<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1998
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. 25 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 21 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH CORPORATE BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH CORPORATE BOND FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE COMPANY: PHILIP M. MANDEL, ESQ.
LEONARD B. MACKEY, JR., ESQ. FUND ASSET MANAGEMENT L.P.
ROGERS & WELLS LLP P.O. BOX 9011
200 PARK AVENUE PRINCETON, N.J. 08543-9011
NEW YORK, NEW YORK 10166
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
------------------------
Title of Securities Being Registered: Shares of Common Stock, Class A,
Class B and Class D.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
PROSPECTUS
[MERRILL LYNCH LOGO]
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1998
PRELIMINARY PROSPECTUS
Merrill Lynch Corporate Bond Fund, Inc.
[MERRILL LYNCH ARWORK]
January , 1999
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING, INCLUDING INFORMATION ABOUT RISKS. PLEASE READ
IT BEFORE YOU INVEST AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 3
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- -----------------------------------------------------------------
The Merrill Lynch Corporate Bond Fund at a Glance........... 3
Risk/Return Bar Chart....................................... 5
Fees and Expenses........................................... 8
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- -----------------------------------------------------------------
How each Portfolio Invests.................................. 12
Investment Risks............................................ 14
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- -----------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System..................... 21
How to Buy, Sell, Transfer and Exchange Shares.............. 28
Participation in Merrill Lynch Fee-Based Programs........... 32
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- -----------------------------------------------------------------
Fund Asset Management....................................... 34
Financial Highlights........................................ 35
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- -----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 4
Key Facts [KEY FACTS ICON]
IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.
FIXED-INCOME SECURITIES -- securities that pay a fixed rate of interest or a
fixed dividend.
CORPORATE BONDS OR NOTES -- fixed-income debt securities issued by
corporations, as distinct from securities issued by a government or its agencies
or instrumentalities.
CONVERTIBLE SECURITIES -- fixed-income securities, such as corporate bonds or
preferred stock, that are exchangeable for shares of common stock of the issuer
or another company.
PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets. Preferred stock may also be convertible into common stock.
INVESTMENT GRADE SECURITIES -- fixed-income securities rated in the four
highest rating categories by recognized rating agencies, including Moody's and
S&P.
THE MERRILL LYNCH CORPORATE BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S OBJECTIVES AND GOALS?
The Fund consists of three separate portfolios -- the High Income Portfolio, the
Investment Grade Portfolio and the Intermediate Term Portfolio. Each Portfolio
is, in effect, a separate fund that issues its own shares. 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.
This means the main goal of each Portfolio is current income. Each Portfolio
also seeks growth of capital by looking for investments that will increase in
value. However, each Portfolio's investments emphasize current income more than
growth of capital. We cannot guarantee that any Portfolio will achieve its
goals.
WHAT ARE THE PORTFOLIOS' MAIN INVESTMENT STRATEGIES?
Each Portfolio invests primarily in a diversified portfolio of FIXED-INCOME
SECURITIES, such as CORPORATE BONDS AND NOTES, CONVERTIBLE SECURITIES, PREFERRED
STOCKS and GOVERNMENT OBLIGATIONS. Both U.S. and foreign companies and
governments may issue these securities. The investment strategies of the
Portfolios differ primarily in the quality and MATURITY of the fixed-income
securities in which they invest.
The High Income Portfolio invests primarily in fixed-income securities that are
rated in the lower rating categories of the recognized rating agencies (Baa or
lower by Moody's Investors Service, Inc. ("Moody's") or BBB or lower by Standard
& Poors ("S&P")), or are unrated securities that Fund management believes are of
comparable quality. Securities rated below Baa by Moody's or below BBB by S&P
are commonly known as "JUNK BONDS." Junk bonds are high-risk investments that
may suffer income and principal losses for the High Income Portfolio.
The Investment Grade Portfolio invests primarily in long-term, fixed-income
securities that are rated in the three highest rating categories of the
recognized rating agencies (A or better by Moody's or S&P). Securities with
credit quality in any of the four highest rating categories are known as
"INVESTMENT GRADE" securities.
MERRILL LYNCH CORPORATE BOND FUND, INC. 3
<PAGE> 5
[KEY FACTS ICON] Key Facts
GOVERNMENT OBLIGATIONS -- fixed-income securities issued by a government or its
agencies or instrumentalities, as distinct from securities issued by
corporations.
JUNK BONDS -- fixed-income securities rated below investment grade by recognized
rating agencies, including Moody's and S&P, or unrated securities that Fund
management believes are of comparable quality.
FOREIGN SECURITIES -- securities issued by a foreign corporation or government,
as distinct from securities issued by a U.S. corporation or the U.S. government.
MATURITY -- date on which a debt instrument becomes due and payable.
The Intermediate Term Portfolio invests primarily in fixed-income securities
that are rated in the four highest rating categories of the recognized rating
agencies (Baa or better by Moody's or BBB or better by S&P) and will mature
within ten years. However, it is anticipated that the Intermediate Term
Portfolio's investments will have an average remaining maturity of five to seven
years, depending on market conditions.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIOS?
As with any fixed-income fund, the value of each Portfolio's investments, and
therefore the value of your Portfolio's shares, may go up or down. The value of
each Portfolio's investments may change in response to interest rate changes or
other factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of fixed-income instruments goes down. If the
value of your Portfolio's investments goes down, you may lose money.
Each Portfolio may invest its assets in FOREIGN SECURITIES, which may involve
additional risks beyond those of U.S. securities.
In addition to these risks, the High Income Portfolio has greater risks than the
other Portfolios because it invests primarily in junk bonds. Investments in junk
bonds involve greater risks than investments in higher quality debt securities,
such as greater price fluctuation and greater risk of loss of income and
principal.
WHO SHOULD INVEST?
A Portfolio may be an appropriate investment for you if you:
- Are looking for an investment that provides income.
- Want a professionally managed and diversified portfolio without
the administrative burdens of direct investments in corporate
bonds.
- Are willing, in the case of the Investment Grade Portfolio and
Intermediate Term Portfolio, to accept the risk of loss of
income and principal, caused by negative economic developments,
changes in interest rates or adverse changes in the price of
bonds in general.
- Are willing, in the case of the High Income Portfolio, to accept
the risk of greater loss of income and principal in return for
the possibility of receiving higher current income.
4 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 6
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO
The bar chart and table shown below provide an indication of the risks of
investing in the High Income Portfolio. The bar chart shows changes in the High
Income Portfolio's performance for Class A shares for the ten year period. Sales
charges are not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the average annual
total returns for each class of the High Income Portfolio's shares for the
periods shown with those of the CS First Boston High Yield Index. How the High
Income Portfolio performed in the past is not necessarily an indication of how
the High Income Portfolio will perform in the future.
[BAR CHART]
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13% 4% (5)% 40% 21% 17% (3)% 18% 12% 11%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 15.94% (quarter ended March 31, 1991) and the lowest return for a
quarter was -5.39% (quarter ended September 30, 1990). The High Income
Portfolio's year-to-date return as of September 30, 1998 was -6.57%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST
(AS OF THE 10 YEARS/
CALENDAR YEAR ENDED PAST PAST SINCE
DECEMBER 31, 1997) ONE YEAR 5 YEARS INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
High Income Portfolio* A 6.99% 10.22% 11.90%
- ---------------------------------------------------------------------------
B 6.61% 10.29% 11.30%+
- ---------------------------------------------------------------------------
C 9.55% N/A 11.88%++
- ---------------------------------------------------------------------------
D 6.73% N/A 11.04%++
- ---------------------------------------------------------------------------
CS First Boston High Yield Index** 12.63% 11.84% 12.09%
- ---------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged market-weighted Index mirrors the high-yield debt market of
securities rated BBB or lower. Past performance is not predictive of future
performance.
+ Inception date is October 21, 1988.
++ Inception date is October 21, 1994.
MERRILL LYNCH CORPORATE BOND FUND, INC. 5
<PAGE> 7
[KEY FACTS ICON] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
INVESTMENT GRADE PORTFOLIO
The bar chart and table shown below provide an indication of the risks of
investing in the Investment Grade Portfolio. The bar chart shows changes in the
Investment Grade Portfolio's performance for Class A shares for the ten year
period. Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Investment Grade Portfolio's
shares for the periods shown with those of the Merrill Lynch Corporate Master
Index. How the Investment Grade Portfolio performed in the past is not
necessarily an indication of how the Investment Grade Portfolio will perform in
the future.
[BAR CHART]
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8% 14% 7% 17% 8% 12% (5)% 20% 2% 8%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 7.69% (quarter ended June 30, 1989) and the lowest return for a
quarter was -4.22% (quarter ended March 31, 1994). The Investment Grade
Portfolio's year-to-date return as of September 30, 1998 was 7.51%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST
(AS OF THE 10 YEARS/
CALENDAR YEAR ENDED PAST PAST SINCE
DECEMBER 31, 1997) ONE YEAR 5 YEARS INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Grade Portfolio* A 4.00% 6.35% 8.47%
- ---------------------------------------------------------------------------
B 3.51% 6.41% 7.98%+
- ---------------------------------------------------------------------------
C 6.55% N/A 8.67%++
- ---------------------------------------------------------------------------
D 3.84% N/A 7.90%++
- ---------------------------------------------------------------------------
ML Corporate Master Index** 10.39% 8.55% 10.08%
- ---------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged Index is comprised of all investment-grade corporate bonds
rated BBB3 or higher, of all maturities. Past performance is not predictive
of future performance.
+ Inception date is October 21, 1988.
++ Inception date is October 21, 1994.
6 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 8
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
INTERMEDIATE TERM PORTFOLIO
The bar chart and table shown below provide an indication of the risks of
investing in the Intermediate Term Portfolio. The bar chart shows changes in the
Intermediate Term Portfolio's performance for Class A shares for the ten year
period. Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Intermediate Term Portfolio's
shares for the periods shown with those of the Merrill Lynch Corporate BBB 5-10
Year Index and the ML Corporate BBB 1-10 Year Index. How the Intermediate Term
Portfolio performed in the past is not necessarily an indication of how the
Intermediate Term Portfolio will perform in the future.
[BAR CHART]
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8% 12% 8% 16% 7% 12% (4)% 18% 3% 8%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 6.77% (quarter ended June 30, 1989) and the lowest return for a
quarter was -3.59% (quarter ended March 31, 1994). The Intermediate Term
Portfolio's year-to-date return as of September 30, 1998 was 7.18%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE PAST
CALENDAR YEAR ENDED PAST PAST 5 10 YEARS/
DECEMBER 31, 1997) ONE YEAR YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Term Portfolio* A 7.10% 6.96% 8.55%
- -----------------------------------------------------------------------------------
B 6.62% 6.63% 6.73%+
- -----------------------------------------------------------------------------------
C 6.58% N/A 8.52%++
- -----------------------------------------------------------------------------------
D 6.99% N/A 8.65%++
- -----------------------------------------------------------------------------------
ML Corporate BBB 5-10 Year Index** 9.38% 8.44% 9.91%
- -----------------------------------------------------------------------------------
ML Corporate BBB 1-10 Year Index*** 8.60% 7.77% 9.21%
- -----------------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged Index is comprised of all investment-grade corporate bonds
maturing in from five to ten years. Past performance is not predictive of
future performance.
*** This unmanaged Index is comprised of all investment-grade corporate bonds
maturing in from one to ten years.
+ Inception date is November 13, 1992.
++ Inception date is October 21, 1994.
MERRILL LYNCH CORPORATE BOND FUND, INC. 7
<PAGE> 9
[KEY FACTS ICON] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- fees paid directly from your investment. These include sales
charges which you may pay when you buy or sell shares of a Portfolio.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER (THESE COSTS ARE DEDUCTED FROM EACH
PORTFOLIO'S TOTAL ASSETS):
ANNUAL PORTFOLIO OPERATING EXPENSES -- expenses that cover the costs of
operating a Portfolio.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing a Portfolio.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
ACCOUNT MAINTENANCE FEES -- fees used to compensate securities dealers for
account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
Each Portfolio offers four different classes of shares; however, shares of the
High Income Portfolio are not available for purchase except as described on page
23. Although your money will be invested the same way no matter which class of
shares you buy, there are differences among the fees and expenses associated
with each class. Not everyone is eligible to buy every class. After determining
which classes you are eligible to buy, decide which class best suits your needs.
Your Merrill Lynch Financial Consultant can help you with this decision.
These tables show the different fees and expenses that you may pay if you buy
and hold the different classes of shares of each Portfolio. Future expenses may
be greater or less than those indicated below.
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO
---------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES: CLASS A CLASS B(a) CLASS C CLASS D
- -------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(b) None None 4.00%(b)
- -------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.00%(b) 1.00%(b) None(c)
- -------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- -------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES:
- -------------------------------------------------------------------------------------------------
MANAGEMENT FEE(d) 0.41% 0.41% 0.41% 0.41%
- -------------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR ACCOUNT MAINTENANCE
(12B-1) FEES(e) None 0.75% 0.80% 0.25%
- -------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.08% 0.09% 0.10% 0.08%
- -------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses(g) 0.49% 1.25% 1.31% 0.74%
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund pays the Investment Adviser fees at annual rates that decrease as
the total assets of the Fund's three Portfolios increase above certain
levels. The fee rates are applied to the average daily net assets of each
Portfolio, with the reduced rates 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"). These annual
fee rates range from 0.55% to 0.40% for the High Income Portfolio and from
0.50% to 0.35% for the Investment Grade and Intermediate Term Portfolios.
For the fiscal year ended September 30, 1998, the Investment Adviser
received a fee equal to 0.40% of the aggregate of the average daily net
assets of the three combined Portfolios.
(e) If you hold Class B or Class C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would
have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended
September 30, 1998, the Fund paid the Transfer Agent fees totaling
$5,854,833 for the High Income Portfolio. The Investment Adviser provides
accounting services to the Fund at its cost. For the fiscal year ended
September 30, 1998, the Fund reimbursed the Investment Adviser $512,372 for
these services.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
8 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 10
[KEY FACTS ICON] Key Facts
<TABLE>
<CAPTION>
INVESTMENT GRADE PORTFOLIO
---------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES: CLASS A CLASS B(a) CLASS C CLASS D
- -------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(b) None None 4.00%
- -------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
- -------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- -------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES:
- -------------------------------------------------------------------------------------------------
MANAGEMENT FEE(d) 0.36% 0.36% 0.36% 0.36%
- -------------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR ACCOUNT MAINTENANCE
(12B-1) FEES(e) None 0.75% 0.80% 0.25%
- -------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.22% 0.23% 0.24% 0.21%
- -------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses(g) 0.58% 1.34% 1.40% 0.82%
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund pays the Investment Adviser fees at annual rates that decrease as
the total assets of the Fund's three Portfolios increase above certain
levels. The fee rates are applied to the average daily net assets of each
Portfolio, with the reduced rates 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"). These annual
fee rates range from 0.55% to 0.40% for the High Income Portfolio and from
0.50% to 0.35% for the Investment Grade and Intermediate Term Portfolios.
For the fiscal year ended September 30, 1998, the Investment Adviser
received a fee equal to 0.40% of the aggregate of the average daily net
assets of the three combined Portfolios.
(e) If you hold Class B or Class C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would
have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended
September 30, 1998, the Fund paid the Transfer Agent fees totaling
$2,465,536 for the Investment Grade Portfolio. The Investment Adviser
provides accounting services to the Fund at its cost. For the fiscal year
ended September 30, 1998, the Fund reimbursed the Investment Adviser $75,981
for these services.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
MERRILL LYNCH CORPORATE BOND FUND, INC. 9
<PAGE> 11
[KEY FACTS ICON] Key Facts
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
---------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES: CLASS A CLASS B(a) CLASS C CLASS D
- -----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) 1.00%(c) None None 1.00%(c)
- -----------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(b) 1.0%(b) 1.0%(b) None(c)
- -----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
- -----------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES:
- -----------------------------------------------------------------------------------------------------
MANAGEMENT FEE(d) 0.36% 0.36% 0.36% 0.36%
- -----------------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR ACCOUNT MAINTENANCE (12b-1)
FEES(e) None 0.50% 0.50% 0.10%
- -----------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.31% 0.32% 0.34% 0.31%
- -----------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses(g) 0.67% 1.18% 1.20% 0.77%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund pays the Investment Adviser fees at annual rates that decrease as
the total assets of the Fund's three Portfolios increase above certain
levels. The fee rates are applied to the average daily net assets of each
Portfolio, with the reduced rates 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"). These annual
fee rates range from 0.55% to 0.40% for the High Income Portfolio and from
0.50% to 0.35% for the Investment Grade and Intermediate Term Portfolios.
For the fiscal year ended September 30, 1998, the Investment Adviser
received a fee equal to 0.40% of the aggregate of the average daily net
assets of the three combined Portfolios.
(e) If you hold Class B or Class C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would
have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended
September 30, 1998, the Fund paid the Transfer Agent fees totaling
$1,156,400 for the Intermediate Term Portfolio. The Investment Adviser
provides accounting services to the Fund at its cost. For the fiscal year
ended September 30, 1998, the Fund reimbursed the Investment Adviser $34,351
for these services.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
10 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 12
EXAMPLES:
These examples are intended to help you compare the cost of investing in a
Portfolio with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the indicated Portfolio for the
time periods indicated, that your investment has a 5% return each year, that you
pay the sales charges, if any, that apply to the particular class and that the
indicated Portfolio's operating expenses remain the same. This assumption is not
meant to indicate you will receive a 5% annual rate of return. Your annual
return may be more or less than the 5% used in this example. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO
- --------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------- -----------------------------------------
Class A $448 $551 $663 $ 991 $457 $578 $711 $1,097
- --------------------------------------------------- -----------------------------------------
Class B $527 $597 $686 $1,511 $537 $625 $734 $1,613
- --------------------------------------------------- -----------------------------------------
Class C $233 $415 $718 $1,579 $243 $443 $766 $1,680
- --------------------------------------------------- -----------------------------------------
Class D $473 $627 $795 $1,282 $480 $651 $837 $1,373
- --------------------------------------------------- -----------------------------------------
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- --------- -----------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ----------------------------------------
Class A $168 $312 $470 $ 926
- --------- ----------------------------------------
Class B $220 $375 $649 $1,432
- --------- ----------------------------------------
Class C $222 $381 $660 $1,455
- --------- ----------------------------------------
Class D $178 $344 $524 $1,045
- --------- ----------------------------------------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO INVESTMENT GRADE PORTFOLIO
- ---------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------- -----------------------------------------
Class A $448 $551 $663 $ 991 $457 $578 $711 $1,097
- --------------------------------------------------- -----------------------------------------
Class B $127 $397 $686 $1,511 $137 $425 $734 $1,613
- --------------------------------------------------- -----------------------------------------
Class C $133 $415 $718 $1,579 $143 $443 $766 $1,680
- --------------------------------------------------- -----------------------------------------
Class D $473 $627 $795 $1,282 $480 $651 $837 $1,373
- --------------------------------------------------- -----------------------------------------
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- --------- -----------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- -----------------------------------------
Class A $168 $312 $470 $ 926
- --------- -----------------------------------------
Class B $120 $375 $649 $1,432
- --------- -----------------------------------------
Class C $122 $381 $660 $1,455
- --------- -----------------------------------------
Class D $178 $344 $524 $1,045
- --------- -----------------------------------------
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 11
<PAGE> 13
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ILLIQUID SECURITIES -- securities that cannot be resold within seven days under
normal circumstances at current value or that have contractual or legal
restrictions on resale.
DISTRESSED SECURITIES -- securities that are subject to bankruptcy proceedings
or are in default or at risk of being in default.
YIELD -- the income generated by an investment in a Portfolio.
HOW EACH PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The main goal of each Portfolio is current income. Each Portfolio also seeks
growth of capital when consistent with its primary goal of current income. Each
Portfolio invests primarily in a diversified portfolio of fixed-income
securities, such as corporate bonds and notes, convertible securities, preferred
stocks and government debt obligations.
Under normal circumstances, each Portfolio anticipates investing more than 90%
of its assets in fixed-income securities. In addition, as a matter of operating
policy, each Portfolio will invest at least 65% of its assets in corporate
bonds, under normal circumstances. Each Portfolio may invest up to 25% of its
assets in foreign securities. Each Portfolio may also invest up to 15% of its
total assets in ILLIQUID SECURITIES. The Portfolios do not intend to invest in
common stocks or other equity securities. However, the High Income Portfolio may
acquire such securities, other than preferred stocks, in unit offerings with
fixed-income securities or in connection with a conversion or exchange of
fixed-income securities.
Each Portfolio may continue to hold securities which, after being purchased by
the Portfolio, are downgraded to a rating below that which the Portfolio
primarily invests.
Under unusual market or economic conditions, each Portfolio may, for temporary
defensive or other purposes, invest up to 100% of its assets in U.S. government
securities, certificates of deposit, bankers' acceptances, commercial paper
rated in the highest rating category by a recognized rating service, cash or
other high quality fixed-income securities that are consistent with the
Portfolio's objectives. The yield on such securities may be lower than the yield
on lower-rated fixed-income securities.
Each Portfolio may purchase or sell futures contracts and options thereon for
hedging purposes. Each Portfolio may also purchase or sell options on debt
securities for hedging purposes, as well as to increase the return on their
portfolio investments. Each Portfolio may also lend its portfolio securities,
invest in repurchase agreements, when issued and delayed delivery securities,
make forward commitments, and (in the case of the High Income Portfolio) enter
into standby commitment agreements.
HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
The High Income Portfolio invests primarily in fixed-income securities that are
rated Baa or lower by Moody's or BBB or lower by S&P, or are unrated
12 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 14
ABOUT THE PORTFOLIO MANAGERS
Vincent T. Lathbury is a Senior Vice President and a portfolio manager of the
High Income Portfolio. Mr. Lathbury has been a First Vice President of Merrill
Lynch Asset Management since 1997 and was a Vice President from 1982 to 1997.
Mr. Lathbury has been primarily responsible for the management of the High
Income Portfolio since 1982.
Christopher G. Ayoub is a Senior Vice President and a portfolio manager of the
Investment Grade Portfolio and Intermediate Term Portfolio. Mr. Ayoub has served
as First Vice President of Merrill Lynch Asset Management since 1997, was a Vice
President from 1985 to 1997, and an Assistant Vice President from 1984 to 1985.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
securities that Fund management believes are of comparable quality. Securities
rated below Baa or BBB are commonly known as "junk bonds." The High Income
Portfolio may invest up to 100% of its assets in junk bonds. Although junk bonds
generally pay higher rates of interest than investment grade bonds, they are
high-risk investments that may suffer income and principal losses for the High
Income Portfolio. The High Income Portfolio may invest up to 15% of its total
assets in secondary market purchases of corporate loans. The High Income
Portfolio may also invest up to 10% of its total assets in DISTRESSED
SECURITIES. The High Income Portfolio may invest in higher rated fixed-income
securities if the risk of loss of income and principal to the Portfolio may be
substantially reduced with only a small decrease in YIELD.
INVESTMENT GRADE PORTFOLIO
- --------------------------------------------------------------------------------
The Investment Grade Portfolio invests primarily in long-term, fixed-income
securities that are rated in the three highest rating categories of the
recognized rating services (A or better by Moody's or S&P). Securities with
credit quality in any of the four highest rating categories are known as
"investment grade" securities. The risks of the Investment Grade Portfolio
should be reduced by the credit quality of the bonds in which it invests.
However, because of the longer maturities of such bonds, the net asset value of
the Investment Grade Portfolio may experience large price fluctuations in
response to changes in interest rates. The Investment Grade Portfolio will
attempt to minimize price decreases and maximize price increases due to interest
rate changes by actively trading its securities in order to change the average
maturity or credit quality of the bonds in the portfolio.
INTERMEDIATE TERM PORTFOLIO
- --------------------------------------------------------------------------------
The Intermediate Term Portfolio invests primarily in fixed-income securities
that are rated in the four highest rating categories of the recognized rating
services (Baa or better by Moody's or BBB or better by S&P). The Intermediate
Term Portfolio will invest primarily in securities that will mature within ten
years. However, the Intermediate Term Portfolio anticipates holding securities
with an average remaining maturity of five to seven years, depending on market
conditions. Because the Intermediate Term Portfolio buys securities with shorter
maturities, changes in interest rates
MERRILL LYNCH CORPORATE BOND FUND, INC. 13
<PAGE> 15
[DETAILS ABOUT THE FUND ICON] Details About the Fund
should have less of an effect on the net asset value of the Intermediate Term
Portfolio than on the net asset value of the other two Portfolios. However, the
Intermediate Term Portfolio will usually offer a lower yield than the other two
Portfolios.
Each Portfolio may continue to hold securities which, after being purchased by
the Portfolio, are downgraded to a rating below that which the Portfolio
primarily invests.
Under unusual market or economic conditions, each Portfolio may, for temporary
defensive or other purposes, invest up to 100% of its assets in U.S. government
securities, certificates of deposit, bankers' acceptances, commercial paper
rated in the highest rating category by a recognized rating service, cash or
other high quality fixed-income securities that are consistent with the
Portfolio's objectives. The yield on such securities may be lower than the yield
on lower-rated fixed-income securities.
Each Portfolio may purchase or sell futures contracts and options thereon for
hedging purposes. Each Portfolio may also purchase or sell options on debt
securities for hedging purposes, as well as to increase the return on their
portfolio investments. Each Portfolio may also lend its portfolio securities,
invest in repurchase agreements, when-issued and delayed-delivery securities,
make forward commitments, and (in the case of the High Income Portfolio) enter
into standby commitment agreements. For further information on these
investments, see the Statement of Additional Information.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Portfolios. As with any mutual fund, there can be no guarantee that any
Portfolio will meet its goals or that any Portfolio's performance will be
positive for any period of time.
MARKET AND SELECTION RISK -- Market risk is the risk that the stock or bond
markets will go down in value, including the possibility that the markets will
go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform the market or other
funds with similar investment objectives and investment strategies.
14 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 16
CREDIT RISK -- Credit risk is the risk that the issuer of debt securities will
be unable to pay the interest or principal when due. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the
obligation.
INTEREST RATE RISK -- Interest rate risk is the risk that prices of fixed-income
securities generally increase when interest rates decline and decrease when
interest rates increase. Prices of longer term securities generally change more
in response to interest rate changes than prices of shorter term securities.
Risks associated with certain types of securities in which the Portfolios may
invest include:
JUNK BONDS -- The High Income Portfolio invests primarily in junk bonds.
Although junk bonds generally pay higher rates of interest than investment grade
bonds, there is a greater risk of loss of income or principal. Junk bonds are
high-risk investments that may cause losses in the High Income Portfolio. The
major risks in junk bond investments include:
- Junk bonds may be issued by less creditworthy companies. Junk
bonds are vulnerable to adverse changes in the issuer's industry
and to general economic conditions. Issuers of junk bonds may be
unable to meet their interest or principal payment obligations
because of an economic downturn, specific issuer developments,
or the unavailability of additional financing.
- Issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other
creditors may have priority over the claims of junk bond
holders, leaving few or no assets available to repay junk bond
holders.
- Junk bonds frequently have redemption features that permit an
issuer to repurchase the security from the High Income Portfolio
before it matures. If the issuer redeemed the junk bonds, the
High Income Portfolio may have to invest the proceeds in bonds
with lower yields and may lose income.
MERRILL LYNCH CORPORATE BOND FUND, INC. 15
<PAGE> 17
[DETAILS ABOUT THE FUND ICON] Details About the Fund
- Prices of junk bonds are subject to extreme price fluctuations.
Negative economic developments may have a greater impact on the
prices of junk bonds than on other higher rated fixed-income
securities.
- Junk bonds may be less liquid than higher rated fixed-income
securities, even under normal economic conditions. There are
fewer dealers in the junk bond market, and there may be
significant differences in the prices quoted for junk bonds by
the dealers. Because they are less liquid, judgment may play a
greater role in valuing certain of the High Income Portfolio's
securities than in the case with securities trading in a more
liquid market.
- The High Income Portfolio may incur expenses to the extent
necessary to seek recovery upon default or to negotiate new
terms with a defaulting issuer.
DISTRESSED SECURITIES -- The High Income Portfolio may invest in distressed
securities. Distressed securities are speculative and involve substantial risks.
Generally, the High Income Portfolio will invest in distressed securities when
Fund management believes they offer significant potential for higher returns or
can be exchanged for other securities that offer this potential. However, there
can be no assurance that the Portfolio will achieve these returns or that the
issuer will make an exchange offer or adopt a plan of reorganization. The High
Income Portfolio will generally not receive interest payments on the distressed
securities and may incur costs to protect its investment. In addition,
distressed securities involve the substantial risk that principal will not be
repaid. Distressed securities and any securities received in an exchange may be
subject to restrictions or resale.
CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure. Borrowers
generally pay interest on corporate loans at rates that change in response to
changes in market interest rates or the prime rates of U.S. banks or the London
Interbank Offered Rate ("LIBOR"). As a result, the value of corporate loan
investments generally is less responsive to shifts in market interest rates.
Because the trading market for corporate loans is less developed than the
secondary market for bonds and notes, the High Income Portfolio may experience
difficulties from time to time in selling its corporate loans. Borrowers
frequently provide collateral to secure repayment of these
16 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 18
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate." The syndicate agent
arranges the corporate loans and holds collateral and accepts payments of
principal and interest. By investing in a corporate loan, the Portfolio becomes
a member of the syndicate. If the agent developed financial problems, the
Portfolio may not recover its investment.
The corporate loans in which the High Income Portfolio invests can be expected
to provide higher yields than bonds and notes that have investment grade
ratings, but may be subject to greater risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans, and when there
is collateral, the value of the collateral may not completely cover the
borrower's obligations at the time of a default. If a borrower files for
protection from its creditors under the U.S. bankruptcy laws, these laws may
limit the Portfolio's rights to its collateral. In addition, the value of
collateral may erode during a bankruptcy case. In the event of a bankruptcy the
holder of a corporate loan may not recover its principal, may experience a long
delay in recovering its investment and may not receive any interest during the
delay.
ILLIQUID SECURITIES -- Each Portfolio may invest up to 15% of its assets in
illiquid securities. If any Portfolio buys illiquid securities it may be unable
to resell them or may be able to sell them only at a price below current value.
FOREIGN SECURITIES -- Since each Portfolio may invest in foreign securities, the
Portfolios offer the potential for more diversification than funds that invest
only in the United States. This is because securities traded on foreign markets
have often (though not always) performed differently than securities in the
United States. However, foreign investments involve special risks not present in
U.S. investments that can increase the chances that a Portfolio will lose money.
In particular, investment in foreign securities involves the following risks,
which are generally greater for investments in emerging markets.
- The economies of certain foreign markets often do not compare
favorably with that of the U.S. in areas such as growth of gross
national product, reinvestment of capital, resources and balance
of payments. Some of these economies may rely heavily on
particular industries or foreign capital and are more vulnerable
to diplomatic developments, the imposition of economic sanctions
against a particular country or countries, changes in
international
MERRILL LYNCH CORPORATE BOND FUND, INC. 17
<PAGE> 19
[DETAILS ABOUT THE FUND ICON] Details About the Fund
trading patterns, trade barriers, and other protectionist or
retaliatory measures.
- Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes.
- The governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital
markets or in certain industries. Any of these actions could
severely affect security prices, impair a Portfolio's ability to
purchase or sell foreign securities or transfer its assets or
income back into the U.S., or otherwise adversely affect a
Portfolio's operations.
- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal
judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain
foreign countries may be less extensive than those available to
investors in the U.S. or other foreign countries.
- Because there are fewer investors in foreign markets and a
smaller number of securities traded each day, it may be
difficult for a Portfolio to buy and sell securities on those
markets.
- Non-U.S. markets have different clearance and settlement
procedures, and in certain markets settlements may be unable to
keep pace with the volume of securities transactions which may
cause delays. This means that a Portfolio's assets may be
uninvested and not earning returns. A Portfolio may miss
investment opportunities or be unable to dispose of a security
because of these delays.
SOVEREIGN DEBT -- Each Portfolio may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject a Portfolio to the risk that a government entity may
delay or refuse to pay interest or repayment of principal on its sovereign debt.
Some of these reasons may include: cash flow
18 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 20
problems, insufficient foreign currency reserves, political considerations, the
relative size of its debt position to its economy or its failure to put in place
economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more time
in which to pay, or for further loans. There is no legal process for collecting
sovereign debts that a government does not pay.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A number of European countries
have agreed to enter into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU establishes a
single European currency (the euro), which will be introduced on January 1, 1999
and is expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Upon introduction of the euro, certain securities
(beginning with government and corporate bonds) will be redenominated in the
euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Portfolios invests, the
Portfolios could be adversely affected:
- If the euro, or EMU as a whole, does not take effect as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by the
Portfolios' service providers, or by other entities with which
the Portfolios or their service providers do business, difficult
for a Portfolio to buy and sell securities on those markets.
SECURITIES LENDING -- Each Portfolio may lend securities to financial
institutions which provide government securities as collateral. Securities
lending involves the risk that the borrower may fail to return the securities in
a timely manner or at all. As a result, the Portfolio may lose money and there
may be a delay in recovering the loaned securities. The Portfolio could also
lose money if it does not recover the loaned securities and the value of the
collateral falls. These events could trigger adverse tax consequences to the
Portfolio.
BORROWING AND LEVERAGE -- Each Portfolio may borrow for temporary emergency
purposes, including meeting redemptions. Borrowing may exaggerate changes in
the net asset value of each Portfolio's shares and its yield. Borrowing will
cost each Portfolio interest expenses and other
MERRILL LYNCH CORPORATE BOND FUND, INC. 19
<PAGE> 21
[DETAILS ABOUT THE FUND ICON] Details About the Fund
fees. The cost of borrowing may reduce each Portfolio's return. Certain
securities that each Portfolio buys may create leverage, including for example
when issued and delayed delivery securities, forward commitments, options,
warrants and repurchase agreements.
DERIVATIVES -- Each Portfolio may use derivatives. Derivatives are financial
instruments whose value is derived from another security, a commodity (such as
gold or oil) or an index (such as the S&P 500). Derivatives allow the Portfolio
to increase or decrease its risk exposure more quickly and efficiently than
other types of instruments. Each Portfolio may use futures, forwards and
options. Derivatives are volatile and involve significant risks, including:
- LEVERAGE RISK -- the risk associated with certain types of
investments or trading strategies (such as borrowing money to
increase the amount of investments) that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the
amount originally invested.
- CREDIT RISK -- the risk that the counterparty (the party on the
other side of the transaction) on a derivative transaction will
be unable to honor its financial obligation to the Portfolio.
- CURRENCY RISK -- the risk that changes in the exchange rate
between currencies will adversely affect the value (in U.S.
dollar terms) of an investment.
- LIQUIDITY RISK -- the risk that certain securities may be
difficult or impossible to sell at the time that the seller
would like or at the price that the seller believes the security
is currently worth.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
20 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 22
YOUR ACCOUNT [YOUR ACCOUNT ICON]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
Each Portfolio offers four share classes, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
Each share class represents the same ownership interest in the portfolio
investments of the particular Portfolio. When you choose your class of shares
you should consider the size of your investment and how long you plan to hold
your shares. Your Merrill Lynch Financial Consultant can help
you determine which share class is best suited to your personal financial goals.
For example, if you select Class A or D shares, you pay a sales charge at the
time of purchase. If you buy Class D shares, you also pay an ongoing account
maintenance fee of 0.25% for the High Income Portfolio and Investment Grade
Portfolio, and a 0.10% account maintenance fee for the Intermediate Term
Portfolio. If you select Class B or C shares, you can invest the full amount of
your purchase price but you will be subject to a distribution fee and account
maintenance fee payable over time and possibly a deferred sales charge when you
sell shares. You may be eligible for a sales charge waiver. See below.
If you purchase Class B shares, you pay an account maintenance fee of 0.25% on
an ongoing basis. If you purchase Class C shares, you pay an account maintenance
fee of 0.25% for the High Income Portfolio and Investment Grade Portfolio, and a
0.25% account maintenance fee for the Intermediate Term Portfolio. In addition,
if you purchase Class B or C shares of the High Income Portfolio or Investment
Grade Portfolio you pay distribution fees of 0.50% and 0.55% on Class B and C
shares, respectively, on an ongoing basis. If you purchase Class B and C shares
of the Intermediate Term Portfolio you pay distribution fees of 0.25% on an
ongoing basis. Because these fees are paid out of each Portfolio's assets on an
ongoing basis, over time these fees increase the cost of your investment and may
cost you more than paying an initial sales charge.
It should be noted that each class of shares of the High Income Portfolio is no
longer available for purchase (or exchange), except as follows: shareholders of
the High Income Portfolio can continue to elect to have dividends and
distributions paid on shares of the High Income Portfolio reinvested in
additional shares of the High Income Portfolio; certain participants in
employer-sponsored retirement or savings plans, including eligible 401k plans,
continue to be permitted to purchase shares of the High Income Portfolio through
such plans; shares of the High Income Portfolio continue to be available for
purchase by participants in certain fee-based programs,
MERRILL LYNCH CORPORATE BOND FUND, INC. 21
<PAGE> 23
[YOUR ACCOUNT ICON] Your Account
such as the Mutual Fund Advisor program administered by Merrill Lynch; and
shares of the High Income Portfolio continue to be available for purchase in
single transactions over $1,000,000. Class A, B, C, and D shares of the High
Income Portfolio will also be available for purchase by existing shareholders of
the High Income Portfolio.
Each Portfolio's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
22 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 24
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Availability Limited to certain Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability
shareholders through other securities through other securities
- Certain Retirement dealers. dealers. Shares of the
Plans Intermediate Term
- Participants in Portfolio are available
certain Merrill Lynch only through the
sponsored programs Exchange Privilege.
- Certain affiliates of
Merrill Lynch.
- ---------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time of No. Entire purchase No. Entire purchase
purchase. Lower sales price is invested in price is invested in
charges available for shares of the Fund. shares of the Fund.
larger investments.
- ---------------------------------------------------------------------------------------------------------------
Deferred Sales No. Yes. Payable if you Yes. 1% Payable if you
Charge? redeem within four years redeem within one year
of purchase for the High of purchase.
Income Portfolio and the
Investment Grade
Portfolio. One year for
the Intermediate Term
Portfolio.
- ---------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account
and Distribution Maintenance Fee. 0.50% Maintenance Fee for the
Fees? Distribution Fee for the High Income Portfolio
High Income Portfolio and Investment Grade
and Investment Grade Portfolio, and a 0.25%
Portfolio, and 0.25% Account Maintenance Fee
Distribution Fee for the for the Intermediate
Intermediate Term Term Portfolio. 0.55%
Portfolio. Distribution Fee for the
High Income Portfolio
and Investment Grade
Portfolio, and 0.25%
Distribution Fee for the
Intermediate Term
Portfolio.
- ---------------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically after No.
shares? approximately ten years.
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS D
- ---------------------------------------------------
<S> <C>
Availability Generally available
through Merrill Lynch.
Limited availability
through other securities
dealers.
- ---------------------------------------------------
Initial Sales Charge? Yes. Payable at time of
purchase. Lower sales
charges available for
larger investments.
- ---------------------------------------------------
Deferred Sales No.
Charge?
- ---------------------------------------------------
Account Maintenance 0.25% Account
and Distribution Maintenance Fee for the
Fees? High Income Portfolio
and Investment Grade
Portfolio, and a 0.10%
Account Maintenance Fee
for the Intermediate
Term Portfolio. No
Distribution Fee.
- ---------------------------------------------------
Conversion to Class D No.
shares?
- ---------------------------------------------------
</TABLE>
* Except as described above on page 23, each class of shares of the High
Income Portfolio is no longer available for purchase.
MERRILL LYNCH CORPORATE BOND FUND, INC. 23
<PAGE> 25
[YOUR ACCOUNT ICON] Your Account
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO*** AND INVESTMENT GRADE PORTFOLIO
- -----------------------------------------------------------------------------------
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* 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 over** 0.00% 0.00% 0.00%
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- -----------------------------------------------------------------------------------
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* 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 and over** 0.00% 0.00% 0.00%
- -----------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% (for the High Income Portfolio and Investment Grade Portfolio) or
0.20% (for the Intermediate Term Portfolio) of the lesser of the original
cost of the shares being redeemed or your redemption proceeds. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
A or Class D shares by certain employer sponsored retirement or savings
plans.
*** Shares of any class of the High Income Portfolio are no longer available for
purchase. See discussion above on page 23.
24 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 26
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
- Merrill Lynch Blueprint(SM) Program participants.
- TMA(SM) Managed Trusts.
- Certain Merrill Lynch investment or central asset accounts.
- Certain employer-sponsored retirement or savings plans.
- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
- Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.
- Certain Merrill Lynch fee-based programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years (or within one year for the Intermediate Term Portfolio) after purchase or
your Class C shares within one year after purchase, you may be required to pay a
deferred sales charge. You will also pay account maintenance fees of 0.25% (or
0.10% for Class D shares of the Intermediate
MERRILL LYNCH CORPORATE BOND FUND, INC. 25
<PAGE> 27
[YOUR ACCOUNT ICON] Your Account
Term Portfolio) and distribution fees each year under a distribution plan that
the Fund has adopted under Rule 12b-1. If you invest in the High Income
Portfolio or Investment Grade Portfolio, you will pay distribution fees for your
Class B and C shares in the amount of 0.50% or 0.55%, respectively, of your
investment each year. Distribution fees for Class B and Class C shares of the
Intermediate Term Portfolio are 0.25% each year. Because these fees are paid out
of each Portfolio's assets on an ongoing basis, over time these fees increase
the cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Portfolio shares.
CLASS B SHARES
If you redeem Class B shares within four years (or within one year for the
Intermediate Term Portfolio) after purchase, you may be charged a deferred sales
charge. The amount of the charge gradually decreases as you hold your shares
over time, according to the following schedules:
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO AND INVESTMENT GRADE PORTFOLIO
- -----------------------------------------------------
YEARS SINCE PURCHASE SALES CHARGE*
- -----------------------------------------------------
<S> <C>
0 - 1 4.00%
- -----------------------------------------------------
1 - 2 3.00%
- -----------------------------------------------------
2 - 3 2.00%
- -----------------------------------------------------
3 - 4 1.00%
- -----------------------------------------------------
4 AND THEREAFTER 0.00%
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- -----------------------------------------
YEAR SINCE PURCHASE SALES CHARGE*
- -----------------------------------------
<S> <C>
0 - 1 1.00%
- -----------------------------------------
1 AND THEREAFTER 0.00%
- -----------------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.
26 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 28
The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.
- Redemption by certain eligible 401(a) and 401(k) plans and group
plans participating in the Merrill Lynch Blueprint Program and
certain retirement plan rollovers.
- Redemption in connection with participation in certain Merrill
Lynch fee-based programs.
- Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following
completion of probate.
- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established.
- Withdrawals resulting from closure by Merrill Lynch of the
account in which shares of the fund are held.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you exchange Class B shares with an eight-year conversion
schedule for Class B shares with a ten-year conversion schedule, or vice versa,
the conversion schedule applicable to the Class B shares acquired in the
exchange will apply. If you acquire your Class B shares in an exchange from
another fund, the Fund's ten year conversion schedule will apply. If you
exchange your Class B shares in a Portfolio for Class B shares of another fund,
the other fund's conversion schedule will apply. The length of time that you
hold both the original and exchanged Class B shares in both funds will count
toward the conversion schedule. The conversion schedule may be modified in
certain other cases as well.
MERRILL LYNCH CORPORATE BOND FUND, INC. 27
<PAGE> 29
[YOUR ACCOUNT ICON] Your Account
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares will be reduced or waived in the same
circumstances as Class B shares, except the deferred sales charge relating to
Class C shares will not be waived in the event of shareholder death or
disability.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
28 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 30
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 25.
appropriate for you Be sure to read this prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for a Portfolio is $1,000 for
investment all accounts except:
- $500 for Employee Access(SM) Accounts
- $250 for certain Merrill Lynch fee-based programs
- $100 for Merrill Lynch Blueprint(SM) Program
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------------
Have your Merrill Lynch Financial The price of your shares is based on next calculation of net
Consultant or securities dealer asset value after your order is placed. Any purchase orders
submit your purchase order placed within fifteen minutes after the close of business on
the New York Stock Exchange (generally 4:00 pm Eastern time)
will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the
net asset value determined on the next business day. Each
Portfolio may reject any order to buy shares and may suspend
the sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35.
-------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent You can purchase shares of a Portfolio directly by mailing a
purchase order to the Transfer Agent at the address on the
inside back cover of this prospectus.
- --------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for
Investment all accounts except that retirement plans have a minimum
additional purchase of $1.
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends and capital gains distributions are
automatic dividend reinvestment plan automatically reinvested without a sales charge.
-------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- --------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your shares of a Portfolio only to another
Another Securities securities dealer securities dealer that has entered into an agreement with
Dealer Merrill Lynch. All shareholder services will be available
for the transferred shares. You may only purchase additional
shares of funds previously owned before the transfer. All
future trading of these assets must be coordinated by the
receiving firm.
-------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 29
<PAGE> 31
[YOUR ACCOUNT ICON] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer - Transfer your shares to an account with the Transfer
Dealer (continued) Agent; or
- Sell your shares.
- --------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer net asset value after your order is placed. For your
submit your sales order request, you must submit your request to your dealer within
fifteen minutes after that day's close of business on the
New York Stock Exchange (generally 4:00 p.m. Eastern time).
Any redemption request placed from a dealer after that time
will be priced at the net asset value at the close of
business on the next business day. Dealers must submit
redemption requests to the Fund not more than thirty minutes
after the close of business on the New York Stock Exchange.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares held by the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter and signatures must be guaranteed. If you
hold stock certificates, return the certificates with the
letter. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 32
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. If you have a
Merrill Lynch CMA(R), CBA(R) or Retirement Account you can
arrange for systematic redemptions of a fixed dollar amount
on a monthly, bi-monthly, quarterly, semi-annual or annual
basis, subject to certain conditions. Under either method
you must have dividends and other distributions
automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of
the value of your shares at the time your plan is
established. The deferred sales charge is waived for
systematic redemptions. Ask your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you want You can exchange your shares of a Portfolio for shares of
Shares to exchange. Be sure to read that many other Merrill Lynch mutual funds. You must have held
fund's prospectus the shares used in the exchange for at least 15 calendar
days before you can exchange to another fund.
Each class of Portfolio shares is generally exchangeable for
shares of the same class of another fund. If you own Class A
shares and wish to exchange into a fund in which you have no
Class A shares, you will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of a
Portfolio will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 31
<PAGE> 33
[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of a Portfolio's total assets after
deducting liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. Each Portfolio calculates its
net asset value (generally by using market quotations) each day the New York
Stock Exchange is open, fifteen minutes after the close of business on the
Exchange (the Exchange generally closes at 4:00 p.m. Eastern time). The net
asset value used in determining your price is the next one calculated after your
purchase or redemption order is placed. Foreign securities owned by a Portfolio
may trade on weekends or other days when a Portfolio does not price its shares.
As a result, a Portfolio's net asset value may change on days when you will not
be able to purchase or redeem the Portfolio's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the particular Portfolio or into a money market
fund. The class you receive may be the class you originally owned when you
entered the program, or in certain cases, a different class. If the exchange is
into Class B shares, the period before conversion to Class D shares may be
modified. Any redemption or exchange will be at net asset value. However, if you
participate in the program for less than a specified period, you may be charged
a fee in accordance with the terms of the program.
32 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 34
DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Portfolio shares as they are paid.
DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Portfolio shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before a Portfolio pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
Each Portfolio will distribute any net investment income monthly, and any net
realized capital gains annually. If your account is with Merrill Lynch and you
would like to receive DIVIDENDS and DISTRIBUTIONS in cash, contact your Merrill
Lynch Financial Consultant. If your account is with the Transfer Agent and you
would like to receive dividends and distributions in cash, contact the Transfer
Agent.
You will pay tax on dividends and distributions from a Portfolio whether you
receive them in cash or additional shares. If you redeem Portfolio shares or
exchange them for shares of another fund, any gain on the transaction may be
subject to tax. Each Portfolio intends to make distributions that will either be
taxed as ordinary income or capital gains. Capital gains are taxed at different
rates than ordinary income.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, each Portfolio's ordinary income dividends (which
include distributions of net short-term capital gains) will generally be subject
to a 30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by each Portfolio may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, the Portfolios must withhold 31% of your distributions and proceeds if
you have not provided a taxpayer identification number or social security
number.
This section summarizes some of the consequences under current federal tax law
of an investment in a Portfolio. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in a Portfolio under all applicable tax laws.
MERRILL LYNCH CORPORATE BOND FUND, INC. 33
<PAGE> 35
Management of the Fund [MANAGEMENT OF THE FUND ICON]
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, L.P., the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Portfolios. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K., an affiliate,
under which the Investment Adviser may pay a fee for services it receives.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
AVERAGE ANNUAL ENDED SEPTEMBER 30,
INVESTMENT RATE* 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
High Income Portfolio .41% $31,867,154
- --------------------------------------------------------------------------------------------
Investment Grade Portfolio .36% $ 4,551,338
- --------------------------------------------------------------------------------------------
Intermediate Term Portfolio .36% $ 1,541,245
- --------------------------------------------------------------------------------------------
Total -- $37,959,737
- --------------------------------------------------------------------------------------------
</TABLE>
* As a % of average daily net assets.
Fund Asset Management is part of Merrill Lynch Asset Management Group, which had
approximately $483 billion in investment company and other portfolio assets
under management as of October 1998. This amount includes assets managed for
Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund's management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Portfolios invest, and this could hurt the Portfolios' investment returns.
34 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 36
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each
Portfolio's financial performance for the period of the Portfolio's operations.
Certain information reflects financial results for a single Portfolio share. The
total returns in the table represent the rate that an investor would have earned
(or lost) on an investment in the indicated Portfolio (assuming reinvestment of
all dividends and distributions). This information has been audited by Deloitte
& Touche LLP, whose report, along with each Portfolio's financial statements,
are included in the Fund's annual report, which is available upon request.
The following per share data and ratios have been derived from information
provided in each Portfolio's audited financial statements.
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO
- -------------------------------------------------------------------------------
CLASS A
-----------------------------
FOR THE YEAR ENDED SEPT. 30,
-----------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997#
<S> <C> <C>
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------
Net asset value, beginning of year $ 8.29 $ 7.93
- -------------------------------------------------------------------------------
Investment income -- net .75 .74
- -------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.19) .36
- -------------------------------------------------------------------------------
Total from investment operations (.44) 1.10
- -------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.75) (.74)
In excess of investment income -- net -- --
Realized gain on investments -- net (.05) --
- -------------------------------------------------------------------------------
Total dividends and distributions (.80) (.74)
- -------------------------------------------------------------------------------
Net asset value, end of year $ 7.05 $ 8.29
- -------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -------------------------------------------------------------------------------
Based on net asset value per share (5.98%) 14.58%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------
Expenses .49% .51%
- -------------------------------------------------------------------------------
Investment income -- net 9.40% 9.23%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------
Net assets, end of year (in thousands) $922,820 $1,044,799
- -------------------------------------------------------------------------------
Portfolio turnover 41.97% 38.58%
- -------------------------------------------------------------------------------
<CAPTION>
HIGH INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------
CLASS A
----------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1996* 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.80 $ 7.66 $ 8.13
- ---------------------------------------------------------------------------------------
Investment income -- net .75 .81 .75
- ---------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .14 .14 (.47)
- ---------------------------------------------------------------------------------------
Total from investment operations .89 .95 .28
- ---------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.76) (.81) (.75)
In excess of investment income -- net --+ -- --
Realized gain on investments -- net -- -- --
- ---------------------------------------------------------------------------------------
Total dividends and distributions (.76) (.81) (.75)
- ---------------------------------------------------------------------------------------
Net asset value, end of year $ 7.93 $ 7.80 $ 7.66
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------
Based on net asset value per share 11.95% 13.27% 3.42%
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------
Expenses .51% .55% .53%
- ---------------------------------------------------------------------------------------
Investment income -- net 9.57% 10.70% 9.27%
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $947,479 $902,321 $876,573
- ---------------------------------------------------------------------------------------
Portfolio turnover 32.44% 24.58% 32.52%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
# Based on average shares outstanding.
+ Amount is less than $.01 per share.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 35
<PAGE> 37
[MANAGEMENT OF THE FUND ICON] MANAGEMENT OF THE FUND
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997# 1996#
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 8.30 $ 7.93 $ 7.80
- ------------------------------------------------------------------------------------------------
Investment income -- net .69 .68 .69
- ------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.20) .37 .15
- ------------------------------------------------------------------------------------------------
Total from investment operations (.51) 1.05 .84
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.69) (.68) (.71)
In excess of investment income -- net -- -- --+
Realized gain on investments -- net (.05) -- --
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (.74) (.68) (.71)
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.05 $ 8.30 $ 7.93
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ------------------------------------------------------------------------------------------------
Based on net asset value per share (6.80%) 13.86% 11.11%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------
Expenses 1.25% 1.27% 1.28%
- ------------------------------------------------------------------------------------------------
Investment income -- net 8.63% 8.46% 8.80%
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $4,469,452 $5,495,488 $4,250,539
- ------------------------------------------------------------------------------------------------
Portfolio turnover 41.97% 38.58% 32.44%
- ------------------------------------------------------------------------------------------------
<CAPTION>
HIGH INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------
CLASS B
-----------------------------
FOR THE YEAR ENDED SEPT. 30,
-----------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.66 $ 8.13
- ------------------------------------------------------------------------------------------------
Investment income -- net .75 .69
- ------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .14 (.47)
- ------------------------------------------------------------------------------------------------
Total from investment operations .89 .22
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.75) (.69)
In excess of investment income -- net -- --
Realized gain on investments -- net -- --
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (.75) (.69)
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.80 $ 7.66
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ------------------------------------------------------------------------------------------------
Based on net asset value per share 12.41% 2.66%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------
Expenses 1.32% 1.29%
- ------------------------------------------------------------------------------------------------
Investment income -- net 9.81% 8.53%
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $3,220,767 $2,347,223
- ------------------------------------------------------------------------------------------------
Portfolio turnover 24.58% 32.52%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
# Based on average shares outstanding.
+ Amount is less than $.01 per share.
</TABLE>
36 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 38
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------
CLASS C
---------------------------------------------------
FOR THE PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPT. 30, 1994+
--------------------------------- TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997# 1996# 1995
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.30 $ 7.94 $ 7.81 $ 7.59
- ----------------------------------------------------------------------------------------------
Investment income -- net .69 .68 .68 .71
- ----------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.19) .36 .15 .22
- ----------------------------------------------------------------------------------------------
Total from investment operations (.50) 1.04 .83 .93
- ----------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.69) (.68) (.70) (.71)
In excess of investment income -- net -- -- -- --++
Realized gain on investments -- net (.05) -- -- --
- ----------------------------------------------------------------------------------------------
Total dividends and distributions (.74) (.68) (.70) (.71)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.06 $ 8.30 $ 7.94 $ 7.81
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ----------------------------------------------------------------------------------------------
Based on net asset value per share (6.72%) 13.66% 11.05% 12.92%##
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------
Expenses 1.31% 1.32% 1.33% 1.38%*
- ----------------------------------------------------------------------------------------------
Investment income -- net 8.58% 8.39% 8.73% 9.06%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $550,482 $638,626 $362,518 $135,019
- ----------------------------------------------------------------------------------------------
Portfolio turnover 41.97% 38.58% 32.44% 24.58%
- ----------------------------------------------------------------------------------------------
<CAPTION>
HIGH INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------
CLASS D
---------------------------------------------------
FOR THE PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPT. 30, 1994+
--------------------------------- TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997# 1996# 1995
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.30 $ 7.94 $ 7.80 $ 7.59
- ----------------------------------------------------------------------------------------------
Investment income -- net .73 .72 .72 .75
- ----------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.20) .36 .16 .21
- ----------------------------------------------------------------------------------------------
Total from investment operations (.47) 1.08 .88 .96
- ----------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.73) (.72) (.74) (.75)
In excess of investment income -- net -- -- --++ --
Realized gain on investments -- net (.05) -- -- --
- ----------------------------------------------------------------------------------------------
Total dividends and distributions (.78) (.72) (.74) (.75)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.05 $ 8.30 $ 7.94 $ 7.80
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ----------------------------------------------------------------------------------------------
Based on net asset value per share (6.32%) 14.29% 11.82% 13.37%##
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------
Expenses .74% .76% .76% .81%*
- ----------------------------------------------------------------------------------------------
Investment income -- net 9.14% 8.95% 9.30% 9.70%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $430,164 $496,836 $267,687 $102,676
- ----------------------------------------------------------------------------------------------
Portfolio turnover 41.97% 38.58% 32.44% 24.58%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# Based on average shares outstanding.
## Aggregate total investment return.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 37
<PAGE> 39
[MANAGEMENT OF THE FUND ICON] Management of the Fund
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- ---------------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.40 $ 11.16 $ 11.51
- ---------------------------------------------------------------------------------------------------
Investment income -- net .73 .76 .76
- ---------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .38 .24 (.35)
- ---------------------------------------------------------------------------------------------------
Total from investment operations 1.11 1.00 .41
- ---------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.73) (.76) (.76)
Realized gain on investments -- net -- -- --
In excess of realized gain on
investments -- net -- -- --
- ---------------------------------------------------------------------------------------------------
Total dividends and distributions (.73) (.76) (.76)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of year $ 11.78 $ 11.40 $ 11.16
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------
Based on net asset value per share 10.05% 9.22% 3.60%
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------
Expenses .58% .57% .56%
- ---------------------------------------------------------------------------------------------------
Investment income -- net 6.32% 6.73% 6.64%
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $600,655 $519,708 $608,901
- ---------------------------------------------------------------------------------------------------
Portfolio turnover 149.41% 113.46% 88.53%
- ---------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- ----------------------------------------------------------------------
CLASS A
-----------------------------
FOR THE YEAR ENDED SEPT. 30,
-----------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------
Net asset value, beginning of year $ 10.77 $ 12.81
- ----------------------------------------------------------------------
Investment income -- net .80 .75
- ----------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .74 (1.49)
- ----------------------------------------------------------------------
Total from investment operations 1.54 (.74)
- ----------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.80) (.75)
Realized gain on investments -- net -- (.10)
In excess of realized gain on
investments -- net -- (.45)
- ----------------------------------------------------------------------
Total dividends and distributions (.80) (1.30)
- ----------------------------------------------------------------------
Net asset value, end of year $ 11.51 $ 10.77
- ----------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ----------------------------------------------------------------------
Based on net asset value per share 14.93% (6.03%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------
Expenses .58% .53%
- ----------------------------------------------------------------------
Investment income -- net 7.30% 6.61%
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------
Net assets, end of year (in thousands) $472,388 $366,792
- ----------------------------------------------------------------------
Portfolio turnover 108.07% 159.05%
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
</TABLE>
38 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 40
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- ---------------------------------------------------------------------------------------------------
CLASS B
-------------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.40 $ 11.16 $ 11.51
- ---------------------------------------------------------------------------------------------------
Investment income -- net .64 .67 .67
- ---------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .38 .24 (.35)
- ---------------------------------------------------------------------------------------------------
Total from investment operations 1.02 .91 .32
- ---------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.64) (.67) (.67)
Realized gain on investments -- net -- -- --
In excess of realized gain on
investments -- net -- -- --
- ---------------------------------------------------------------------------------------------------
Total dividends and distributions (.64) (.67) (.67)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of year $ 11.78 $ 11.40 $ 11.16
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------
Based on net asset value per share 9.21% 8.39% 2.81%
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------
Expenses 1.34% 1.34% 1.32%
- ---------------------------------------------------------------------------------------------------
Investment income -- net 5.56% 5.96% 5.88%
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $685,345 $577,989 $724,089
- ---------------------------------------------------------------------------------------------------
Portfolio turnover 149.41% 113.46% 88.53%
- ---------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- ----------------------------------------------------------------------
CLASS B
-----------------------------
FOR THE YEAR ENDED SEPT. 30,
-----------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------------------
Net asset value, beginning of year $ 10.77 $ 12.81
- -----------------------------------------------------------------------
Investment income -- net .72 .66
- -----------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .74 (1.49)
- -----------------------------------------------------------------------
Total from investment operations 1.46 (.83)
- -----------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.72) (.66)
Realized gain on investments -- net -- (.10)
In excess of realized gain on
investments -- net -- (.45)
- -----------------------------------------------------------------------
Total dividends and distributions (.72) (1.21)
- -----------------------------------------------------------------------
Net asset value, end of year $ 11.51 $ 10.77
- -----------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -----------------------------------------------------------------------
Based on net asset value per share 14.04% (6.73%)
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------
Expenses 1.35% 1.29%
- -----------------------------------------------------------------------
Investment income -- net 6.52% 5.85%
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------
Net assets, end of year (in thousands) $631,517 $483,053
- -----------------------------------------------------------------------
Portfolio turnover 108.07% 159.05%
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 39
<PAGE> 41
[MANAGEMENT OF THE FUND ICON] Management of the Fund
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- -----------------------------------------------------------------------------------------
CLASS C
------------------------------------------------
FOR THE PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPT. 30, 1994+
------------------------------ TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------------------------------------
Net asset value, beginning of period $ 11.40 $ 11.17 $ 11.51 $ 10.67
- -----------------------------------------------------------------------------------------
Investment income -- net .63 .67 .66 .67
- -----------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .39 .23 (.34) .84
- -----------------------------------------------------------------------------------------
Total from investment operations 1.02 .90 .32 1.51
- -----------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.63) (.67) (.66) (.67)
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 11.79 $ 11.40 $ 11.17 $ 11.51
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- -----------------------------------------------------------------------------------------
Based on net asset value per share 9.25% 8.23% 2.85% 14.60%#
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------
Expenses 1.40% 1.39% 1.38% 1.40%*
- -----------------------------------------------------------------------------------------
Investment income -- net 5.50% 5.91% 5.83% 6.27%*
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $77,464 $49,918 $64,931 $25,778
- -----------------------------------------------------------------------------------------
Portfolio turnover 149.41% 113.46% 88.53% 108.07%
- -----------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT GRADE PORTFOLIO
- ------------------------------------------------------------------------------------------
CLASS D
-------------------------------------------------
FOR THE PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPT. 30, 1994+
------------------------------- TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------------------------------------
Net asset value, beginning of period $ 11.41 $ 11.17 $ 11.51 $ 10.67
- -----------------------------------------------------------------------------------------
Investment income -- net .70 .73 .73 .73
- -----------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .38 .24 (.34) .84
- -----------------------------------------------------------------------------------------
Total from investment operations 1.08 .97 .39 1.57
- -----------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.70) (.73) (.73) (.73)
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 11.79 $ 11.41 $ 11.17 $ 11.51
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- -----------------------------------------------------------------------------------------
Based on net asset value per share 9.77% 8.95% 3.43% 15.22%#
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------
Expenses .82% .82% .81% .83%*
- -----------------------------------------------------------------------------------------
Investment income -- net 6.07% 6.47% 6.40% 6.91%*
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $123,202 $77,398 $63,822 $25,153
- -----------------------------------------------------------------------------------------
Portfolio turnover 149.41% 113.46% 88.53% 108.07%
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
</TABLE>
40 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- -------------------------------------------------------------------------------
CLASS A
-----------------------------
FOR THE YEAR ENDED SEPT. 30,
-----------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.49 $ 11.28
- -------------------------------------------------------------------------------
Investment income -- net .73 .73
- -------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .34 .21
- -------------------------------------------------------------------------------
Total from investment operations 1.07 .94
- -------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.73) (.73)
In excess of realized gain on
investments -- net -- --
- -------------------------------------------------------------------------------
Total dividends and distributions (.73) (.73)
- -------------------------------------------------------------------------------
Net asset value, end of year $ 11.83 $ 11.49
- -------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -------------------------------------------------------------------------------
Based on net asset value per share 9.59% 8.59%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------
Expenses .67% .65%
- -------------------------------------------------------------------------------
Investment income -- net 6.27% 6.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------
Net assets, end of year (in thousands) $200,679 $179,115
- -------------------------------------------------------------------------------
Portfolio turnover 111.03% 76.99%
- -------------------------------------------------------------------------------
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- -------------------------------------------------------------------------------------
CLASS A
--------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
--------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.50 $ 10.90 $ 12.44
- -------------------------------------------------------------------------------------
Investment income -- net .73 .79 .75
- -------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (.22) .60 (1.26)
- -------------------------------------------------------------------------------------
Total from investment operations .51 1.39 (.51)
- -------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.73) (.79) (.75)
In excess of realized gain on
investments -- net -- -- (.28)
- -------------------------------------------------------------------------------------
Total dividends and distributions (.73) (.79) (1.03)
- -------------------------------------------------------------------------------------
Net asset value, end of year $ 11.28 $ 11.50 $ 10.90
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -------------------------------------------------------------------------------------
Based on net asset value per share 4.56% 13.33% (4.25%)
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------
Expenses .59% .59% .53%
- -------------------------------------------------------------------------------------
Investment income -- net 6.41% 7.14% 6.48%
- -------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $216,545 $217,714 $170,222
- -------------------------------------------------------------------------------------
Portfolio turnover 96.40% 142.84% 155.42%
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 41
<PAGE> 43
[MANAGEMENT OF THE FUND ICON] Management of the Fund
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- --------------------------------------------------------------------------------------------
CLASS B
-------------------------------------------------
FOR THE YEAR ENDED SEPT. 30,
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.50 $ 11.28 $ 11.50
- --------------------------------------------------------------------------------------------
Investment income -- net .67 .67 .67
- --------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .33 .22 (.22)
- --------------------------------------------------------------------------------------------
Total from investment operations 1.00 .89 .45
- --------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.67) (.67) (.67)
In excess of realized gain on
investments -- net -- -- --
- --------------------------------------------------------------------------------------------
Total dividends and distributions (.67) (.67) (.67)
- --------------------------------------------------------------------------------------------
Net asset value, end of year $ 11.83 $ 11.50 $ 11.28
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- --------------------------------------------------------------------------------------------
Based on net asset value per share 8.94% 8.13% 4.02%
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------
Expenses 1.18% 1.17% 1.11%
- --------------------------------------------------------------------------------------------
Investment income -- net 5.75% 5.91% 5.89%
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $178,464 $148,148 $216,641
- --------------------------------------------------------------------------------------------
Portfolio turnover 111.03% 76.99% 96.40%
- --------------------------------------------------------------------------------------------
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- ------------------------------------------------------------------------
CLASS B
-------------------------------
FOR THE YEAR ENDED SEPT. 30,
-------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ------------------------------------------------------------------------
Net asset value, beginning of year $ 10.90 $ 12.44
- ------------------------------------------------------------------------
Investment income -- net .74 .69
- ------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .60 (1.26)
- ------------------------------------------------------------------------
Total from investment operations 1.34 (.57)
- ------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.74) (.69)
In excess of realized gain on
investments -- net -- (.28)
- ------------------------------------------------------------------------
Total dividends and distributions (.74) (.97)
- ------------------------------------------------------------------------
Net asset value, end of year $ 11.50 $ 10.90
- ------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ------------------------------------------------------------------------
Based on net asset value per share 12.73% (4.72%)
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------
Expenses 1.11% 1.04%
- ------------------------------------------------------------------------
Investment income -- net 6.61% 5.98%
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------
Net assets, end of year (in thousands) $212,146 $141,212
- ------------------------------------------------------------------------
Portfolio turnover 142.84% 155.42%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude the effects of sales loads.
</TABLE>
42 MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 44
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- ---------------------------------------------------------------------------------------
CLASS C
----------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED SEPT. OCT. 21,
30, 1994+
---------------------------- TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $11.49 $11.28 $ 11.50 $10.81
- ---------------------------------------------------------------------------------------
Investment income -- net .67 .67 .67 .70
- ---------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .34 .21 (.22) .69
- ---------------------------------------------------------------------------------------
Total from investment operations 1.01 .88 .45 1.39
- ---------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.67) (.67) (.67) (.70)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $11.83 $11.49 $ 11.28 $11.50
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------------------------
Based on net asset value per share 9.03% 7.99% 3.99% 13.25%#
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------
Expenses 1.20% 1.20% 1.15% 1.14%*
- ---------------------------------------------------------------------------------------
Investment income -- net 5.70% 5.89% 5.86% 6.24%*
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $4,832 $1,571 $10,144 $6,806
- ---------------------------------------------------------------------------------------
Portfolio turnover 111.03% 76.99% 96.40% 142.84%
- ---------------------------------------------------------------------------------------
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
- ------------------------------------------------------------------------------------------
CLASS D
-------------------------------------------------
FOR THE PERIOD
OCT. 21,
FOR THE YEAR ENDED SEPT. 30, 1994+
------------------------------- TO SEPT. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $ 11.50 $ 11.28 $ 11.50 $ 10.81
- ---------------------------------------------------------------------------------------
Investment income -- net .71 .72 .72 .74
- ---------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .33 .22 (.22) .69
- ---------------------------------------------------------------------------------------
Total from investment operations 1.04 .94 .50 1.43
- ---------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.71) (.72) (.72) (.74)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $ 11.83 $ 11.50 $ 11.28 $ 11.50
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------------------------
Based on net asset value per share 9.39% 8.58% 4.46% 13.65%#
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------
Expenses .77% .77% .71% .70%*
- ---------------------------------------------------------------------------------------
Investment income -- net 6.16% 6.32% 6.32% 6.81%*
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $106,294 $64,335 $33,270 $16,349
- ---------------------------------------------------------------------------------------
Portfolio turnover 111.03% 76.99% 96.40% 142.84%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC. 43
<PAGE> 45
[ML POTENTIAL INVESTORS CHART]
<TABLE>
<S> <C>
POTENTIAL
INVESTORS
Open an account (two options).
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Advises shareholders on their Fund investments. Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL THE FUND CUSTODIAN
ROGERS & WELLS LLP The Board of Directors STATE STREET BANK AND TRUST COMPANY
200 Park Avenue oversees the Fund. P.O. Box 351
New York, New York 10166 Boston, MA 02171
Provides legal advice to the Fund. Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP FUND ASSET MANAGEMENT, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
</TABLE>
MERRILL LYNCH CORPORATE BOND FUND, INC.
<PAGE> 46
For More Information [FOR MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about each Portfolio's investments is available in the
Fund's annual and semi- annual reports to shareholders. In the Fund's annual
report you will find a discussion of the market conditions and investment
strategies that significantly affected each Portfolio's performance during its
last fiscal year. You may obtain these reports at no cost by calling
1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800- MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
THE FUND'S STATEMENT OF ADDITIONAL INFORMATION CONTAINS FURTHER INFORMATION
ABOUT THE FUND AND IS INCORPORATED BY REFERENCE (LEGALLY CONSIDERED TO BE PART
OF THIS PROSPECTUS). YOU MAY REQUEST A FREE COPY BY WRITING THE FUND AT
FINANCIAL DATA SERVICES, INC. P.O. BOX 45289 JACKSONVILLE, FLORIDA 32232-5289 OR
BY CALLING 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
File #2-62329
Code #10046-01-99
(C) Fund Asset Management, L.P.
PROSPECTUS
[MERRILL LYNCH LOGO]
Merrill Lynch
Corporate Bond Fund, Inc.
[MERRILL LYNCH ARTWORK]
January , 1999
<PAGE> 47
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1998
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
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 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. The main goal of each Portfolio
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. 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 stocks. 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. There
can be no assurance that a Portfolio's investment objectives will be achieved.
Each Portfolio may employ a variety of instruments and techniques to enhance
income and to hedge against market and currency risk.
Pursuant to the Merrill Lynch Select Pricing(SM) System, each Portfolio of
the Fund offers four classes of shares, each with a different combination of
sales charges, ongoing fees and other features. 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 "Purchase of Shares."
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated January
[ ], 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus.
------------------------
FUND ASSET MANAGEMENT L.P. -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is January [ ], 1999.
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... 2
High Income Portfolio..................................... 2
Investment Grade Portfolio................................ 4
Intermediate Term Portfolio............................... 4
Risk Factors and Special Considerations..................... 5
Risk Factors in Transactions in Junk Bonds................ 5
Risk Factors in Transactions in Distressed Securities..... 5
Risk Factors in Transactions in Corporate Loans........... 6
Risk Factors in Transactions in Foreign Securities........ 6
Risk Factors in Transactions in Futures and Options
Thereon................................................ 7
European Economic and Monetary Union...................... 9
Other Portfolio Strategies.................................. 10
Investment Restrictions..................................... 14
Management of the Fund...................................... 15
Directors and Officers.................................... 15
Compensation of Directors................................. 17
Investment Advisory Arrangements.......................... 17
Duration and Termination.................................. 20
Code of Ethics............................................ 20
Purchase of Shares.......................................... 20
Initial Sales Charge Alternatives -- Class A and Class D
Shares................................................. 23
Reduced Initial Sales Charges -- Class A and Class D
Shares................................................. 26
Deferred Sales Charge Alternatives -- Class B and Class C
Shares................................................. 30
Distribution Plans........................................ 34
Employer -- Sponsored Retirement or Savings Plans and
Certain Other Arrangements............................. 37
Limitations on the Payment of Deferred Sales Charges...... 37
Redemption of Shares........................................ 39
Redemption................................................ 39
Repurchase................................................ 40
Reinstatement Privilege................................... 40
Pricing of Shares........................................... 41
Determination of Net Asset Value.......................... 41
Computation of Offering Price Per Share................... 41
Portfolio Transactions...................................... 43
Portfolio Turnover........................................ 44
Shareholder Services........................................ 44
Investment Account........................................ 45
Automatic Investment Plans................................ 45
Fee-Based Programs........................................ 46
Automatic Reinvestment of Dividends and Capital Gains
Distribution........................................... 46
Systematic Withdrawal Plans............................... 46
Retirement Plans.......................................... 47
Exchange Privilege........................................ 48
Dividends, Distributions and Taxes.......................... 49
Dividends and Distributions............................... 49
Federal Income Taxes...................................... 50
Tax Treatment of Transactions in Options on Debt
Securities, Futures Contracts and Options Thereon...... 52
Performance Data............................................ 53
Additional Information...................................... 57
Organization of the Fund.................................. 57
Independent Auditors...................................... 58
Custodian................................................. 58
Transfer Agency Services Arrangements..................... 58
Legal Counsel............................................. 58
Reports to Shareholders................................... 59
Shareholder Inquiries..................................... 59
Additional Information.................................... 59
Financial Statements........................................ 59
</TABLE>
<PAGE> 49
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. 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. See "Investment
Restrictions." 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 stocks. 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 High
Income 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 "Risk Factors in Transactions in Futures and Options
Thereon" below and "Other Portfolio Strategies -- Options on Debt Securities"
below.
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 B: Description of Corporate Bond Ratings attached hereto for additional
information concerning rating categories. Junk bonds may constitute as much as
100% of the Portfolio's investments. Although junk bonds can be expected to
provide 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. Fund Asset Management, L.P.'s ("FAM" or
the "Investment Adviser") 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,
2
<PAGE> 50
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 invest up to 15% of its total assets in
secondary market purchases of loans extended to corporate borrowers by
commercial banks and other financial institutions ("Corporate Loans"). As in the
case of junk bonds, the Corporate Loans in which the High Income Portfolio may
invest may be rated in the lower rating categories of the established rating
services (Baa or lower by Moody's and BBB or lower by S&P), or may be unrated
investments of comparable quality. As in the case of junk bonds, such Corporate
Loans can be expected to provide higher yields than higher-rated fixed-income
securities but may be subject to greater risk of loss of principal and income.
As discussed below under "Risk Factors in Transactions in Corporate Loans,"
however, there are some significant differences between Corporate Loans and junk
bonds.
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 characteristics which offer the Portfolio significant
opportunities for capital appreciation and future high rates of current income.
See "Risk Factors in Transactions in Distressed Securities."
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.
3
<PAGE> 51
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 Portfolio's 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 Portfolio 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. 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 Intermediate Term Portfolio than for the other two
Portfolios. In addition, the Intermediate Term Portfolio will usually offer a
lower yield than the other two Portfolios.
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 two Portfolios, under
unusual market or economic conditions, the Intermediate Term 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.
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. Investments
in Foreign Securities may involve additional risks beyond those of securities
issued by U.S. companies. See "Risk Factors in Transactions in Foreign
Securities."
4
<PAGE> 52
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 junk 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 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.
RISK FACTORS IN TRANSACTIONS IN DISTRESSED SECURITIES
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 bankruptcy 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
5
<PAGE> 53
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
Portfolio 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.
RISK FACTORS IN TRANSACTIONS IN CORPORATE LOANS
As in the case of junk bonds, the Corporate Loans in which the High Income
Portfolio may invest can be expected to provide higher yields than higher-rated
fixed income securities but may be subject to greater risk of loss of principal
and income. There are, however, some significant differences between Corporate
Loans and junk bonds. Corporate Loans are frequently secured by pledges of liens
and security interests in the assets of the borrower, and the holders of
Corporate Loans are frequently the beneficiaries of debt service subordination
provisions imposed on the borrower's bondholders. These arrangements are
designed to give Corporate Loan investors preferential treatment over junk bond
investors in the event of a deterioration in the credit quality of the issuer.
Even when these arrangements exist, however, there can be no assurance that the
principal and interest owed on the Corporate Loans will be repaid in full.
Corporate Loans generally bear interest at rates set at a margin above a
generally recognized base lending rate that may fluctuate on a day-to-day basis,
in the case of the Prime Rate of a U.S. bank, or that may be adjusted on set
dates, typically 30 days but generally not more than one year, in the case of
the London Interbank Offered Rate ("LIBOR"). Consequently, the value of
Corporate Loans held by the High Income Portfolio may be expected to fluctuate
significantly less than the value of fixed rate junk bond instruments as a
result of changes in the interest rate environment. On the other hand, the
secondary dealer market for Corporate Loans is not as well developed as the
secondary dealer market for junk bonds, and therefore presents increased market
risk relating to liquidity and pricing concerns.
The High Income Portfolio may acquire interests in Corporate Loans by means
of a novation, assignment or participation. In a novation, the High Income
Portfolio would succeed to all the rights and obligations of the assigning
institution and become a contracting party under the credit agreement with
respect to the debt obligation. As an alternative, the High Income Portfolio may
purchase an assignment, in which case the High Income Portfolio may be required
to rely on the assigning institution to demand payment and enforce its rights
against the borrower but would otherwise typically be entitled to all of such
assigning institution's rights under the credit agreement. Participation
interests in a portion of a debt obligation typically result in a contractual
relationship only with the institution participating out the interest and not
with the borrower. In purchasing a loan participation, the High Income Portfolio
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement, nor any rights of set-off against the borrower, and
the High Income Portfolio may not directly benefit from the collateral
supporting the debt obligation in which it has purchased the participation. As a
result, the High Income Portfolio will assume the credit risk of both the
borrower and the institution selling the participation to the High Income
Portfolio.
RISK FACTORS IN TRANSACTIONS IN FOREIGN SECURITIES
Investments in foreign securities, particularly those of nongovernmental
issuers, involve considerations which are not ordinarily associated with
investing in U.S. 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
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diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. If it should become necessary, the Portfolios could encounter
greater difficulties in invoking legal processes abroad than would be the case
in the U.S. Transaction costs in foreign securities may be higher. 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
U.S. 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 U.S. entities. In addition, certain foreign securities
may be subject to non-U.S. withholding taxes. 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 Portfolio'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.
RISK FACTORS IN TRANSACTIONS IN FUTURES AND OPTIONS THEREON
Each Portfolio of the Fund may engage in hedging transactions in bond
futures contracts and options thereon. 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. The Portfolios
currently may trade only in futures contracts on U.S. Treasury bonds, bills and
notes and Government National Mortgage Association ("GNMA") mortgage-backed
certificates and options on such futures 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.
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
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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 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 Appendix A "Interest Rate Futures, Options Thereon and
Options on Debt Securities" attached hereto for a more complete description of
options and futures transactions.
Call Options on Futures Contracts. As set forth in Appendix A, 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 Appendix A, a put option
on a futures contract provides the purchaser with the right, but not the
obligation, to enter into a "short" position in the futures contract at any time
up to the expiration of the option. A Portfolio will purchase a put option on a
futures contract to hedge its securities against the risk of a decline in market
value as a result of rising interest rates.
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.
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 Portfolio 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 Portfolio 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 Portfolio 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.
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The Portfolio may also purchase futures contracts or options thereon to
hedge against a possible increase in the price of securities before the
Portfolio is able to invest its cash in fixed-income securities. In such
instances, it is possible that the market may instead decline. If the Portfolio
does not then invest in such securities because of concern as to possible
further market decline or for other reasons, the Portfolio 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 Portfolio 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. 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 Portfolio 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 Portfolio or such rates move in a
direction opposite to that anticipated, the Portfolio may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Portfolio'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 (the "Investment
Company Act") 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.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU")
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce
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government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these European countries. The Treaty on European Union (the
"Maastricht Treaty") seeks to set out a framework for the European Economic and
Monetary Union ("EMU") among the countries that comprise the European Union
("EU"). Among other things, EMU establishes a single common European currency
(the "euro") that was introduced on January 1, 1999 and is expected to replace
the existing national currencies of all EMU participants by July 1, 2002. EMU
took effect for the initial EMU participants as of January 1, 1999, and will be
implemented over the weekend January 1, 1999 through January 3, 1999
("conversion weekend"). Upon implementation of EMU, certain securities issued in
participating EU countries (beginning with government and corporate bonds) will
be redenominated in the euro, and, thereafter, will be listed, traded, and make
dividend and other payments only in euros.
No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will be
implemented but not completed, or will be completed but then partially or
completely unwound. Because any participating country may opt out of EMU within
the first three years, it is also possible that a significant participant could
choose to abandon EMU, which could diminish its credibility and influence. Any
of these occurrences could have adverse effects on the markets of both
participating and non-participating countries, including sharp appreciation or
depreciation of participants' national currencies and a significant increase in
exchange rate volatility, a resurgence in economic protectionism, an undermining
of confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic unity,
and/or reversion of the attempts to lower government debt and inflation rates
that were introduced in anticipation of EMU. Also, withdrawal from EMU at any
time after the conversion weekend by an initial participant could cause
disruption of the financial markets as securities redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on a Portfolio's investments in Europe generally or in specific
countries participating in EMU. Gains or losses from euro conversion may be
taxable to Portfolio shareholders under foreign or, in certain limited
circumstances, U.S. tax laws.
OTHER PORTFOLIO STRATEGIES
Each Portfolio may engage in the additional Portfolio strategies described
below.
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 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. 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 Portfolio 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 Portfolio
but only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Portfolio 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 Portfolio will
be dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Portfolio 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, each Portfolio 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, a Portfolio will not enter
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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 the Portfolio would be so invested.
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 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).
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 Portfolio enters into the commitment and the value of the
security will thereafter be reflected in the calculation of the Portfolio's net
asset value. Although the Portfolio will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, the
Portfolio 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 Portfolio will enter
into forward commitment arrangements only with respect to securities in which it
may otherwise invest pursuant to its investment objectives and policies.
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 (the "Securities
Act") on the resale of securities acquired in private placements. If
registration of such securities under the Securities Act is required, such
registration may not be readily accomplished, and if such securities may be
resold without registration, such resale may be permissible only in limited
quantities. In either event, a Portfolio of the Fund may not be able to sell its
restricted securities at a time which, in the judgment of the Investment
Adviser, would be most opportune.
Standby Commitment Agreements. The High Income Portfolio of the Fund may
from time to time enter into standby commitment agreements. Such agreements
commit the Portfolio, for a stated period of time, to purchase a stated amount
of a fixed-income security, which may be issued and sold to the Portfolio at the
option of the issuer. The price and coupon of the security is fixed at the time
of the commitment. At the time of entering into the agreement, the Portfolio may
be paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.5% 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 securities 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
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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.
Lending of Portfolio Securities. Subject to investment restriction (8) in
the Investment Restriction section on page 15, however, 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 U.S. Treasury
securities which at all times while the loan is outstanding will be maintained
in amounts equal to at least 100% of the current market value of the loaned
securities. Any cash collateral will be invested in short-term securities, which
will increase the current income of the Portfolio making the loan. Such loans,
which will not have terms longer than 30 days, will be terminable at any time.
The Portfolio 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 Portfolio
may pay reasonable fees to persons unaffiliated with the Portfolio for services
in arranging such loans. In the event of a default by the borrower, the
Portfolio may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral.
Options on Debt Securities. The Portfolios may write call and put options
on U.S. Treasury bills, notes and bonds in order to increase the return on their
investments and in order to hedge optionable U.S. Treasury securities held by
the Portfolios. The Portfolios will write only covered call options on debt
securities (i.e., options in which it owns the underlying security) or fully
funded put options on debt securities (i.e., options in which an amount of cash
or short-term securities equal to the exercise price of the put has been
segregated with the Fund's custodian). By writing covered options on U.S.
Treasury securities, a Portfolio will be able to increase its return on the
underlying securities by the amount of the premium, if the option expires
unexercised, or by the amount of any profits earned by closing out the option
position. The Portfolio may be required, however, to forego benefits which could
have been obtained from an increase in the value of securities on which a call
is written or a decrease in the value of securities on which a put is written.
As a result, the Portfolio may receive less total return, and at other times
greater total return, than if it had not written options.
The Portfolios also may purchase put options on optionable U.S. Treasury
bills, notes and bonds held in a Portfolio and, under certain limited
circumstances described below, 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. See
Appendix A "Interest Rate Futures, Options Thereon and Options on Debt
Securities attached hereto."
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 is authorized to write (i.e., sell) covered call options and 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
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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. The writer of a
covered call option has no control over when he may be required to sell his
securities since he may be assigned an exercise notice at any time prior to the
termination of his obligation as a writer. If an option expires unexercised, the
writer realizes a gain in the amount of the premium. Such a gain, of course, may
be offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer realizes a gain or loss
from the sale of the underlying security.
A Portfolio will receive a premium from writing a put or call option, which
increases the Portfolio's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. In the former instance,
the Portfolio increases its return by retaining the premium without being
required to purchase or sell the underlying security. In the latter case, the
Portfolio increases its return by liquidating the option position at a profit.
The amount of the premium will reflect, among other factors, the current market
price of the underlying security, the relationship of the exercise price to the
market price, the time period until the expiration of the option and interest
rates. By writing a call, the Portfolio limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for so long as the Portfolio's obligation as a writer continues.
By writing a put, the Portfolio will be obligated to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise for as long as the option is outstanding. In addition, in
closing out an option position, the Fund may incur a loss. Thus, in some periods
the Portfolio will receive less total return and in other periods greater total
return from its option positions than it otherwise would have received from the
underlying securities. To the extent that such transactions are engaged in for
hedging purposes, any gain (or loss) thereon may offset, in whole or in part,
gains (or losses) on securities held in a Portfolio or increases in the value of
securities the Portfolio intends to acquire. The Portfolio will attempt to
achieve, through the receipt of premiums on covered options, a more consistent
average total return than it would otherwise realize from holding the underlying
securities alone. To facilitate closing transactions, as described below, the
Portfolio will ordinarily only write options for which a liquid secondary market
appears to exist.
A Portfolio may engage in closing transactions in order to terminate
outstanding options that it has written. To effect a closing transaction, the
Portfolio purchases, prior to the exercise of an outstanding option 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.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock Exchange
and the Amsterdam Stock Exchange. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Portfolio will not be able to sell the underlying security
until the option expires or until it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be
13
<PAGE> 61
imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Clearing Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
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 the following fundamental and non-fundamental
restrictions and policies relating to the investment of the Portfolios' assets
and their 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
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. (For purposes of this restriction, corporate debt
securities includes corporate loans purchased in the secondary market).
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 investment policies as set forth in
its Prospectus and Statement of Additional Information, as they may be
14
<PAGE> 62
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 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. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act at any time the Fund's shares are owned by
another investment company that is part of the same group of investment
companies as the Fund.
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 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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors of the Fund consist of six individuals, five of whom are
"non-affiliated" persons of the Fund as defined in the Investment Company Act.
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. The Board of Directors
elects officers of the Fund annually.
15
<PAGE> 63
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 (66) -- President and Director(1)(2) -- Chairman of Fund
Asset Management, L.P. ("FAM" or the "Investment Adviser"), (which term herein
includes its corporate predecessors) and Merrill Lynch Asset Management, L.P.
("MLAM") (which term as used herein includes its corporate predecessors) since
1997; President of the Investment Adviser and MLAM from 1977 to 1997; President
and Director of Princeton Services, Inc. ("Princeton Services") from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990.
RONALD W. FORBES (58) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Associate Professor of Finance, School of Business, State University
of New York at Albany since 1989. Consultant, Urban Institute, Washington, D.C.
since 1995.
CYNTHIA A. MONTGOMERY (46) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02613. Professor, Harvard Business
School, since 1989; Associate Professor, J.L. Kellogg 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 (67) -- 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 Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
KEVIN A. RYAN (66) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director 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 (60) -- 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., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.
TERRY K. GLENN (58) -- 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
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
JOSEPH T. MONAGLE, JR. (50) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of the
Global Fixed Income Division of the Investment Adviser and MLAM since 1997;
Senior Vice President of Princeton Services since 1993.
DONALD C. BURKE (37) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; and Director of
Taxation of MLAM since 1997.
VINCENT T. LATHBURY, III (58) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Vice President of MLAM
from 1982 to 1997; Portfolio Manager of the Investment Adviser and MLAM since
1982.
CHRISTOPHER G. AYOUB (43) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Vice President of MLAM
from 1985 to 1997; Assistant Vice President from 1984 to 1985.
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<PAGE> 64
GERALD M. RICHARD (49) -- 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 since 1984.
PHILIP M. MANDEL (51) -- Secretary(1)(2) -- First Vice President of MLAM
since 1997; Assistant General Counsel of Merrill Lynch since 1989.
- ---------------
(1) Interested person, as defined in the Investment Company Act, 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, 1998, the Directors and officers of the Fund as a group
(13 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.
COMPENSATION OF DIRECTORS
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 Adviser (each a "non-affiliated Director") an annual fee of $4,500
plus a fee of $300 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-affiliated Directors, with a fee of $1,400 per
year. The principal purpose of the Committee is to review the scope of the
annual audit conducted by the Fund's independent auditors and the evaluation by
such auditors of the accounting procedures followed by the Fund. The Committee
will also select and nominate the Directors who are not "interested persons" of
the Fund within the meaning of the Investment Company Act. The Chairman of the
Audit Committee is paid an additional annual fee of $1,000.
The following table sets forth for the fiscal year ended September 30,
1998, compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1997, 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-affiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR MLAM/FAM
COMPENSATION RETIREMENT BENEFIT ADVISED FUNDS
FROM THE ACCRUED AS PART PAID TO
DIRECTOR/TRUSTEE FUND OF FUND EXPENSES TRUSTEE/DIRECTOR(1)
- ---------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
Ronald W. Forbes............................. $7,400 None $153,500
Cynthia A. Montgomery........................ $7,400 None $299,000
Charles C. Reilly............................ $8,400 None $313,000
Kevin A. Ryan................................ $7,400 None $153,500
Richard R. West.............................. $7,400 None $153,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (29 registered investment companies consisting of 42 portfolios); Ms.
Montgomery (29 registered investment companies consisting of 42 portfolios);
Mr. Reilly (47 registered investment companies consisting of 60 portfolios);
Mr. Ryan (29 registered investment companies consisting of 42 portfolios);
and Mr. West (48 registered investment companies consisting of 70
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, a wholly owned subsidiary of ML & Co.)
is itself a wholly owned affiliate of ML & Co. and has its principal place of
business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. ML & Co.,
which has its principal place
17
<PAGE> 65
of business at 250 Vesey Street, New York, New York 10281, is a financial
services firm. FAM or MLAM acts as the investment adviser for more than 140
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individual and institutional
accounts. As of December 31, 1998, the Investment Adviser and MLAM had a total
of $ billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser.
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. Similarly,
the following entities may be considered "controlling persons" of Merrill Lynch
Asset Management U.K. ("MLAM U.K."): Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., a subsidiary of ML & Co.
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.
The address of MLAM U.K. is Milton Gate, 1 Moore Lane, London EC2Y 9MA, England.
Vincent T. Lathbury III serves as Portfolio Manager of the High Income
Portfolio, and Christopher G. Ayoub serves as Portfolio Manager of the
Investment Grade Portfolio and Intermediate Term Portfolio. They are primarily
responsible for the day to day management of the Fund. Vincent T. Lathbury III
has served as First Vice President of MLAM since 1997, Vice President of MLAM
from 1982 to 1997 and Portfolio Manager of the Investment Adviser and MLAM since
1982. Christopher G. Ayoub has served as Director (Fixed Income Fund Management)
of MLAM since 1997, Vice President of MLAM from 1985 to 1997 and Assistant Vice
President from 1984 to 1985.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of each Portfolio and has responsibility
for making decisions to buy, sell or hold any particular security. The
Investment Adviser provides the portfolio managers for the Portfolios, who
consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the Fund
and is obligated to provide all the office space, facilities, equipment and
personnel necessary to perform its duties under the 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
18
<PAGE> 66
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 year ended September 30, 1998, FAM received advisory fees
from the Fund in the amount of $37,959,737 of which $31,867,154 was received
with respect to the High Income Portfolio (representing 0.41% of its average
daily net assets), $4,551,338 was received with respect to the Investment Grade
Portfolio (representing 0.36% of its average daily net assets) and $1,541,245
was received with respect to the Intermediate Term Portfolio (representing 0.36%
of its average daily 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, 1998 were $103,764,049 of which $87,536,308 was attributable
to the High Income Portfolio, $12,457,496 was attributable to the Investment
Grade Portfolio, and $3,770,245 was attributable to the Intermediate Term
Portfolio, respectively.
For the fiscal years ended September 30, 1996 and 1997 the advisory fees
paid by the Fund to the Investment Adviser totaled $27,255,524 and $33,985,376,
respectively. The Investment Adviser did not reimburse any portion of its
advisory fee for the fiscal years ended September 30, 1996, 1997 and 1998.
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 ML & Co. 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), 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, 1998, the
amount of such reimbursement for accounting services was $622,704 of which
$512,372 was received with respect to the High Income Portfolio, $75,981 was
received respect to the Investment Grade Portfolio and $34,351 was received with
respect to the Intermediate Term Portfolio. For the fiscal year ended September
30, 1997, the amount of such reimbursement for accounting services was $735,200,
of which $505,855 was received with respect to the High Income Portfolio,
$153,971 was received with respect to the Investment Grade Portfolio and $75,374
was received with respect to the Intermediate Term Portfolio. For the fiscal
year ended September 30, 1996, the amount of such reimbursement for
19
<PAGE> 67
accounting services was $606,335, of which $443,142 was received with respect 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.
DURATION AND TERMINATION
[Continuation of the Investment Advisory Agreement for the period March 1,
1999 to March 1, 2000 was approved by the Board of Directors, including a
majority of the disinterested directors, on December 9, 1998.] Unless earlier
terminated as described below, the agreement will remain in effect until March
1, 2000 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 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.
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 which incorporates the Code of Ethics of the
Investment Adviser Act of 1940 (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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus. Each Portfolio offers 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.
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 Merrill Lynch Select
Pricing(SM) System is used by more than 50 registered investment companies
advised by the Investment Advisor or its affiliate, MLAM. Funds advised by the
Investment Advisor or MLAM that use the Merrill Lynch Select Pricing(SM) System
are referred to herein as Select Pricing Funds.
It should be noted that each class of shares of the High Income Portfolio
are no longer available for purchase (or exchange), except as follows:
shareholders of the High Income Portfolio can continue to elect to have
dividends and distributions paid on shares of the High Income Portfolio
reinvested in additional shares of the High Income Portfolio; certain
participants in employer-sponsored retirement or savings plans, including
20
<PAGE> 68
eligible 401k plans, continue to be permitted to purchase shares of the High
Income Portfolio through such plans; shares of the High Income Portfolio
continue to be available for purchase by participants in certain fee-based
programs, such as the Mutual Fund Advisor program administered by Merrill Lynch;
and shares of the High Income Portfolio continue to be available for purchase in
single transactions over $1,000,000. Class A, B, C, and D shares of the High
Income Portfolio will also be available for purchase by existing shareholders of
the High Income Portfolio.
Each Portfolio continuously offers its shares 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.
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 and the minimum subsequent purchase in each Portfolio is
$50, except that for retirement plans the minimum initial purchase in each
Portfolio is $100 and the minimum subsequent purchase is $1, and for
participants in certain fee-based programs the minimum initial purchase is $250
and the minimum subsequent purchase is $50. Merrill Lynch charges its customers
a processing fee (currently $5.35) to confirm a sale of shares to such
customers.
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 25 of the
Prospectus.
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 (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" on page 34. Each class has different exchange privileges.
See "Shareholder Services -- Exchange Privilege on page 48."
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 CDSC and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees 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, that are eligible
to sell shares.
21
<PAGE> 69
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 PORTFOLIO AND INVESTMENT GRADE PORTFOLIO
<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 four 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 4.0% 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" on page 23.
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants 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,
instead may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC
may be waived in connection with certain fee-based programs. A 0.75% sales
charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with 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 an eight year conversion period. If Class B shares of a
Portfolio of the Fund are exchanged for Class B shares of another Select
Pricing 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 in connection with certain fee-based programs.
22
<PAGE> 70
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 of 0.25% 0.25% B shares convert to D
1.0% during the first year, shares automatically
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" on page 23.
(3) Reduced for purchases of $100,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants 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 0.20% CDSC if redeemed
within one year. A 0.30% sales charge for 401(k) purchases over $1,000,000
will apply.
(4) The CDSC may be modified in connection with 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 an eight year conversion period. If Class B shares of a
Portfolio of the Fund are exchanged for Class B shares of another Select
Pricing 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 in connection with 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 and subject to liability as such. The Distributor will
retain the entire sales charge on orders placed directly with it. The sales
charges applicable to the Portfolios, expressed as a
23
<PAGE> 71
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 PORTFOLIO AND INVESTMENT GRADE PORTFOLIO
------------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS
A PERCENTAGE OF A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED* 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
</TABLE>
<TABLE>
<CAPTION>
CLASS A AND CLASS B SHARES OF
INTERMEDIATE TERM PORTFOLIO
------------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS
A PERCENTAGE OF A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT 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 and participants in certain fee-based programs. If the sales charge
is waived in connection with a purchase of $1,000,000 or more, such purchases
may be subject to a CDSC of 1.0% for the High Income Portfolio and Investment
Grade Portfolio or 0.20% for the Intermediate Term Portfolio if the shares
are redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. A sales charge of 0.75% (with respect to the High
Income Portfolio and Investment Grade Portfolio) 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.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended September 30, 1998, the gross sales charges for
the sale of Class A shares of the High Income Portfolio, Investment Grade
Portfolio and Intermediate Term Portfolio were $201,329, $32,187 and $2,653,
respectively, of which $19,815, $3,117 and $185, respectively, were received by
the Distributor and $181,514, $29,070 and $2,468, respectively, were received by
Merrill Lynch. For the fiscal year ended September 30, 1998, the gross sales
charges for the sale of Class D shares of the High Income Portfolio, Investment
Grade Portfolio and Intermediate Term Portfolio were $934,171, $119,932 and
$19,729, respectively, of which $91,768, $12,327 and $1,895, respectively, were
received by the Distributor and $842,403, $107,605 and $17,834, respectively,
were received by Merrill Lynch. For the fiscal year ended September 30, 1997,
the gross sales charges for the sale of Class A shares of the High Income
Portfolio, Investment Grade
24
<PAGE> 72
Portfolio and Intermediate Term Portfolio were $353,557, $48,809 and $3,867,
respectively, of which $33,865, $4,495 and $281, respectively, were received by
the Distributor and $319,692, $44,314 and $3,586, respectively, were received by
Merrill Lynch. For the fiscal year ended September 30, 1997, the Distributor
received CDSC proceeds of $1,006 with respect to redemption within one year
after purchase of Class A shares purchased subject to a front-end sales charge
waiver of the Intermediate Term Portfolio. For the same period 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 and Investment Grade Portfolios. For the
fiscal year ended September 30, 1998, the Distributor received CDSC proceeds of
$10,901 and $114,814 with respect to redemption within one year after purchase
of Class A and Class D shares, respectively, purchased subject to a front-end
sales charge waiver of the High Income Portfolio. For the fiscal year ended
September 30, 1997, Class D gross sales charges aggregated $1,947,053 of which
the Distributor received $183,587 and Merrill Lynch received $1,763,466. During
the fiscal year ended September 30, 1997, the Distributor received $135,329 with
respect to redemptions within one year after purchase of Class D shares
purchased subject to a front end sales charge waiver. For the same period, the
Distributor did not receive any CDSC proceeds with respect to redemption within
one year after purchase of Class A or Class D shares purchased subject to a
front-end sales charge waiver of the Intermediate Term Portfolio and Investment
Grade Portfolio.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio of the Fund in a shareholder account, including participants in the
Merrill Lynch BlueprintSM 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 Select Pricing Funds.
Also eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMASM 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 ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
the Investment Advisor, MLAM, and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees and
to members of the Board of Directors 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 described below 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 Select Pricing 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
Select Pricing Funds.
As to purchase orders received by securities dealers prior to the close of
the New York Stock Exchange ("NYSE") (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 NYSE
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 NYSE (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 NYSE such orders will be deemed received on the
next business day. Any order may be rejected by the Distributor or the Fund.
Neither
25
<PAGE> 73
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.
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" on page 23. See "Shareholder
Services -- Fee Based Programs" on page 46.
Provided applicable threshold requirements are met, either Class A and
Class D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. 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 described below 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.
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
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 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.
The Distributor may reallow as a discount all or a part of the 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 and subject to liability as such. The Distributor will
retain the entire sales charge on orders placed directly with it.
26
<PAGE> 74
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 Select Pricing Funds. 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 Select Pricing
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 Select Pricing 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"). Class B shares of all three Portfolios are offered to
certain participants in 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. Class B shares are offered through Blueprint only to 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.
27
<PAGE> 75
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.
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 0.80% 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 0.50% 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 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
the Investment Advisor, MLAM 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 Select Pricing Funds are offered at
net asset value to shareholders of 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 Senior Floating Rate Fund in
shares of the Fund. In order to exercise this investment option, Senior Floating
Rate Fund shareholders must sell their Senior Floating Rate Fund shares to the
Senior Floating Rate Fund in connection with a tender offer conducted by the
Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund.
This investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. 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 Pricing(SM) System commenced operations)
and wish to
28
<PAGE> 76
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares of the Fund. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 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 Portfolios 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.
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.
29
<PAGE> 77
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.
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 Select Pricing 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 Portfolio and
Investment Grade Portfolio 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" on page 33. 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 Portfolio and
Investment Grade Portfolio 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" on page 34. The proceeds from the account maintenance fees
are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" on page 34.
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" on page 37. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
30
<PAGE> 78
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services-Exchange
Privilege" on page 48 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 that
are redeemed within four years of purchase for the High Income Portfolio and
Investment Grade Portfolio, 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
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE 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>
For the fiscal year ended September 30, 1997, the Distributor received
$7,883,414 in CDSCs with respect to redemptions of Class B shares, amounting to
$6,548,694 and $1,334,720 in the High Income Portfolio and the Investment Grade
Portfolio, respectively, all of which were paid to Merrill Lynch. For the fiscal
year ended September 30, 1998, the Distributor received $8,589,221 in CDSC's
with respect to redemptions of Class B shares amounting to $7,823,901 and
$765,320 in the High Income Portfolio and the Investment Grade Portfolio,
respectively, all of which were paid to Merrill Lynch. Additional CDSC's payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
INTERMEDIATE TERM PORTFOLIO:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- -------------------
<S> <C>
0-1................................................. 1.0%
Thereafter.......................................... 0.0%
</TABLE>
For the fiscal year ended September 30, 1997, the Distributor received
CDSCs of $187,231 for the Intermediate Term Portfolio with respect to
redemptions of Class B shares all of which were paid to Merrill Lynch. For the
fiscal year ended September 30, 1998, the Distributor received $61,366 in CDSC's
with respect to redemptions of Class B shares with respect to the Intermediate
Term Portfolio. Additional CDSCs payable to the Distributor may have been waived
or converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
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
Portfolio and Investment Grade Portfolio, it will be assumed that the redemption
is first of shares held
31
<PAGE> 79
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 redemption in an Employee Access(SM)
Account available through employers providing eligible 401(k) plans. The Class
B CDSC also is waived for any Class B shares that are purchased within
qualifying Employee Access(SM) Accounts. Additional information concerning the
waiver of the Class B CDSC described below. The terms of the CDSC may be
modified for redemptions made in connection with certain fee-based programs.
See "Shareholder Services -- Fee Based Programs" on page 46.
Redemptions for which the waiver applies in the case of such withdrawals
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, 1996, Merrill Lynch received
CDSCs 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.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs" on page 46. The following
32
<PAGE> 80
table sets forth the rates of the contingent deferred sales charge on Class C
shares of the High Income Portfolio, Investment Grade Portfolio and Intermediate
Term Portfolio:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- -------------------
<S> <C>
0-1................................................. 1.0%
Thereafter.......................................... 0.0%
</TABLE>
For the fiscal year ended September 30, 1997, the Distributor received
CDSCs of $293,302 for the High Income Portfolio, $38,878 for the Investment
Grade Portfolio and $2,668 for the Intermediate Term Portfolio with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch. For the
fiscal year ended September 30, 1998, the Distributor received CDSC's of
$324,713 for the High Income Portfolio, $23,584 for the Investment Grade
Portfolio and $1,535 for the Intermediate Term Portfolio with respect to
redemptions of Class C shares, 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
Portfolio and Investment Grade Portfolio and 0.10% of net assets for the
Intermediate Term Portfolio, but are not subject to the distribution fee that is
borne by Class B shares. Automatic conversion of Class B shares into Class D
shares will occur at least once each month (on the "Conversion Date") on the
basis of the relative net asset values of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a purchase or
sale of the shares for federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. 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.
33
<PAGE> 81
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" on page 46.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% of average daily net assets of the relevant class and
Portfolio for Class B, Class C and Class D shares of the High Income Portfolio
and Investment Grade Portfolio, 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.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. 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 (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.
34
<PAGE> 82
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 Portfolio
and Investment Grade Portfolio, 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, 1998, the High Income Portfolio,
Investment Grade Portfolio and Intermediate Term Portfolio paid the Distributor
$41,453,364, $4,348,083 and $771,948, respectively, pursuant to the Class B
Distribution Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $5.5 billion, $579.7 million and $154.0
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, 1998,
the High Income Portfolio, the Investment Grade Portfolio and the Intermediate
Term Portfolio, paid the Distributor $5,501,857, $443,418 and $10,574,
respectively, pursuant to the Class C Distribution Plan (based on average daily
net assets subject to such Class C Distribution Plan of approximately $687.7
million, $55.4 million and $2.1 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, 1998, the High Income Portfolio, the Investment Grade
Portfolio and the Intermediate Term Portfolio, paid the Distributor $1,313,068,
$225,932 and $86,740, respectively, pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan of
approximately $525.2 million, $90.4 million and $86.8 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, CDSCs 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,
35
<PAGE> 83
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultation compensation.
As of December 31, 1997, 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 $70,230,000 (1.26% of Class B net assets at that date) with
respect to the High Income Portfolio and approximately $4,869,000 (.85% of Class
B net assets at that date) with respect to the Investment Grade Portfolio and
approximately $311,000 (0.21% of Class B net assets at that date) with respect
to the Intermediate Term Portfolio. As of September 30, 1998, direct cash
revenues received with respect to the Class B shares of the High Income
Portfolio for the period since October 21, 1988 (commencement of operations)
exceeded direct cash expenses by $89,480,398 (representing 2.00% of High Income
Portfolio's Class B net assets at that date). As of September 30, 1998, direct
cash revenues received with respect to the Class B shares of the Investment
Grade Portfolio for the period since October 21, 1988 (commencement of
operations) exceeded direct cash expenses by $3,737,348 (representing 3.27% of
Investment Grade Portfolio's Class B net assets at that date). As of September
30, 1998, direct cash revenues received with respect to the Class B shares of
the Intermediate Term Portfolio for the period since November 13, 1992
(commencement of operations) exceeded direct cash expenses by $22,381,579
(representing 2.09% of Intermediate Term Portfolio's Class B net assets at that
date).
With respect to Class C shares, as of December 31, 1997, 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 $1,993,000 (0.29% of Class C net
assets at that date) with respect to the High Income Portfolio and approximately
$116,000 (0.23% of Class C net assets at that date) with respect to the
Investment Grade Portfolio and approximately $1,000 (0.06% of Class C net assets
at that date) with respect to Intermediate Term Portfolio. As of September 30,
1998, direct cash revenues received with respect to the Class C shares of the
High Income Portfolio for the period since October 21, 1994 (commencement of
operations) exceeded direct cash expenses by $8,120,317 (representing 1.48% of
High Income Portfolio's Class C net assets at that date). As of September 30,
1998, direct cash revenues received with respect to the Class C shares of the
Investment Grade Portfolio for the period since October 21, 1994 (commencement
of operations) exceeded direct cash expenses by $809,976 (representing 1.16% of
Investment Grade Portfolio's Class C net assets at that date). As of September
30, 1998, direct cash revenues received with respect to the Class C shares of
the Intermediate Term Portfolio for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $84,063
(representing 1.74% of Intermediate Term Portfolio's 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 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" on page 33.
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
36
<PAGE> 84
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.
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.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the NASD Conduct Rules of the National
Association of Securities Dealers, Inc. ("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 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,
1998 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, 1998 for the High
Income Portfolio and Investment Grade Portfolio, for the period November 13,
1992 (commencement of Class B operations) to September 30, 1998 for the
Intermediate Term Portfolio, and for the period October 21, 1994 (commencement
of operations) to September 30, 1998 for Class C shares of each Portfolio.
37
<PAGE> 85
<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as Adopted.......... $6,192,761(1) $387,047 $110,283 $497,330 $140,431 $356,899 $22,347
Under Distributor's Voluntary
Waiver............................ $6,192,761(1) $387,047 $ 30,964 $418,011 $140,431 $277,580 $22,347
CLASS C
Under NASD Rule as Adopted.......... $ 880,182 $ 55,011 $ 9,904 $64,915 $ 8,967 $ 55,948 $ 3,027
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT GRADE PORTFOLIO
------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as Adopted........... $1,067,731(1) $66,733 $23,219 $89,952 $29,766 $60,186 $3,427
Under Distributor's Voluntary
Waiver............................. $1,067,731(1) $66,733 $ 5,339 $72,072 $29,766 $42,306 $3,427
CLASS C
Under NASD Rule as Adopted........... $ 105,817 $ 6,613 $ 1,221 $7,834 $ 1,042 $ 6,792 $ 426
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE TERM PORTFOLIO
----------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as Adopted............ $230,749(5) $14,421 $3,894 $18,315 $3,739 $14,576 $446
Under Distributor's Voluntary
Waiver.............................. $230,749(5) $14,421 $1,154 $15,575 $3,739 $11,836 $446
CLASS C
Under NASD Rule as Adopted............ $ 5,574 $ 348 $ 82 $ 430 $ 59 $ 371 $ 12
</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. See "Purchase of Shares -- Distribution Plans" on page 34. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Funds Advisor ("MFA") program. The CDSC is booked as a contingent obligation
that may be payable if the shareholder terminates participation in the MFA
program.
(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.
38
<PAGE> 86
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
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
Portfolios, there will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating their total
holdings also will receive upon redemption all dividends declared on the shares
redeemed. If a shareholder redeems all of the shares in his account, he will
receive, in addition to the net asset value of the shares redeemed, a separate
check representing all dividends declared but unpaid. If a shareholder redeems a
portion of the shares in his account, the dividends declared but unpaid on the
shares redeemed will be distributed on the next dividend payment date.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by each
Portfolio at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other than by
mail should be delivered to Financial Data Services, Inc., 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case
of shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. The
notice in either event requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as their name(s) appears on the
Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. Examples of "eligible guarantor institutions" include most
commercial banks and broker dealers (including, for example, Merrill Lynch
branch offices). Information regarding other financial institutions which
qualify as "eligible guarantor institutions" may be obtained from the Transfer
Agent. In certain instances, the Transfer Agent may require additional documents
such as, but not limited to, trust instruments, death certificates, appointments
as executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment will be mailed
within seven days after receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time, not exceeding ten
days, as it has assured itself that good payment (e.g., cash or certified check
drawn on a United States bank) has been collected for the purchase of such
shares.
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 NYSE
is restricted as determined by the Commission or such Exchange is closed (other
than customary weekend and holiday closings), for any period during which an
emergency exists as defined by the Commission as a result of which disposal of
portfolio securities or determination of the net asset value of any Portfolio is
not reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of each Portfolio.
39
<PAGE> 87
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. The Fund normally will accept orders to
repurchase shares by wire or telephone from dealers for their customers at the
net asset value next computed after the order is placed. Shares will be priced
at the net asset value calculated on the day the request is received, provided
that the request for purchase is submitted to the dealer prior to fifteen
minutes after the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) on the day received, and such request is received by
the Fund from such dealer not later than 30 minutes after the close of business
on the NYSE 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 NYSE in order to obtain that day's closing price. 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.
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 that do not have selected dealer agreements with the
Distributor 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 $5.35) to confirm a repurchase of shares to such
customers. Repurchases made directly through the Fund's 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. A shareholder whose order
for repurchase is rejected by the Fund, however, 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.
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 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. 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.
40
<PAGE> 88
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes 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
NYSE (generally 4:00 p.m., Eastern time) on days that the NYSE 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 a Portfolio is required to sell or redeem shares. The NYSE is
not open for business on the following holidays: New Year's Day, Martin Luther
King, Jr. 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 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,
1998, the Fund paid MLSPS $29,883 for securities price quotations to compute the
net asset value of the Portfolios.
The per share net asset value of Class A shares 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 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 that 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 ("OTC") market are valued at the most
recent bid prices (in the case of the Investment Grade Portfolio and
Intermediate Term Portfolio) 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 OTC 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 OTC 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.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
High Income Portfolio, 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, 1998, is calculated as set forth below.
41
<PAGE> 89
High Income Portfolio:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets............................ $922,820,393 $4,469,451,657 $550,482,584 $430,163,677
============ ============== ============ ============
Number of Shares Outstanding.......... 130,921,727 633,911,571 78,024,103 60,987,369
============ ============== ============ ============
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ $ 7.05 $ 7.05 $ 7.06 $ 7.05
Sales Charge* (for Class A and Class D
shares: 4.00% of offering price
(4.17% of net asset value per
share))............................. 0.29 ** ** .29
------------ -------------- ------------ ------------
Offering Price........................ $ 7.34 $ 7.05 $ 7.06 $ 7.34
============ ============== ============ ============
</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 -- Merrill Lynch Select Pricing(SM) System" and "Deferred Sales Charge
Alternatives -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" herein.
Investment Grade Portfolio:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets......................... $600,655,063 $685,344,569 $77,463,550 $123,202,426
============ ============ =========== ============
Number of Shares Outstanding....... 50,978,895 58,167,078 6,571,952 10,450,702
============ ============ =========== ============
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).............. $ 11.78 $ 11.78 $ 11.79 $ 11.79
Sales Charge* (for Class A and
Class D shares: 4.00% of offering
price (4.17% of net asset value
per share))...................... 0.49 ** ** .49
------------ ------------ ----------- ------------
Offering Price..................... $ 12.27 $ 11.78 $ 11.79 $ 12.28
============ ============ =========== ============
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Merrill Lynch Select Pricing(SM) System" and "Deferred Sales Charge
Alternatives -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" herein.
42
<PAGE> 90
Intermediate Term Portfolio:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net Assets.......................... $200,679,008 $178,463,442 $4,832,373 $106,294,042
============ ============ ========== ============
Number of Shares Outstanding........ 16,964,688 15,085,969 408,636 8,985,243
============ ============ ========== ============
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)...................... $ 11.83 $ 11.83 $ 11.83 $ 11.83
Sales Charge* (for Class A and Class
D shares: 1.00% of offering price
(1.01% of net asset value per
share))........................... 0.12 ** ** 0.12
------------ ------------ ---------- ------------
Offering Price...................... $ 11.95 $ 11.83 $ 11.83 $ 11.95
============ ============ ========== ============
</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 -- Merrill Lynch Select Pricing(SM) System" and "Deferred Sales Charge
Alternatives -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the portfolio decisions of each Portfolio
and the placing of its portfolio transactions. With respect to such
transactions, the Investment Adviser seeks to obtain the best net results for
the Portfolio, 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 Portfolio 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.
Under the Investment Company Act, persons affiliated with the Portfolios
are prohibited from dealing with the Portfolios as a principal in the purchase
and sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. Since over-the-counter ("OTC") transactions are
usually principal transactions, affiliated persons of the Portfolios, including
Merrill Lynch, may not serve as dealer in connection with transactions with the
Portfolios. Affiliated persons of the Fund may serve as broker for the
Portfolios in over-the-counter transactions conducted on an agency basis.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Board of Directors have considered all factors deemed relevant,
and have made a determination not to seek such recapture at this time. The Board
of Directors will reconsider this matter from time to time.
The Portfolios may not purchase securities, during the existence of any
underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Board of Directors of the Fund which either comply
with rules adopted by the Commission or with interpretations of the Commission
Staff. Rule 10f-3 under the Investment Company Act sets forth conditions under
which the Portfolios may purchase corporate bonds or other securities from an
underwriting syndicate of which Merrill Lynch is a member. The rule sets forth
requirements relating to, among other things, the terms of an issue of corporate
bonds or other securities purchased by the Portfolios, the amount of corporate
bonds or other securities which may be purchased in any one issue and the assets
of the Portfolios which may be invested in a particular issue.
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The securities in which each Portfolio invests are traded primarily in the
over-the-counter market. Where possible, each Portfolio will deal directly with
the dealers who make a market in the securities involved unless better prices
and execution are available elsewhere. Such dealers usually act as principals
for their own account. On occasion, securities may be purchased directly from
the issuer. Bonds and money market securities are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. The cost of portfolio securities transactions of each Portfolio will
consist primarily of dealer or underwriter spreads.
While the Investment Adviser seeks to obtain the best price and execution
in effecting transactions in the portfolio securities of each Portfolio, brokers
who provide supplemental investment research to the Investment Adviser may
receive orders for transactions by a Portfolio. Such supplemental research
services ordinarily consist of assessments and analyses of the business or
prospects of a company, industry, or economic sector. If, in the judgment of the
Investment Adviser, a Portfolio will be benefited by such supplemental research
services, the Investment Adviser is authorized to pay commissions to brokers
furnishing such services which are in excess of commissions which another broker
may charge for the same transaction. Information so received will be in addition
to and not in lieu of the services required to be performed by the Investment
Adviser under its Investment Advisory Agreement. The expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. In some cases, the Investment Adviser may use such
supplemental research in providing investment advice to its other investment
advisory accounts.
For the fiscal year ended September 30, 1996, the Fund paid total brokerage
commissions of $63,684, of which $60,484 was paid to Merrill Lynch. For the
fiscal year ended September 30, 1997, the Fund paid total brokerage commissions
of $9,748, $2,998 of which was paid to Merrill Lynch. For the fiscal year ended
September 30, 1998, the Fund paid total brokerage commissions of $23,702,
$11,600 of which was paid to Merrill Lynch.
PORTFOLIO TURNOVER
The rate of portfolio turnover is not a limiting factor when Fund
management deems it appropriate to purchase or sell securities held by the
Portfolios. 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.
High portfolio turnover involves correspondingly greater transaction costs in
the form of commissions and dealer spreads, which are borne directly by the
Fund. 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" on page 49. 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in the shares of the Portfolios. Full details
as to each of such services and copies of the various plans described below can
be obtained from the Fund, the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors.
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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. 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 shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the transfer agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the transfer agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
with Merrill Lynch for those shares.
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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account 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.
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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 the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
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 full and fractional
shares of the Portfolio in which the shareholder is invested. Such reinvestment
will be at the net asset value of shares of Portfolios as of the close of
business on the payment date. 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 Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone only if the shareholder account is maintained
at the Transfer Agent (1-800-MER-FUND) that they no longer wish to have their
dividends and/or distributions reinvested in shares of a Portfolio or vice
versa, and commencing ten days after receipt by the transfer agent of such
notice, those instructions will be effected. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest will
accrue on amounts represented by uncashed distribution or redemption checks.
Cash payments can also be directly deposited to the shareholder's bank account.
No CDSC will be imposed on redemptions of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the Portfolios may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for shareholders
who have acquired shares of the Portfolios having a value, based on cost or upon
the current net asset value, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business on the NYSE (generally
4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the 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 of the
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withdrawal payment will be made on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends and distributions
on all shares in the Investment Account are reinvested automatically in shares
of the applicable Portfolio. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the Fund,
the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yields or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase 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.
Alternatively, a 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 CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second or fourth Monday of
the month. If the Monday selected is not a business day, the redemption will be
processed at net asset value on the next business day. The Systematic Redemption
Program is not available if shares are being purchased within the account
pursuant to the Automatic Investment Program. For more information on the
CMA(R)/CBA(R) Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Clients affected by a conversion from Class
B shares to Class D shares, must re-elect the systematic withdrawal plan. Any
CDSC that otherwise might be due on such redemption of Class B or Class C shares
will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are otherwise redeemed.
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.
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
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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.
EXCHANGE PRIVILEGE
U.S. 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. There is an exchange privilege available
with Summit Cash Reserves Fund ("Summit") a series of Financial Institutions
Series Trust, which is a Merrill Lynch sponsored money market fund specifically
designated as available for exchange by holders of Class A, Class B, Class C and
Class D shares of Select Pricing 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
Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A shares
of the other Portfolio or second fund in his account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of the other Portfolio or a second MLAM-advised mutual fund,
and the shareholder does not hold Class A shares of the other Portfolio or
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. 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.
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 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
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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 Fund ("High Income
Portfolio") for those of Merrill Lynch Special Value Fund, Inc. ("Special Value
Fund") after having held the High Income Portfolio'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 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
Special Value Fund Class B shares, the investor will be deemed to have held the
new Class B shares for more than four years.
Class A and Class D shares are exchangeable for Class A shares of Select
Pricing Funds and Summit, and Class B and Class C shares are exchangeable for
Class B shares of Summit. Class A shares of Summit have an exchange privilege
back into Class A or Class D shares of Select Pricing Funds; Class B shares of
Summit have an exchange privilege back into Class B or Class C shares of Select
Pricing Funds and, in the event of such an exchange, the period of time that
Class B shares of Summit are held will count toward satisfaction of the holding
period requirement for purposes of reducing any CDSC and toward satisfaction of
any Conversion Period with respect to Class B shares. Class B shares of Summit
will be subject to a distribution fee at an annual rate of 0.75% of average
daily net assets of such Class B shares. This exchange privilege does not apply
with respect to certain Merrill Lynch fee-based programs for which alternative
exchange arrangements may exist. Please see your Merrill Lynch Financial
Consultant for further information.
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 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.
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, monthly, 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
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respect to the Class D shares. See "Determination of Net Asset Value" on page
41. 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 attributable annually after the close of the Fund's fiscal
year.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gain Distributions" on page 46 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 ("RICs") under the Internal Revenue Code of 1986
(the "Code"). As long as it so qualifies, the Fund (but not its shareholders)
will not be subject to Federal income tax on the part of its net ordinary income
and net realized capital gains which it distributes to Class A, Class B, Class C
and Class D shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income. If in any taxable year the Fund
does not qualify as a regulated investment company, all of its taxable income
will be taxed to the Portfolio at corporate rates. Under the Code, each
Portfolio of the Fund is treated as a separate corporation for federal income
tax purposes and, thus, each Portfolio will be required to satisfy the
qualification requirements under the Code for regulated investment company
treatment.
The Fund contemplates declaring as dividends substantially all of its net
investment income. 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. 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 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. Dividends paid by the Fund from its ordinary income or from an
excess of net short-term capital gains over net long-term capital losses
(together referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Recent legislation
creates additional categories of capital gains taxable at different rates.
Although the legislation does not explain how gain in these categories will be
taxed to shareholders of RICs, it authorizes regulations applying the new
categories of gain and the new rates to sales of securities by RICs. In the
absence of guidance, there is some uncertainty as to the manner in which the
categories of gain and related rates will be passed through to the shareholders
in capital gain dividends. Any loss upon the sale or exchange of Fund shares
held for six months or less, however, will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Although the Fund may invest in certain
municipal securities, it is not anticipated that any portion of the dividends
paid by the Fund will qualify for tax-exempt treatment to shareholders.
Upon sales or exchange or 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
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shares must be treated as long-term capital loss to the extent of capital gains
dividends received with respect to such shares. Currently, the maximum tax rates
applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, and (ii) 20% for capital assets held for more
than one year. Shareholders should consult their tax advisors regarding the
availability and effect of a certain tax election to mark-to-market shares of a
Portfolio held on January 1, 2001. Capital gains or losses recognized by
corporate shareholders are subject to tax at the ordinary income tax rates
applicable to corporations. The new tax rates for capital gains described above
apply to distributions of capital gain dividends by regulated investment
companies ("RICs") such as the Fund as well as to sales and exchanges of shares
in RICs such as the Fund.
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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisors concerning the applicability of the United States withholding
tax.
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.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. 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.
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.
For shares of a Portfolio of the Fund acquired after October 3, 1989, if a
shareholder exercises his exchange privilege within 90 days after the date such
shares were acquired to acquire shares in another Portfolio of the Fund or a
second Fund ("New Fund"), then the loss, if any, recognized on the exchange will
be reduced (or the gain, if any, increased) to the extent the load charge paid
to the Fund reduces any load charge such shareholder would have been required to
pay on the acquisition of the New Fund shares in the absence of the exchange
privilege. Instead, such load charge will be treated as an amount paid for the
New Fund shares and will be included in the shareholder's basis for such shares.
Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month
51
<PAGE> 99
will be deemed to have been received on December 31 of such year if actually
paid during the following January.
Ordinary income and capital gains dividends may also be subject to state
and local taxes.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98 percent of the Fund's investment company
income, with certain adjustments, for such calendar year, plus 98 percent of the
Fund's capital gain net income for the one-year period ending on October 31, of
such calendar year. In addition, an amount equal to any undistributed investment
company taxable income or capital gain net income from the previous calendar
year must also be distributed to avoid the excise tax. While the Fund intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. The excise tax is imposed on the
amount by which the regulated investment company does not meet the foregoing
distribution requirements.
Only dividends paid by the Fund which are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares in
the Fund for more than 45 days to qualify for the deduction on dividends paid by
the Fund. Because most of the income of each Portfolio will be interest income,
rather than dividends on common or preferred stock, it is unlikely that any
substantial proportion of its distributions will be eligible for the
dividends-received deduction available for corporations under the Code.
At September 30, 1998, the Fund had a capital loss carryforward of
approximately $26,063,000 in the Investment Grade Portfolio of which $23,459,000
expires in 2003 and $2,604,000 expires in 2005, and approximately $7,614,000 in
the Intermediate Term Portfolio of which $7,338,000 expires in 2003 and $276,000
expires in 2005. 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.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.
TAX TREATMENT OF TRANSACTIONS IN OPTIONS ON DEBT SECURITIES, FUTURES CONTRACTS
AND OPTIONS THEREON
Each Portfolio of the Fund may purchase and sell interest rate futures
contracts and may write and purchase call and put options on such futures
contracts and on certain debt securities. The Portfolios may write or purchase
options which will be classified as "nonequity options" under the Code.
Generally, gain and loss resulting from transactions in options on debt
securities, as well as gain and loss from transactions in futures contracts and
options thereon, will be treated as long-term capital gain or loss to the extent
of 60 percent thereof and short-term capital gain or loss to the extent of 40
percent thereof (hereinafter "blended gain or loss"). In the case of the
exercise or assignment of an option on a debt security, the premium paid or
received by the Fund generally will adjust the gain or loss on disposition of
the underlying security.
Any option or futures contract held by a Portfolio on the last day of a
fiscal year will be treated as sold for market value on that date, and gain or
loss recognized as a result of such deemed sale will be blended gain or
52
<PAGE> 100
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.
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 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.
Dividends paid by a Portfolio with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. Each Portfolio
of the Fund will include performance data for all classes of shares of that
Portfolio in any advertisement or information including performance data of the
Fund.
The Fund also may quote 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. 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
53
<PAGE> 101
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.
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, 1998
Class A................ 5.64% (9.74)% 8.50% $1,056.40 $ 902.60 $1,085.00
Class B................ 5.21% (10.16)% 7.94% $1,052.10 $ 898.40 $1,079.40
Class C................ 8.25% (7.56)% 8.03% $1,082.50 $ 924.40 $1,080.30
Class D................ 5.38% (10.07)% 8.30% $1,053.80 $ 899.30 $1,083.00
Five Years Ended
September 30, 1998
Class A................ 5.24% 6.29% 5.98% $1,290.90 $1,356.40 $1,336.90
Class B................ 5.30% 6.35% 5.65% $1,294.40 $1,360.60 $1,316.10
Ten Years Ended
September 30, 1998
Class A Shares......... 8.50% 10.00% 8.59% $2,260.00 $2,598.40 $2,278.80
Class B Shares
10/21/88 - 9/30/98... 8.08% 9.59% -- $2,165.20 $2,486.40 --
Class B Shares
11/13/92 - 9/30/98... -- -- 7.03% -- -- $1,491.20
Class C Shares
10/21/94 - 9/30/98... 8.78% 7.49% 8.64% $1,393.60 $1,329.40 $1,386.50
Class D Shares
10/21/94 - 9/30/98... 8.28% 6.94% 8.83% $1,368.20 $1,303.00 $1,395.90
</TABLE>
54
<PAGE> 102
<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
- ------ ---------- --------- ------------ ----------- ---------- -------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Year Ended September
30, 1998
(Class A).............. 10.05% (5.98)% 9.59% $1,100.50 $ 940.20 $1,095.90
(Class B).............. 9.21% (6.80)% 8.94% $1,092.10 $ 932.00 $1,089.40
(Class C).............. 9.25% (6.72)% 9.03% $1,092.50 $ 932.80 $1,090.30
(Class D).............. 9.77% (6.32)% 9.39% $1,097.70 $ 936.80 $1,093.90
1997
(Class A).............. 9.22% 14.58% 8.59% $1,092.20 $1,145.80 $1,085.90
(Class B).............. 8.39% 13.86% 8.13% $1,083.90 $1,138.60 $1,081.30
(Class C).............. 8.23% 13.66% 7.99% $1,082.30 $1,136.60 $1,079.90
(Class D).............. 8.95% 14.29% 8.58% $1,089.50 $1,142.90 $1,085.80
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 --
</TABLE>
55
<PAGE> 103
<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
- ------ ---------- --------- ------------ ----------- ---------- -------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
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................... -- (3.00)% -- -- $ 970.00 --
1980................... -- (1.04)% -- -- $ 989.60 --
</TABLE>
- ---------------
* Commencement of operations October 21, 1988.
+ Commencement of operations October 21, 1994.
++ Commencement of operations November 13, 1992.
Set forth below is total return and yield information for the Class A,
Class B, Class C and Class D shares of the High Income Portfolio, the Investment
Grade Portfolio and the Intermediate Term Portfolio for the periods indicated.
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED ON A REDEEMABLE VALUE OF A HYPOTHETICAL $1,000
HYPOTHETICAL $1,000 INVESTMENT INVESTMENT AT THE END OF THE PERIOD
--------------------------------------- -------------------------------------------
INVESTMENT HIGH INTERMEDIATE INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM GRADE INCOME TERM
PERIOD PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------ ---------- --------- ------------ ----------- ----------- -------------
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Commencement of
operations** to
September 30, 1998
Class A............... 517.04% 641.95% 502.09% $6,170.40 $ 7,419.50 $6,020.90
Class B............... 116.52% 148.64% 49.12% $2,165.20 $ 2,486.40 $1,491.20
Class C............... 39.36% 32.94% 38.65% $1,393.60 $ 1,329.40 $1,386.50
Class D............... 36.82% 30.30% 39.59% $1,368.20 $ 1,303.00 $1,395.90
</TABLE>
<TABLE>
<CAPTION>
YIELD
----------------------------------------
INVESTMENT HIGH INTERMEDIATE
GRADE INCOME TERM
PERIOD PORTFOLIO PORTFOLIO PORTFOLIO
- ------ ---------- ---------- ------------
<S> <C> <C> <C>
30 Days Ended September 30, 1998
Class A................................................... 5.57% 10.72% 5.38%
Class B................................................... 5.04% 10.39% 4.92%
Class C................................................... 4.98% 10.33% 4.92%
Class D................................................... 5.33% 10.48% 5.28%
</TABLE>
- ---------------
** Commencement of operations for Class A shares of Investment Grade Portfolio
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.
56
<PAGE> 104
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 the Portfolios 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. In addition, from time to time the
Fund may include the risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. to the Portfolios in advertising or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of a Portfolio's relative performance for any future
period.
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The Fund was organized as a Maryland corporation in August 1978 and
commenced operations on November 10, 1978 as the Merrill Lynch High Income Fund,
Inc., consisting solely of the High Income Portfolio. The Fund was reorganized
on September 8, 1980 to change its name from the Merrill Lynch High Income Fund,
Inc. to the Merrill Lynch Corporate Bond Fund, Inc. and to add the High Quality
Portfolio and the Intermediate Term Portfolio. The High Quality Portfolio and
the Intermediate Term Portfolio commenced operations on October 31, 1980.
The authorized capital stock of the Fund consists of three billion six
hundred fifty million (3,650,000,000) 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 500,000,000 shares, 1,500,000,000
shares, 200,000,000 shares and 500,000,000 shares, respectively, High Quality
Portfolio Series Common Stock (which does business under the name "Investment
Grade Portfolio") which is divided into four classes designated "Class A Common
Stock," "Class B Common Stock," "Class C Common Stock" and "Class D Common
Stock" 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. 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."
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
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. Each share is
entitled to participate equally in
57
<PAGE> 105
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.
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.
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 AGENCY SERVICES ARRANGEMENTS
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. The Transfer Agent, which is
a subsidiary of ML & Co. and an affiliate of both the Investment Adviser and
Merrill Lynch, acts as the Fund's transfer agent pursuant to a Transfer Agency,
Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, the Transfer Agent receives an annual fee of up to
$11.00 per Class A or Class D account and up to $14.00 per Class B or Class C
account and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
LEGAL COUNSEL
Rogers & Wells LLP, New York, New York is counsel for the Fund.
58
<PAGE> 106
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 investments of
each 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. Only one copy
of each shareholder report and certain shareholder communications will be mailed
to each identified shareholder regardless of the number of accounts such
shareholder has. If a shareholder wishes to receive separate copies of each
report and communication for each of the shareholder's related accounts the
shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Financial Data Services,
Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of November 2, 1998 with the exception of
[ ].
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
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<PAGE> 107
APPENDIX A
INTEREST RATE FUTURES, OPTIONS THEREON AND OPTIONS ON DEBT SECURITIES
Each Portfolio 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
each Portfolio'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
Portfolio realizes a loss or gain. In addition, a commission is paid on each
completed purchase and sale transaction.
Each Portfolio will deal only in standardized contracts on recognized
exchanges. The clearing members of an exchange's clearing corporation guarantee
the performance of their futures contracts through the clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (known as the "holder") the right, but not the obligation, to enter
into a long position in the underlying futures contract (i.e., purchase the
futures contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put" option, at a
fixed price (the "exercise" or "strike" price) up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchaser of the option assumes is
equal to the premium, the transaction costs and the unrealized profits, if any,
although this entire amount may be lost. Upon exercise of the option by the
holder, the contract market clearing corporation establishes a corresponding
short position for the seller, or "writer" of the option in the case of a call
option, or a corresponding long position in the case of a put option, at the
strike price. In the event that an option is exercised, the holder will be
subject to all the risks associated with the trading of futures contracts. An
option becomes worthless when it expires.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the holder of the option
may be included in initial margin. The writing of an option on a futures
contract involves risks similar to those relating to futures contracts, which
are described on page 43.
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<PAGE> 108
A position in an option may be terminated by the purchaser or seller prior
to its expiration by effecting a closing purchase or sale transaction, which
requires the purchase or writing of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously written or
purchased. The premium received from the holder on the closing transaction may
be more or less than the premium paid for the option, resulting in a gain or
loss on the transactions.
Exercise prices of options are set at specified intervals in relation to
the price of the underlying futures contract by the exchange on which they are
traded. Exercise prices are initially established when a new expiration cycle
commences and additional exercise prices may subsequently be introduced as the
futures contract price fluctuates. The expiration of an option is generally
based on the expiration of the underlying futures contract.
The holder of an option exercises it by notifying his broker of his
intention to exercise. The broker tenders the exercise notice to the clearing
house of the applicable exchange which assigns the notice on a random basis to a
broker with a customer who has written and outstanding an option of the same
series. That broker then assigns the exercise notice to such customer, generally
on a random basis, and the customer is then obligated to enter into the
underlying futures contract upon exercise. At that time, the contract market
clearing house establishes appropriate long and short futures positions for the
holder and writer. A corresponding short position for the writer would be
established in the case of a call option, or a corresponding long position would
be established in the case of a put option. The parties will then be subject to
initial and variation margin requirements with respect to the underlying futures
contract. By interposing itself between options writers and purchasers, the
clearing house in effect guarantees the performance of the other side to each
option purchased or sold.
Options on Debt Securities. An option on a U.S. Government security gives
the holder the right, but not the obligation, to purchase the underlying
security, in the case of a call option, or to sell the underlying security, in
the case of a put option, at the specified strike price up to a stated
expiration date. The holder pays a non-refundable premium upon purchasing the
option. The maximum amount of risk assumed by the holder is equal to the
premium, transaction costs and unrealized profits, if any, although this entire
amount may be lost. Upon exercise of the option, the holder purchases or sells
the underlying security at the strike price. Options on debt instruments to be
traded by the Fund are traded on national securities exchanges regulated by the
Securities and Exchange Commission. The Options Clearing Corporation is
interposed between the clearing members which are the parties to each such
option, thereby assuring the performance of the parties.
If a liquid market exists, a position in an option may be terminated by the
purchaser or seller prior to expiration by entering into an offsetting purchase
or sale transaction in an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or written. The
premium paid or received by the trader on the closing transaction may be more or
less than the premium paid or received for 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.
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APPENDIX B
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 that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
The modifier 1 indicates that the bond ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its rating
category.
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.
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<PAGE> 110
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB
B
CCC
CC Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is being
paid.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1 (a) -- Articles of Incorporation (incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A)
("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-1A)
("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).
(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 (incorporated by reference to Exhibit 5(b)
filed with Post-Effective Amendment No. 23).
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).
12 -- Inapplicable.
</TABLE>
C-1
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
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-1A (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 -- Scheduled 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--High Income Portfolio--Class A
shares (filed herewith)
(b) -- Financial Data Schedule--Investment Grade
Portfolio--Class A shares (filed herewith)
(c) -- Financial Data Schedule--Intermediate Term
Portfolio--Class A shares (filed herewith)
(d) -- Financial Data Schedule--High Income Portfolio--Class B
shares (filed herewith)
(e) -- Financial Data Schedule--Investment Grade
Portfolio--Class B shares (filed herewith)
(f) -- Financial Data Schedule--Intermediate Term
Portfolio--Class B shares (filed herewith)
(g) -- Financial Data Schedule--High Income Portfolio--Class C
shares (filed herewith)
(h) -- Financial Data Schedule--Investment Grade
Portfolio--Class C shares (filed herewith)
(i) -- Financial Data Schedule--Intermediate Term
Portfolio--Class C shares (filed herewith)
(j) -- Financial Data Schedule--High Income Portfolio--Class D
shares (filed herewith)
(k) -- Financial Data Schedule--Investment Grade
Portfolio--Class D shares (filed herewith)
(l) -- Financial Data Schedule--Intermediate Term
Portfolio--Class D shares (filed herewith)
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Inapplicable.
ITEM 25. 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
C-2
<PAGE> 113
Law to indemnify a corporate representative under certain circumstances against
expenses incurred in connection with the defense of a suit or action by or in
the right of the Registrant. Under the Distribution Agreements, the Registrant
has agreed to indemnify the Distributor against any loss, liability, claim,
damage or expense arising out of any untrue statement of a material fact, or an
omission to state a material fact, in any registration statement, prospectus or
report to shareholders of the Registrant. Reference is made to Article VI of
Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and
Section 9 of the Class A, Class B, Class C and Class D Distribution Agreements.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), acts as
the investment adviser for the following open-end registered 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 Corporate High
Yield 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
Multi-State 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 registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund III, MuniHoldings Fund, Inc., MuniHoldings
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund II, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHolding New York Insured Fund II, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, Inc., 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 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 Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), acts as the investment
adviser for the following open-end registered 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
Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Growth Fund,
Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Growth Fund,
Inc., 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 Intermediate Government Bond 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 Real Estate Fund, Inc.,
Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill
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<PAGE> 114
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., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
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 Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
of the Manager, FAM and Princeton Services, Inc. ("Princeton Services"), and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is North Tower, World Financial Center, 250 Vesey Street, New
York, New York 10281-1201. The address of the Fund's transfer agent, Merrill
Lynch Financial Data Services, Inc. ("MLFDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
September 30,1995, for his or her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Richard is Treasurer of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors or officers of
one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
ML & Co.............................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services................... General Partner General Partner of MLAM
Arthur Zeikel........................ Chairman Chairman of FAM; Chairman and Director
of Princeton Services; President of
Princeton Services from 1993 to
1997; Executive Vice President of ML
& Co.
Jeffrey M. Peek...................... President President of MLAM since 1997;
President and Director of Princeton
Services; Executive Vice President
of ML & Co.
Terry K. Glenn....................... Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of Princeton
Funds Distributor, Inc.; Director of
FDS; President of Princeton
Administrators, L.P.
Linda L. Federici.................... Senior Vice President Senior Vice President of FAM and
Senior Vice President of Princeton
Services
Philip L. Kirstein................... Senior Vice President Senior Vice President of FAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services
Vincent R. Giordano.................. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth A. Griffin................. Senior Vice President Senior Vice President of FAM and
Senior Vice President of Princeton
Services
</TABLE>
C-4
<PAGE> 115
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Norman R. Harvey..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel............... Senior Vice President, Senior Vice President and General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President of Princeton Services
Ronald M. Kloss...................... Senior Vice President Senior Vice President of FAM; Senior
Vice President
Debra Landsman-Yaros................. Senior Vice President Senior Vice President of FAM; Vice
President of MLFD and Senior Vice
President 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, Jr................ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Brian A. Murdock..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
and Director of MLFD
Richard L. Reller.................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
and Director of MLFD
Gerald M. Richard.................... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of the
Distributor
Gregory D. Upah...................... Senior Vice President Senior Vice President of FAM and
Senior Vice President of Princeton
Services
Ronald L. Welburn.................... Senior Vice President Senior Vice President of FAM; 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; Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, 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 Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., 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
International Equity Fund, 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 Real Estate Fund, Inc., Merrill Lynch Series
Trust Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund,
C-5
<PAGE> 116
Inc., and Worldwide DollarVest Fund, Inc. The address of each of these
registered 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,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION 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, Executive
Vice President of ML & Co.
Alan J. Albert....................... Senior Managing Director Vice President of the Manager
Terry K. Glenn....................... Director Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
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
the MLFD
Carol Ann Langham.................... Company Secretary None
Debra Anne Searle.................... Assistant Company Secretary None
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except 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. and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
C-6
<PAGE> 117
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O. Box
9011, Princeton, New Jersey 08543-9081, except that the address of Messrs.,
Crook, Brady, Breen, Fatseas, and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH DISTRIBUTOR WITH REGISTRANT
---- ---------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn........................... President and Director Executive Vice President
Richard L. Reller........................ Director None
Thomas J. Verage......................... Director None
Robert W. Crook.......................... Senior Vice President None
Michael J. Brady......................... Vice President None
William M. Breen......................... Vice President None
Michael G. Clark......................... Vice President None
James T. Fatseas......................... Vice President None
Debra W. Landsman-Yaros.................. Vice President None
Michelle T. Lau.......................... Vice President None
Gerald M. Richard........................ Vice President and Treasurer Treasurer
Salvatore Venezia........................ Vice President None
William Wasel............................ Vice President None
Robert Harris............................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are
maintained at the offices of the Registrant, 800 Scudders Mill Road, Plainsboro,
New Jersey 08536, and its transfer agent, Merrill Lynch Financial Data Services,
Inc. 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and Under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to 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.
(d) The Fund, if requested to do so by the holders of at least 10% of the
Fund's outstanding shares, will call a meeting of shareholders for the purpose
of voting upon the question of removal of a director or directors and will
assist communications with other shareholders as required by Section 16(c) of
the Investment Company Act of 1940.
C-7
<PAGE> 118
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED
THIS AMENDMENT TO THIS 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 SECOND DAY OF DECEMBER, 1998.
Merrill Lynch Corporate Bond Fund,
Inc.
(Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
Arthur Zeikel, President
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Director December 2, 1998
- --------------------------------------------------- (Principal Executive
Arthur Zeikel Officer)
* Treasurer (Principal
- --------------------------------------------------- Financial and Accounting
Gerald M. Richard Officer)
* Director
- ---------------------------------------------------
Ronald W. Forbes
* Director
- ---------------------------------------------------
Cynthia A. Montgomery
* Director
- ---------------------------------------------------
Charles C. Reilly
* Director
- ---------------------------------------------------
Kevin A. Ryan
* Director
- ---------------------------------------------------
Richard R. West
* By: /s/ ARTHUR ZEIKEL December 2, 1998
-------------------------------------------------
Arthur Zeikel, President
(Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
11 Consent of Deloitte & Touche LLP, independent accountants
for the Registrant.
17(a) Financial Data Schedule -- High Income Portfolio -- Class A
shares.
17(b) Financial Data Schedule -- Investment Grade
Portfolio -- Class A shares.
17(c) Financial Data Schedule -- Intermediate Term
Portfolio -- Class A shares.
17(d) Financial Data Schedule -- High Income Portfolio -- Class B
shares.
17(e) Financial Data Schedule -- Investment Grade
Portfolio -- Class B shares.
17(f) Financial Data Schedule -- Intermediate Term
Portfolio -- Class B shares.
17(g) Financial Data Schedule -- High Income Portfolio -- Class C
shares.
17(h) Financial Data Schedule -- Investment Grade
Portfolio -- Class C shares.
17(i) Financial Data Schedule -- Intermediate Term
Portfolio -- Class C shares.
17(j) Financial Data Schedule -- High Income Portfolio -- Class D
shares.
17(k) Financial Data Schedule -- Investment Grade
Portfolio -- Class D shares.
17(l) Financial Data Schedule -- Intermediate Term
Portfolio -- Class D shares.
</TABLE>
C-9
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Corporate Bond Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 25 to Registration Statement No. 2-62329 of our reports dated November 18,
1998 appearing in the annual reports to shareholders of the Investment Grade
Portfolio, Intermediate Term Portfolio and the High Income Portfolio of the
Merrill Lynch Corporate Bond Fund, Inc. for the year ended September 30, 1998,
and to the reference to us under the caption "Financial Highlights" in the
Prospectus, which is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
December 1, 1998
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