN> 7.80
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> .15
<PER-SHARE-DIVIDEND> (.71)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.93
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> INVESTMENT GRADE PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 1448500470
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<RECEIVABLES> 33354915
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 06
<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS B
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1996
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> HIGH INCOME PORTFOLIO - CLASS C
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> INVESTMENT GRADE PORTFOLIO - CLASS C
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS C
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> HIGH INCOME PORTFOLIO - CLASS D
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> INVESTMENT GRADE PORTFOLIO - CLASS D
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> INTERMEDIATE TERM PORTFOLIO - CLASS D
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<PAGE>
EXHIBIT 99.5(b)
SUB-ADVISORY AGREEMENT
Agreement made as of the th day of January, 1997, by and between Fund Asset
Management, l.p., a Delaware limited partnership (hereinafter referred to as
"FAM"), and Merrill Lynch Asset Management U.K. Limited, a corporation
organized under the laws of England and Wales (hereinafter referred to as "MLAM
U.K.").
Witnesseth:
Whereas, Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a Maryland
corporation engaged in business as a non-diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
Whereas, FAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
Whereas, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
Whereas, FAM has entered into a management agreement (the "Management
Agreement") dated , pursuant to which FAM provides management and
investment and advisory services to the Fund; and
Whereas, MLAM U.K. is willing to provide investment advisory services to FAM
in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
Now, Therefore, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and FAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
FAM hereby employs MLAM U.K. to act as investment adviser to FAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of FAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to
assume the obligations herein set forth for the compensation provided for
herein. FAM and its affiliates shall for all purposes herein be deemed a
Professional Investor as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided of authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on FAM and shall
provide FAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the assets of the
Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the Fund's
<PAGE>
investment objective, investment policies and investment restrictions as the
same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and
any other rights pertaining to the portfolio securities of the Fund shall be
exercised.
MLAM U.K. will not hold money on behalf of FAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of FAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are affiliated persons
of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., FAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by FAM and MLAM U.K. but in no event in excess of the amount that
FAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of
its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for FAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
2
<PAGE>
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. FAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO
directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures of contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above written and
shall remain in force until the date of termination of the Management Agreement
(but not later than two years after the date hereof) and thereafter, but only
so long as such continuance is specifically approved at least annually by (i)
the Directors of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund 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 FAM or by vote of a majority of the outstanding voting securities
of the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Management Agreement. Any termination
shall be without prejudice to the completion of transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement of interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meaning specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
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<PAGE>
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
In Witness Whereof, the parties hereto have executed and delivered this
Agreement as of the date first above written.
Fund Asset Management, l.p.
By______________________________
Title
Merrill Lynch Asset Management U.K.
Limited
By______________________________
Title
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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. 23 to Registration
Statement No. 2-62329 of our report dated November 7, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 28, 1997
